More and more executives are coming to appreciate the enormous EBITDA improvement potential locked in their vendor spending. Vendor Spending represents 25% – 60% of the total expense for most firms, second only to employee compensation. Despite the enormous size of the vendor spend category, most firms are seeing no bottom-line results from their various Strategic Sourcing efforts as their Vendor Spending is increasing as fast or faster as Revenue growth
Magnus Bergfors, Lead Analyst at Spend Matters and Todd Ford, CFO at Coupa in a recent webinar Unlock The Strategic Value Of Spend In Times of Business Uncertainty discuss that leaders can achieve transformative results through strong spend management.
They point out that a PwC Covid-19 CFO Pulse Survey finds that 80%+ CFOs are planning to implement cost containment.
Beyond the typical strategies of furloughs, layoffs and other “low-hanging” but morale-damaging and top-line impacting options, what other cost management options are available to executives? Ford and Bergfors argue that vendor spend optimization not only positions firms to reduce costs, but it is also an essential value driver to fund growth & innovation.
Contrary to popular belief, Ford says that it is very hard to impact revenue with vendor spend optimization; yet vendor spend optimization delivers a 1:1 relationship between cost reduction and profitability. That is, $1 cost reduction is equivalent to $1 profit increase. Ford goes on to state that vendor spend optimization is best alternative to headcount reductions, and we argue an essential tool to fund growth initiatives.
Finally, Ford and Bergfors argue that vendor spend management, and more broadly, Strategic Sourcing is a great opportunity for CPOs to move from tactical to strategic engagement, while delivering meaningful impact to employees, stakeholders, and shareholders.
Specifically, deploying best-practice Strategic Sourcing requires a substantial evolution of in-house expertise, approach, and engagement with key stakeholders. But the payoff is substantial – 15%+ cost reduction equivalent to 20%+ EBITDA increase, improving employee morale and engagement, being able to address vendor risk, engaging preferred suppliers in true innovation and growth initiatives, among many others.