the doctor is sure that by now you have certain (mega-)suite vendors whispering in your ear that you really need their full 1 Million+ (annual subscription) S2P solution to maximize efficiency and savings (and that the doctor was crazy*0 when he told you that you should be able to get a sufficient Source-to-Pay solution for 120K a year), which, while possibly true stated that way, you don’t need to spend nearly that much to maximize your ROI.
But how do you maximize ROI without necessarily maximizing savings and/or efficiency? Simple! The same way you optimize profit by optimizing COGS vs. increasing volume. Just like every $1 of savings goes straight to the bottom line vs only $0.10 of revenue, every dollar you don’t spend on a technology solution goes straight to the bottom line vs. only squeezing out an extra 1% on savings.*1
But the best way to see this is to, gasp, do some math! Let’s take three mid-markets at 250M, 500M, and 750M. We’ll use industry averages for COGS (with 33% salaries & contractors; 2% utilities; 5% rental; and 20% amortization/depreciation) and assume 40% external spend. Depending on the industry, external costs can go to 50% or more, but not much in the Mid-Market (MM). We’ll assume an average 5% savings potential and 80% spend addressability over 3 years (as some existing contracts will be long term and not addressable in the short term, and some tail spend will just be too small / one time to ever bother with). We’ll assume that a base solution can achieve 80% of that savings potential, or 4% over three years (if there is sufficient manpower to address all the relevant categories [semi]-strategically).
|Addressability (80% of 40%)||80M||160M||240M|
|Savings Potential @ 4%||3.2M||6.4M||9.6M|
|3 Year Cost||360K||360K||360K|
|Savings Potential @ 5%||4M||8M||12M|
|3 Year Cost||3M||3M||3M|
Now, what type of ROI would you like to see if you are a 250M MM? A 1.4X ROI or a 8.8X ROI? the doctor knows what type of ROI he’d like to see! Also, if the mega-suite provider cuts the price in half, it only doubles the ROI to 3.2X. Barely acceptable, and you need the manpower to identify the full savings potential and everything to go perfectly to realize it. (What’s the probability that this will hold true continuously for three  years? Zero Percent. 0%)
Unless you have a (very) large category over 10M (where the savings potential on that category is 500K), the reality is that the 80% solution you will get by an average across-the-board solution / self-assembled platform-powered BoB suite will provide you an ROI that far outshines what the oversized, overpriced solutions will do for you as a mid-sized business. (Those suites are only needed for 1B+ enterprises where there are 50M to 100M+ categories where an extra 1% makes a huge difference.)
the doctor loves sourcing optimization, but it typically won’t find that much savings beyond what you can find with good spend analysis on RFP data in a category < 5M. (It might take a few hours of spend analysis, but you will get 80% of the savings with intelligence. If the vendor includes an affordable optimization module (2K/month; likely with model size caps), then you should use it on every category, if just to get a baseline, as you will get a good ROI from the module with continuous use, but if they want 10K/month and you are a 250M business, you likely won’t get enough of a return, especially since most of your categories aren’t that large or complex. Note that if you are a 1B+ multi-national enterprise, the story is the exact opposite. You absolutely need it and in your well managed categories, you won’t identify enough savings without it.)
For most categories, all you need to do in sourcing is 3-5 bids, side by side unit cost and total landed cost (TLC) comparisons, supplier award selection with RFP (spend) analysis, contract cutting to capture the price, configured POs in the eProcurement system to capture the contracted price, and line-item match on the invoice to the PO to make sure you’re paying what you should be. This is two-decade old tech now, but more than sufficient, when properly implemented and enforced, to capture 80% of the “savings” (or cost avoidance) in a category. Procurement savings come more from the proper implementation of a process than from technology that enables that process. What technology does is make it easy to do the process efficiently and effectively because it can guide you through the process, prevent you from missing steps or making mistakes, provide you the insight you need to make the best decisions, and even train you on best practices you aren’t familiar with. And allow you to repeat the process many more times on many more categories in a much shorter timeframe than if you were trying to do it all by hand.
Plus, the technology will allow you to do more with less, so you can minimize the need to expand the Procurement team as the company grows. Remember, good people cost $$$. In fact, a fully burdened high-end resource will cost as much as you pay for the tech, if you are paying the right price. This means that the tech will not only provide you an ROI on measurable cost reductions, but a measurable cost avoidance as you grow as you will not need to add as many people to a Procurement department that will become more efficient over time (as more and more tactical tasks get automated, freeing up the team to focus on value-add tasks). (Remember, tech never replaces the people you need, it just makes them many times more efficient so that you only need one or two high performing individuals for a function vs ten for one that is poorly managed; allowing you to add those ten resources elsewhere to produce more product or grow the business further. However, remember that Procurement does more than one function, so you may still need those 10 people for contract management, supplier development, additional strategic sourcing events, etc. but you won’t need them processing paperwork.)
So don’t overpay for S2P tech. You absolutely need S2P tech, but overpriced tech won’t get you the ROI!
*0 they may be right, I may be crazy … but it just may be a lunatic you’re looking for …
*1 An extra savings of 10% on a maximum savings of 10% leads to a maximum additional savings of 1% overall on a single category. In inflationary times, which we are now back to, you’ll never find more than 10% slack in the TCO of any category. In fact, you’ll do good to find 5%, which means going from average capability to advanced capability will only shave an extra 0.5% off of the total category spend on average.
Don’t think that these inflationary times are going away anytime soon. Supply chains are at their shakiest thanks to both the pandemic and the repercussions thereof, the rapid increase in climate change which has led to a rapid increase in natural disasters, the increased geopolitical destabilization around the globe, and the rebelling workforce, many of whom have gone from living barely above the actual poverty line (relative to where they live) to below it. Now add that to the flat and recessionary economic conditions in most major GDP players, and we won’t be seeing good times ahead for quite a while.