Procurement Savings Lack Credibility
“Procurement – and especially the Procurement consultants and analysts – have blown their credibility.”
That was the verdict of an executive with whom I was talking last week. His point was that the claims of savings generated by procurement are overstated. But he went further: “The process model and methods that have been put in place are based on the retail and manufacturing industries. They do not translate to a world of complex services or projects.”
Our conversation had arisen because we were exploring IACCM’s recent research findings on the cost of poor contracting. Like others, this executive was not surprised by the results, but he made the point that it is now essential to demonstrate how those savings or revenue improvements will be tracked. “We simply can’t go to senior management any longer with abstract numbers that may or may not translate to the bottom line.”
The irony of the IACCM results is that a significant proportion of the financial benefits that flow from improved contracting are in fact the theoretical savings already claimed by Procurement. In other words, better contract management ensures disciplined implementation and on-going governance, including change management and performance management, plus ensuring that commited outcomes are in fact achieved. This discipline is especially critical in any services or project environment.
“Bringing an aggressive retail mentality to project-based industries has done a lot of damge,” we concluded. “It has undermined the loyalty and collaboration that are essential to long-term relationships and unpredictable conditions. The truth is, far from achieving savings, we have probably finished up costing the business more as a result of some of the methods and systems we introduced. They simply aren’t appropriate across all areas of spend.”
The results of IACCM’s ‘Return on Investment’ study have pointed to the areas where there is greatest financial opportunity and we are now exploring these with several corporations, to understand how best to implement and measure improved contract management.