Procurement programs routinely identify savings as discounts resulting from a sourcing event or a price negotiation, which means they count savings before spending takes place. This doesn’t take into account savings leakage, which occurs between when contracts are negotiated and when dollars are actually spent.
Consider company travel. If an employee uses a favorite airline rather than the company’s preferred carrier—whether as a deliberate choice or because of a lack of awareness of company policy—negotiated rates and discounts are lost, which costs the company more money. That’s savings leakage in action. And it adds up.
Savings can erode due to a number of factors: a supplier applies the wrong price or discount (and your system doesn’t catch it); an employee makes a purchase from a non-preferred supplier and there is no process in place to flag the exception; and so on. It’s no wonder savings don’t fully materialize—it’s all because of savings leakage.
It’s time for a completely new paradigm: measuring savings only after spending occurs, and measuring savings that are actually realized, not just identified. To learn about five key enablers and critical success factors that can help leaders create a culture that plugs savings leakage and drives real savings, read The Real Realized Savings: Creating Positive Impact on the Bottom Line.