The start of a new year is always a time for reflection and resolutions and, as we begin 2021, many of the executives I talk to are resolving to do a better job of managing how their companies spend their money.
And that really shouldn’t be a big surprise. While spend management is an evergreen issue for most companies, it’s become even more important in the wake of one of the most challenging years in history. With disruption and economic uncertainty continuing to rule the day, companies everywhere are feeling immense pressure to eliminate costs that don’t deliver value. At the same time, they’re also striving to become more resilient and grow more responsibly.
It’s a difficult scenario, and it calls for a distinct departure from the ways companies have traditionally approached cost reduction, which often miss real value-creation opportunities while rarely generating sustainable, long-term savings. Now more than ever, companies can’t afford to remain trapped in the seemingly endless cycle of cutting costs, watching them grow back, and then cutting again.
There’s a much better way to address today’s challenges: closed loop spend management (CLSM). CLSM is a model we’ve developed that enables a company to take a forensic look at its entire spend to identify opportunities to turn non-working money into working money; and then embed new processes, capabilities, and behaviors needed to capture those opportunities and sustain the value generated over time.
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Taking a zero-based look at spend
With CLSM, companies start by applying a zero-based perspective to all of their third-party expenses to identify the full range of opportunities to remove costs that aren’t creating value. With zero-basing, a company forgets about the past and reimagines its cost base not from what it was or is today, but what it should be if the company were to start from scratch—and then uses the resulting savings to fund investments in innovation, distinctive capabilities, and specific activities that drive growth. Today’s sophisticated artificial intelligence and machine learning tools can help companies gain full cost and supply base visibility at the most granular level, categorize all their spend, and then identify specific savings opportunities to pursue and how to capture them. At its essence, zero-basing enables companies to model the spend level that’s optimal for running the business based on various internal and external factors—and, in the process, unlock hundreds of millions of dollars of savings every year.
Going beyond pure cost savings
There’s also a significant resiliency and responsibility component to CLSM. Sustainability-enhanced zero-basing goes beyond cost savings to help companies create a strong purpose for cost reduction and enhance trust. It also helps get buy-in for change among internal stakeholders and adds a dimension to savings that’s attractive to the external investor community. Plus, a sustainability perspective can greatly enhance value targeting. Using responsible sourcing analytics tools, a company can visualize its current sustainability performance versus peers to illustrate how certain cost-savings initiatives can influence sustainability, as well as identify sustainability-specific interventions (such as required emissions reduction) that also save money.
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Changing behaviors and mindsets
Importantly, CLSM doesn’t just uncover savings opportunities. It also puts in place the organization and infrastructure needed to capture those savings and sustain and build on them over time. This includes new operating models, roles, processes, policies, controls, reporting, metrics, technology, and skills.
With CLSM, a company can approach its business in an entirely new way. The visibility CLSM provides into the supply base, environment and social impact, possible risk, and potential efficiencies and savings opportunities enables a company to make faster, insights-driven business decisions and identify where new investments can have the most significant impact.
One of the hallmarks of CLSM is its ability to bring together procurement, finance, and the business to collaboratively agree, speak the same language, and make insight-based decisions about the full range of savings opportunities CLSM has uncovered. Doing so effectively “closes the loop” with planning and budgeting activities and ensures that procurement is an integral part of all purchasing decisions by the business. This is absolutely critical to ensuring savings are sustained over time and costs don’t gradually creep back in.
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In other words, CLSM powers new ways of working across the enterprise—it’s not just a one-time project the company completes or an annual budgeting exercise. CLSM is a durable and repeatable process that becomes ingrained in the company’s culture, and is a true decision-making and management tool that provides the visibility necessary to align an organization around the priorities in which it will invest. It’s an approach that can generate significant benefits for any company, in any industry. For example, a number of companies we’ve helped adopt CLSM are seeing cost savings of $1 billion or more while establishing a company-wide cultural change to help control costs on an ongoing basis to improve margins and unlock funds for growth.
With the new year offering everyone a chance to make a new start, isn’t it a good time to take a fresh look at how your company spends its money? If you want to learn more about CLSM, I encourage you to read our paper, “Closed Loop Spend Management: The Path to Growth With a More Resilient and Responsible Supply Chain.”
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