Recently asked and realized I haven’t addressed this in a while.
(Summarized) question from an experienced Director Level:
“I’ve never seen vendor ROIs materialize. Where’s the gap?”
First, the 30% to 40% gap has been known since the early 2000s when AMR (swallowed by Gartner) reported it.
Reasons:
1) Formulas assume best case scenario
2) Formulas assume all savings are captured … sourced must be purchase-ordered at the right volume from the contracted supplier using the right logistics at the right volume at the contracted price
3) Payables must check the invoice against the … PO (for price) logistics tables (for freight rates) against received (for quantity not shipped) …. and ensure that there is received inventory not paid for (as some suppliers will keep resubmitting the invoice until paid, leading to duplicates without PO numbers)
Also, most “suites” miss one or more of these capabilities and there goes 20%+ the day you buy it!
Then there is org maturity to ensure
* contracts get switched
* maverick spend is properly assessed
* “expedited” and “surcharges” are within range …
Spend analysis service providers love to dive into utility, contract services, and “tail spend” for a reason: they can find overpayments of 15% to 30% they can go after, and then keep 33% of what’s recovered (that you could do yourself with a cheap tool and a week of training). It takes a long time to ensure contracts get switched across a mid-size or larger organization!
Providers that like to get rich off of overpayments, once you implement proper m-way invoice matching, will switch to the new trick of “identical” SKU substitution. I.E “we don’t have the 8-packs/20-pack/10000 screw boxes in stock, but we have the same product in 4-packs, 10-packs, 5000 screw boxes — is that okay?” … you say yes, they ship, but the half size packs cost 75% of the normal size pack, so you end up paying 50% over contract rate!
Of course, there’s always exceptions for “expedited” or “surcharges” that will creep in on orders suddenly too small, too big, or shipped fast … if those aren’t indexed and checked, well, we all know the fraudulent 800,000 shipping charge for a hammer (and a small package of emergency parts) was true!
You’ll never see more than half of what they promise in an average organization as:
- you won’t be able to source/procure more than a 1/3 of the spend through the system in a given year (if that!)
- there will always be exceptions
- there will always be missing features that suppliers can exploit to overcharge you, and by the time audits find them, most of that won’t be recoverable
- they assume you, and your team, are all seasoned Procurement experts
- they assume you have mastery over a tool they just installed with little to no training
In short: always discount the promised ROI by at least half if you want a reasonable estimate! Vendor ROIs are a lie!