While the debate between savings and value has been going on for some time in procurement, we’re seeing signs of a tipping point toward value.
Savings still matter in procurement! Savings are on the first line in your report to the CFO, and there's a good chance you are judged heavily on them. Savings will always be important, but we expect value quantification to rise in priority as organizations grapple with articulating how their activities matters to the bottom line. The big challenge with this transition will be measurement and calculating precisely what value actually means to justify investments.
Additional read: 5 Steps to Drive Value With Tail Spend
Increasing Importance of Non-Savings Procurement Priorities
Procurement teams are increasingly confronted with strategic imperatives that map to a company’s mission but don’t necessarily have savings as the primary driver. Supply risk management is the example that we see most frequently in the headlines but other topics include:
- Specification Collaboration
- Demand Management
- Reduction in New Product Time-to-Market
- General Data Protection Regulation (GDPR) in Europe and CCPA in California
Additional read: Finding New Areas of Impact for Procurement
What is Value in Procurement?
Simply put, creating value in procurement is focusing on aspects beyond “just” savings. Spend Matters does a good job of succinctly articulating the role of value:
"More bang for the buck where “bang” is the utility the business gets from supplier products/services, divided by the bucks (i.e., spend)".
A more comprehensive explanation comes courtesy of the CPO at Thyssen Krupp in Procurement and Supply magazine:
“At the strategic level Procurement Value can be defined by:
- Becoming a customer facing capability
- Connecting commercial and technical capabilities of the Company
- Activating key supplier relationships
- Reducing supply vulnerability; accessing new products, R&D and innovation
- Lowering costs
- Delivering high quality goods and services; and
- Creating transparency and visibility across the Company's spend activities
These and other available resources typically point to having procurement break out of its traditional “bean counter” mode and move into other areas of the business and the supply chain.
How to Drive More Value in Procurement
One big challenge with this transition to an emphasis on value rather than (or in addition to) savings will be measurement. No one is going to argue that creating value is “bad”. What’s hard is calculating precisely what that value means, how it flows to the bottom-line of the organization, and how it justifies the investment in the resources needed to get there.
Since so many organizations use scorecards to measure procurement department success, there will need to be some new ways to incorporate measurements. We expect quantifying value to become one of the next big frontiers in procurement research as organizations grapple with trying to articulate how what they’re doing matters to the strategy of the organization.
Additional read: Where Procurement is Headed
Another focus area that needs to be addressed is a better understanding of what actually generates value. If you talk primarily to Procurement and Finance professionals, your attention will undoubtedly be drawn back to savings because that’s what Finance and Procurement people think about.
Instead, try reaching out to some of the business users to find out what matters to them. Operations staff will likely focus on service levels. Sales teams will talk about the quality of promotional material. IT might discuss ease of support. Each of these matters to the business owners at least as much as savings.
Some examples from CIPS of key value drivers beyond savings include:
- Innovation – harnessing ideas from your supply base to improve your product of operations
- New revenue – identifying new ways for suppliers to help generate revenue
- Marketing – co-marketing opportunities with suppliers, especially when the supplier is a larger company with broader marketing reach
Rise of Procurement Technology and Automation
As the procurement tools become more powerful through processing advances, IoT, Blockchain, etc., they will be able to increasingly identify and capture the savings from negotiation, spend analysis, contract review, spend leverage and more - the once bread-and-butter of the “traditional” procurement approach.
Good luck trying to analyze 10,000 supplier contracts for Purchase Price Variance(PPV) faster than your automated spend analysis platform. As one of the speakers at a recent eWorld said, “When you Combine data with processing power - You get opportunity”.
Assuming this trend will continue (and that is a pretty safe assumption), it is going to free up procurement resources to focus more on creating value that is less obviously quantifiable. Many recent thought leaders have focused on the need for best-in-class procurement teams to dig deep into their ability to sell, manage and interact with stakeholders inside and outside your organization. That is one place where computers will never replace humans. Look instead for a renewed focus on the need for best-in-class procurement teams to create more value to the organizations in the future.
Need for New Procurement Tactics As Old Ones Mature
Unless your organization is very early in your procurement journey, you have likely already implemented many of the standard savings tactics like renegotiating contracts, PPV, eAuctions, etc. While these tactics will always be important, you will need to find new ways to stay ahead of the competition. New tactics will almost certainly involve deeper collaboration with suppliers, within your business and with partners to generate more value together.
Each of these is focused more heavily on value than savings and will require both new ways of thinking and a heavy reliance on collaboration between groups inside and outside the organization. Learn more about How to Maximize Procurement Value and Savings.
Now is the time for your organization to start thinking about how to both better incorporate value into your (value) proposition and identify ways that you can accurately measure and report value to your stakeholders.