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savings realisation

The great savings black hole

It’s a familiar situation. The CPO is declaring impressive savings of several million dollars. The CFO simply doesn’t believe it. It’s not that he or she thinks the CPO is making the numbers up, but they are just not flowing through to the financial reports. So where exactly do they go?

Depending on which research paper you read, savings identified through strategic sourcing or other procurement-led projects, shrink by 30 to 40% by the time they are implemented and fully realised. One major cause of this shrinkage is compliance, or lack of it, particularly on indirect categories. Poorly specified requirements leading to price creep at the point of contract or beyond can be another cause. Timing is another factor, with implementation often taking longer than anticipated resulting in a significant lag between when savings are reported and when they actually show up.

So how can the CPO’s numbers gain credibility with the CFO?

The key is a robust process. This may require more vigour and attention throughout the entirety of a cost reduction process. Rather than focusing the majority of time and effort on the negotiation in the middle of the process, time spent upfront with key stakeholders will lead to a better implementation down the line and will also enhance understanding of the challenges likely to be faced and therefore a more realistic savings estimate. Time spent on the back-end, carefully project managing the implementation and seeing through to completion will help deliver savings on time.

Of course, this enhanced vigour will require more resource, which is why it is essential the process is backed up by an appropriate technology. Technology that supports both the project management and savings tracking aspects will take some of the burden off the procurement professionals and provide them with the time to focus on plugging that black hole.