Are one-off savings real savings? What effort should be applied to obtaining one-off savings? How should they be reported? Many companies struggle with these questions.
A few years ago I worked for a procurement outsource provider managing indirect spend categories for a large FMCG company. Naturally, although we had a wide range of performance metrics, the vast majority of the focus was on delivering savings, to deliver a direct return on their investment.
One golden rule for claiming savings was that we could only claim sustainable savings. One-off savings didn’t count. By sustainable, I mean the reduced cost could be maintained year after year.
This rule brought a number of implications. Firstly, it meant savings on capital spend were virtually impossible. Secondly, we had no incentive to chase one-off rebates or temporary savings, focusing instead purely on sustainable savings.
So is this right? Should procurement ignore one-off savings? Perhaps in some environments it makes sense, but of course they still have some value, they just need to be treated differently to sustainable savings. There are different ways of doing this – here are two.
One is to report the two types of savings completely separately with separate targets. Procurement should still be motivated to go after the one off savings, particularly if large portions of spend are non-repeat, making sustainable savings impossible. The short term value is the same, and if one-off savings are achieved every year, they become sustaining, albeit you have to repeat every year to keep them.
The second way is to look at a one-off saving as a cash injection into the business. You can’t reduce future budgets based on these savings, but you do have more cash. Therefore, putting a figure on that cash in the form of a cost-of-capital saving is an accurate way of normalising to the sustainable savings. So a £1m one-off saving at 10% COC would equate to £100k in sustainable savings.
Whatever the numbers are, it’s key that your measurement is aligned with your Finance colleagues’ accounting principles so whatever the numbers are, they are reported in a way that provides credibility and breeds confidence.