With the holidays upon us I thought now would be a good time to make my nomination for the Grinch of Sourcing. This year my nominee is the doctor over at Sourcing Innovation. The good doctor has recently restated a rant that “savings is just money you shouldn't have spent in the first place”. His original blog on the subject can be found here.
It seems that the base of the argument is that good sourcing people get it right the first time. If you find savings after you have already sourced and contracted an agreement, it only means you have been spending too much all along, which isn’t really savings at all, is it?
The problem I have with this premise is that it ignores a simple fact - MARKETS ARE FLUID! They aren’t stagnant, and in my experience, there is always a better deal available. Even if you negotiate the best deal possible, it is only best deal FOR THAT MOMENT IN TIME. Once you set the bar to a new low you have effectively changed the playing field.
Markets (and pricing) change for a variety of reasons, including:
- Supplier efficiencies and increased productivity
- New technologies
- Removal of perceived risks
- New economies of scale
- Additional volumes or new types of products purchased/scope enhancements
- Enhanced customer or supplier processes
- New Market Competition
- My favorite - Timing in relation to the salespersons monthly/quarterly/annual quotas
Particularly in indirect spend and service categories, these types of market changes can’t always be tracked with an index, at least not with 100% accuracy. Yet all of the factors listed above are subject to change from time to time and those changes bring about lower costs that may not have been available in the past.
Here is a simple example. Let’s say there is a marketplace with two dominant suppliers. We’ll call them “FedEx” and “UPS” for illustrative purposes. Each has their own market share and understands their competition. A sourcing expert has negotiated a discount with for services with one of these vendors that is competitive based on the profile of their business.
Suddenly a new competitor, we’ll call them “DHL”, enters the marketplace and starts taking business from “FedEx” and “UPS” based on price. “FedEx” and “UPS” clearly feel threatened (although would never admit it), so when the contract comes up for renewal, the sourcing expert is suddenly receiving offers 10% lower than the past contract, and ends up negotiating further for an overall cost reduction of 20%.
Is this cost avoidance? NO! That 20% was not on the table before. It’s savings, pure and simple and beautiful. Hard dollars in the pocket, Christmas bonus check to pay for the new pool AND jelly of the month club membership combination savings.
The doctor also mentions that “That's why "saving" consultancies can come back and revisit a spend category every three to five years and find "savings" when, in reality, there shouldn't be any if they did the job right the first time and the category was properly monitored at contract renewal time.”
I can’t speak for other consultancies, but I can say that at Source One we often source and resource for customers. The difference is that we DO monitor the agreement to make sure prices don’t creep up and we DO monitor (and exploit) contract renewal timing. We have to - we only get compensated based on savings achieved (as opposed to savings projected). Still, I can say with confidence that we can get a lower price (almost) every time. Does that mean we left money on the table the first time? No, the price we get three years from now is not available today. Markets are constantly changing and savings are achieved by closely monitoring these changes and striking when the opportunity is available. Try getting long distance for $0.05 per minute in the nineties. It wouldn’t be possible. But today, we can get it for less than $0.03. We didn’t become better negotiators, the markets changed.
If a procurement/sourcing department is effective, will the savings become less and less substantial over time? Probably. Should there be better ways to track procurements effectiveness? Absolutely. But Yes Virginia, there is a such thing as savings, and there always will be!