Making Sourcing Savings Stick

Click here to listen to the podcast on this topic.

As a sourcing professional, my most difficult negotiations aren't with suppliers but rather with internal customers. Based on conversations with my colleagues, this experience is not unusual. One measure of this challenge is "savings leakage" (savings negotiated but not realized). Aberdeen Group reports average leakage rates of 21% as Purchasing strives to implement its sourcing decisions. Best In Class companies experience about 14% leakage whereas All Others see 24% leakage¹. Small companies experience up to 40% savings leakage ². Net, there is a huge payout for improvement.

There can be many reasons for leakage:

1. Communication. The using organization is unaware of the award and continues buying from the incumbent.
2. Inconvenience. The new supplier's process is inefficient providing a negative incentive to change (e.g. a travel reservation website which is difficult to use).
3. Fear of the unknown. There may be a long-standing, positive relationship between the supplier and the user. Alternately, the internal customer may not be thrilled with their current supplier.
4. Lack of trust. The internal customer organization doesn't trust the buyer to properly address non-price criteria when making sourcing decisions.

Regardless of the reason, this leakage represents innumerable hours of wasted effort and, more importantly, millions of dollars in missed bottom line profit improvements.

Communication breakdown is relatively easy to address, particularly with the use of eSourcing, eProcurement, Spend Analysis and on-line contract management systems. See article below for tips on "Stopping Contract Leakage". The other three reasons require a deliberate process and up-front planning. It's all about effective change management! Successful sourcing managers don't wait until after the award to sell their internal customers. This is particularly critical in companies where business units are relatively autonomous, and not subject to corporate edicts.

Effective sourcing professionals follow Stephen Covey's advice: "Begin with the end in mind". What does that mean? It means involving key stakeholders throughout the entire sourcing process so they will support implementation of the ultimate award decision.

Specifically, what does this entail?

1. Ensure upper management support for sourcing initiatives and savings goals.

• Review your corporate and/or business unit objectives, and be sure your sourcing initiatives support them.
• Communicate to leadership how your savings priorities support business objectives. Be sure to quantify and communicate specific goals and results. Enlist your management sponsor. Partner with Finance. Learn to talk like a CFO.

2. Initiate a comprehensive and methodical change management process early on.

• Identify Key Stakeholders. If the number is very large, look for the "thought leaders". These are the people who influence the rest of the pack.
• Identify potential areas of resistance and develop a plan to address. People resist change for a variety of reasons. Therefore, it is necessary to identify the issues and address them.
• Research customer business objectives and pinpoint those that can be fulfilled through your sourcing initiative.
• Have your project sponsor pre-sell the initiative to his/her peers, being conscious to link to customer business objectives.
• Develop a project plan that incorporates specific actions to ensure customer influence in the decision process. Communicate your objectives and project plan to internal customers highlighting their involvement.

3. Work with stakeholders to clearly define decision criteria with appropriate measures.

• Survey stakeholders to identify concerns, and to begin defining savings goals, award strategy (e.g. single source, co-source, etc.) and decision criteria. Decision criteria should include things like projected switching costs and non-price criteria (e.g. quality, service, etc.). Be sure to get agreement on the weighting of the various criteria.
• Summarize measurable decision criteria, and seek feedback from key stakeholders. If working with a subset of stakeholders, broaden the group for this step. Also, have your sponsor communicate this information to his/her cross-functional peers.

4. Conduct the RFP/RFQ with stakeholder input and involvement.

• Develop the RFP including survey questions which address the "must have" decision criteria. Identify survey evaluators. Validate the survey with key stakeholders. Listen to and incorporate feedback.
• Have evaluators score the surveys. Meet with stakeholders to discuss and resolve discrepancies, to identify the bidder "short list" and to determine how the RFP responses will be incorporated into the RFQ.
• Create the RFQ incorporating the RFP data and appropriate non-price decision criteria. Validate the RFQ with stakeholders. Confirm decision criteria and savings goals.
• Collect supplier responses and bids. If you're conducting an auction, invite stakeholders to participate in a practice auction and/or observe the live event. There is nothing like the excitement of a live auction to build enthusiasm and buy-in.
• Develop award recommendation consistent with pre-agreed decision criteria. Review with key stakeholders.
• Management sponsor should share the approved award decision, projected savings and implementation timing with his/her peers.

5. Gain stakeholder support for a comprehensive implementation plan
and enforce accountability.

• The plan should include actions, names and dates. Manage the plan holding people accountable for meeting commitments. Escalate outages through the project sponsor, if necessary.
• When the implementation is complete, CELEBRATE and share the glory! Acknowledge, publicize and recognize the cross-functional success.

6. Monitor expenditures over time to identify any leakage.

• You can't improve what you don't measure.
• Ideally, use a spend analysis solution to facilitate this process.
• Look for "root causes" of any leakage.

Sound like a lot of work? It is. However, it often eliminates months of wasted effort on sourcing decisions that don't stick. We recently followed this process at a client where there was great reluctance to formally source a spend category. The business owner valued their "partnership" with the incumbent and projected huge switching costs and disruption in order to move business. Why bother!?! By following this process, we identified important decision criteria and enlisted support of the business. They were 100% behind the ultimate award that delivered almost 25% savings with virtually no switching costs!

Is this formal process necessary for all savings initiatives? No, but the thought process should be applied to all situations. Thinking through this process allows you to determine the extent of the effort required. One size does not fit all.

Addressing stakeholder fear, lack of trust and potential inconvenience through a comprehensive change management effort and improved communication will have a tremendous impact on savings leakage. Yes, it requires an upfront time investment, but it also delivers a huge back-end payout!

Click here to read a more comprehensive article on this topic.

¹ Aberdeen Group. "The Advanced Sourcing & Negotiation Benchmark Report. January, 2007. http://aberdeen.com/aberdeen-library/3857/RA_AdvancedSourcing_3857.aspx
² Aberdeen Group. "Sourcing Challenges for SMB". August, 2007. http://aberdeen.com/aberdeen-library/4420/SI-smb-sourcing-challenges.aspx