Lies, Damn Lies, Statistics....and Savings Calculations.
With all due respect to Mark Twain, the propensity of Procurement organizations to rely on savings as a proof of the value they provide is often misguided. Presenting an objective measure such as a savings is an enticing way in its perceived simplicity to communicate the value of the function. However, in reality, it is little understood, difficult to calculate, and can in the long run harm the reputation of the Procurement function within your organization.
With a need to present the value generated, is there a better way?
What's wrong with "Savings"
It is important to first understand the many drawbacks of savings calculation and reporting.
- Hard to calculate - It sounds like a simple concept but can get complicated very easily. Is it a reduction in total costs paid? But how are volume fluctuations handled? Is it the final agreement as compared to an initial offer by a supplier? But how often are initial offers padded knowing it will be negotiated? Should "free services" be included? But do we actually need these services? For every potential savings type, there is a "but" that needs explained, documented, and validated.
- Only a Best Guess - Once savings are calculated and validated, it is important to remember they are only estimates. Only the most robust systems can make this a calculation based on actual activity. Claiming savings on items that were never purchased or on deals that have changed multiple times since execution will damage the validity of the numbers reported.
- Who Cares? - Most importantly, what does the organization value. Not all organizations want or value saving money. Are you in growth mode where time to market is most important? Is innovation most important where suppliers are needed to support those efforts? If this isn't valued as an organization, leaning on savings numbers only makes Procurement seem out of touch with the organization as a whole.
- Wrong Motivation - if Procurement staff are overly measured on savings achieved, it incents the wrong behavior. Other attributes and behaviors such as a consultative approach or category expertise need to be stressed, as they will lead to overall value generation, not just savings achieved.
Take a Holistic Approach
As a better presentation, Procurement should approach value from a more holistic viewpoint. Articulate the various ways the organization drives value to reduce the focus on "savings" and make the shift to Total Value Delivered.
- Service or Product Offering - Was the "right" thing purchased? Procurement can offer great value in facilitating a structured process that helps to more clearly define requirements and better ensure providers meet or exceed expectations. What new or added benefits were identified by Procurement's efforts?
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Supply Base
Management - What does the supply base look like? Is the organization using the right providers? Consolidation of purchases across business units increases leverage. Continuing to review the market and bring market leaders in for consideration helps to avoid complacency for both stakeholders and providers in long term relationships. - Results - Most importantly, what was the result of the engagement? Were the stakeholders goals achieved? A strong Supplier Relationship Management (SRM) function can help to monitor the quality of the providers used. Document and communicate stories of successful projects and actual results as a way to promote Procurement and encourage other stakeholders to work with you and achieve similar successes.
- Process - How efficient is your process? What work have you done with suppliers to improve this? Examples can be consolidated invoicing or established rate cards. Making the day to day easier while following good procurement practices incents the right behavior and should be highlighted as a source of value.
- Savings - Last but not least, savings. If all of the other areas are addressed, savings will happen. Were there key negotiations where current pricing was brought into market range? Was a proposed increase avoided? Track the big wins, but don't make this the driver.
By focusing on the total value that Procurement can bring within the context of your organization, you can help to strengthen the way Procurement is perceived, encourage partnerships with your stakeholders, and help you Spend Smarter and Grow Smarter.