Hey Procurement Legends Community, how are you all?
I’m casting the line out here…can any of you share how you currently calculate savings, how you store this information, how it’s incentivised, and the pros and cons of doing it your way?
Intention: help people in our community nail down savings calculations.
Savings are calculated using newly negotiated price less previous price multiplied by current volume where procurement has taken an initiative to negotiate (with or without RFP). You can sometimes back out market effects (to this number depending on category.
Absolutely - I'm keen to hear if the likes of Finance/CEO consider this a saving at all or merely a reduction because in a business sense, from their perspective, this is never going to be a saving.
How have I not heard of: ""BASS" system (aka "BigAssSpreadSheet")"" I love that!.
Thanks for the link Pierre, I'm going to take a read tis week. I may follow up with you - I'm in the early stages of bringing together some thoughts on savings in procurement but I don't want to merely repeat what's already out there so it may go nowhere.
I find this a very fluid and somewhat controversial topic as it is differently defined among the organizations, even within the same industry. In my current organization (financial institution) the above example would for instance be treated as cost avoidance, while the prevalent source of savings would come from the delta between the current run-rate and the new rate/price. This is mostly applicable with renewals or if you are replacing a supplier with a similar product or a service.
Second source of savings is when the project is dislodging any existing infrastructure (e.g. in-house servers) in case of switching to SaaS or outsourcing, however this one is tricky as it is questionable how much is this a procurement-driven savings as in most of the situations this decision is coming from the technology or operations teams.
The third and the final source is from a delta between the budget and negotiated price. This will also fluctuate among the organizations depending on their budgeting process and how flexible line of business are in obtaining additional funding mid-year.
Anything that doesn’t fit into these three buckets is Cost Avoidance.
Savings are calculated using newly negotiated price less previous price multiplied by current volume where procurement has taken an initiative to negotiate (with or without RFP). You can sometimes back out market effects (to this number depending on category.
I appreciate that, Joseph!
"where procurement has taken an initiative to negotiate" - good addition there too.
If I may add.. how specifically to do so in a inflationary economy.. someplace where double digit inflation is the norm
Absolutely - I'm keen to hear if the likes of Finance/CEO consider this a saving at all or merely a reduction because in a business sense, from their perspective, this is never going to be a saving.
I did procurement benchmarking for 8 years at Hackett and created a study on this that still lives on. It deals with how 20 value improvements are 'counted' or not, how they're booked/realized (or not). The performance is usually tracked in the "BASS" system (aka "BigAssSpreadSheet") and sometimes in a homegrown app or in a few of the S2P app vendors. Savings are usually only counted for a year (typically because of yearly budgeting cycles and associated budget take down), and occasionally for the life of the contract. Here's the download link (it's via S2P suite player Ivalua who licenses the IP from Hackett)... https://info.ivalua.com/reports/hackett-procurement-value-measurement-2023-en?utm_campaign=2023-global-report-hackett-procurement-value-measurement&utm_medium=email&_hsmi=282792738&utm_content=282792738&utm_source=hs_email
Happy to have a chat about this if you'd like.
Great job with the newsletter BTW!
Pierre Mitchell
How have I not heard of: ""BASS" system (aka "BigAssSpreadSheet")"" I love that!.
Thanks for the link Pierre, I'm going to take a read tis week. I may follow up with you - I'm in the early stages of bringing together some thoughts on savings in procurement but I don't want to merely repeat what's already out there so it may go nowhere.
And appreciate it :D
I find this a very fluid and somewhat controversial topic as it is differently defined among the organizations, even within the same industry. In my current organization (financial institution) the above example would for instance be treated as cost avoidance, while the prevalent source of savings would come from the delta between the current run-rate and the new rate/price. This is mostly applicable with renewals or if you are replacing a supplier with a similar product or a service.
Second source of savings is when the project is dislodging any existing infrastructure (e.g. in-house servers) in case of switching to SaaS or outsourcing, however this one is tricky as it is questionable how much is this a procurement-driven savings as in most of the situations this decision is coming from the technology or operations teams.
The third and the final source is from a delta between the budget and negotiated price. This will also fluctuate among the organizations depending on their budgeting process and how flexible line of business are in obtaining additional funding mid-year.
Anything that doesn’t fit into these three buckets is Cost Avoidance.
This is super useful and informative, Momir. This is a good breakdown.
Appreciate it.
Indirect savings is always tricky, isn't it? One method that worked in a company where I was, specifically on Indirects, was the following:
1. The average price of all the supplier quotes was determined (stripping-out any obvious outliers)
2. Procurement effort was applied
3. The final price achieved, when deducted from the average price, was declared as a saving.
Hope this helps.
Hey Martin, definitely a good formula - appreciate it!