Zero savings? Thanks, that’s perfect!

In this article, the fourth in a series of five, I consider the level of credit granted to projects which deliver substantial savings, and whether, from the perspective of the business, this is appropriate.

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As procurement professionals our time is often consumed by savings targets. Delivering, seeking approval and recording savings. Big savings are good news. No savings is bad news – really bad news. The type of bad news that gets you sacked.

For those of you who have followed my previous articles you know that I like to turn things around a little – to view things from the perspective of a business owner rather than a procurement professional. This article is no different.

The Savings Process

Let me first paint a picture which represents countless procurement activities around the world, I think it will be familiar to you:

After months, sometimes years, of effort the cross-functional procurement team signs the contract with the new supplier and implementation commences. The business signs off the savings which satisfies the agenda of the procurement leaders. The procurement personnel step back to allow the business to implement the new contract and manage the contract thereafter. “See you in three years” is the agreed message.

The newly contracted supplier, who may be the incumbent working on new contractual terms, sets about a “seamless” implementation (Ever seen one of those? No, nor me). Ever constrained resources of the procurement team and the business mean that effective Supplier Performance Management (SPM), (being very distinct from Supplier Relationship Management (SRM)) becomes a luxury too often performed by personnel unskilled at perpetual jousting with a hardened supplier account executive.

The inappropriate flow of information commences, which, in turn, will detriment the value (cost, service quality, innovation etc) retained by the buyers organisation. Suppliers work hard to find loopholes in the carefully negotiated performance clauses and claim to be meeting their contractual obligations even though the satisfaction levels of the buying organisation may remain low or decreasing with time.

Before we know it, the causes of the dissatisfaction which caused the buying organisation to test the market a few months ago are back on the agenda. Inevitably, at the end of the contract term, perhaps before, the market will be tested again. The result of the repeated procurement activity? Savings. Again, savings.

A Perfect Zero

How about we turn this around? How about we strive for zero savings? That’s right. You heard me correctly. Procurement could strive for zero savings. Before you question the level of my delusion please read the last paragraphs of this article, but first let me paint another picture.

In this picture, the same procurement activity took place as before, but the post-contract SPM was fully executed by adequate and skilled personnel. In this case, the innovation and continuous improvement clauses that were written in to the contract are realised. Suppliers are not able to wriggle out of the spirit of the previous negotiations. An appropriate period ahead of the expiry of the contract – long enough to switch suppliers should the need arise – the buying organisation commences its procurement activity only to find there are zero savings. A disaster? No. Let me tell you why.

We all hear the newsreaders’ tone change if the Dow Jones, FTSE, or Nikkei, or whatever is your favoured index, has fallen that day. Their tone drops portraying a sense of negativity. We are indoctrinated that a falling market index is bad news. Instead, however, what if the event of the indices dropping was accompanied by a cheerily delivered message of “great news folks, tomorrow you’ll be able to buy those blue chip stocks at a price way cheaper than today!”

Such a statement would be true; the stocks would be available at cheaper prices, but we never hear this message, even though we each take advantage of the falling index via our pension funds managers who are continually investing our hard earned cash.

Analogously, with procurement savings on repeated contracts – is a saving, a saving? I contend that those numbers which are repeatedly cited as savings by procurement teams could alternatively be merely a measure of the buying organisations ineffectiveness in managing its suppliers during the last contract term. A high saving means a poorly managed preceding contract.

A robustly managed supply contract, followed by a professionally implemented procurement project which delivers zero savings could be (stress, could be) demonstrative of a very well run contract where value has readily flowed to the buying organisation throughout the contract term, leaving non-incumbent suppliers with nothing further to offer.

Theory and Reality

Do I really believe zero savings are aspirational for most procurement projects? Well, no, actually I don’t. There are always some inefficiencies that can be eliminated, market developments and innovations that can be exploited, and organisations simply do not have the resources to execute the theoretically perfect procurement and contract management that I have set out above.

My message is simply that procurement leaders should carefully consider the causes of significant savings numbers, including the degree, and success, of post-contract supplier management – the news may not all be positive. Offering reactionary congratulations for projects delivering big savings numbers or an automatic chastisement for projects delivering small savings may be ill-advised.

By the way, I also need to be abundantly clear that I am not suggesting managers chastise personnel who report significant savings with a short-sighted, inflammatory question of how their staff previously spent their time. To do so is sure to lessen future efforts.

So, it may then be advantageous to allocate the scarce resources of the organisation toward contract management rather than repetitive RfX-style procurement. Readers of my earlier article “Buyers under the Duvet” may recognise a need to stretch practises outside the normal comfort zones of buyers, with the possible result that effective contract management actually reduces the level of savings from RfX-style negotiation.

In itself, this is not a problem so long as (!) organisations have already secured the value during the contract management phases of the procurement cycle.

Jim Willshaw (MBA, MCIPS, MIIAPS) is an experienced procurement professional acting as a consultant, speaker, coach and trainer to leading organisations all over the globe.