Making Sourcing Savings Stick

April 13th, 2010 at 09:53am Paladin Associates - Barb Ardell

As a sourcing professional, my most difficult negotiations aren’t with suppliers but rather with internal customers.  Based on conversations with my colleagues, that experience is not unusual.  One measure of this challenge is “savings leakage” (savings negotiated but not realized).  Aberdeen Group reports average leakage rates of 21% as Purchasing strives to implement its sourcing decisions.  Best In Class companies experience about 14% leakage whereas All Others see 24% leakage ⁽¹⁾.  Small companies experience up to 40% savings leakage ⁽²⁾.  Net, there is a huge payout for improvement.

There can be several reasons for leakage:

1. Communication.  The using organization is unaware of the award and continues buying from the incumbent.  
2. Inconvenience.  The new supplier’s process is inefficient providing a negative incentive to change (e.g. a travel reservation website which is difficult to use).
3. Fear of the unknown.  There may be a long-standing, positive relationship between the supplier and the user.  Alternately, the internal customer may not be thrilled with their current supplier, but at least the incumbent is “the devil they know”.
4. Lack of trust.  The internal customer organization doesn’t trust the buyer to properly address non-price criteria when making sourcing decisions.

 Regardless of the reason, leakage represents innumerable hours of wasted effort and, more importantly, millions of dollars in missed bottom line profit improvements.

Communication breakdown is relatively easy to address, particularly with the use of eSourcing, eProcurement, Spend Analysis and on-line contract management systems.  The other three reasons require a deliberate process and up-front planning.  It’s all about effective change management!  Successful sourcing managers don’t wait until after the award to sell their internal customers.  This is particularly critical in companies where business units are relatively autonomous, and not subject to corporate edicts. 

Effective sourcing professionals follow Stephen Covey’s advice: “Begin with the end in mind”.  What does that mean?  It means involving key stakeholders throughout the entire sourcing process so they will support implementation of the ultimate award decision

Specifically, what does this entail? 

1. Ensure upper management support for sourcing initiatives and savings goals. 
2. Initiate a comprehensive and methodical change management process early on.
3. Work with stakeholders to clearly define decision criteria with appropriate measures.
4. Conduct the RFP/RFQ with stakeholder input and involvement.
5. Gain stakeholder support for a comprehensive implementation plan and enforce accountability.
6. Monitor expenditures over time to identify any leakage.

Sound like a lot of work?  It is.  However, it often eliminates months of wasted effort on sourcing decisions that don’t stick.  Why is it that we never have time to do it right, but we always have time to do it over?  Is this formal process necessary for all savings initiatives?  No, but the thought process should be applied to all situations.  Thinking through this process allows you to determine the extent of the effort required.  One size does not fit all.

 Addressing stakeholder fear, lack of trust and potential inconvenience through a comprehensive change management effort and improved communication will have a tremendous impact on savings leakage.

Click here to access a more detailed write up or here for a podcast on the topic.

⁽¹⁾ Aberdeen Group.  “The Advanced Sourcing & Negotiation Benchmark Report.  January, 2007.

⁽²⁾ Aberdeen Group.  “Sourcing Challenges for SMB”.  August, 2007

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Entry Filed under: Analysts/Research, Functionality, General, Reverse Auctions, Spend Analysis, Supply Management Best Practices