In 2013 the country was in the grip of recession, and CEOs and financial directors (FDs) were facing the tough challenge of cutting and managing costs to survive, while investing to grow for the future.
Unfortunately, many boards only consider the short-term picture and immediately default to a defensive cost-cutting mentality. This often means that more effective and sustainable strategies, such as effective procurement and smarter spending, are either ignored or are incorrectly implemented by inexperienced employees.
With this in mind, Expense Reduction Analysts (ERA) a UK-wide network of specialist procurement advisors commissioned a research piece calling on UK businesses to implement ‘smarter spending strategies’ to aid their chances of survival.
The research, which was conceived over eight years ago as a result of the economic crisis, is based on a survey of 100 FDs in the UK and Ireland, across nine key industry sectors at enterprises with revenues between £10 million and £500 million.
“People give procurement attention when they first start up”, says Rob Allison, managing director of ERA. “They get things in place and think they’ve got it all organised, then they get growing and get busy taking their business forward and very quickly it’s the old adage: we always do what we’ve always done.
“They bring on new staff as they grow, but their old habits stay. They don’t change or develop with the business, and relatively little time and effort is spent researching and developing. Very few companies look inwards at procurement function and think about how it can be improved on a regular basis.”
Rob Allison suggests organisations should think long-term instead of short-term. “Cutting costs may keep businesses afloat temporarily, but it won’t enable them to compete long-term. A smarter spending strategy, combining effective cost control aligned with development for innovation and investment is the only way businesses will be able to successfully ride this storm,” he adds.
The research uncovered various psychological barriers to business growth strategies:
The board often looks to the FD to manage and control the spending behaviour of their organisation, but almost half of the FDs surveyed stated that their company discussed procurement at board level only once a year, or never. Naturally, this has a huge impact on the spending psychology of both the FD and the company’s employees. To illustrate this point, the survey found that four out of five organisations don’t have a specialist procurement team or individual, while more than one in three leaves responsibilities to individual departments.
If procurement is to deliver true strategic value, then the FD must be given a seat at the board room table in much the same way as sales and marketing directors have been over the last couple of decades.
Rob Allison says: “The first thing someone involved in procurement can do to get procurement be taken more seriously is demonstrate the difference they’re making. Try to find ways of quantifying and measuring the results of the difference procurement is making when they apply it because we all know boardrooms respond to performance measures. Being able to see a measured difference as a result of a good procurement will get that board to sit up and pay more attention.”
“When we talk about everyday areas of spending, particularly the indirect costs of the business, often the buying of those essential services and transactions is left to operational staff in the business. People who have buying of goods and services bolted onto their job description. Rarely do those individuals have any real support or training in the field of buying,” says Rob Allison.
If board room psychology dictates that procurement is only ever used to cut costs, then enterprise-wide investment in procurement initiatives, expertise and skills will be minimal. For example, 52% of FDs feel employees suffer from a lack of time, experience and energy when it comes to securing the best deals from suppliers. And only one in 10 felt their employees had excellent attitudes to procurement with the right level of experience and time to find the best deals.
The psychological approach of the board room impacts on the culture and behaviour of the employees spending the cash. Of the FDs interviewed, 58% stated that some departments resisted efforts to establish professional procurement practices, while 57% felt some departments believed procurement was hindering the effectiveness of their department for the sake of cost cutting.
A successful supply chain is dependent on mutual trust and understanding. “It’s about cost management and supplier management, putting in place strategies and plans to get the absolute best out of your supply chain,” says Rob Allison. “You may get different products or services than you’ve been getting previously but they help you to be more efficient overall, making you savings in other areas.”
Only 21% of FDs surveyed viewed their suppliers as partners but if you consider the impact that the recession has had on all elements of the supply chain—with costs rising and sales falling on all sides—it is easy to explain the lack of warmth towards suppliers.
Rob Allison refers to a boardroom conversation where a director piped up, saying a particular project is only going to ‘cost us peanuts’, but the founder of the business slammed his fist on the table, saying ‘they may be peanuts, but they’re my peanuts’. “It’s important to keep that culture in the business, as you grow. People need to understand that the pennies matters,” he says. “Most entrepreneurs, most businesses know that for themselves, but an important lesson in procurement is making sure that as you grow everyone you bring on cares as much for your money, as you do”.
Here are some tips to getting smarter with your procurement and using cost-cutting as a strategic tool:
Be Kind Movement, a UK registered charity, hosted an exclusive Champagne Reception at the prestigious The Mandeville Hotel recently to raise funds for the Girl Child's Education Program in India. “Our. MORE
Forty years on from the launch of Ferrari’s iconic first-ever mid-rear-engined V8 berlinetta, the 308 GTB, the Ferrari 488 GTB opens a new chapter in the history of cars with this. MORE