We are in an interesting economic period. With the US economy in a recession, the sum of all business is declining.

In a recession, many companies and consumers reign in their spending. This affects the demand part of the classic economic supply and demand graph. In typical cases, when demand slows, pricing drops because supply outpaces demand. Pricing will reach a floor when supply contracts to balance with demand.

Recession, Stagflation, Cost Savings & Corporate Purchasing

Today, the US economy is seeing slowing demand yet rising prices. This is referred to as “stagflation” – an odd combination of stagnant growth and rising prices.

Many economists attribute this, in part, to the effect on global demand from China’s growing economy that is putting upward pressure on commodity prices. Because many companies’ cost structure is affected by commodity prices for their inputs – even if the raw materials are further down the supply chain – they need to pass along the cost increases to the consumer to stay viable.

Purchasing can often achieve cost savings in typical recessionary times by securing declining prices and working with eager suppliers struggling not to lose too much business. To today’s CPO, however, the inflationary environment in this recession can make it seem like there is no opportunity for cost savings – the traditional metric through which Purchasing can communicate its value.

Finding Cost Savings Amidst Inflation

But I personally believe that today’s recession does indeed have opportunities for cost savings. Just not in the volatile commodity markets, though.

Domestic service providers see weakening demand. China’s growing economy is not offsetting the demand for local services.

There are many service categories where pricing is not dependent on commodity inputs (such as fuel). These industries have many suppliers who want to fight against the threat of declining sales. These categories offer a tremendous opportunity for typical recession-era cost savings.

There will be the inevitable meetings with top management for many purchasing executives this year. Many of them will have the purchasing exec saying, “We struggled to contain costs as commodity markets saw across-the-board inflation.” But, hopefully, this statement will be followed with “But we were able to (partially) offset rising commodity costs by saving $x in our services spend.”

So, the moral of the story is: don’t ignore your services spend. It represents a great opportunity to save face in tough times for cost savings.

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Recommended Reading

• Direct vs. Indirect Spend
• Effective Spend Management & Transformation
• Adding Procurement Value to Marketing Spend
• Spend Analysis
• Enterprise Spend Management
• How to Manage Spend Before It Starts
• Why Direct Spend Procurement Cost Savings Matters More
• Benefits of Spend Analysis

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