Forget short term cost-cutting – effective longer-term cost optimisation will help businesses not only survive, but thrive in the new normal
In a world of rapid change and adaptation, one pressure remains constant for all businesses – maintaining high-value results at a lower cost. Recent events such as COVID-19 and Brexit – and the myriad challenges that came with them – forced teams to re-evaluate internal processes in order to keep up with changing regulations and shifting demands. The economic slump experienced in 2020, as a result of the pandemic, intensified the need for businesses to optimise costs to aid recovery and maintain future growth beyond this period. Finances have therefore become paramount to the current business agenda – and procurement functions quite often find themselves at the centre of this discussion.
A procurement team’s role is highly influenced by the forever fluctuating trends in consumer and business demand, and so an element of agility is paramount to its success. However, this demand does not simply shift side-to-side, from trend-to-trend, it also increases in quantity. The pressure on the procurement function to step up and deliver more value at a faster pace, and at a lower cost, has intensified through recent months. It falls to the team to draw a fine balance between generating short term savings, optimising overall costs, and maintaining a steady supply chain – doing all of which whilst monitoring patterns in demand and keeping up the necessary level of agility.
The crucial element that must be considered is the difference between longer term cost optimisation and short-term cost-cutting. Depending on their immediate predicament, businesses should be wary of looking for often tempting, quick-fire ways to bring their costs down in the short term without considering a longer-term strategy. Cost-cutting remains a very short-term solution, whereas longer term cost optimisation is undertaken with the view of both preparing the business for further challenges in the future and helping them achieve a positive growth trajectory. And ultimately, it is the role of the Chief Procurement Officer (CPO) to spearhead the discussion and effort on how these long-term savings can be made.
The challenges falling at the CPO’s door
There are many challenges for the CPO to overcome, all of which are key to succeeding on the cost optimisation journey. Quite often, the short-term nature of financial incentives for employees can slow down and even impede decision-making on longer term value initiatives. But more than that, long term value can only be achieved through changes in behaviour from the business and suppliers and that means collaboration and buy-in from all parties is essential. However, this is one of the hardest things to achieve alignment on as a CPO when everyone else is busy doing his or her day job trying to meet their next set of targets.
There is good news, however. One of the key factors that can often cause real issues for CPOs and their teams seeking to improve long term value – and something they generally have more ability to fix themselves – is the lack of visibility over third-party spend and other procurement related data. Yet it is by interpreting this data and making it visible to others that CPOs can get others to sit up and listen.
Many companies fail to understand the overall spend across teams and suppliers, and this makes managing costs trickier in the long-term. Teams often know who their top suppliers are, but they rarely know the total level of spend with each of these suppliers if those suppliers are also used by other business units, and they often have even less of an idea about which other suppliers are being used in the business that provide a duplicate product or service representing a consolidation opportunity.
Transparency reveals all
Luckily, these days the market is awash with technology solutions that provide excellent spend visibility through dashboards, provided the CPO can embed a process that captures and categorises spend data accurately. Building a full spend cube in this way across the organisation that maps all your suppliers and their annual spend against a common market facing categorisation is the key foundation for holding a mirror up to others in terms of where the procurement opportunity could lie. Building market-facing categories highlights opportunities to consolidate and control spend, makes internal benchmarking easier and ensures you have a holistic view on how the company uses third parties. To maximise effectiveness, CPOs should categorise the majority of the spend before starting to review opportunities, since the spend data will lead you to the most promising ones.
Setting the goal for long-term success
Looking beyond building a spend cube, there are several additional avenues that procurement functions can undertake to lay the groundwork for optimising costs over the long term. From bringing transparency to the incumbent suppliers’ contract landscape to implementing an initiative management and savings tracking tool that shines a light on the work procurement is doing and its impact, there is an array of technology solutions for businesses currently operating on a low-end budget. A lack of funds doesn’t have to be the barrier to companies building up their visibility over third-party spend and contracts. Beware though that technology is only ever part of the solution; ensuring the right processes and that people are incentivised to use them are just as important – and often harder to get right.
Making incremental improvements through procurement in this way is possible, but it can often be more effective through a programmatic approach. A formal Opportunity Assessment, for example, can build a strong business case and implementation plan, with forecasts around return on investment (ROI). There are a number of common targets associated with carrying out this assessment, number one being to reduce costs; but they could also include risk mitigation, working capital improvements, supplier performance improvement, and more. By moving to a return-on-investment based business case with a clear, trackable implementation plan, opportunity assessments provide the perfect foundation and catalyst for cost optimisation and procurement transformation.
An Opportunity Assessment such as this helps to build momentum and enthusiasm for a concerted procurement effort that will be cross functional in nature – the only way it can achieve significant, long-term cost optimisation. Without this approach, procurement functions can find themselves in the endless cycle of knocking a percentage or two off the purchase price of supplier deals while missing and potentially even excluding the bigger prize – the very definition of short-term cost cutting.