Why does delivering value beyond savings remain a struggle?

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Value beyond savings

The subject of driving value beyond savings remains as topical as ever for the procurement function, with the Procurement Leaders’ 2019 CPO Challenger guide showing that the second most prominent ambition of CPOs is for their function to be seen as value creators.

 

To get a deeper understanding of the challenges behind this, Procurement Leaders has brought together a cohort of members from a range of industries to explore the topic and work towards common goals and outputs. As such, this collaborative value creation (CVC) project will initially focus on how to define value beyond savings, before moving on to how companies can measure and communicate it.

 

Initial conversations and research among the group found that the function has a way to go, with few companies successfully measuring value-adding activities such as revenue generation, supplier-innovation efforts or the number of ideas generated from the supply base. Meanwhile, the group as a whole agreed the majority of their stakeholders don’t fully understand the capabilities of procurement.

 

So, the question remains as to why procurement continues to struggle here?

 

The CVC identified one of the problems is the ambiguity of the term ’value beyond savings’. The meaning is often interpreted differently by people, not only within the same procurement function, but even within the same team. Without a consensus on what it means, it is extremely difficult to know what to strive towards. As such, discussions need to take place between stakeholders and procurement to understand what the perceptions of value are, then a link needs to be created between that and overall business objectives. This is the first step procurement needs to take to create that baseline definition.

 

Procurement professionals defining value in different ways also makes it difficult to identify the activities that do and don’t deliver value. The 2018 Procurement Leaders CPO planning guide found that some 21.8% of respondents cited excellence in procurement’s core activities of demand management, total cost of ownership, cost avoidance and compliance in their definition of value.

 

In comparison, just 15% believe it involves supporting innovation, while only 11% say it involves excelling in supplier relationship management.

 

These ideas may well be shaped by the demands from the business for savings, which would place the emphasis of value on hitting annual savings targets. But procurement professionals can’t currently decide on which value-adding activities they should be focusing their resources on.

 

Over the years, procurement functions have focused their attention primarily on the delivery of savings, meaning that success, or otherwise, could be quantified more easily in savings figures. But it’s fair to say some value-adding activities are less tangible in terms of measurable impact, especially when it comes to things such as supporting innovation efforts.

 

Instead, the group said storytelling can be a powerful tool to use to explain the value procurement is delivering. It is powerful in that it can help highlight complex situations and scenarios. The downside, which was pointed out by many in the group, was that such an approach can lead to conflict with stakeholders because of the lack of hard profit and loss impact.

 

The final challenge discussed by the group was a lack of intelligent information. Procurement functions are surrounded by data that can work as an enabler to find new sources of value, but, in reality, functions actually only scratch the surface in terms of how they use it. Procurement Leaders research has identified organisations often don’t have spend analytics or, if they do, it is at such a rudimentary level that it is difficult to understand.

 

Ultimately, the group agreed that coupled together, these issues create a situation where procurement actually avoids focusing on new value-adding activities because of the difficulty in quantifying output. This was said to be a particular problem for those functions reporting directly to finance.

 

It’s clear procurement has a way to go until it is truly able to take advantage of all the opportunities that exist to drive value into the business, which is why this CVC will focus on creating:

  • A baseline definition of value beyond savings that can be adapted.
  • A list of activities that can deliver value beyond cost savings.
  • A guide showcasing best-in-class examples of communicating value both quantitatively and qualitatively.
  • A procurement key performance indicator dashboard to illustrate value beyond savings.

To find out more about Procurement Leaders’ Collaborative Value Creation groups, members should contact their account manager.

 

This article is a piece of independent writing by a member of Procurement Leaders’ content team.

Nilen Bhatt
Posted by Nilen Bhatt

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