With a majority of CEOs viewing cost-reduction initiatives as a top priority in 2019, there is a growing trend in organizations to scrutinize expenditures more closely by outsourcing to procurement solutions providers as a way to better manage costs and expenses.
And no wonder — some estimate that most companies waste as much as 30% of their expenditures. These expenditures are deemed wasteful because they fail to impact customers. At the same time, it is vital that companies have appropriate systems in place and cut the right costs through strategic reductions that don’t impede their ability to grow and remain competitive.
As a recent Forbes article noted, “A business without good systems is, in the end, not sustainable.”
Strategic procurement is one of the most effective ways to positively impact a company’s bottom line, but many businesses lack the resources and expertise to optimize their procurement capabilities.
As a result, companies without current dedicated procurement resources, or that have a minimal amount of internal category expertise, may remain loyal to suppliers year after year without objectively assessing costs and end up paying higher prices than necessary.
While a group purchasing organization (GPO) can be useful in helping companies realize savings through economies of scale and supplier management, GPO’s provide very limited services.
New procurement solutions models go much further, offering options ranging from fractional resources that are applied based on an organization’s budget and resources, to serving as an organization’s long-term procurement partner by helping with sourcing, request-for-proposal documents, contract management, auditing services, negotiating with suppliers and more.
These services pay for themselves and provide quick, measurable wins. Based on my experience, a typical return on investment is around 300% when comparing savings to the costs.
Can my company benefit from outsourced procurement?
How do you know if your company — regardless of its industry — could benefit from outsourced procurement? Here are five key questions to discuss with your financial team:
- Is there control around the company’s spend? If there are multiple suppliers or sources being used for similar categories or a single area of spend, that usually is a signal there is an issue with expense management.
- Is there a formal process and a team of individuals who look at the spend or the expenses of an organization and evaluate whether their suppliers are providing the best possible value?
- Are there metrics for cost efficiencies and savings?
- Are there standards around the products that are purchased?
- Is there a vice president or equivalent leader in procurement who is part of the decision-making process? (An individual at that level is essential to a formal procurement process.)
LBMC is an aggregated procurement provider.
Procurement solutions experts can bring value and drive efficiencies through the overall bidding and buying process as well, along with control and sourcing. The result is substantial savings and a true procurement partner that helps an organization grow in scale.
While GPO’s use group rates at a pre-determined vendor list level, companies like LBMC’s W Squared aggregate volume so that all organizations receive the same pricing. Regardless of the size of an organization, it can receive two times, three times, even 10 times the volume discount it might already have.
Measurements, benchmarks, analytics, spend analysis and reporting are all tasks that lend themselves to efficiencies around the expense side of a business and enable companies to get expenditures under control. Getting into the control environment and truly managing the supply base by establishing a procurement and purchasing process — along with standardizing, simplifying and consolidating specs — are keys to driving a best-in-class procurement system.
LBMC developed a solution that turns passive participation in a GPO into an active effort to bring all needed items under contract and control, effectively becoming an organization’s aggregated procurement partner.
One of the biggest surprises many of our clients' experience is the customized solutions suppliers offer. For example, one of our suppliers guided a startup-size client in getting its ordering process up and running, helped the company vet new and innovative products and created an online order portal. This startup could never have envisioned all that on their own if they had tried to do those tasks themselves.
The first step for any organization seeking to optimize its procurement efficiencies and savings is to have a conversation with a procurement solutions provider. This starts the process of discovering where a business may have issues around its budget and identifying ways to save costs.
Improvements to the bottom line can come in hard savings based on a cost-to-cost comparison or soft savings in efficiencies, technology, and reporting. Strategic procurement, however, goes beyond just saving money to creating innovative processes that improve a company’s operations and efficiencies and position it for long-term success.
Debbie Long is the vice president of procurement services for LBMC Procurement Solutions, a leading Tennessee-based outsourcing solutions company that provides services to a range of businesses. Contact Debbie at email@example.com.