Daily Archives: July 28, 2008

Claro’s Crown Jewels

Last year, I blogged about how you could achieve Clarity with Claro in your sourcing projects. Since then, Claro has been named one of Seven Small Jewels for 2008 by Consulting Magazine. I was in Chicago recently, so I decided to catch up with Bart Richards, who is now a Managing Director of the Sourcing Group.

Over the past year, their sourcing practice has been growing by leaps and bounds as more and more companies are trying to find savings opportunities in an inflationary market where cost pressures on all sides are causing financial hardships across the board. The good news is that they have been successful as there are still savings to be found when the right categories are addressed, but the better news is that they understand that, in today’s market, cost avoidance is king as simply holding prices static can provide you a significant advantage over a competitor who sees their costs rise 10% to 30%.

The truth of the matter is that if your organization is still focussed on cost savings, and you are focussed only on strategically sourcing those categories you know you can save on, you’re actually losing money. How can this be? Let’s pretend that you source steel and services (or petroleum and travel, or energy and telecom, etc.). Let’s also say that you spend 10 Million on each category and that it is your expectation that you can only save on services. If put all of your effort into strategically sourcing services, you could probably save 20%. But steel prices have more than doubled over the past year. If you simply delegated steel to an e-Auction, you’re likely to find your steel prices increase 90%. Although that would be good compared to the market, that would be very bad if focussing all of your efforts on this category could have resulted in a price increase of only 60%. By focussing on savings, you saved 2M on savings only to lose 3M on steel — for a net result of a 1M loss. Not very smart. Today, it’s more important to focus on those categories that have substantially increased in price since your last sourcing event, or that are rapidly rising in price, than it is to focus on the few remaining categories that might yield savings. Because if you don’t, you find that you save a dime only to lose a dollar.

This is also why it’s critical that an organization’s sourcing performance metrics, as well as incentives and bonus plans, revolve around cost avoidance and not cost savings. After all, as I have said before, there’s no such thing as savings, because if you really can save money, it simply means that you shouldn’t have been paying that much in the first place, and that you are paying a price that should have been avoided! Now, I know it is more work to define avoidance metrics than it is to define savings metrics, but the payoff is worth more than the price. Furthermore, there are a number of on-line resources, such as the article archives and blog entries provided by Next Level Purchasing and the wiki paper on the e-Sourcing Wiki, that you can use to guide your efforts, standard pricing indexes that you can use to precisely define average raw material price increases since your last sourcing event, and a number of consultants (including the doctor) who can help you define the right metrics as well as the right sourcing sourcing program.

With this knowledge, Claro has been successful both at finding savings for their clients in categories such as services, travel, and benefit plans as well as controlling cost increases and keeping them to a level that is usually significantly less than market average by focussing on those categories that the client can buy in bulk, hedge against, or lock in longer-term preferential agreements. They’re still saving an average of 10%+ in a number of categories for their average client, but more importantly, they’re reducing expected cost increases in key categories by 10% to 20% or more, which provides for better overall cost containment across an organization than simply focusses on the low hanging fruit.

A number of examples of their success stories can be found in the numerous case studies on their web-site, and if you want to know whether or not they have sourced a particular category recently, and what sort of results you could expect, you can contact them for more information and additional case studies relevant to your situation at any time. They’re more than happy to take your call, or your e-mail, and Bart Richards can be reached at brichards <at> theclarogroup <dot> com.

Our next post on Claro will talk about the other services Claro offers as well as some of their particular areas of expertise.