Only a low percentage of chief procurement officers and chief finance officers feel that they have “very effective” sourcing, according to the most recent research we conducted among 400 procurement and finance professionals. Effective sourcing equates to 10 percent or more in savings year over year. Unfortunately, finance executives say only a small fraction of those potential savings ever make it to the bottom line, according to our survey. Operational variables — overspending, changing needs, and buying from unauthorized suppliers — were among the primary causes for suboptimal savings, along with invalid savings assumptions, unrealistic savings projections, and a failure to effectively track realized savings.
Our full survey results will be released later this month, and there are definitely positive and encouraging findings — but they are not the majority. I thought it would be instructive here to examine the responses of self-reported top performers in the three areas below to see what traits they had in common — specifically, how they analyze spending patterns, align with other business functions, and establish an effective savings governance program.
Over two-thirds of our top performers consider their spend analysis to be robust and routine. These professionals do not consider analysis as an afterthought; rather, it is baked into their budgets, planning and strategy from the beginning.
Our data suggests that, as companies perform more robust analysis, their ability to minimize financial leakage greatly increases. The categories benefiting most from this trend are duplicate payments, unrealized credits, and paying non-contracted prices.
Notably, over half are using a third-party spend analysis tool, rather than in-house assessments. Clearly, they’ve decided it’s an expenditure that’s worth making, and find, or expect, it to help them drill down into spend data to drive insight, identify savings opportunities, and support budgeting and future planning efforts.
Organizational Design and Relationship
Most of our top respondents have centralized finance and procurement departments. They describe the relationship between procurement and finance as “collaborative decision making.” This relationship is crucial for visibility and understanding of the savings that the procurement team is generating.
Savings Methodology and Tracking
Given the strong relationship between the two functions, it makes sense that almost all of our top respondents feel that their finance and procurement teams are aligned on cost saving initiatives. For this to be the case, initiatives must be clearly conveyed, strategized and executed. Over two-thirds of these respondents felt that the savings from procurement are properly tracked and well understood.
For the most part, the answers of the top performers paint a picture of confidence and solid understanding of the need for strong connection between procurement and finance. For those not yet there, I have the following recommendations:
- Start with spend analysis. A formal, robust spend analysis is perhaps the most essential building block of procurement success.
- Consider investing in third-party spend analysis tools.
- Track and measure savings. Top procurement functions quantify the value they generate, as well as how effectively they document and communicate that value to the rest of the organization.
- Ensure that negotiated savings make it through to the bottom line. Ultimately, procurement’s objectives should include making the organization more profitable, driving competitive advantage and exerting a positive impact on the bottom line.
- Understand the value of cross-functional collaboration. Establish a consistent, enterprisewide view of spending and value to help enable sustainable savings.
- Align with finance. All organizations should assess the extent to which a gap is evident between the two functions and identify ways to close it as quickly as possible.
Our report, complete with full statistics, methodology, and participation by title, will be released later this month. To be notified of the release, click here.