This month, Bill Dorn and I will be speaking at Corporate United’s Synergy conference in Scottsdale Arizona. Synergy has always been a great place to learn about the latest trends in sourcing and procurement, and we are excited to head to this new venue, which reflects Corporate United’s growth into new markets and ever expanding membership base.
The subject of our presentation is measuring and reporting cost savings, but over the 40 slide presentation we only spend about 15% of our time reviewing the actual metrics you should use when developing reports. The focus, instead, goes to the heart of why sourcing events often fail, and why there is such a disconnect between sourcing/procurement and the rest of the organization, particularly when it comes to indirect procurement. The problem, in our eyes, can be traced back to two things - poor tracking/supplier management after a contract has been signed and inadequate internal communication.
The first issue is the easiest to comprehend. Without recurring measurement and reporting of cost savings initiatives, the impact of sourcing activities will slowly dissipate, or never get implemented at all. The important thing to realize here is that in many cases, not only can lack of tracking lead to zero savings, it can also lead to cost increases. For instance, if your pricing agreement expired with an incumbent and your sourcing activities led you to a contract with a new supplier, but they are not properly implemented and sites continue to buy from the old supplier, your rates may actually be higher since you are now buying out of contract.
The reasons savings aren’t tracked are also easy to comprehend. First, tracking becomes a resource issue. How can a sourcing professional justify spending hours tracking savings that should have already been implemented when they have numerous other day to day operational issues, including sourcing the next category? Further, even when reports are used, they are under-utilized or simply dismissed as invalid by management (I’ll get to that in a moment) and heavily scrutinized, when not ignored, by stakeholders.
So why are reports often dismissed by management? That takes us to the communication issue – management and stakeholders don’t understand what the reports are telling them. Sure they see there are savings opportunities available, but what changes need to be made to obtain the savings? If the new program is already implemented, why haven’t they seen a corresponding reduction in the budget numbers?
This is not to say that stakeholder engagement isn’t improving, because it is. But clearly communicating at the front end of a project how cost savings will be defined, along with setting expectations regarding stakeholder roles, responsibilities and commitments during the life of the sourcing engagement (including when it’s time to change suppliers), is often times still lacking in a major way. So sourcing continues to operate in a bubble, and when it’s time to implement, the legal team has no time to look at a contract, the stakeholders aren’t interested in changing suppliers, and finance isn’t aware, or doesn’t understand, the savings opportunity.
Internal communication is a critical component of savings sustainability – and improving it is the key to not only providing reports that make sense to stakeholders, but ensuring that the reports provide value to the organization. If you’d like to learn more, we’ll see you at Synergy!