Spend Size = Spend Importance, Or Does It?

Posted: 09/21/2018 - 00:26
In my last post, I wrote about the need for procurement to stand up and confront our own “fundamental truths,” especially if we are interested in elevating the conversation and effectively transforming our ability to generate value for our organization. In this post, I focus on one of those truths: the greater the amount of spend associated with a contract, the greater its strategic importance. 
 
For most mature procurement organizations, the largest spend categories are optimized for cost multiple times. To continue creating sustainable value, therefore, we must pursue new pools of spend and alternate supplier management strategies. We also have to approach this with a creative, one-off, results-driven style, not with a volume-leveraged management model.  
 
Traditional procurement frameworks are designed to manage predictable spend generated from pre-determined, well-understood requirements. These days our organizations confront a significantly more dynamic environment where change is the constant for which we must manage. More than ever, our work with suppliers underpins our organization’s future revenue sources or is the source of competitive advantage, and these types of commissions tend to start as smaller, lower-dollar projects. A one- to two-percent savings on a small pool of spend doesn’t even cover our overhead. If we were to measure our impact traditionally, we would likely walk away before the work even starts.  
 
If we want to make a difference and get involved in areas of the business that represent key value creation opportunities, we can’t allow ourselves to be limited by a traditional, spend-determined priority scale. Innovative approaches, relationships and technologies should not be cast aside simply because the associated spend may be low. Just because spend is small, it doesn't mean it is intrinsically unimportant.  
 
How, then, do we identify a small but important opportunity?  
 
Procurement can uncover these opportunities by proactively partnering with stakeholders, taking a serious look at current and possible future business strategies and asking how a particular project can impact the business. As a conversation, this may be rather straightforward. More often than not, however, actually implementing this workflow is a struggle as procurement has been (and in many cases continues to be) measured by our ability to bring spend under management and deliver savings. Delivering savings dollars requires us to focus on large spend categories. This is the very paradigm we must disrupt. 
 
We must challenge our bias toward large spend categories and against allocating strategic resources to lower dollar projects. When our internal partners see us reorient our priorities and decision-making frameworks, it serves as proof of real change: both in terms of how procurement is perceived internally and in terms of the projects we are asked to join. 
 
An important driver of the procurement transformation movement is the idea that we can contribute more to operational effectiveness than a few percentage points of savings here and there. We know we can drive greater value from strategic supply partners, create competitive advantages for our firms and help grow the top line. 
 
In the next post in this series, I will challenge another fundamental procurement "truth:" supplier consolidation is a sure-fire path to effective spend management.
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About The Author

Phil Ideson's picture

Philip Ideson is the founder, editor and host of the Art of Procurement Network.  His prior experience includes work at Accenture, Ally Financial Inc., and Chiquita Brands International Corporation. 

The Art of Procurement podcast delivers multi-channel learning and development programs to help procurement leaders increase the capabilities of their internal teams.
Twitter: @aopshow