Historically, companies have managed costs through a series of (mainly) uncoordinated technologies and processes, supported by tactical initiatives when budgets needed to be squeezed.
Today, with competitors constantly innovating and new entrants changing the game, businesses need to take a more enduring approach to cost optimisation and find new operating models and/or efficiencies to release the cash needed to fund their own innovation and growth.
The following five levers are key to optimising spend across any business operating cost. Each lever can optimise costs independently - collectively they can sustainably reduce operating costs by 20-50% for each area of spend.
Whether you run a multi-national organisation with disparate systems, and de-centralised supply-base or a sole-supply contract with complex commercial or operational terms, getting visibility of spend, usage and performance drives better decision making.
The visibility lever will;
- Bring transparency to complex categories and contracts
- Provide governance for your business policies
- Centralises relevant data
Giving the right insight, to the right people, at the right time allows for simple data-driven decision making.
Errors in invoices or missed discounts accounts for up to 3% of the cost of goods/services bought in some categories. Some estimates put ‘procurement fraud’ at as much as 1% of a businesses turnover.
The compliance lever includes factors such as;
- AP and contact commercial terms compliance
- Governance over days-to-pay and early-payment discounts
- Identification of shadow/rogue spend
Finance and ERP systems deliver an element of this compliance, but a lot of value is lost throughout the process. Pre-payment audit routines and insightful reporting retains cash in the business and provides the mechanism to drive change.
Be that non-production, “We were paying $5m per annum on mobile phone services for people who had already left the business – some of them years ago!” or production, “We used 0.5% more in one factory than another, with almost identical outputs, doesn’t seem a lot but the cost was millions per year”.
The consumption lever brings insight to make simple, data-driven decisions;
- Benchmarking internal usage and cost profiles
- Optimising assets
- Making users accountable
Generating the realisation of cost brings behavioural and cultural change. Users are in the best position to reduce costs and bring faster innovation to business operating models.
Over two-thirds of CPO’s see cost reduction as a priority, and yet 84% are not satisfied with the levels of insight they receive from the business.
Businesses need to recruit well and have a strategy for these procurement professionals to align with. However arming them with good, consistent data allows the team to negotiate and manage suppliers from a position of knowledge.
The price lever comes from;
- A suite of reports of spend and usage from all silo’s in the business
- Insight to business and new product strategy
- Supplier performance and risk management insight
Procurement working as a business partner rather than simply a cost reduction specialist, better defines the business objectives for the supply base, to increase agility, optimise costs and reduce supply-chain risks.
Simplification and standardisation are two of the key words we hear repeated at almost every customer. But where do you focus resource where it really matters?
The process lever provides the business and the change agents with insight to identify these areas and data on where best practice is being achieved;
- Benchmarking cost, usage, margin and ROI
- Identifying why rogue/shadow spend happens – what is the benefit
- Identifying impacts across silos
Some components of these levers are simple to implement, others require a more structured approach to sustain the benefits over the longer term. These benefits, however, can be significant and businesses investing in these levers can expect to see sustainable reductions of 20-50% of operating expenses for in-scope functions and categories.
To learn more, download our ebook - The Hidden Value in AP