There’s No Such Thing As Savings!

I’ve said it before and I’ll say it again: There’s No Such Thing As Savings. And I’m glad to say that I’m finally not the only one screaming it. As per this recent editorial in the CPO Agenda on an escape from the tyranny of savings, the problem with savings — whereby procurement is executed properly and there is early engagement, demand challenge, functional specifications, and diligent supply-market analysis — is that there are none. The more preparation that is done, the narrower is the range of offers from candidate-suppliers. The more radical the procurement solution, the less it fits a standard unit-price-difference calculation.

In other words, when a procurement department is well run, it will generate less of the head-turning savings that CPOs are obsessed with. So there is actually a perverse incentive not to change at all, and to manage spend badly. Because, as I’ve said many times before, savings is just money you shouldn’t have spent in the first place. That’s why “savings” quickly disappear after a company runs all its top spend categories through an open reverse auction for the first time. Once a company is getting market price, there are no more “savings” on the unit price. The only “savings” left are in efficiencies, and once an optimization is run to optimize the network, there are no “savings” left in the buy. The only option left is to go back and reengineer the product to reduce production and/or raw material costs. Then when that’s done there are no “savings” left. Success is then measured by controlling costs and preventing the inevitable rise to previous levels of excess that always happens when a category is put on the back burner and unmonitored. (That’s why “saving” consultancies can come back and revisit a spend category every three to five years and find “savings” when, in reality, there shouldn’t be any if they did the job right the first time and the category was properly monitored at contract renewal time.)

I understand that a Procurement Department still has to track and report its progress against a standard performance metric, but it definitely shouldn’t be savings. In the past I have recommended “cost avoidance” as a possible metric, but the CPO agenda article offers another recommendation which, if properly implemented, might be better. The author suggests using a “Procurement Control Index” which is to be developed by applying the following five criteria against each relevant procurement category:

  1. Is there a policy that describes how staff approach suppliers, what their financial authorities are, and what kinds of goods and services they may buy?
  2. Is there a procurement strategy document that is developed and agreed jointly with the ultimate budget-owner?
  3. Is there compliance with policy and strategy?
  4. Are current contracts and delivery performance actively monitored and managed?
  5. Are there improvement targets for assessing compliance, delivery performance and user satisfaction?

If the appropriate measurements are defined with respect to each question, for example:

  • % of categories with policies
  • % of categories with strategies
  • % of categories where policies are followed
  • % of contracts that are actively monitored
  • % of categories where improvement was seen

and these measurements are combined into a single perfect procurement metric through straight-forward multiplication, then a good measurement of overall procurement performance would be whether or not the PCI increased over time.

Of course, if this is too much, you could always start with Charles’ cost indices, but I’d hope the ultimate goal is a more comprehensive metric that applies organization wide.

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