Revenue Generation in Procurement: Finding Funds Without Mortgaging the Future

Published October 4, 2024

Category: Procurement

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Written by: Rich Ham
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Rich Ham

In early 2002, Rich resigned a position with an industry leading uniform supplier and founded Fine Tune in a basement in Bloomington, IN. He oversees all areas of the business, dedicating the majority of his time to building and developing our team of “Tuners,” telling the Fine Tune story to current and future clients, and leading Fine Tune’s overall strategic direction.

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Procurement leaders and their teams are increasingly prioritizing revenue generation in their dealings with suppliers, and it’s not just because they want to throw a better holiday party (though that probably wouldn’t hurt morale). No, they’re seeking to cause funds to flow into the department because, well, they don’t have any. And this lack of funds too often prevents smart procurement practitioners from making investments to address vulnerabilities in the system and advance the business’ interests.

In 2024, perhaps the chief vulnerability they attempt to address is the department’s inability to effectively manage costs after supplier contracts go live. Before the Great Recession, procurement played an activist role in making sure their efforts manifested in the P&L and stuck over time. But today, nearly everyone in the field is being asked to do the work of three people, and as a result, practitioners find themselves looking outside the company’s walls to augment in-house capabilities in a range of disciplines—including expense management.

The problem, all too often, is money—or the lack thereof. While category owners and their managers and directors understand the bandwidth constraints, their augmentation strategies are often met with the lazy retort of “isn’t that your job?” Of course, those lodging the retort probably don’t grasp the conundrum (“Well, sure…but I’m not working 120 hours/week!”) but the barrier to good business decisions often remains.

So, procurement teams are attempting to combat this challenge by prioritizing revenue generation in their supplier dealings through a range of strategies. Of course, corporate governance within individual companies plays a huge role in determining what can and cannot happen when procurement causes funds to flow back into the organization. While we can’t control these rules for our clients, Fine Tune has vast experience in pursuing pretty much every imaginable revenue generation strategy for our clients’ procurement departments. And unfortunately, some of the most common of these strategies often tend to cause increases in category costs, with an outsized price paid for the short term revenue influx.

Consider the imperfections in the most common revenue generation strategies:

Retroactive auditing:

As leaned-out teams have gradually surrendered to the fact that they simply don’t have the bandwidth to manage expenses down to the invoice level, they’ve often turned to retroactive auditing of their suppliers—frequently looking back at 3-5 years of spend history in these exercises. And while retroactive audits do, on occasion, generate some revenue, reliance on this sort of auditing is a bad strategy if controlling spend is a priority.

Retroactive audits tend to yield only $0.20-0.30 on the dollar—at most—even in cases where the findings involve black and white contractual non-compliance. Simply put, it is dramatically easier to keep a dollar than it is to get it back after it’s left the building.

But beyond their ineffectiveness as a spend-control tool, retroactive audits also strain supplier relationships in ways that other revenue generation strategies do not. Telling your supplier they have done something wrong and “you owe me money” often creates toxic situations where nobody emerges satisfied and the relationship is severely strained. In the worst (best?) cases, these audits can entail explosive discoveries which tend to set off complicated and distracting chain reactions, including disputes, supplier transitions, and lawsuits.

When the dust settles after a retroactive audit, the most common result finds a frustrated customer having learned how much it has been overspending, how little leverage it has to recover any of this money, and a frayed supplier relationship.

Despite these drawbacks, retroactive auditing may, on occasion, be effectively used as a precursor to contract renewal/extension discussions. More on this in the “signing bonuses” section below.

Rebate programs:

Rebate programs can certainly be a useful revenue source. But they also come with a big fly in the ointment: the rebates grow as spend increases, creating an unhealthy disincentive for procurement to combat dubious cost increases of all manner once the program is in place.

We don’t tend to love rebate programs for this reason, but we understand that with some business models—especially those involving pass-through expenses by a management company—they’re a necessary tool. In the end, though, our experience has taught us that the customer tends to overspend when rebates are involved.

Signing bonuses:

There’s no better time to generate departmental revenue than when contractual commitments are being made. So, when executed properly, signing bonuses can be among the most effective revenue generation tools.

Unfortunately, signing bonuses are often the tool wielded by the overwhelmed category manager who doesn’t really have the bandwidth to get into the weeds of a category and understand what’s really going on—so they simply ask for some front-end money in exchange for a multi-year commitment.

The norm tends to be that 1-3% of contract value is paid to the customer on the front end, while the customer then proceeds to overspend by 20-40% over a 3-5 year period. As referenced above, though, where retaining incumbent vendors is desired, a pre-negotiation audit can set procurement up to maximize a signing bonus on the front end of a new deal. Buyers can capitalize on a vastly higher percentage of audit findings when their vendors are able to position audit-related refunds as signing bonuses instead.

Capitalization on payments:

The best revenue generation strategies not only bring money into the organization, but also solve problems. Bill payment is an arena which presents tremendous opportunities along these lines. Leveraging early payment discounts and credit card rebates can generate 2% or more for procurement departments. If the business is not taking advantage of this money in the system, why not take advantage of it for procurement purposes? By using third-party payment partners, this transactional money “available” can then be reinvested in more effective expense management strategies.

Regardless of a buyer’s chosen revenue generation strategy, success depends perhaps more than anything else on understanding what’s really going on within your expenses.

Even the sharpest procurement professionals tend not to realize just how much leverage they have with their suppliers because they don’t understand those suppliers’ “tricks of the trade.” Coming to any negotiation armed with the knowledge of where overspending has been occurring—and where the suppliers’ billing practices strain legitimacy—can shift the playing field significantly to the buyer’s advantage—and help the buyer avoid overpaying for short-term revenue.

It’s completely understandable that today’s procurement departments would be prioritizing revenue generation. They see solutions everywhere for addressing vulnerabilities and improving the business’ performance but they too often don’t have the funds to make the call on those solutions.

Ultimately, these departments should take care to ensure that in prioritizing departmental revenue, they’re not trading outsized longer-term losses for short-term gains.

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