Accelerating Procurement's Impact On The Bottom Line

Accelerating Procurements
Impact on the Bottom Line:

Building Corporate
Consensus by Enabling a
360 View of Savings
Iasta Global Headquarters

+1-317-594-8600
Iasta European Headquarters
+44(0) 124 970 0726
Website: www.iasta.com
Email: successteam@iasta.com
TABLE OF CONTENTS
Executive Overview ................................................................................................................................ 3
Should Procurement be Focused on ROI? .............................................................................................. 4
The Potential of Bottom-line Savings from Procurement ........................................................................ 4
The Burden of Proof: Trying to get to the Bottom line ........................................................................... 6
Cost Reductions .................................................................................................................................. 6
Cost Avoidance ................................................................................................................................... 7
Other Value Drivers to Savings ........................................................................................................... 8
How Procurement Savings Gets Lost in Translation .............................................................................. 8
Ensuring Visibility to Savings Identification .......................................................................................... 10
A Call to Action for Procurement Savings ............................................................................................ 12
About Iasta .......................................................................................................................................... 14
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Accelerating Procurements Impact on the Bottom Line: Building Corporate Consensus by Enabling a 360 View of Savings
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Executive Overview
In this age of ber-cost management and ROI, procurement professionals need to clearly demonstrate
their value to the organization. For procurement, demonstrating value involves the unique challenge of
showing finance and other leading executives their ability to reduce costs and increase profitability.
But the story of procurements struggle to contribute to ROI and bottom line results is nothing new,
and is often illustrated by how frequently their efforts are put aside by finance. According to research
conducted by the management consultancy Arthur D. Little, executives typically analyze less than 50
percent of the savings reported from procurement. One cant help but wonder, why is this percentage
so low?
Part of the explanation is simply a lack of credibility, where claims of savings generated in the past
have been overstated or have been misaligned due to lack of a common understanding of what savings
is or should be. Another possible reasoning is based on a lack of investment in technology that actually
focuses on how spend management activities work in conjunction with realized savings.
To improve its corporate image, procurement organizations today yearn for simplified and automated
ways to consolidate their disparate internal spend and sourcing systems. They are also actively looking
for ways to streamline savings information to the appropriate financial executive or line of business. By
doing so, procurement is better enabled to monitor and show KPIs related to cost savings, while
enhancing business decisions that reflect wider-corporate savings goals.
This paper takes a brief look at procurements challenge of savings tracking and reporting, and
describes how tools such as Iasta Savings Tracker are designed to focus on improving procurements
savings identification for establishing deeper savings insights, and removing the traditional barriers that
arise between procurement and finance.
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Should Procurement be Focused on ROI?

Why is procurement so focused on Return on Investment (ROI)? The quick answer: because so is
everyone else. ROI has become that current buzz-word for most industries and operational aspects of
business today. The emphasis on ROI is not surprising considering the increased need to focus on how
investments in both working capital and operational resources translate to profits. With global price
competition and regulatory pressures on the rise, every line of business is being forced to do more with
the financial resources at their disposal, which even includes justifying their actions by measuring their
own results. And of course, procurement is no exception to this trend.
When a company commits to spending money on goods or services, CFOs and other senior executives
like to see, and better yet, like to understand how procurement departments are able to improve the
return on their efforts. While ROI is often discussed in terms of the amount of time necessary to
recoup their expenditure in pure financial terms, establishing a positive procurement ROI also means
ensuring the costs of managing a procurement organization are less than the amount of savings it
generates.
However, industry experts note that using ROI as the sole measure may be inadequate to understand
the true value of procurements contribution.1 Procurement ROI is not just "cost savings," but the
actual impact that the procurement organization has on source-to-pay activities and their ultimate
impact on the bottom-line of the business.2 Yet, understanding where savings comes from and how
savings get applied remains one of the largest challenges for building a corporate consensus on
procurements organizational impact.
The Potential of Bottom-line Savings from Procurement

Taking a step back into understanding the potential of procurement helps us understand the challenges
procurement still faces for establishing a consensus on activities related to savings identification and
recognition. The classic example is weighing the difference between cutting costs and generating
income, where due to profit margins, one dollar in savings is more valuable than one dollar in sales.
Studies have shown that a 5 percent cost savings is the equivalent of a 30 50 percent increase in
sales.3 Furthermore, not only can a reduction in costs directly impact the bottom line as reflection of
http://info.proximagroup.com/buyingBlog/bid/87575/Does-your-procurement-function-exist-to-deliver-savingsThen-you-re-doomed
2
spendmatters.com/2012/10/02/procurement-roi-the-righ-metric-part-1
3
http://www.mhprofessional.com/downloads/products/0071770615/0071770615_ch01.pdf
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corporate performance, but cost reductions can also generate improvement on shareholder value
through increased earnings per share for publically traded companies.
Throughout all of the years that procurement automation has been put in practice, one presentation
after the other has argued that procurements potential is based on the capability of significantly
reducing costs. Hence one can understand the allure of procurement technology by simply looking at
an income statement model. For instance, Figure 1 below demonstrates the potential financial benefits
that can be derived from reducing SG&A costs. By using eSourcing technology, a $15 billion publically
traded company can better source specific categories related to indirect spend in their SG&A and
identify significant savings.
Figure 1: The Potential of Identified Savings through eSourcing on the P&L:
WHAT TO CONSIDER:
The savings in SG&A can be
impacted by the effective
use of eSourcing platform
technologies that leverage
features such as eAuctions,
RFx, Optimization, Contract
Management and Spend
Analysis.
But the challenge in
recognizing Procurements
contribution to both bottomline and non-bottom-line
efforts remain steeped in
the inability to establish
consistent definitions and
more visible approaches to
finance and other lines of
business.
Realizing a 10 percent savings across all categories related to SG&A generates a 16 percent increase in
operating income and a 14 percent increase on EPS. If the company is best-in-class, they have the
opportunity to achieve a 15 percent savings, increasing operating income by 23 percent and EPS by 21
percent. This high impact potential in cost savings explains the immediate gravitation towards
procurement automation in the late nineties for both upstream and downstream procurement. For
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more than a decade, leading technologies like Iasta that focus on strategic sourcing, continue to pique
the interest of CPOs and other CXO executives. Strategic sourcing solutions help these executives with
the ongoing challenge of trying to increase revenues by reducing the impact of price volatility required
for managing the day-to-day activities of the business.4
The Burden of Proof: Trying to get to the Bottom line

Based on the simple example above, it would appear that simply automating the process to identify
and incorporate savings into the P&L is all that needs to happen. But technology alone is not a
panacea to solving business problems. One of the real challenges in driving procurements efforts home
is the ability to drive acceptance in savings recognition. There are several clear examples that
demonstrate how procurement management must deal with the complex issue of translating savings to
both bottom-line and non-bottom-line impacts. This starts with procurement establishing a
fundamental understanding of what defines cost reductions versus cost avoidance, and the external
market variables driving the need to expand how procurement understands savings.
Cost Reductions
Cost reductions or hard cost savings are all about quantifying and measuring. Hard cost savings can
often be understood as the tangible bottom line reductions. Some example definitions of cost
reductions include: 5
Year-on-year savings over the constant volume of purchased product / service
Direct reduction of expense or a change in process, technology or policy that directly reduces
expenses
Process improvements that result in real and measureable cost or asset reductions
Examination of existing products or services, contractual agreements, or processes to determine
potential changes that reduce cost
Net reductions in prices paid for items procured when compared to prices in place for the prior
twelve months or a change to lower cost alternatives
When it comes to specialty projects like Six Sigma, organizations are focused on the hard dollar cost
reductions. However, procurement is also faced with the challenge of accepting and using accounting
approaches to recognizing to bottom-line savings that may not translate to the income statement due
to accounting difference between operating and capital expenditures.
4
5
Why Procurement must transform itself by 2020, Deloitte. 2013.

www.esourcingwiki.com/index.php/Cost_Reduction_and_Avoidance
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For instance, OPEX or operating expenses are typically recurring expenses and costs associated with
the day-to-day activities of the business such as research/development, sales and administration that
are critical to the operation of a business; essentially the money needed to turn inventory into
throughput. Since OPEX are shown in the income statement, procurement identifying savings in these
categories can become very visible if they are tracked properly and managed effectively through the
source-to-pay cycle.
CAPEX or capital expenditures, on the other hand, typically correspond to capital spending where the
initial impacts are represented on the cash flow statement and amortized over time on the balance
sheet. Generally only costs of repair or maintenance will be represented on the income statement as it
relates to CAPEX items. As a result, understanding and measuring the savings involved with CAPEX
items is possible to measure, but may be more difficult for procurement to trace their total impact for
having effectively sourced a CAPEX good or service.
Cost Avoidance
While hard cost savings are more tangible, much of a supply managements efforts also result in cost
avoidance essentially actions taken that may incur higher costs in the short run, but look to lower
costs over the course of time. Unless savings are recurring and can be tracked to a specific financial
budget, cost avoidance savings will never make it to the income statement. Moreover, soft cost savings
or cost avoidance is more difficult to define, but the suggested definitions from Iastas eSourcing Wiki 6
include:
Resisting or delaying a suppliers increase

Purchase price that is lower than the original quoted price
Value of additional services at no cost such as free training
Long-term contract with price-protection provisions
(that for instance avoid issues such as price inflation)
Some of the common approaches to cost avoidance include:
Reduced ownership cost

Avoidance of costs due to market changes
Improved total value
Strategic preferred contract relationships
Competitive bidding of requirements

Spot buy transaction negotiation
Substitution or standardization
Negotiated better contract terms
www.esourcingwiki.com/index.php/Cost_Reduction_and_Avoidance
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While cost avoidance is not something that can be tracked to the bottom-line, Aberdeen research
shows that 66% of procurement organizations still look at both hard and soft cost savings in
understanding savings. In addition, an IBM study7 indicated 91% of the top performing chief
procurement officers (CPOs) placed high or very high importance on cost avoidances, compared with
only 54% of the emerging performers. These numbers demonstrate the value put on both types of
savings cost reductions and cost avoidance as it relates to savings.8 Thus changing a companys
perception of soft savings from not-impacting the bottom line to something tangible and adding value
is something that procurement must convey to other stakeholders to advance their cause.
Other Value Drivers to Savings

Finally, another area that cannot be measured in accounting terms is how procurement is able to
enhance purchasing decisions by incorporating a wider understanding of where savings can be applied.
In other words, a fanatical focus on better price realization and lower cost of procurement alone can
lead procurement down a rabbit hole by overly focusing on implementing more sophisticated ways of
improving procurement while neglecting more coordination within the wider organization.9
Hence, other aspects that make getting cost savings so difficult are the external global challenges that
encompass the modern procurement enterprise. These global challenges can be reflected in areas
such as through currency fluctuations, volume, and dynamic market movements. Immaturity in
managing savings can demonstrate procurements inability to improve and react to external aspects
that can directly impact spend. Even when driving costs from supply contracts will always be a central
tenant of procurement, many organizations may also look to procurement for extending their savings
activities proactively into wider core capabilities such as category management, supplier relationship
management and risk management.10
How Procurement Savings Gets Lost in Translation

Both finance and procurement would agree that hard dollar cost reductions are the shortest path to the
bottom line. However, establishing this lingua franca or working language that translates procurement
metrics into financial ones, without automating savings tracking and visibility remains one of the largest
hurdles for most companies today.
Chief Procurement Officer Study 2013, IBM, May 2013

Dynamic Procurement: The CPO as Collaborator, Innovator and Strategist. Aberdeen Group. August 2011.
9
Avoiding the Procurement Rabbit Hole. Booz & Co. 2007.
10
The Power of Procurement: A global survey of Procurement functions. KPMG. 2012.
8
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For instance, anyone reading financial statements such as an income statement, balance sheet, or cash
flow can clearly uncover core financial metrics that determine a companys financial performance.
Commonly accepted measures such as gross margins, operating margins, or net profit margins are
monitored and well understood with the context of U.S. GAAP and/or other international accounting
standards used for financial reporting. Moreover, while industries vary in terms of the make-up of their
revenues, organizations can easily compare these metrics against their industry peers, competitors or
even other markets to understand how they performed related to profits and shareholder returns. As a
result, these metrics are easily or relatively transferable.
However, characteristics of procurement metrics such as spend under management, spend under
contract, or procurement cost savings typically are not measured with a high degree of consistency
from one organization to the next. Part of this difference resides in how an organization defines cost
savings that includes factors such as improvements in quality, service, delivery and increasingly
sustainability. Moreover, the focus on long-term factors that look at savings based on the total cost of
ownership (TCO) also creates the issue of putting both quantitative and qualitative factors on the total
benefits derived. Thus generating procurement standards and metric definitions is highly dependent on
the culture of procurement in each organization and frequently distinguished by the maturity of the
procurement organization. Given the lack of consistent metric definitions across organizations and the
absence of regulated bodies for measuring them, procurement metrics are less transferable than
financial metrics in understanding an organizations performance.
Research even points to the fact that savings also becomes a function of the responsibilities within an
organization, where personal metrics, planning needs, and analytical skill sets for each part of the
business created the understanding what savings means.11 For example:
A sourcing or buying manager may interpret savings as the incremental discounts negotiated
from the suppliers first quote or otherwise benchmarked market process across anticipated
purchase volumes.
A financial manager may look at it as the direct costs or expense reductions reflected as a
positive variance or working capital improvement in the budget.
Finally a CFO, controller or treasurer may interpret it as a something that impacts earning or
cash-flow plans including financing and global exchange implications.
Still, another challenge is the degree of credibility related to procurements ability to measure savings
due to not being adequately aligned with accounting. Finance organizations have often been
11
The CFOs View of Procurement: Getting More to the Bottom Line. Aberdeen Group, 2005.
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confronted by procurement savings with the need to question their validity due to a number reasons
including:
carrying over savings from previous years
inconsistencies in establishing market benchmarks
assumptions with high inflation rates
mishandling of changes in unit price and quantity
overestimating savings assumptions due to process change
As a result of not speaking the same language, nothing gets interpreted easily between procurement
and finance. Research demonstrates this fact as well. According to a study by the Aberdeen Group,
32% of enterprises have no formal process to measure the savings generated by procurement, and
another 25% only calculate these measures on a case-by-case basis. Even more surprising, is that less
than a quarter use booked savings to acknowledge procurements performance.12
Ensuring Visibility to Savings Identification

While there are a number of ways procurement can improve its transparency from an accounting
framework, procurements organizations today must become more savvy and knowledgeable in how
expenditure types should be treated based on their stored data. In the end, procurement needs to
think hard and wide about how to document the complicated world of savings. And as one analyst
firm suggests, top-performing organizations are 40% more likely to hold visibility into booked savings
across the enterprise.13 Being more adept at identifying and reporting on savings visibility means
avoiding savings getting lost, which in part requires the right combination of both process and
technology.
As a result, Iasta recognizes that technology capabilities such as Iasta Savings Tracker tool can help
organizations better identify and eliminate threats and capitalize on opportunities that will enhance
business decisions and improve execution. The Savings Tracker tool provides procurement teams with
a centralized visibility into the status of key department metrics and corporate cost savings goals.
Moreover, through the use of technology, procurement organizations can streamline savings into prebuilt, user-specific data views, and templates that give decision makers the ability to monitor and
measure KPIs related to cost savings through identified negotiated, implemented, or bottom line
savings.
12
13
The CFOs View of Procurement: Work in Progress. The Aberdeen Group. 2009
Blog posting: http://cporising.com/2013/07/18/the-visibility-factor-another-best-in-class-advantage/
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But to improve procurements impact on identifying savings, a discussion also needs to take place
around the types of savings that are occurring within the organization such as project savings or cost
avoidance savings. With Iasta Savings Tracker organizations can obtain savings in a number of
different ways which includes:
Savings
Savings
Savings
Savings
by
by
by
by
Program Maturity
CapEx
OpEx
Division
Run Rate Savings

Cumulative Savings
Savings in Progress
Actual v. Forecasted
Figure 2: Screen Capture of Iasta Savings Tracker Dashboard
As illustrated above, Savings Tracker provides a graphical, analytic reporting tool with transaction level drilldown. The tool
compiles <department level> <company level> <individual level> information on expenses, budgets, goals, risks and then
calculates savings, cost avoidances, probabilities, and identifies trends for identified periods of time, specific groups, and
classifications.
Improving procurements impact also requires a wider technology direction. For instance, in concert
with spend analytics for classifying and cleansing data, using advanced tools such as the Iasta strategic
sourcing, contract and supplier information and performance management applications, organizations
can better track spend. As a result, decision makers are provided with visibility into spend data within
and/or across categories, classifications, groups, individuals, or various combination of these elements.
By doing this, organizations can save time and increase productivity. Best of all, they can provide
intelligent decision making guidance supported by data to executive leadership to:
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Specifically pinpoint where savings are occurring from their source

Identify findings that can help in forecasting and decision making for near and long-term goals
Provide insights that can assist with managing both internal and supplier risk
Simplify the aggregation and reporting on savings information through standardizations the end-toend process
Automate the aggregation of data from multiple sources which tends to be a huge challenge for
most businesses
Finally, becoming a procurement team that delivers high value and impact requires the flexibility to
manage the savings recognition in a dynamic and complex environment that faces change on a daily
basis. Procurement professionals need the flexibility to:
Provide procurement management visibility into what they've done and justification for future
Integrate market intelligence data into dashboard and reporting
Integrate capabilities such as spend analytics, strategic sourcing and contract management
Understand the needs of multiple currency environments to capture savings with multiple lot
currencies, converting project savings, maintaining exchange rates, and the ability to input custom
exchange rate
A Call to Action for Procurement Savings

Based on the challenges outlined in this paper, it is clear that businesses today need a simplified,
automated way to consolidate their own disparate internal savings data and streamline it into pre-built,
user-specific data views and templates. As a result, decision makers in procurement, finance, and other
lines of business will need a better way to monitor and measure KPIs related to cost savings be it
identified, negotiated, implemented or bottom line savings. By using the Savings Tracker solution,
organizations are more prepared to identify and eliminate threats and capitalize on opportunities that
enhance business decisions and improve execution. What are your next steps?
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Step 1 Establish consistent savings definitions and types

This starts by understanding the value that can be potentially provided from improved savings
recognition capabilities by improving the alignment of procurement metrics with the rest of the
organization. This includes Identifying the savings potential and base-lining both bottom line / non-bottom line impacts from
procurement activities
Aligning a common or standard definition of savings with Finance and other Executive stakeholders
so that everyone understands what savings means
Addressing the common external macro variables impacting cost (e.g. currency, industry,
environment, diversity) that can impact savings recognition approaches and interpreting their
effects
Step 2 Assess Savings Maturity and Create IT Alignment

Being more consistent starts not only with multiple stakeholder alignment but understanding the
current state of things and the realm of possibilities now and in the future by Assessing current maturity in the savings recognition capabilities whether they be manual, semiautomated or automated
Creating an improved IT alignment with procurement systems and tools that collect data impacted
by procurement such as spend, sourcing, product, or contract data
Integrating with external 3rd party for collecting additional factors that will impact savings
opportunities such as inflation, market trends or regulatory information
Step 3 Drive for Savings recognition

Once definitions are aligned through the use of both process and automation, procurement
organizations can achieve a more consistent approach to driving savings recognition to the rest of the
organization by Using more conservative approaches to savings for establishing credibility (especially soft savings)
due to the lack of impact on income statement
Establishing a process of savings governance and repeatability with procurement systems and tools
that prevents a misinterpretation of what is meant by savings
Establishing heightened delivery and awareness savings recognition through the use of savings
reporting tools and executive-level dashboards
Are you ready to improve your teams impact with enhanced visibility and better relationships with
Finance? Contact our sourcing experts today at successteam@iasta.com or visit www.iasta.com.
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About Iasta
Iasta is a team of dedicated sourcing and spend management experts who empower procurement to
expand their impact and influence across the organization. Our unmatched blend of software and
services allow companies to incorporate best in class purchasing practices through Iastas spend
analysis, supplier management, strategic sourcing, decision optimization, and contract management
solutions. We empower procurement organizations with the tools, business intelligence, and experience
needed to make responsible business decisions. Most importantly, the heart of Iasta's business model
is customer success. We believe that strong customer relationships drive user adoption, which
increases the ROI of our easy-to-use software and exceptional service offerings.
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Accelerating Procurements

Impact on the Bottom Line:

Iasta Global Headquarters

Should Procurement be Focused on ROI?

The Potential of Bottom-line Savings from Procurement

The Burden of Proof: Trying to get to the Bottom line

Why Procurement must transform itself by 2020, Deloitte. 2013.

Resisting or delaying a suppliers increase

Some of the common approaches to cost avoidance include:

Reduced ownership cost

Competitive bidding of requirements

Other Value Drivers to Savings

How Procurement Savings Gets Lost in Translation

Chief Procurement Officer Study 2013, IBM, May 2013

Ensuring Visibility to Savings Identification

Run Rate Savings

Figure 2: Screen Capture of Iasta Savings Tracker Dashboard

Specifically pinpoint where savings are occurring from their source

A Call to Action for Procurement Savings

Step 1 Establish consistent savings definitions and types

Step 2 Assess Savings Maturity and Create IT Alignment

Step 3 Drive for Savings recognition

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