This article originally appeared on IndustryWeek.
Most companies only scratch the surface of procurement efficiency. Those that dig deeper discover that the savings can be dramatic. External purchasing is the largest single expense category for most ﬁrms, averaging 43% of total costs. Bain research shows that world-class procurement organizations can reduce a company’s purchasing cost base by an average of 8%-12% and deliver additional annual savings of 2%–3%.
A talented procurement team can provide leadership teams with valuable data, analysis and insights that inﬂuence what a company buys and how it buys. But many organizations wall off procurement from the rest of the business, treating it as a non-strategic service. Procurement managers that have a mandate to think strategically about what a company buys and spends can make the business case for change. But overcoming organizational silos takes time, and procurement needs to earn a seat at the table with business unit leaders.
Successful companies achieve greater savings by creating a collaborative partnership between procurement and the business, and making both accountable for results. Collaboration enables smarter, proactive purchasing decisions. One example: Procurement can provide regular feedback to business unit heads on where their spending is less efficient than the competition’s. That’s powerful intelligence.
Collaboration is also vital to making sure procurement savings really stick. Often, they evaporate before finance can book the gain. Why? Procurement managers seek to cut category costs (such as travel and entertainment expenses) that typically span multiple budgets, so the savings are difficult for ﬁnance to track. As a result, procurement claims large savings that never show up in the company ﬁnancials—a major point of frustration for CFOs and business unit managers. When procurement and ﬁnance work together, they can create systems that reliably capture these gains, delivering real cash savings to management.
Another important step is building the capabilities to lock in long-term savings. Even when companies achieve significant purchasing savings, many cannot sustain the process. Giving procurement a strategic mandate requires behavior change across the entire organization. Successful companies understand that and invest in the talent and tools to find new opportunities year after year.
David Schannon is a partner in Bain’s Silicon Valley ofﬁce. Sam Thakarar is a partner in Bain’s Boston ofﬁce. Klaus Neuhaus is a partner in the company’s Düsseldorf office.