Today, we’ll be reviewing an Aberdeen whitepaper entitled “The CFO’s View of Procurement: Same Page, Different Language,” available from Zycus.
Early in the whitepaper, Aberdeen introduces three tiers of cost savings: Identified, Implemented, and Booked, defined as follows…
- Identified: Beyond simple identification of a savings opportunity, this tier of savings is characterized by sourcing activity and negotiated pricing, where savings potential is attainable.
- Implemented: After the contract has been executed, enterprises begin to realize the potential of previously identified savings opportunities. This tier is characterized by purchasing, receiving, invoicing, and settlement activity and ensured by contract compliance and strong end-user adoption.
- Booked: Once savings have been realized, they can be recognized or booked in operating budgets and other enterprise-level financial statements. This tier is characterized by close involvement with finance, procurement, and the budget holder.
According to the whitepaper, booked savings is, on average, only about 27% of the identified savings. The traditional view places blame for the gap between implemented and booked savings squarely on the shoulders of procurement. This is a significant and fundamental issue that must be revisited and challenged. Procurement’s role should be to deliver savings to the enterprise. If a line of business chooses to deploy the savings to drive other goals that do not make implemented savings any less real.”
That is a good point. And it underscores the need for procurement and senior management to have a common understanding of exactly why procurement is working towards “savings.”
What is the organization’s goal? Is it to reduce expenses? Or is it to reduce prices and costs? They are two different things.
If the goal is to reduce expenses
In this case, you need senior management (who demands the expense reductions), procurement (who can reduce prices and costs). Include the business unit (who can comply with supplier agreements and work within a reduced budget) to work collaboratively to get identified savings to equal implemented savings to equal booked savings.
However, if the goal is to get more out an existing budget amount, the whitepaper explains:
“Procurement should not be responsible for booked savings. Challenge the current view that it is procurement’s responsibility to negotiate budget reductions with the line of business. Once savings have been achieved, it should not fall to procurement to establish how this very real benefit should be allocated across the enterprise, but rather, to the line of business and / or finance.”
The key is that senior management (including the CFO) and procurement have a common understanding of the goal. If they don’t, there’s that classic risk that procurement will say “We’ve saved the company $500,000,000” and the CFO will say “But our expenses are 5% higher than they were last year!”
It all comes down to the goal of saving in the first place. Is it to enable growth on the same budget? Is it to reduce expenses to improve the corporate profit margin? Is it to match expenses with revenues (a common mantra in these economic times)?
Why are we saving?
Once that is known, saving money should be treated as a corporate goal and evaluated in light of that strategic goal. Was the goal accomplished through the savings and compliance efforts (which is different than futily figuring out whether implemented savings equals booked savings in cases where saved money is reinvested)?
My favorite parts of the whitepaper were the quotes from various executives.
All in all, this whitepaper is definitely worth a read. You can download your own copy from Zycus’ Web site.
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