Procurement Savings – Lies, Damned Lies and Savings Measurement

Procurement savings measurement and reporting - so are your processes and methodologies slightly flawed, very flawed or simply a tissue of lies and half-truths?  That leading question came to mind when I was reading that the UK's productivity statistics are still terrible. As The Guardian said:

Britain’s poor productivity record has been highlighted by government figures showing the biggest gap with other leading western economies since modern records began in the early 1990s.

Output per hour worked in the UK was 18 percentage points below the average for the remaining six members of the G7 group of industrial nations in 2014, the Office for National Statistics said.

Yet every time we see a procurement survey that includes savings data, we find most companies claiming savings figures of between 3% and 10% every year. Note, that is EVERY year. Now I haven't got the economics brain power to model exactly what this would mean in macroeconomic terms if it really were happening, but surely it would lead to some combination of a severely deflationary economic environment and / or major gains in productivity?

But of course these savings figures are, in the main, nonsense. They exist mainly to justify the existence of procurement and more importantly (or cynically) the CPO's bonus. There is then a conspiracy of silence in that the CEO and CFO are quite happy to go along with the dodgy data because they might want to use the stats in some of their presentations to investors and media.

The lack of reality runs deep in most of the figures produced. For example, I bet that during the recent fall in oil prices, every procurement department has been quick to capture and declare any savings resulting from that market movement - even though it is nothing to do with procurement performance or competitive advantage (everyone is benefitting). But now oil prices are heading upwards, then no doubt those cost increases will just be ignored in the next savings report. I don't see many people netting off the price rises in certain categories against the "savings".

Or what about this common approach, explained in this example.

Last year we bought 800 laptops for £1,000 each. This year we will buy 1,000 for £900 each. So our overall spend has gone up from £800K to £900K- but of course procurement will declare a £100,000 "saving" based on the reduced unit price (and of course, without any regard to the fact that perhaps the market price of laptops has come down by 20%!).

Or perhaps the price goes up to £1100 (poor procurement this time). In this case, we might buy 750, so again the overall spend has gone up from £800K to £825K. But this time we declare a "saving" from "demand management" of 50 x £1100 = £55K. Not bad, eh?

So in neither case has any "saving" hit the bottom line, and neither do the numbers reflect in any real way the performance of procurement. In fact, the hypothetical investor might simply be most concerned that spend on laptops is on the rise. But procurement still has that nice "saving" to declare.

We don’t have any magic answers to this, although it has been interesting to note that the adoption of the best software in the market to track savings has not been as rapid as we might have expected, perhaps because many CPOs actually don’t want to measure it properly!  But overall, this is just one of several reasons why as a profession we really need to develop better performance measures for procurement – to try and reduce dependence on this very dubious measure as the central claim as to our worth.

Voices (19)

  1. bitter and twisted:

    Serious question: how do these tools tell you what your competitors are paying?

    1. aazevedo:

      Out of your experience, which of those “effective tools” would you recommend?

    2. pierre lapree:

      bitter and twisted: I’d be surprised that any tool could tell you this (if only because commercial conditions usually fall under confidentiality clauses and if anyone had this kind of information it would most likely be illegal).

      Some of our clients compare themselves not to competitor but to market indices which are public — there are a few vendors providing this kind of data.
      Usually they consider that if prices are up 5%, and they limite the price increase to 3%they’re better than the market.

      aazevedo: I have an idea, contact me if you want (using the link to our website on my name) 😉

      1. bitter and twisted:

        So we are striving to precisely measure a meaningless phantom.
        What matters is competitive advantage.

        1. Secret Squirrel:

          Both agree and disagree. Whilst the end game is competitive advantage, measuring progress against yourself is useful provided the baseline is fixed and not inflated through estimated market movements. It’s certainly better than not measuring at all.

          Shame that CCS inflate their measures all over the place to create a theoretical instead of real saving…..

        2. Dan:

          Except that competitive advantage doesn’t exist in the public sector

          1. Mark Lainchbury:

            Hey don’t bring the Public Sector into this.
            For us, it’s pretty simple.
            Does this saving allow finance to claw money back from a Dept’s budget ?
            Anything else is *just* cost avoidance.

  2. Anoop:

    Over the last decade the procurement department has evolved with the advent of quality IT tools to track and manage procurement savings and productivity. With my 10 years of procurement experience, I can assuredly say that there are effective tools with customized and complex algorithms available in the market which could bring an end to this speculation on savings calculation methodology. At the same time, It is true that even the best of companies haven’t been focusing on their procurement operations and take the efforts of cost reduction achieved as a “default” value. The need of the hour is for the CFO’s and CPO’s of these companies to really evaluate the importance, need and investment to update procurement departments to the next class. Even a professional training in negotiation can help achieve an additional 3%-5% additional revenue to the tune of millions$ for a large company. End of the day, procurement in any company is generally a nightmare for any sales team, this itself speaks volumes on the importance and possibility of what best can be achieved to the bottom-line with a little more focus.

  3. Helen:

    Nothing like tarnishing a whole industry with one massive non specific brush based on what I can only assume is your rather limited personal experience with procurement. Of course there are bad and ineffective procurement people, like there are in most industries. But there are plenty of guys who brings real ‘value’ to their stakeholders, the ones they actually talk to on a regular basis.

    1. Dan:

      You’ve missed the point (although I did like the comment about ‘limited experience procurement…).

      This isn’t a dig at the performance or ability of procurement teams, but at the way they’re treated by the wider business and the C-suite. They’re recognised as being able to deliver greater value, but are only ever measured on savings.

      1. RJ:

        Thanks, Dan, for the defence! That was exactly my point – there are very good procurement people out there, doing a grand job but not being recognised for it as all we ever seem to be measured against is savings, savings, savings (with several comments above showing exactly this). I do think, though, as a profession we have failed in that we haven’t managed to convince most of industry or public sector to find a better way to do it.

  4. RJ:

    Oh Peter, I despair each time I read a blog or article along these lines. 25 years plus in procurement and we haven’t moved on from this argument!

    Claimed savings are, by and large, completely meaningless in this day and age – gone are the days when a firm bought the same widget year in year out for 10 years and could compare last year’s price with this year’s to see whether it went up or down. Even then, though, nobody ever really looked at what was happening to commodity prices or the cost of production.

    Sadly, the rise of Procurement (with a big “P”)’s star has been largely on the back of claimed savings. Especially in the last 7 years everyone has been chasing cost-cutting exercises and most of us in the profession have done pretty well from this renewed focus on our core competency of cost management. Yes, I agree with Pierre above, that some degree of measurement is inevitable and necessary and provided it’s agreed with internal stakeholders and makes some sense in relation to the organisation’s key objectives then it has some validity.

    But surely we can do better than this and have a few more varied (I hesitate to say “balanced”) measures that reflect on the other value that good, professional procurement (with a small “p”) brings – supply market innovation, risk mitigation, speed to market, guaranteed ROIs, quality of service, clear performance measures, internal efficiency improvements… anything but this one-dimensional focus! And yes, I do know about AT Kearney’s model and various others that haven’t really gained a lot of traction. Perhaps if we started debating these a bit more openly and refused to be tied to hackneyed savings targets then we’d get somewhere.

    I’m retiring in about 20 years, hope we have an answer by then….

  5. Pierre Laprée:

    About the “And don’t get me started on the situations where Finance reduce the budget before procurement get involved….”

    This is also the epitome of a what could go wrong. If Finance does this, this is super bad.
    If Finance does it *with* Procurement this is exactly where we should be as a function: “Procurement, please help me reduce this budget by identifying where we could optimise the spend using whatever lever we can”. THIS is how it should be.

    (end of rant)

  6. Pierre Laprée:

    Thanks Dan for bringing this example. I think this is one of the reasons why the controversy on savings is counter productive.

    Some people tend to be report anything over 10 years as savings and this results in the world not believing a word of what procurement says.
    So the pendulum swings and savings are considered pure evil, lies. Even the things that bring value (cost avoidance) are simply ignored. And you kill all incentives for your buyers to do good work.
    Collaborate with the supplier to improve processes and contain demand? “I don’t care, it doesn’t hit my P&L”. So why would the buyers bother?

    That’s bad. I’ve already said it and I say it again: TALK! Get out of your office and talk with your stakeholders & CFO to build a common understanding of the value you bring to the organisation, figure out what the organisation expects from you. Only at this point will you build the proper analysis grids to actually gauge Procurement’s performance, be it with cost savings, cost avoidance or whatever else. The only thing I’m sure: it will not be black or white.

  7. Dan:

    My organisation has a simple method of calculating savings: if it doesn’t result in a budget reduction then its not a saving.

    Its very annoying when you eliminate a budget overspend, or Finance would prefer to be able to buy more for the same budget, as then its not a recognised saving, even if the organisation has undoubtedly saved some cold hard cash. And don’t get me started on the situations where Finance reduce the budget before procurement get involved….

    1. bitter and twisted:

      Do they double down on this dumbness by then judging yous on the ‘savings’ and not much else?

      1. Dan:

        You guessed it

  8. Pierre Laprée:

    I think savings are pretty much like your bathroom scale: it’s possibly not completely accurate and you may dislike/disagree with the measurement. It is nevertheless an excellent way to get a measurement and to see how it evolves. This should be a driver for action.

    In the context of Procurement I like to see this as a conversation starter with your stakeholders or management. Your savings might not reflect an exact reality, but if everybody agrees beforehand on the rules and the meaning, then it is as good a measurement as anything else.

    And I couldn’t agree more with the last paragraph 🙂 a proper tool to track them is the best way to have a meaningful conversation rather than arguing on formulas, errors or tampering with the data.
    Plus you’ll manage your team much more easily (the usual disclaimer: I build and sell such tools).

  9. bitter and twisted:

    “Savings” are bullshit.

    What is the point of comparing the price you paid with the price your hypothetical idiot twin would have paid?

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