Observations from Ed Winterschladen, EVP Europe, October 2020
As we move towards winter and many parts of the United Kingdom are seeing new restrictions being introduced to combat the spread of COVID-19, hopes of a V-shaped economic recovery are fading fast.
Businesses have anticipated this, and many have moved swiftly over the last six months to strengthen their positions and implement cost optimization strategies. Supply chains which risked crumbling back in March and April have been shored up, and while they are still fragile in places, the short-term risk of wholesale collapse has now passed.
Around the world, companies have taken significant steps to bring their costs into line with the new economic reality they face. Most are seeking a lower, more agile cost base. This reflects some businesses being smaller than at the turn of the year, and others seeking to introduce more flexibility to ride out volatile periods.
Many have negotiated with existing suppliers to find cost efficiencies or changed suppliers in search of better prices. Some have also adapted the structure of how they buy what they need to deliver further savings. However, many businesses are now seeing the limits in terms of savings that can be delivered via that approach. As anyone who has run a cost reduction program will know, there comes a time when the low hanging fruit has gone and spurious cuts start to hurt. The next raft of value comes from a more strategic approach; cost optimization or cost transformation (both being used interchangeably).
This means thinking more deeply about cost optimization and how spending powers business outcomes. It brings into focus things like outcomes-based contracting, collaboration and partnerships, and make vs. buy, as organizations seek to tie the right suppliers closer to objectives and use their speed and innovation to power business advantage.
By now, it will be becoming clear to many senior executives, particularly CEOs and CFOs, that more radical changes will be needed to achieve more radical savings (and soon growth) targets. With the average FTSE 350 company spending 70% on suppliers, these savings are achievable if there is a sequential shift through buying better to looking at more wholesale changes.
In some cases, this will mean changing what we buy; in other ways, how we buy. It may mean investing more with some partners, and in other cases taking the hard decision to remove some cost lines altogether and stop all associated activity.
Achieving this is not easy. It involves a difficult process of identifying what is business-critical spend and what is ‘nice to have,’ which in some cases will be clear but in many will be harder to decipher. CFOs may look to Zero Based Budgeting as a solution. This can be effective, and many of us have become “overnight experts” in the last six months, but it does not necessarily optimize the value of what you continue to buy. It can also quickly unwind if the organizational infrastructure and culture is not ready. CPOs should be lobbying their leadership for a more collaborative approach to start now.
The organizational appetite is there. It has become easier to get the buy-in of relevant internal stakeholders to do something different. In fact, they are often under pressure to do so and perhaps not fully aware of how individual suppliers or collaborative partnerships could help. For example, a considerable number of sectors across the economy, in particular B2C sectors, are having to pivot towards online in a far more rapid way than they ever anticipated. Many have already run digitization programs over the last few months that would have previously taken years.
So, for those businesses, there is the need to simultaneously drive existing spend down and think about long-term organizational health. The mindset needs to shift to cost transformation. This is all the more difficult as the new products and services that businesses are buying may be in areas the organization has not invested in before – and thus lack benchmarks and experience to deliver the very best value for money.
But it is time to take action
There is no doubt these coming months will continue to be challenging. Still, as we saw when COVID-19 hit back in March, businesses can move at an extraordinary pace to overcome tremendous challenges.
How Proxima can help
Our expert procurement consultants and procurement specialists can help you overcome your challenges ready for 2021. We have procurement consultancy firms in the US and Europe helping brands optimize their spend, improve efficiency and increase performance. Get in touch to find out you could benefit.