Most Cost Reduction Initiatives Fail. Here's How to Succeed.

For consumers, the hard work of purchasing comes down to little more than supplier selection. A savvy shopper might break out their calculator to compare unit prices or scour their weekly circulars for "cost reduction opportunities" like coupons and vouchers, but that's about as complicated as things get.

Companies run into trouble when they bring this mindset into professional purchasing. Delivering on cost reduction opportunities is rarely (if ever) as simple as selecting a supplier and reaping the benefits. Procurement's work isn't over when the ink dries on their new contract. In fact, a handshake and a signature on the dotted line means it's time for the real effort to begin. 

Many organizations have yet to realize this. That's a big part of why so many savings initiatives result in failure. To take cost reduction from a goal to a reality, Procurement needs to stop expecting suppliers to do all the heavy lifting. The function should enter each engagement with a full understanding of the workload ahead and ensure its practitioners recognize the value of effective change management. 

Implementing a cost reduction strategy always presents unique challenges. These will vary based on the spend category as well as the organization's goals and unique personalities. Whatever form these obstacles take, a few best practices should help guide any organization. Here are a few that Source One has shared with clients over the years.

1. Be a Savings Cheerleader
Procurement should answer every argument from end users and internal stakeholders the same way - by reiterating the potential benefits that are on the table. There are times when the facts won't speak for themselves. Quite often, as hurdles pile up, internal stakeholders decide that maintaining the status quo is preferable to seeing an initiative through. In these instances, it's up to Procurement's people to remind everyone what a successful initiative will mean for the organization.

Procurement should remember, however, that dollar savings won't motivate everyone. To engage these folks, Procurement will need to do some digging to identify the potential value adds that'll successfully inspire action. Instead of emphasizing that a project will save $60,000, for example, they might emphasize what it will mean in terms of process improvement.

2. Maintain Focus
Throughout cost reduction initiatives, few things are dangerous as misinformation. Even the most well-staffed and experienced Procurement team can run into trouble when end users start to challenge a premise.

For example, imagine you've just executed a a project to reduce freight costs. You've settled on a supplier who offers a 10% discount. On paper, however, their fuel surcharge appears 10% higher than the incumbent's. You know that the discount is taken out of your gross price and the fuel surcharge is a factor of the net price. In other words, the impact of the discount is still greater than that of the additional charges. Unfortunately, end users aren't familiar with all the details of the agreement. They see the additional surcharge and begin to doubt the savings numbers you've presented. Things could quickly get out of hand if they share their misgivings with other individuals across the organization. In time, you might even begin to doubt your own analysis.

When end users challenge recommendations, project timelines can quickly grow unmanageable. Getting a project back on track starts with addressing concerns and outlining next steps in writing. Next, Procurement should schedule a meeting to establish due dates for answering additional questions and taking strategic action. Getting a meeting on the calendar ensures your end users won't drag their feet on addressing concerns. Throughout this meeting (or meetings) Procurement should continually emphasize the end user's accountability and ensure they never lose focus. Keeping everyone on a schedule and coming to each meeting prepared will keep Procurement's initiatives from dragging on and on until they ultimately fail.

3. Secure and Maintain Support from Leadership
There are a number of reasons a Procurement team might lack for high-level support. Most often, it's a symptom of a decentralized company culture. When executives leave business units and end users to their own devices, they often create a situation in which successful cost reduction is all but impossible. Without executive support, Procurement will have no answer to push-back. In time, initiatives will stall and ultimately fail.

Fortunately, Procurement has options for securing and maintaining the support it needs. Written status reports or brief, regularly scheduled meetings are often enough to ensure Procurement's voice is heard. These meetings will allow the executive suite to offer their feedback and identify potential obstacles before they've had a chance to stand in the way of savings.