Have companies exhausted all opportunity for incremental cost reduction? Some say that ‘Procurement used to chase dollars, now we chase cents.’ Many in Procurement loudly complain that being measured on cost reduction is unfair. But is it true? Let’s take a look at data…
S&P 500 data shows lack of sourcing-driven savings
S&P 500 data shows that operating expenses are increasing at nearly the same rate as revenue growth. That is, a typical F500 firm has been unable to deliver sourcing-led savings for many years if not decades.
Industry self-reported surveys report underwhelming performance, with cost reduction hovering just above rate of inflation
We all know that self-reported surveys should be handled with care; after all, respondents often report what others want to hear, rather than the fact-based results. Even so, these self-reported surveys show that even best-in-class Procurement teams generate less than 6% cost reduction, while the vast majority say they generate less than 3.5% cost reduction.
Sourcing Advisors Group data shows lack of sourcing-driven savings
Of the hundreds of companies – ranging from $100 million revenue firms to $50 billion revenue firms – we have served or evaluated, fewer than 5% demonstrated material bottom-line contribution generated through Strategic Sourcing (prior to our involvement). With few exceptions, vendor spending is increasing either in-line with or faster than revenue growth – indicating that Strategic Sourcing function is not contributing to cost reduction and profitability.
CPO surveys consistently rank cost reduction as one of the top priorities for Procurement
The importance of cost reduction is not lost on anyone at the senior and C-Suite level as a vital tool for competitive differentiation and ability to win market-share. Unsurprisingly, Chief Procurement Officers (CPOs) have prioritized cost reduction – and its various derivative benefits. CPOs have indicated this consistently over at least the past 5 years, with cost reduction appearing as one of the top 3 priorities.
Deloitte Global CPO survey 2019 validates this …
… as does a recent Forrester study …
.. and Hackett Group …
… and Ardent Partners …
Opportunity for CFOs, Line of Business executives and Chief Procurement Officers
Executives demand cost reductions from Procurement, yet data shows that Procurement has been unable to deliver meaningful and consistent cost reductions. But is it realistic or fair to expect Procurement to deliver cost reductions?
Over the past decade our teams have generated more than 20% cost reductions on multi-category Strategic Sourcing initiatives. Depending on industry, these cost reductions are equivalent to 20% – 300% increase in EBITDA, with low margin businesses (e.g. manufacturing and industrial firms) at the top end of the range and high-margin businesses (e.g. financial services and some software firms) at the lower-end of the range.
These results are generated through a comprehensive deployment of best-practice vendor contracting including most-favored-nations pricing and terms. Fundamentally, the approach ensures our clients’ purchasing power is fully valued.
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For a customized no-fee assessment of cost reduction opportunities for your firm, please contact us at sourcing@SourcingAdvisorsGroup.com.