24 Jan 2011 P2P 101: The Financial Impact of Maverick Spend
Recently we wrote about spend analysis and in particular how important it is for spend analysis to be meaningful in a commercial sense. Analysis for the sake of analysis is worse than useless – it makes you look like a fool – so it’s important not just to understand your purchasing metrics but also why you measure them in the first place.
I once read of shoe shop that was failing. To work out how to become more profitable a member of staff was sent to a much more successful competitor to understand what it was that they did to sell more shoes. The shop assistant, who had been instructed to buy a pair of shoes, came back with a pair of shoes, some polish and a set of shoe trees. “Great” thought the manager – “we just need to sell extra items” and he told all his staff to sell as many products as possible to every customer. It didn’t work. In fact the store became even less successful as they irritated their customers with attempts to over sell.
So why did this happen? The reality is that the successful shoe shop was run by a family firm who’d been established in the town for decades. They knew most of their customers by name and had often shod generations of the same family. They only sold quality and were concerned to ensure that shoes purchased from them would last. They gave sound advice about shoe care. They cared for the customer and they showed this in the way they behaved and yes – they sold lots of polish and shoe trees – because they cared.
The moral of the story? It’s not good enough to know what to do – you need to know why you are doing it too.
Making Use of Your Compliance KPI
And so to spend analysis and in particular to maverick – or non-compliant – spend.
It’s a very common P2P metric. How much do you spend on what products and services and importantly – how much of this spend is with preferred suppliers? It gives you an idea of how compliant your business is and provides the opportunity to understand how effective your procurement function is. But what’s the point? Ask yourself the so what question? The answer isn’t difficult. The more compliant the spend, the more savings can be realized. If your preferred stationery supplier changes on average 10% less than the regular street price then 40% compliance means that 10% saving is only 4%.
Pretty basic stuff isn’t it. But how many procurement organizations actually do this calculation? When a buyer does a deal that saves 10% on stationery do they claim 10% saving on total spend or do they multiply this by the level of compliance achieved a year into the contract? The difference in savings claimed could be dramatic.
Don’t just measure compliance – do something with it. The financial impact of maverick spend is significant and it costs in two ways – firstly in the extra cost of spend through more expensive suppliers and secondly in the bonuses paid to buyers and CPOs who claim savings that never actually get delivered.