How to Optimize Spend Within Your Organization
As we push ahead into these days of economic uncertainty, Chief Financial Officers (CFOs) are closely monitoring all facets of their organization - with one of the top areas of focus being procurement. With macroeconomic factors playing a significant role in the decision-making of business leaders around the world, most are doing what is considered the “common-sense” approach during times of economic hardship - cutting costs.
Procurement and cost-cutting seem like they could almost be antonyms of each other, considering that procurement is literally defined as buying. While of course, it is the job of procurement to purchase what is necessary for the business to operate, it is integral to a company’s health to locate areas where spend can be optimized and thus procurement teams dive into their overall strategy. This requires procurement leaders and teams to rid themselves of the biases that solely protect themselves and instead take on a holistic view to firmly grasp what can be conducted in a much more cost-effective manner.
Effective procurement leaders and Chief Procurement Officers (CPOs) will remove the “procurement-bias” blinders and strive to truly optimize the spend of their organization. Taking a step back and understanding what key areas to look into can be a beneficial first step to understanding how to optimize spend.
Understanding Procurement’s Role With Finance
Procurement’s primary role is to work the spend to get the best deal. But do we ever verify that the spend request is 100% legitimate? Many companies do not. The Finance Planning & Analysis (FP&A) role today is typically just to confirm that the spend is budgeted, not to validate if the spend is also a necessary purchase. Let’s broaden the FP&A role to validate with the business owner that the requested spend is absolutely required. This role is critical! Business Owners have their own biases on what they “need” (e.g., IT manager will request platinum support for a SAAS software solution to ensure top notch 24/7 support, but a lower support package would be adequate). If FP&A takes on the spend validation role, over time stakeholders’ behavior will change because Finance will question the spend. They will practice better diligence to ensure they buy only what they need and nothing more. It is possible that the Finance spend validation process can reap greater savings than even Procurement can obtain by securing the best deals.
Implementation of new processes can be challenging, but the right approach can help with streamlining it. Beginning with a procurement request (PR) dollar amount threshold is a simple yet effective first step to managing an organization’s spend. For example, assume that a new policy ensures FP&A reviews all submitted spend greater than $50,000. The FP&A Analyst would be responsible for explaining and justifying each of these PRs greater than $50,000 and will have aligned with their stakeholders prior to weekly meetings. While tedious initially, you will soon observe that behavior will change once Finance is questioning the team on their spend and therefore will only purchase what is necessary to reduce any potential downtime during the PR process. This approach will also enable the FP&A analyst to understand the business owners and the teams that they support, ultimately becoming “partners” and developing the holistic view needed to adequately support procurement operations.
Seizing Other Spend Opportunities (How to Optimize Non-Managed Spend)
Many procurement leaders will stress the importance of managed spend while neglecting non-managed spend (the spend that is not influenced by the procurement team) altogether and can be traced directly to the competency of the procurement organization and culture. Many companies do not have an accurate metric that measures managed spend and don’t allow the organization to have the holistic view needed to make decisions regarding procurement. If procurement organizations can get a better understanding of not only managed but non-managed spend, then this presents an opportunity for additional cost savings.
In order to optimize non-managed spend you will need to empower stakeholders to obtain better pricing. Utilizing a competitive bid (CB) process will not only motivate stakeholders, but it is simple to implement and will lead to cost reduction. For example, imagine simply changing the procurement request (PR) workflow process to require a requestor to conduct a competitive bid (CB) when a procurement request (PR) is over $50,000 and attach at least two bids to a procurement request (PR). If bids aren’t attached, then have a dropdown menu to enter causal for not doing competitive bid (CB). Once the procurement request (PR) is submitted, procurement execution will review it and if there is non-compliance with doing a competitive bid (CB), then have procurement schedule a meeting with the initial requestor.
It is essential to meet with team members and discuss why a competitive bid (CB) was not completed, as the cost savings will range between 2-5%. Not to mention that you are changing the behavior of the business through establishing a competitive bid (CB) mindset for all significant spend - even when it doesn’t go through procurement.
Applying Sensible Standards Within Procurement Cycle Times
Production leaders often find themselves frustrated with the non-managed spend, considering that it usually correlates directly with long procurement cycle times. Without this, it is difficult to convince business owners to work with procurement in order for us to add value to better spend optimization.
We must apply a “sensible” standard on any procurement process step that increases cycle time. For example, it is common that recommendations from internal procurement audits increase the procurement cycle time. While this is due to auditors wanting to ensure 100% compliance, there are cases where recommendations are not always necessarily “sensible”. It is a must to weigh the costs and benefits of increasing cycle time, considering that it may result in turning away stakeholders from utilizing procurement and ultimately making it more difficult to optimize spend.
Towards a Cultural Shift
It is easy to fall into bias, but this mindset needs to be avoided when seeking to optimize and streamline business processes. Wearing a company hat as opposed to solely rooting for your department/team will allow you to cement yourself into your company and aid in the establishment of a cost/expense-reduction culture. Optimizing spend needs to not only be a procurement effort - but a concept instilled within the culture. Getting everyone on board can be a challenging task, but the right intermediary can streamline the process.
Mike Glass runs GPC (Glass Procurement Consulting), a procurement consulting firm focused on optimizing a company's spend. Mike has worked in senior procurement management positions at NVIDIA, Google, Meta, Fitbit, and Flextronics. Mike would enjoy getting your insight on any procurement topic, feel free to contact Mike at mike@glassprocurementconsulting.com.
