Off-contract spend is procurement’s greatest nightmare, says Richard Hogg. But most CPOs already possess the tools to tackle it.
Market volatility, supplier uncertainty and hard-to-predict commodity prices are among the challenges keeping CPOs awake at night. But the greatest procurement nightmare actually lies within the organisation: off-contract spend.
When employees “go rogue”, the procurement team’s hard work – and added savings – leak out of the business, affecting the procurement team’s ability to surpass savings goals and advance their reputation in the organisation as a business driver. The good news is many CPOs already have the tools necessary to combat this lack of compliance; most just fail to realise it.
Let’s start with spend analysis, the first building block. It is not meant to be a one-off, annual exercise (although many companies treat it that way) to solely expose a few opportunities for savings. Rather, spend analysis can facilitate more spend under management by acting as the catalyst for procurement to better understand rogue spend. When executed properly, the analysis provides a window into why negotiated contracts are missing the mark and how off-contract spend can be halted, before material impact on the bottom line. This approach extends the return on investment of spend analysis in the short and long-term.
Often, the motivation behind off-contract spend is much deeper than non-compliance. Employees will do whatever it takes to do their jobs effectively. If a supplier isn’t meeting their needs, they will circumvent procurement.
Spend analysis exposes the suppliers coming up short. This also extends into the longer term. The most mature procurement teams have honest conversations with their colleagues to better understand non-compliance, why suppliers are missing the mark, how often contracts must be reassessed and how user-friendly the procurement process and tools are. It’s surprising how often the answers for off-contract spend revolves around employees’ distaste for the process or current supply.
Spend analysis can also expose rogue suppliers. What if a supplier charges too much? Or charges a different amount each month? With millions of line items and thousands of contracts, it’s nearly impossible for procurement to manually achieve 100 per cent visibility into every contract.
Beyond driving savings and more spend under management, CPOs are also charged with accelerating procurement’s move beyond tactical execution towards driving top- and bottom-line business recommendations. Deep and thorough spend data can be leveraged outside of procurement by finance, management, engineering, logistics, and even marketing and IT departments to support business decisions. The continual spend management process also ensures that savings targets are realistic, accurate and actionable – and raises the red flag if the company is missing the mark.
To undertake this transformation, CPOs must be armed with a flexible process and tools that can analyse and segment contract and spend data at the most granular levels – by department, product and price.
Most importantly, CPOs need the ability to alter the vision for procurement, instilling company-wide that cost cutting is not just the responsibility of one department.
By Richard Hogg | May 2012, CPO Agenda