Procurement savings part one: Do they really matter?
“Do procurement savings really matter?” This probably seems like a bit of a stupid question. The ability to boost a business’ bottom line through procurement savings is arguably as important as improving it through increased revenues. In fact, procurement savings are a much easier way for businesses to improve their profit margin, as all of the savings go directly to the bottom line.
But are these savings targets as important as traditional procurement wisdom suggests? And, perhaps more importantly, should procurement be even given these savings targets in the first place?
In this special two-part article, Senior Operations Performance Consultant, James Bousher, discusses procurement savings: the implications of having them and whether they should exist, plus some of the common problems they can pose to procurement teams and businesses as a whole.
Are procurement savings important?
If you ask most procurement professionals around the country what their targets are based upon, the vast majority will say, ‘savings delivery’ at least in some small part. That’s because in most businesses, procurement departments are positioned as cost-cutting corporate firefighters, fighting off the fire of increased costs.
This tends to be done by going from supplier-to-supplier demanding savings, which typically only ever works in the short term, or launching lengthy strategic sourcing processes to change suppliers, generally to the annoyance of other areas of the business.
In both instances, savings delivery is the primary motivation.
The implications of having a savings-focused procurement team
When savings become procurement’s primary focus, the risk is that they become the be-all-and-end-all and other important aspects of procurement get overlooked.
I’ve experienced many situations where the implications of using a new, cheaper supplier hadn’t been considered properly as savings were the primary focus. Factors that often get overlooked, include the cost of adding an additional, unexpected product or service and the supplier’s ability to cope with increased demand and adapt to new ways of working.
Responses for support can also get turned down or rushed if they’re not going to help hit a procurement team’s savings targets. This can lead to relationships with the wider business breaking down and becoming increasingly reactionary. As a result, a business stakeholder may not approach the procurement team in the event of a real opportunity to reduce costs because they felt the service they received before was poor. This can lead to business units working in silos which, in turn, results in contracts going missing or over-running, winding up with the overall business being in a sub-optimal position.
When savings are too heavily focused on, the role of procurement often gets overlooked too. If the new piece of technology has been budgeted for, then can the business save against their budget? It won’t impact their profit and loss, as the money has never been spent before. Does this then hit procurement savings targets?
On a lot of occasions, the answer to this would be ‘no.’ This could mean that the potentially lucrative emerging technology system receives no, or poor, support from procurement as it doesn’t hit their hallowed savings targets.
A lot of what I’ve written suggests that I’m not in favour of generating savings targets for procured goods and services, which isn’t true. Businesses can’t rely on just their revenues for growth. Savings targets are needed to drive positive, cost-conscious behaviours and procured goods or services represent a large proportion of most companies’ spend. The real question I have is, whether procurement departments should be given procurement savings targets?
Should procurement teams have savings targets?
To answer this, I’m going to use an example that I came across recently with a client (I’ve experienced it on many other occasions as well).
The facilities department had been set a savings target for the year and so had the procurement department. The multi-million pound Soft FM contract had come up for renewal and the two teams had worked together to run a tender for the new contract. Both agreed to move to a new supplier and save £1million per year. Who gets to claim the savings?
It’s a facilities contract and the spend comes out of their budget. But procurement helped achieve it and it relates to external spend. They can’t both claim the saving as the business reports on savings and hasn’t saved £2million. Cue rounds of arguments over who can claim the saving.
The ultimate answer is, it doesn’t matter. You’ve successfully saved £1million for the business by working collaboratively, as it should be done. But by assigning procurement and business unit savings targets, one party is going to be left disgruntled at the result. Does that encourage whoever can’t claim it to go through that collaborative process again?
The problem with procurement savings targets
This is the problem with savings targets for procurement departments. Procurement departments should be an enabler for the business to achieve their goals, be it successfully delivering a new product, maintaining revenue growth or saving against their budgets. Providing procurement teams with savings targets overlooks the other areas of value that procurement can provide. In extreme cases, it can actually serve to damage a procurement team’s position within a business.
Businesses should start to look at how else they can assess their procurement department’s performance beyond savings targets. Perhaps they could look at procurement’s actual involvement in spend decision-making, the level and quality of support they provide the business with or the proactivity of contract management?
Savings targets have their place in the corporate world, a squeeze of the metaphorical sponge is needed to remove excess water every now and then. But, as a whole, targets should be broader than just a percentage saving each year. If it’s that narrow, then the likelihood is your procurement department will just be attempting to squeeze the sponge under water.
In the second instalment of this article, James will explore how procurement savings are achieved.
About the author
James Bousher is a Operations Performance Manager, specialising in procurement and supply chain, at Ayming. James has a degree from Cambridge University in Land Economy & Management.