Three Occasions when Procurement Should Spend More – Spend Matters Top Papers

In the run up to Christmas and my passing over the Spend Matters UK/Europe reins, we’ve been featuring some of the briefing papers I’ve written over the last eight years. We’ll leave those published in 2018 – we will run through those again in the first week of January to get you back into work mode and thinking about serious matters again.

Today, one of the papers I’m most proud of – I felt some of the content here was quite intellectually important for the procurement profession, and if I was going to do a doctorate in procurement, this might be the topic. There is much talk of “value” now, rather than just cost savings, but how many people really understand what that means – and how do you measure “value” in an area such as procurement of marketing services? Anyway, here is what we wrote back in 2014 about “Three Occasions When Procurement Should Spend More”.

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We announced our new research paper (sponsored by BravoSolution) a week or so back - Three Occasions When Procurement Should Spend More. And here it is available for download…  Today we’ll feature the first of some excerpts we’ll be running here.

Given the title, it is not surprising that we look at those instances when it is right for procurement to spend more. Some are obvious, like the total cost of ownership argument; spend more up-front in order to save over the lifetime of the goods or services you are buying. Other reasons for spending more are less obvious and more subtle. But even before we get into that argument, we need to understand just what it is that procurement is trying to achieve. Here’s a section that address that and introduces a particular concept – of Value Categories - to the discussion.

Extract from Three Occasions When Procurement Should Spend More

“From the point of view of this discussion, we will consider that the key drivers of shareholder value are the following (for private sector firms):

  • the organisation’s profit and profit margins
  • the revenue and more particularly revenue growth of the organisation (unprofitable firms with high revenue growth can by highly valued)
  • reputation – at brand level and organisational
  • capital effectiveness – how much funding is required to generate the returns

Straightaway, we can see one issue with much of procurement’s traditional focus. The function and processes are heavily skewed towards just one of these drivers – profit margin improvement, usually through cost reduction. But in reality, in a strongly growing firm, an Amazon, a Google, or a Twitter, the revenue line is more important to the valuations than the margin. Growth can be a much more powerful driver of shareholder value, yet procurement rarely contributes much towards this goal.

However, procurement has made strides towards a contribution in the area of reputation. Risk is higher on the agenda in many organisations, quite rightly. And coming back to margin, there are many ways in which procurement can contribute towards this beyond cost cutting. Helping the organisation run more effectively and efficiently for instance is a worthwhile goal.

But the fundamental point here is that in many categories, procurement should have less interest in cost cutting and should in many cases support spending more rather than less, where that drives value via revenue growth or reputational improvement. We will use the term Value Category to describe spend areas where increasing third party spending (in a targeted and controlled manner) can potentially generate increased shareholder value.”

 

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