Today’s guest post is from Torey Guingrich, a Senior Consultant at Source One, a Corcentric company, who focuses on helping global companies drive greater value from their expenditures.
I’ve heard it time and time again “we don’t count soft savings” — which at times translates to “we don’t consider value beyond unit cost and volume reduction“. In recent years, many companies seem to have taken an overly broad definition of soft savings to include cost avoidance, budgeted-cost reduction, and other ways that Procurement adds value to the organization through their sourcing and negotiation efforts. Much of the work that Procurement does isn’t just reducing costs on recurring purchases, and what we consider a strategic partner from a sourcing and procurement standpoint, is helping business units to source and put in place solutions that meet their evolving needs.
So should Procurement not get any “credit” for this work?
Below are a few scenarios where Procurement professionals may struggle in quantifying savings/impact and where the bottom line cost may actually see an increase (gasp!)
New Recurring Purchases: When a new need arises for a department, Procurement can add value by helping to support the requirements definition, RFI and eventual RFP process — this is where Procurement’s role is to help business users understand the options in the market and make the best-fit decision based on their needs. Consider an organization that is growing and needs to implement an applicant tracking system to better manage their recruitment process. This is certainly a process improvement measure to better the recruitment process for the HR department, hiring managers, and the applicants themselves — but one that is not going to yield a tangible cost reduction result (and is going to add a new expense to total cost).
Should Procurement not support the RFP to put the solution in place because they cannot quantify the process improvement or completely offset the new expense?
Capital Purchases: Organizations typically define a capital plan for the year based on upcoming large-scale purchases. For instance, within the Facilities spend category, there are a number of systems that get replaced infrequently, but that represent a large financial outlay. Say an organization is looking to replace the HVAC system at a given facility or perhaps changing the doors at a warehouse — these are both scenarios that should have some degree of competitive bid associated to ensure the project is cost competitive.
Should Procurement really be comparing proposed pricing to the cost paid 10 (or more) years ago or not support the effort because there are no “hard savings”?
Increased Volume: As organizations grow, or most obviously, as they increase production, their volumes associated with direct and indirect goods will scale to some degree. Procurement may have negotiated a great deal on electricity price per kWh in the deregulated market, but once production ramps up your total electricity cost is going to increase.
Should Procurement not bother negotiating a price reduction because the total cost will increase anyway? Note, this is probably the most extreme view of “soft savings”, but is something that Procurement should align on with Finance to ensure savings are being calculated based on unit cost reduction against actual volumes!
Dynamic Requirements: Plenty of categories are driven by constantly changing requirements or where similar services may be required, but the specifications drive the cost. Commercial print is a common area for this — the print needs of an organization may be driven by their specific campaigns, events, or one-off marketing needs. Print costs don’t get broken down into the cost per coloured pixel — they are made up of various specs that come together for a complete need.
Should Procurement not support an RFP for a large scale print campaign because they can’t count savings or be forced to measure outcomes against different specifications?
Market Changes: Certain products and categories within direct and indirect spend are more prone to price fluctuation due to the raw materials that make up the final product. Take packaging for example — due to some of the extreme weather scenarios in 2017, we saw many packaging suppliers pushing increases on final product given the rise in the pulp and paper costs as the supply market was impacted. Many times these increases were mitigated or minimized through negotiation, but that did not actually result in reduced unit cost.
Should Procurement not negotiate with these suppliers or in these markets because the mitigated increases “don’t count” or wait for the cost increase to be billed just to show tangible savings?
I hope you’re all yelling a collective “no!” to these questions, but so often ideas like cost avoidance or reduction from first proposal are written off as “not real“. Understandably, as a Procurement organization looks to build its credibility within the organization and invest in new talent and solutions, hard-dollar cost reduction tends to be a big focus. But once the group moves from a tactical to strategic approach and supports business units in managing their suppliers and sourcing events, the way value and results are measured needs to reflect this changing dynamic. For the scenarios above, maybe it’s measuring impact/value from the average of bids received, or from first proposal to final value, or coming up with a NPV for that HVAC system from 10 years ago — Procurement should define the methodologies for these common scenarios and define for finance and leadership how they will be capturing value and what it means to budgets and bottom lines.
If we expect Procurement to support the evolving needs of the organization, then we must also evolve the way that Procurement and the broader organization as a whole sees and communicates the value of the sourcing and negotiation outcomes from the Procurement team.