As COVID-19 ripped through the global economy in March 2020, businesses big and small looked to drive down costs in any way they could. Cost-cutting was often done quickly and indiscriminately as business scrambled to control the bottom line. Sustainable measures for optimizing costs were disregarded by many firms as they took fast and effective measures to find savings and protect cash.
Cost-cutting came in a number of different guises, but perhaps the most high-profile was the devastation wreaked upon the global labor market. Businesses made huge cuts to headcount as lockdown forced entire sectors to shut up shop. For many, this reaction was a necessary reaction, but sadly also a knee-jerk one. Job cuts were made to deliver fast savings, but savings that would actually deliver the most strategic value or even the greatest long-term financial value were not always the focus.
Our own State of Spend report in September 2020 found that for businesses in consumer discretionary sectors, which have been among the hardest hit by the crisis and faced the biggest job losses, labor spend accounts for only 24%, while supplier costs account for 76%. Rather than look at their headcount as the primary source of saving, this research revealed that the supplier base offered far greater value to businesses.
This underlined the potential power of procurement as a cost-saving capability. With suppliers taking the lion’s share of a business’s spend, good procurement practice offers enormous potential to put money back on the bottom line in times of crisis. And encouragingly, we have seen some businesses do just that, focussing on realigning costs in accordance with changing needs and market conditions.
What next? 2021, the Finance view
Our Finance Leaders Outlook report, conducted in February 2021, found that finance leaders on both sides of the Atlantic had increasingly turned to the procurement function as a “go-to” support for overcoming COVID-related challenges. Nearly half (49%) of all U.S. leaders and over a third of U.K. leaders (34%) indicated that it had played a very significant part in overcoming COVID-related challenges. In comparison, 47% of U.S. and 60% of U.K. finance leaders said it had played a ‘relatively significant part.’
The key takeaway for procurement professionals is that over 90% of Finance Leaders on both sides of the Atlantic were recognizing procurement’s significant contribution. With over 60% of FTSE and Fortune procurement functions reporting in through finance, this is an important marker. The finance agenda is shifting to include resilience, growth, and ESG in 2021. It follows that now is the time for procurement to prove that it can truly deliver strategic value well beyond savings.
Our report also found that 78% of finance leaders across both the U.S. and U.K. have changed their supplier base over the last 12 months to increase resilience. The pandemic has placed a historic strain on supplier networks. As a result, many businesses have moved to take a more active role in creating an invested supply chain that can better adapt to volatility. Supplier collaboration is here to stay. The art? It’s not just knowing how to do it; it’s also when and when not to do it.
Businesses have also deployed a number of other measures to support transparency, relationships, and resilience efforts in the supply chain. Investing in Supplier Management technology was identified as the most common tactic deployed by U.S. finance leaders (53%), while in the U.K., the most common tactic used was increased supplier monitoring processes (52%), two sides of a similar coin. While the pandemic may have forced businesses to take this approach to their suppliers, we expect these technologies and these behaviors to be here for the long term. There is a cultural change to address here beyond the technology. If the goal is to produce the data that enables smarter decisions, then there is education to be done on what data and just how it informs smarter decisions.
Easily overlooked on the resilience agenda was growth. When asked, the majority of finance leaders singled out ‘growth into new markets’ as a key driver of business resilience. Where growth is organic, working with supplier partners who can enable expansion will be a key accelerator in 2021, as will having the knowledge and capability to build new supply chains and commercial capability in new territories or product domains. The speed at which this can be done may prove to be one of 2021’s key wins.
Unsurprisingly, in 2021 businesses are looking to the supplier base as a means of driving social value in 2021. Over 80% of a conventional businesses social impact is incurred through the supplier base, and it appears that the race is on. Our report found that 77% of finance leaders across the U.K. and U.S. were already using sustainability and social value as selection criteria for their suppliers, while a further 22% said they are not yet using it but have plans to. Embedding sustainability into the commercial DNA of a business is not easy and is a relatively new challenge that procurement is best placed to, and must take the lead on.
So how do you measure the impact of procurement in 2021?
When finance leaders were asked what they thought procurement should be measured on, business resilience topped the list in the U.S. (38%), and innovation topped the list in the U.K. (40%). More traditional measurements such as cost-cutting featured highly on both markets’ procurement priorities, but the findings highlight a fundamental shift in procurement’s purpose and potential for organizations.
Procurement has long been promoting a value proposition that includes, but goes beyond, its ability to predominantly deliver cost efficiencies. It seems that in 2021 business are clearly asking for more than just savings from their suppliers, and so the stage is set. There is a seat at the table; now that we are there, our research highlights what we should be seeking to say.