As I get more frustrated with the state of infrastructure in the UK (roads, trains, 5G, water supply anyone?), it seems to me one of the flaws of democracy is that when elections happen every 4 or 5 years, there’s an overwhelming temptation for governments to make decisions that bring benefits within that window rather than invest in improvements that will yield potentially bigger benefits 10 or 20 years later.

Procurement teams often operate on an even shorter time horizon.

Most procurement teams have a current Financial Year savings target to meet. That’s hopefully not the only target they have, but it’s usually one of the key metrics and often the one they are rightly or wrongly judged on.

Equally, most procurement teams are only allowed to claim the first 12 months of any savings achieved. This is borne out by the fact that 93% of the benefits plans across all our customers in Provalido (the period for which savings are claimed) are 12 months or less.

When both the target and the metric seldom look beyond the next 12 months, how can procurement be encouraged to make long term decisions which may involve taking a short-term hit, yet bring larger benefits over a 5–10-year timespan?

A typical example would be sticking with an incumbent supplier who had offered an immediate 3% price reduction for 5 years on $10m annual spend, versus re-sourcing to a new supplier who can offer a 10% reduction for 5 years, but the switch will take 12 months, and there will be a $500k cost in year 1 to switch (perhaps for tooling, or for approval / validation / buffer-stock building etc).

Sticking with the current supplier yields $300k for the current year and $1.5m over the next 5 years. Switching suppliers costs $500k in year one, but then saves $1m per year after that, so a net $4.5m.

Over 5 years, the additional benefit is $3m by switching vs sticking. Assuming risk, quality and other factors are constant, that’s a significant benefit to turn down. But for Procurement, faced with the option of getting $300k towards the current year target, or either nothing or as much as negative $500k in the current year (depending how savings are measured and if costs are amortised), it’s not so simple. As with governments, the temptation would be to opt for the short-term benefit, perhaps with the good intention of making the switch another time.

So how do we stop this happening?

Before thinking about the metrics themselves, surely the key is for procurement to be aligned with the long-term vision and strategy of the organisation. Rather than trying to make sourcing decisions in isolation, procurement must be engaged with the long-term goals and direction of the various parts of the organisation it touches. Certainly, any major decisions such as out-sourcing, in-sourcing, make-vs-buy etc. need to be made in line with long-term thinking.

So how should the contribution to the long-term vision be measured?

The obvious answer is to have a multi-year savings target, and allow multi-year claiming of benefits. There are some issues with the latter. Savings are typically only claimed for 12 months because:

• Finance “re-sets” the pricing once a year, so after 12 months the new price is “expected” and no longer a saving vs budget etc.

• The longer you move from the date that the base-price was set, the more tenuous the saving becomes. Volumes, mix, the way products or services are bought changes over time, so measurement against a base taken multiple years ago at some point becomes meaningless.

My personal recommendation, rather than to jump wholesale into multi-year cumulative benefits, would be to allow multi-year savings to be claimed as an exception on designated “strategic” projects. Such projects should have any cost of change incorporated into the measurements and overall phasing of savings targets should be adjusted accordingly. The “real” benefits should also be tracked, with retrospective correction if needed. You can’t just sign the contract and the assume everything will stay the same for 5 years.

All organisations are unique, and any measurement principles need to fit with the organisation’s unique goals, and with support from Finance, plus a little flexibility, it should be possible to create something that fits well.

It’s certainly easier than fixing short-termism in governments.

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