What if Savings Didn’t Matter in Procurement

There are countless articles and blogs on the value procurement brings to an organisation.

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This article was originally published on LinkedIn.

Most say that savings are just one component of this value proposition and that we need to look outside of savings into other areas of value like stimulating innovation, supporting the organisation’s corporate social responsibility goals and reducing risk throughout the supply chain. Everyone agrees with these articles and, as we map out KPIs for our procurement department or individual team members, we ensure savings is just one, albeit important, metric that their value will be evaluated on.

What happens though when you remove the value of savings altogether from a procurement department and it’s individual team members? Even from the offerings of procurement consultancies which often focus on savings as a way of convincing CPOs to purchase their services?

Other Value Opportunities

This is a question I first grappled with in Singapore where I came across organisations so cash-rich that they did not seem to value savings, were not actively looking for savings within procurement or from external suppliers, and they actively pursed other types of value like corporate social responsibility as mentioned earlier.

Interestingly, the procurement team members in these organisations also seemed to be grappling with this issue as when savings are off the table the value procurement, and individual procurement professionals, brings becomes harder to demonstrate.

I came across a great quote recently in an old article on the SpendMatters website which is from a technical stakeholders view and sums up their view on savings well: “Procurement is like a UFO — here one day, gone the next. Zapping savings here and then going off to the next project.”

It is interesting that this technical stakeholder wanted his procurement representatives to focus on areas of value outside of savings as well. It seems then that in some of these organisations in Singapore that do not value savings, other areas of procurement value get their time in the spotlight.

Here are some brief observations on three of the many areas of value these organisations focused on rather than savings. I think these are valuable as they are complementary components of value and can be applied in organisations with and without a focus on savings:

1. Compliance

For a number of the organisations I met with in Singapore a key area of focus for the procurement team was on how they supported compliance within the wider organisation. A large part of their value proposition therefore was based around maintaining the quality of the goods and services being purchased, managing supply chain risk especially around continuity of supply and ensuring that supply chain practices around labour and bribery complied with applicable legal requirements like the UK Bribery Act.

Compliance is an area that all procurement teams focus on, however outside of Singapore I have not come across many compliance related KPI’s from a procurement team or individual view other than basic ones like non-acceptance rate for raw materials or supplier certification rates. By raising awareness of the way procurement supports compliance and measuring teams against it, procurement can grow its brand away from the traditional savings agent.

2. Innovation

Singapore has a focus on pioneering advances in innovation and driving competitive advantage for growth according to Teo Lay Lim, MD, Accenture Singapore and ASEAN. I found this to be true with most of organisations in Singapore I have met with recently bringing innovation into our conversation and wanting to discuss methods for using procurement to stimulate and support innovation.

Outside of Singapore, innovation is increasingly being recognised as the key to sustainable growth by companies around the world and as Capgemini research points out, innovation has evolved from a purely internal capability to a collaborative process with the external network of supply partners. Therefore the ability of procurement to work with suppliers to identify and execute innovation within existing contracts and to stimulate innovation outside of existing arrangements is a key part of the procurement value proposition.

Some simple observations from Singapore include having incentive schemes in place relating to innovation in supplier contracts, having innovation as an agenda item on regular meetings with key suppliers as well as internal stakeholders and having KPI’s in place which reward procurement team members for focusing on innovation rather than relying purely on traditional savings or throughput metrics.

3. Corporate Social Responsibility

Research conducted by the Harvard Business School found that organisations who focus on corporate social responsibility (CSR) significantly outperform their competition in terms of stock market and financial performance. One Singapore-based organisation, Fuji Xerox, describes their view of CSR very clearly, “…forging a link between long-term competitiveness and the sustainable development of society and the company…” which seems to be a view echoed by many of the organisations I have met with in Singapore.

Each of these organisations had different ways of using their procurement team to support their organisation’s focus on CSR. Some common examples included the standard inclusion of evaluation criteria on environmental, social and ethical standards, educating suppliers on CSR principles and supporting suppliers to implement improvements in their manufacturing processes to reduce environmental impacts.

An IBM IBV CPO study found that 97 per cent of successful and influential procurement teams are significantly involved in their organisation’s CSR initiatives compared to 61 per cent of average procurement teams.

Regardless of the current maturity of a procurement team though, or if it is the organisation driving these initiatives or procurement lobbying for them, clear KPIs (results driven rather than process orientated ideally) will allow procurement to demonstrate the value it is providing to the organisation.

In summary, regardless of whether your organisation is cash-rich and based in Singapore, a not-for-profit based in South Africa or is financially and geographically somewhere in between, your procurement team needs to deliver value beyond savings.

Whether the area of value is compliance, innovation, CSR or any other area, having good stakeholder communication and clear KPIs will help ensure the value your procurement team brings is clear and you avoid the sobriquet UFO unlike the unfortunate procurement team in the SpendMatters article.