It is the worst question Procurement ever faces. C’mon – you know that procurement savings question I’m talking about. That horrible, terrible question from Finance for which there is no good answer…
If Procurement worked so hard and saved all of this money, WHERE IS IT?
The problem is that the space between negotiated and realized savings is full of pitfalls: unexpected requirements, inaccurate demand, and budget holders who see an opportunity to unofficially reallocate savings elsewhere. Even when additional value is created, many times by the end of the year the savings have all but evaporated.
This is a problem that has to be handled by the top level of the organization. If the strategic vision of the leadership team requires that all uncommitted funds be returned to a central account, they have to be willing to support Procurement by issuing a mandate. Declaring that all funds saved by Procurement are to be removed from line of business budgets is a tough love decision. But all that really matters is whether or not it is the right decision for the company as a whole.
An example of a company that made this tough call is VSP Global, a major player in the eye care industry based in California. Their CPO, Greg Tennyson, recently spoke to an audience of procurement professionals about how savings are addressed in their company. They call it a “claw back” when they remove the savings that Procurement negotiates from a budget as part of the standard process. These savings are then repurposed at the corporate bottom line rather than in each line of business. Despite their belief in this approach, it isn’t easy.
As Tennyson told the audience, “That’s painful – painful for our team, its painful for the business, but it’s a directive coming from our CEO, so in this one case it’s thou shalt identify budget savings and we will repurpose those at the corporate bottom line as opposed to the line of business.”
With VSP Global’s case, this challenging approach to achieve budget savings is worth the return to the company. Just as Procurement can often save more by leveraging their demand volume with a smaller number of suppliers, the organization can accomplish more by centralizing the surplus funds from all budget holders. And while it changes the cooperation dynamics for budget holders who understand more savings leads to a smaller budget, when the right mindset about resource efficiency is pervasive throughout the organization, that reduction will be seen as an accomplishment rather than a punishment.
* Download this paper to learn how Procurement professionals are demonstrating value to their organizations by reducing costs and increasing profitability with spend and sourcing systems that share savings information with financial executives and other lines of business.