- "Best-in-class" procurement teams manage 88% of corporate spend and their savings is 8.5% of total spend, which equates to about 10% of managed spend
- "Laggard" procurement teams manage just 23% of corporate spend and their savings is 3.7% of total spend, which equates to about 16% of managed spend (higher savings as a percentage of managed spend than the best-in-class)
Based on my experience, I believe that there is overlap in the types of categories managed by both best-in-class and laggards. In my opinion, that 23% that the laggards manage is comprised of the products and services that are core to the organization and repeat purchases - the obvious stuff for a procurement team to manage that is also managed by the best-in-class.
I am speculating that the other 65% that the best-in-class manage is comprised of many categories that are considered "non-traditional" - HR benefits, fleet management, insurance, marketing, facilities, etc. If this is true, then why doesn't procurement save as high a percentage on these categories?
In my experience, products and services that procurement has contracted for for years, or even decades, have less supplier margin to eat away at while categories that have gone unmanaged or managed by departments outside of procurement have far more "juice." The baselines are different - Procurement has kept costs in check on their "bread and butter" while suppliers are getting "fat and happy" in categories that had been under the procurement radar.
I reached out to Andrew Bartolini - the author of the Aberdeen whitepaper - to see if I was missing something or if we could get to the bottom of the numbers. We didn't reach any definitive conclusions. But here are possible explanations that we discussed (but didn't necessarily agree upon):
- The assumption that there are diminishing returns when strategically sourcing categories over and over is sometimes, but not always, true
- Procurement professionals have deep category expertise in core categories that enable them to achieve higher savings compared to indirect categories where they do not possess such deep expertise
- If a procurement team has a certain impressive ROI ratio (e.g., 7:1) in historical performance, that doesn't mean that management will not deploy procurement on projects that have a lower, but still positive ROI (e.g., 6:1 or 5:1)
- The commodity price volatility from 1st quarter 2008 to 1st quarter 2009 has resulted in direct materials prices falling farther than indirect materials, services, consumer goods, etc. (the explanation I feel is most plausible)
One of the things that Andrew and I did agree on was that what really matters is the aggregate savings number, not so much savings as a percentage of managed spend. For the theoretical company with $1,000,000 in total spend from yesterday's post, we both agree that a procurement team that saves $85,000 would be better than a procurement team that saves $37,000.
But I still don't feel at peace with what the research may imply. Do you think that the best-in-class should save more as a percentage of managed spend than the laggards? Or are the implications of Aberdeen's research spot on in all economic scenarios (recession, expansion, stagnation)?
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2 comments:
Rembering that there's no such thing as savings in a perfect procurement organization, the numbers make perfect sense to me.
This myopic view on "savings" makes it hard to see the simple truth -- if Procurement is doing its job perfectly, it's always getting the absolute best deal, so there are no "savings" to be had. Procurement should be about "cost avoidance" because a "savings" opportunity just means that Procurement didn't do the best job that could be done the first time around.
Thus, a best in class company should see diminished "savings" year after year as they get better and better at getting the best deal each and every time they tackle a category, leaving the only "savings" opportunities to be those opportunities where product costs (either due to commodity price or labor price decreases or production efficiency increases) have decreased since the last time a contract was cut.
Remember, even Wal-Mart, despite the popular perception, doesn't roll-back forever! (Heck, sometimes they roll-up by 51%. Case in point, last time I was there I was going to pick up "our" brand of coffee because they advertised, in their flyer a month ago, 4.99 everyday. Well, I get there, and it's 7.57 ... a 51% increase.) At some point, until a disruptive innovation comes along, a best-in-class Procurement department is going to get the "best deal" and there will be no more savings. The better the department, the sooner they hit the floor. The sooner they hit the floor, the sooner they maximize "cost avoidance", which is what procurement should be all about, and minimize savings.
In other words, I think the numbers are just fine and Andrew did a good job of uncovering numbers that reflect the actual reality of what a good procurement department really is!
Doc,
I'm afraid you misunderstood. Aberdeen's numbers seem to suggest that procurement is saving MORE on the repeatedly sourced categories than they are on the newly sourced categories, not the other way around.
My real-world experience suggests - as you point out - that there is less fat to cut in repeatedly sourced categories than there is in newly sourced categories.
So, then, do you disagree with Aberdeen?
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