Value Categories – When It Is Right To Spend More

We've had a lot of coverage here recently of marketing services procurement, driven in the main by the recent ProcureCon Marketing event, and it reminded us of the paper we published last year.

In Three Occasions When Procurement Should Spend More , sponsored by BravoSolution, we looked at just that - those situations when it is entirely appropriate for procurement (and indeed the business, cost centre or CFO) to be very happy to spend more rather than less. We actually used marketing services as the main example to illustrate some of the points in the paper, as one of the obvious categories where this is clearly the case. Taking it to extremes, if another £100 spend on incredible marketing would bring you another £1 million in sales, then of course you would spend the money. But even if the return is less extreme than that, there are many occasions when additional expenditure is a good thing, not bad.

And marketing is not the only category where this can be true. Spending more on brilliant packaging can bring a major boost to sales, and for instance enable you to sell a bit of chocolate for a lot of money -  as anyone who has ever bought Easter Egg packaging will tell you! Spending more on various components for a car - from safety equipment to that great music system - might pay back several time over in terms of sales and profits.

In the paper, we talked a lot about what procurement can do to help create shareholder value, and we introduced the term "value category", and hoped that might catch on. It's not clear that it is has yet, so we're going to bring it up again from time to time just to remind everyone! Here is an extract from that paper - and you can still download the whole thing here, free of charge.

 

Three Occasions When Procurement Should Spend More (extract)

"... 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.

When spending more is good

Once shareholder value is positioned at the heart of the organisation’s raison d'être, it is clear that simply reducing bought-in costs is an incredibly narrow view of procurement objectives. Shareholder value can be created through margin improvement, which in turn can be generated by unit cost reduction of purchased items – all other things being equal (remember the horsemeat discussion).

But suppose procurement can contribute to revenue growth? Or improve the reputation of the business? Those factors can drive shareholder value equally well, but require a very different approach. Procurement, and budget holders of course, must be prepared to spend more rather than less in Value Categories, if the overall aim is net creation of shareholder value.

Now this isn’t simply an excuse to ignore costs, or to spend more unthinkingly. As we will see, it requires an analytical approach to spend; one that frankly, few organisations have in place. But at least understanding the principles is a good starting point. And as well as the more complex cases, there are obvious occasions when it is right to spend more. In total, there are three justifications for doing so, which we can look at in turn as separate cases.

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