Over on spendmatters.com/cpo, the maverick has been doing a great job knocking out Procurement myths one by one, with twenty (20) down and five (5) to go. While the doctor did not co-author this series, as per a post this spring, he did consult on them and believes that all of these are myths that you need to be aware of.
The first 10 myths are:
- Hit Your Metrics
- Pay No Heed to Cost Avoidance
- Stay Away from Maverick Spending
- Surveys are Silly
- The Shared Services Model is Bad
- PMOs and CoEs are Bad
- Spend Should Always Decrease
- Category Management is Best
- Take Negotiated Savings Out of Budgets
- Sourcing and P2P Definitions are Set in Stone
Of these, the doctor‘s favourites are:
- Stay Away from Maverick Spending,
- Spend Should Always Decrease, and
- Take Negotiated Savings Out of Budgets.
While avoiding maverick spend is generally a best practice, sweeping it under the rug, even if it is small, is not a best practice — nor is mandating a stop until you understand why there is maverick spend. Is it because the buyer doesn’t know, doesn’t care, or thinks he has found a better deal? If the buyer didn’t know, then there is an issue with the process (of communication) somewhere, and fixing it will prevent future maverick spend. If the buyer doesn’t care, then there is a personnel issue that needs to be dealt with. If the buyer thinks he has a better deal, why? Lower cost, higher quality, quicker acquisition, or false perception. In the first three cases, the Procurement pro needs to investigate to see if there is a new opportunity she was not aware of, in the last case, an education program is probably required.
While spend is important, it is not the most important thing. Organizations exist to make profit for their shareholders. Profit is revenue minus expenses. That means that profit is increased when spend is decreased, or revenue is increased faster than spend is increased. The best way to to increase revenue faster than spend is to increase value. That’s why value creation, and not spend reduction, is the most important thing.
Savings are not a means to cut budgets — they are a means to find additional revenue for investment into opportunities for future value creation. These days, no department has enough money, and no one has enough money, or time, for training. If budget is freed up, it should be used to invest in training and new technologies, not to blindly increase shareholder dividends.
But these are just a few of the myths. More to come!