Savings targets, budget wars: how Procurement can help
In a recent guest post for Spend Matters, Mert Erkan discusses Savings Targets and Budget Wars and how Procurement can help you win.
At the beginning of every financial year when top-down savings targets are announced to C-level executives and directors, they are often missing bottom-up analysis and a robust plan to support the delivery. The problems really begin when team members are not clear on terminologies and methodologies, such as the difference between an operational saving against a procurement saving. This can lead to double counting and confusion such as "is the baseline what was paid last year or is it this year's budget", "is this year's budget correct?", "does the budget include these savings"...
In the past few years many versions of this story have played out in leading banks, retailers, utilities, infrastructure and construction companies.
Third-party spend opportunities
While discussing third-party spend opportunities, a Commercial Director of a leading UK construction company said: “We baked these opportunities into our own budget-reduction targets and we should not double count them.” The Procurement Director replied: “All the third-party spend savings are procurement savings”. They were both correct but team spirit was lacking around the table. The Commercial Director was concerned, as potentially his budget would be cut further, and the Procurement Director was feeling the pressure of delivering “his” savings targets. While these discussions are on-going it is beneficial to remember that someone needs to do the hard work and deliver the savings.
Tips on how to achieve the desired savings
Set out below are a few tips to achieve the desired savings by avoiding these pitfalls. They should also help to guard against a “silo mentality” when individual teams and business units try to deliver their “own” targets.
1. A data-driven approach is key to identify ambitious targets and eliminate double counting
Employing robust data analysis and technology to inform the top-down target setting decisions from the start can enable companies to set these important targets in a much shorter timescale. Then it is much easier to sense check the targets, clarify them and turn them into initiatives and plans across business units.
Depending on the sector and scale of spend, on average companies can save 5% to 10% across their third-party costs. With third-party spend representing 40% to 80% of companies’ total revenue there is a significant opportunity to increase their profitability. At the same time, it is easy to see if the targets are inflated to an unachievable level.
In-depth data analysis early on is critical to set achievable targets and avoid double counting across the business. On a recent global banking project, the team consolidated more than 1,000 single sourcing initiatives every week and reported the savings delivery progress to the board across multiple business units and countries. They did this to ensure that the forecast was correct, progress was monitored and any challenges / risks are tackled on time. In this specific case, without analytical capability it would not be feasible to deliver such a program on time.
2. One Team: Cross functional engagement is the success factor
Once the targets are set it is critical to form a cross-functional team and communicate the targets regularly through the business. A senior executive simply saying: “You should work with Procurement to deliver these targets” is not enough and the team will not remember their targets two weeks down the line. Regular communication of the savings targets is often seen as unimportant due to the fact that CEOs/CFOs do not realise how big the savings can be or the power of Procurement as a function.
These are company targets which should be incorporated into the business units’ budget reduction. Procurement is there to work together with the business and support them to deliver their targets. It requires continuous communication across the business supported by senior executives. As part of this process every function involved, not only Procurement, should be rewarded for positive outcomes.
A programme will only be successful by engaging all relevant business functions as early as possible so different parties can work together and silos are eliminated. As a result the fact-based decision-making process will be supported by proactive stakeholder engagement.
3. Run and deliver the results
The rest of the strategic sourcing or supplier relationship management process is more straightforward but also more labour-intensive and challenging. A typical strategic sourcing project might take three to six months, and savings might vary from 10% to 30%. During that time it is essential to continue working with the stakeholders as “One Team”. To ensure that the right suppliers are selected and savings are maximized Procurement needs strong analytical and negotiation skills. As a good example, having automated tender responses analysis and negotiation tools is one of the key catalysts of a successful sourcing process.
To maximize the in-year benefits, teams need to move from the category planning phase to delivery phase as soon as possible as the delivery requires both time and effort.
4. Final battle: track and manage the savings
It is important to develop a savings tracking / monitoring tool based on a technology platform to sustain the results in the long run. Once the savings are signed off it will be an easy task to run the weekly PMO and develop periodic reporting. Commercial teams can also use it for contract management activities such as continuous spend analysis, commercial negotiations, target cost setting or KPI/SLA management. Therefore, continuing to bring the different business functions together and position Procurement strategically.
To run a successful savings delivery program there has to be robust analytical capability and stakeholder engagement skills. These skills are required throughout this challenging journey from target setting / category planning, strategy development stage until the results are delivered, tracked and monitored. Then Procurement will be automatically positioned as a strategic component of the business which other departments will queue up to work with.
To view this post on Spend Matters, click here.