It's important to know what we mean by savings, so procurement and finance are working to – and measuring – the same goals, says CIPS CEO Malcolm Harrison
When I spoke at the CIPS UK Conference in October, I talked about how procurement professionals were measured. In fact my words on the day were that the savings were a given, so what can we do over and above the savings?
But are savings a given – is this our modus operandi? And what do we really mean when we talk about savings?
For many years there has been talk of procurement becoming more strategic. Risk management, supply chain innovation and supporting M&A are seen as the more strategic parts of procurement, and these activities can be directly linked back to making savings, or rather to delivering commercial benefits – they are not mutually exclusive. The trick is to make that link more overt.
Jim Hemmington, CPO at the BBC once said that the savings his team make mean more and better programmes are produced. This is where a lot of us still get a buzz from the role. It’s important that we don’t lose sight of this and are open with up-and-coming young professionals that delivering commercial benefits – which in many instances mean savings – will always be a business imperative. Fabio Francalancia, group procurement director at Sky, says on p12: “If you are in an interview with me and you say, ‘I don’t want to do savings’, then the interview is over.”
It almost feels like we need a major rebrand on savings. How can you save money when you have never bought an item before or when the market price, and the price you pay, has increased? Savings that occur through product innovation, process improvements, social value and sustainability initiatives all bring real commercial benefits and are closely linked to business goals, they just may not always deliver “cash releasing” savings.
If screwing a supplier down on price results in your competitor being the first recipient of a market-changing innovation then your savings will likely pale into insignificance compared to the lost opportunity for commercial benefits from innovation.
Tomas Veit, head of procurement at brewers Asahi, explained how he links it back to innovation. Veit has introduced a dedicated budget for his team to spend time with suppliers at their factories, plants and farms to look for innovative opportunities.
Veit used the example of Asahi’s relationship with water and hygiene services provider Ecolab. “In the past traditional way, we would sit with them and push them on price,” he said. “It’s not like that anymore. We talk about how we can lower water or energy consumption, and they are bringing solutions. It’s a new level of partnership.”
It is all well and good if you can actually demonstrate that the savings release cash. But in a survey by management consultants Protiviti, nearly half of finance leaders claimed that 20% or less of procurement savings show on the bottom line. Only 31% of procurement leaders shared this view. A third (35%) of procurement leaders rate their sourcing process in delivering value and cost savings as “very effective”. Only 20% of finance leaders agreed.
Protiviti said it had been motivated to carry out the study due to perceived shortcomings in the way procurement tracks and communicates savings, how they collaborate with finance departments and how they work with the wider business. Are finance and procurement always measuring the same thing?
We must differentiate between cash-releasing savings and other commercial benefits. Both are important, but are not necessarily the same. It is always about adding value; there should always be commercial benefits and often these are cash-releasing savings. Our business functions may be more interested in commercial value, while our finance colleagues will always want to ratify the financials. Either way, all roads ultimately lead to what are commonly described as savings. We need an agreed definition for savings – so that we all measure the same thing or things.