Something strange usually happens between the point when you conduct a sourcing process and contract negotiation, and when spending actually occurs: the savings you thought you negotiated don’t all hit the bottom line. This gap between “identified” or negotiated savings and “realized” savings—the savings that actually hit the bottom line—can undermine the credibility of procurement with business stakeholders and the finance organization.
This paper outlines the most common savings methodologies and lays out the steps you can take to establish a realized savings discipline and infrastructure in your organization.
The opportunity to deliver substantial bottom-line financial benefits through savings in indirect categories of spend is substantial. Indirect spend can represent 15-40 percent of revenues for a typical company. In an ideal world, achieving 10 percent savings on that spend could yield 1.5-4.0 percent in bottom-line margin benefits. However, the reality is that most firms achieve only a fraction of these potential savings. The level of savings achieved—or left on the table—is a function of four key levers:
Spend Managed: The amount of spend that is managed via a professional procurement process.
Savings Achieved: The level of savings that are negotiated and contracted.
Savings Realized: The amount of those savings that are actually realized through compliance management efforts.
Continuous Cost Improvement: The incremental savings that can be driven post-sourcing.
Recent survey data highlights that only 22 percent of firms focus on realized savings, while nearly 70 percent of firms instead count identified or contracted savings, before spending has occurred. This 70 percent majority thinks that they are driving realized savings, but in fact they are “booking” identified savings that may not actually be realized.
This report discusses the five key enablers to drive realized savings and the critical success factors to creating a realized savings culture and capability.
Procurement has a strategic role to play in helping deliver realized savings, driving bottom-line financial impact and supporting the strategic goals of the business. With proper alignment between finance and procurement, firms can increase the level of savings that can reliably be achieved and ensure that hard-won savings are delivered to the bottom line, rather than being eroded after sourcing and negotiation.