Measuring procurement savings – part 2

We looked at how easy it is to measure savings badly in the last post.  So what can procurement do to make that measurement more credible and meaningful?

(We've already had some very interesting comments on Part 1 - we will come back and review them shortly - thanks to those contributors).

There are four basic success criteria to producing savings data that is likely to be accepted by users, the CFO or the Board as genuinely reflecting what has happened to third party spend.  And (Florence) I do accept this is an  'ideal world' analysis!

1. Data availability.  This sounds a little obvious, but as we showed with our 'bad practice' example in the last post, organisations claim 'savings' often on the basis of very limited data. "I think we spent X million in this category (but I can't prove it) and I think we got a discount of 20% against the market" is not a basis for real measurement.  It has tended to be easier to get data in manufacturing or retail environments, where standard pricing processes and accurate unit price data is usually available.  It is much harder in soft categories such as professional, marketing or facilities services, where it may be hard to get good data on what has actually been spent. Hence the effort that a number of solutions providers, (including but not limited to Emptoris, Fieldglass), have put into systems that better capture the detail of spend in such areas, enabling better comparisons to be made.

2. A baseline - if you are going to measure savings, you must have a baseline (and of course, this is linked to the point above.) But that baseline is not necessarily just hard spend data.  It needs to include price and quantity, but also specification and quality, which can be very tricky - again, particularly for services.  I don't think there is anything wrong with claiming 'savings' where the specification has been cut with consequent cost saving (see point 4 below), but if there is for instance a drop in service or quality, then that should be noted.  So we need to know where we are starting from.  In the case of consulting services for instance,  I would ideally want to be tracking my internal client satisfaction, so that if I reduce day rates from an average of £1200 to £1000, I can track whether users are more, less or equally happy then they were.

3. Counter-factual: what would have happened if we hadn't taken the action that we did? That is what the 'counter factual' is all about. This is where we can take into account that the market price of commodity X has gone up 30% this year, and we managed to keep the increase down to 20%, so we can claim a saving.

The problem is...this can be so subjective. How do I know the cost of social care, or cleaning services, has gone up 5% this year?  Again, it is easier with true commodities; when I bought (food) raw materials, you could track prices against world market or EU 'set' prices. But consultancy? This is also where I have seen procurement using some pretty sharp practice to justify huge savings claims, and funnily enough, I rarely see reducing cost counter factuals quoted! “IT hardware market prices are falling by 10% a year, so I'll only claim 2% when we've achieved a 12% cost reduction...”  No, don't think I've ever seen that!

4.  Specification (Quality) issues: linked to point 2, a factor that must be considered.  We need to track the quality of what is being bought as well as the price. In the case of a very clearly defined commodity – perhaps raw materials in a manufacturing environment, or a well defined IT hardware product, this hardly matters. But at the other extreme we find spend areas such as the example given by our reader whose comment started this discussion; social care services. It is clear that a 'saving' could be declared through a dramatic change to the specification for care services. Similarly, we can find a consultant or interim, or a marketing agency, for half the price of our previous provider; but will the specification and the quality of what is delivered be the same? We may have made a cost saving; but I think if I were the chief Exec or CFO, I would want to understand the consequences of that saving in terms of the quality of what has been delivered.

So these are the measurement factors that need to be considered; in the next episode of what is becoming a somewhat longer rant than I expected, we'll look at how savings can be classified and attributed.

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