Measuring and reporting procurement savings is a strange practise. It’s strange because we all do it, it’s core to our function, yet many do it reluctantly believing procurement has moved beyond being predominantly about savings, and despite the fact everyone does it, there are very few recognised standard methods about how to do it.
Just as every snow flake is different, every School Business Manager/Finance Manager has different savings definitions, different ways of calculating what those savings are, and different ways of measuring and reporting these savings to the wider school/academy. Cost “avoidance” is a good example of this. In some places this is religiously reported as a true saving in terms of additional cost that procurement has helped the organisation avoid. In other places, cost avoidance is either treated as a “second class” saving, or ignored completely as an irrelevance. Another example is how inflation is treated. If you “beat” inflation is it a saving? If you accept an inflationary increase is that treated as a negative saving?
If it’s so complicated, why do we even bother? Surely procurement these days is more about being recognised as a key partner that can deliver value in many ways other than simple cost reduction? Also, aren’t savings just a sign that things weren’t procured very well in the past? If I do a perfect job in procurement surely I’m buying at the best price first time and there should be no savings available?
Well, there are a number of reasons why procurement savings will always exist and need to be measured and reported, no matter how good you are at getting it right first time.
Firstly, savings are a tangible measurement. Value, quality, innovation etc. are harder to measure as although some elements can be quantified, other elements are subjective. Savings can be counted in pounds and pence and are there for everyone to see. It’s easy to create a key performance indicator based on savings and consequently most schools do this.
Secondly, the finance function will always be interested in savings. Savings play a huge part in helping to define budgets, cost planning etc. Stakeholders such as governors who are interested in the finances will naturally focus on costs and the control of those costs and reporting of savings goes hand in hand with this. In most schools the savings reports are submitted to the governors, or validated by them. It would simply not be acceptable in most schools for procurement not to report any savings at all.
With regards to why savings opportunities will always exist, the key word is change. Change happens. This is the reason procurement teams never reach that utopia where everything is procured at the lowest possible cost.
This change could be in your own school, it could be changes in the supply market, or change brought about by innovation. The most cost effective way of buying something two years ago may not still be the most cost effective method. Part of procurement’s role is to understand these changes, or even predict them, and react accordingly.
So what makes measuring savings so hard, and why do we get into so many debates around what constitutes a saving and whether a saving is real? There are two main issues that we see when claiming savings.
The first issue is that the savings number claimed is not believed. The second issue is that the savings number claimed never makes it through to the bottom line, so even if it is believed initially it loses credibility. These issues can be linked, but let’s tackle them separately to see how we can make our savings numbers more believable and ensure that they make it through to the bottom line which is where the true value to the school can be measured.
- Creating a believable number comes down to having a clearly defined, understood and agreed saving.
- The agreement should include not only what the saving is, but also detail of how the benefit is calculated.
While there are not many black and white answers for how to define savings, there are some basic principles that can be adhered to, as well as common sense. A few tips for creating credible savings are:
- Ensure the definition is completely aligned with your school stakeholders. Better still, involve them from the outset in defining the different types of saving.
- Ensure that the definitions tie in with how they will ultimately be accounted for. For example, if you receive a signing bonus from a supplier, will finance be required to amortise that benefit over the duration of the contract? Does it depend on whether there is any opportunity for the supplier to claw it back or not (for example if the contract ends early)?
- Have enough definitions to cater for the different situations that arise.
This can also encourage buyers to be creative in how they contract savings rather than trying to contrive a saving that fits a basic set of rules. If you find yourself debating with anyone whether something constitutes a savings or not, the chances are you need tighter definitions or more of them.
- Look at the total cost. There’s far more to measuring savings than looking at simple purchase price variance. Include delivery, payment terms, one-off costs, life-cycle costs etc. in your calculations. Reward innovation by quantifying efficiency savings or even revenue growth that’s driven by procurement.
- Don’t forget the increases. Are upward price changes driven by inflation or market conditions defined as increases or negative savings? These can’t simply be ignored otherwise no matter how well you define all the cost reduction, you won’t be reporting the full picture and the end result will be skewed.
- Have a clear governance process. Ensure that each savings is approved. The level and type of approval may vary depending on spend, criticality etc., but it’s important that the savings rationale and calculation method are ratified and agreed, to help standardisation and provide credibility. Also ensure that the on-going method of actually checking or measuring the saving is approved so everyone is on the same page.
So what about making sure the numbers hit the bottom line? The key here is taking measures to ensure the declared savings are all realised, which is the preferred position, but the fall-back is to be able to recognise when the realised numbers are not the same as declared, to be able to adjust them, and most importantly to learn from those adjustments to make future savings forecasting more accurate. Here are a few tips on getting those savings realised:
- Don’t look at sourcing as a linear process that start and ends. It’s part of a cycle and a hugely important part of that cycle comes directly after the sourcing. Effectively implementing savings and managing the contracts to ensure compliance and prevent cost creep from a number of angles is a key procurement skill. You can potentially save more money by doing this effectively than through the sourcing in the first place.
- Don’t stop measuring at the point of contract. It’s so easy to “bank” identified savings, but any savings claimed should be monitored in some form post-contract to ensure they are being realised. This monitoring could be via reports from procurement systems or reports from suppliers (make it a contractual commitment if you can’t get the data any other way). The downside is that whichever way you do it, monitoring realised savings and updating numbers takes time. Bearing this in mind, be sensible about the time spent. For example if monitoring on a quarterly basis is sufficient, don’t do it every month.
- Use the appropriate technology to log and report your savings. Many organisations still rely on spreadsheets to do this, but there are cloud-based products such as Schools Procurement in the market designed exactly for this purpose which can dramatically improve the clarity, efficiency and credibility of the savings measuring and reporting process.
- A final point is to keep the big picture in mind. Savings in isolation don’t mean a whole lot, in fact they could be bad for the organisation if reduced spend in certain areas is stifling productivity. It’s what those savings bring the organisation in terms of value that’s important, whether it’s profit or the ability to spend more in critical areas. It’s vital to remember savings are a means to an end, not an end themselves.
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