Banish the Skeptics: Creating Procurement Credibility through Realized Savings

Procurement was long considered a largely tactical function—that is, until the Great Recession of 2008-2009. To save money during difficult financial conditions, organizations began to focus on the strategic importance of procurement and its potential contribution to financial performance.

But we say “potential” for a reason; too many times, procurement professionals report projected savings, but lack the data to show that value has hit the bottom line.

That causes a credibility issue for procurement that erodes trust for the function in an organization—most particularly the CFO’s office, which literally banks on its results. CFOs want financial predictability, not promises. Unrealized savings cause tension between procurement and finance over why they don’t show up on the profit and loss statement. The function that should be procurement’s greatest champion ends up as a skeptic instead.

And, of course, other areas of the organization can be skeptical of procurement, too, and for reasons other than financial. Whether you want your procurement team to be an advisor to internal stakeholders, to be included earlier in projects, or to increase spend under management, the organization must believe in the value procurement offers for the function to achieve those goals.

How can procurement get results that make a real financial impact on an organization—and solidify the function’s role as a strategic partner? Through truly realized savings.

Three Phases of Procurement Transformation

At Insight Sourcing, we approach procurement transformation in three phases:

Phase 1 – Target Value: A diagnostic that starts any large procurement transformation. In this phase, an organization analyzes procurement spending and compares it to benchmarks to identify opportunities to reduce costs.

Phase 2 – Capture Value: Implementation of the changes the diagnostic uncovered. With opportunities identified, procurement develops savings strategies for different categories of spend and begins to implement them. Depending on the effectiveness of execution, this is the phase when potential savings and actual savings can start to diverge – a phenomenon known as savings leakage.

Phase 3 – Realize Value: Where ongoing, predictable, and maintainable savings begin – that is, in an ideal project. In reality, savings leakage can be as high as 50%; in other words, half of what an organization expected to gain through procurement transformation erodes.

Savings leakage is where the trouble with procurement credibility can begin. While it often starts in Phase 2, it becomes more obvious in Phase 3 if an organization fails to establish tools to monitor the procurement function. Rigorous tracking of spend, savings, pricing, and demand is the key to realizing savings. If an organization doesn’t continue to track and analyze procurement spending, savings leakage is a foregone conclusion. Thorough and accurate data analysis will stop the leak and help procurement meet all-important savings commitments.

Doubters All Around

While savings leakage is an enormous contributor to credibility issues, it’s also all too common for procurement’s internal customers to misunderstand the department’s role and mistrust its motives. Many organizations view procurement as a bottleneck or an annoyance. Unapproved and uncontrolled spending can be rampant at such companies. They also contribute to savings leakage, creating an endless cycle: mistrust leads to uncontrolled spending leads to savings leakage, which creates more mistrust – and on and on.

That makes it very difficult for procurement to gain greater control over spending, which is necessary for the success of the function. Not surprisingly, the spend under procurement management at the beginning of a transformation project often is less than optimal. While 80% is considered best in class, most procurement organizations control 50% of the procurement spend – sometimes far less – at the start of a project.

Achieving a high level of influence over vendor selection, cost, quantity, quality, and service levels requires planning, deep category expertise, rigorous analysis, and alignment with stakeholders: issues that a transformation project can and should address.

Becoming a Strategic Partner

Savings realization means meeting the commitments of a transformation project and then going one better: growing savings incrementally year-over-year. That’s the power of continued data collection and analysis.

And that’s when the role of procurement is most clearly understood and appreciated. Success becomes self-sustaining; stakeholders see the impact procurement can have on an organization, spend under management increases, and the value of the function continues to grow, in both real and reputational terms. Doubters are converted into true believers. That kind of credibility cements procurement’s role as a strategic partner, once and for all.

Interested in learning more?

Grab your copy of our full guide, 'Savings, Realized: Delivering on the Promise of Procurement Transformation.'

This is part one of a series of posts on procurement transformation. Up next: more on Target Value, the diagnostic phase that starts any large procurement transformation.