This article is part of a multiple-part series.  Click here to start at the beginning.

So, we’re a couple of posts deep and your still not convinced that your budgets are costing you money right? Let’s get a bit more complicated and let’s see if I can convince you that your budgeting needs more attention.

One of our clients, who shall rename nameless, is a large Fortune 100 organization who’s actually at the forefront of many spend management initiatives and widely considered a leader in what they do. This company has layers upon layers of divisions, sectors, departments and teams; but they've done a remarkable job over the last few years of developing and integrating shared services departments into their culture. These shared-services teams are meant to ensure the best utilization of their internal capabilities and resources across all aspects of their business. They've developed a streamlined process for needs assessments, supplier identification, sourcing, negotiating and legal review of all acquisitions, and have integrated that process into the culture of their organization. They've identified and implemented millions of dollars of savings through this process through hard-dollar negotiated savings, strategic goals alignment and soft-dollar savings in the reduction of time and systems.

So, how does budgeting play into this success story in a negative way? Well, the programs and controls they have implemented have been wildly successful. Their finance and executive management teams figured out a great solution to keep cross department managers willing to work with procurement and shared services groups. If the shared services team is successful at reducing the cost of an acquisition (through negotiations or scope rightsizing) and the department that made the request had budgeted the expense already for the higher cost, than they get to keep that unspent money in this year’s budget. They then have to ability to re-appropriate those funds to another departmental initiative or look good when they come in under budget in the next year.

Sounds great and in practice and it’s working pretty good. But there are also flaws in this plan. First and foremost, since 100% of the savings that are achieved are applied back to the department that had the acquisition request it actually makes the shared services team a cost-center, when they should be viewed as a profit center. So, the shared services team has a base cost of salaries, overhead and software tools, but they don’t have the ability to demonstrate an offset cost on the saving they produce. Also, while savings is an ancillary measurement, their team is primarily measured on contract output, not on savings. They are measured on their ability to push contracts and purchase orders through the system with as minimal resources as possible. The savings are a great feather in the cap, but they belong to the department that made the acquisition. This system creates a situation in which the shared services team will not put in the best efforts possible to adequately reduce spending, as they are measured on volume not results. It incentivizes the shared services team to always go after the low hanging fruit.

Further, it makes it impossible to justify more resources because each resource is seen as a cost instead of a profit. Case in point, our consulting firm has been providing supplementing sourcing resources to IT their shared services department. We were given some of the most complicated IT spend contracts to negotiate, contracts that the suppliers knew they had already won the business to. They gave us these contracts to negotiate because they did not even know where to begin nor did they did not have the capacity to get to them in a timely manner. We've delivered north of $350K of savings against $20K in fee. The head of IT shared services was thrilled with the results, but was unable to justify increasing his departmental resources because his own budget for resources had already been set for the year.

Now, he’s obviously going to fight for either more internal resources or external consultants like us in next year’s budget. He’s going to push to have the metrics in which his department is measured redesigned. But those battles and budget discussion are months and months away. The pilot projects we reduced costs in were only a couple of months’ worth of work. If we applied the same results to a similar amount of projects just up until budget review time (in a few months), they could reasonably expect to receive about $1.5 million in saving against less than $100K in cost. The math is pretty straight forward and hard to dispute, but their existing budget process and measurement metrics need to be changed before they can even explore these opportunities.

Lost sales opportunities are something that everyone is familiar with, including the budgeting committee. I don’t think I've ever seen a budget report that accounted for lost savings opportunities. But lost savings opportunities are a very real thing and they are a metric that should be incorporated into those budget discussions. We hear it all the time when we are selling our services, “I could get the savings myself” or “I have a sourcing department that does what you do”. But you’re not getting to those opportunities, you continue to overspend on one-time acquisitions and recurring spend items because you’re not staffed appropriately to get to them all. You probably don’t have the right in-house expertise for every single spend category and it would not make sense to hire someone for each of them, but your budgets can’t justify a consultants. And your budgets are probably not aligned with showing the value of ramping up your internal sourcing or shared service teams because they might be shown as a cost center.

So, maybe you’re thinking you should give your sourcing/procurement/shared services department 100% credit for savings achieved right? They can then use that money as justification to further develop their roles and departments, right? Well, not so fast. Let’s look at another example in my final case study on this topic. Check out our next budgeting post.
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William Dorn

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