Procurement Intelligence Unit

The past 18 months have seen the spotlight fall firmly on cost savings, with every area of the business looking in procurement’s direction in expectation (and, in some cases, hope).

Given the importance of maintaining profit margins and ensuring long-term stability, a number of high profile companies have introduced an almost unprecedented raft of cost saving measures since the credit crunch first bit in the summer of 2007 – some more successful than others.

Heineken is just one of a number of firms raising a glass to a new era of efficiencies, with the company last week announcing savings of €50m courtesy of its ‘Total Cost Management’ programme.

Beyond these admittedly impressive numbers, however, lies a greater conundrum, and one that is doubtless taxing CPOs across the world; namely how procurement measures its cost savings with the degree of accuracy that companies currently require.

And despite a widespread acknowledgement that cost savings are going to continue to dominate the agenda as we move into the final quarter of 2009 and beyond, the apparent absence of an industry wide standard in this area still appears to represent a considerable obstacle.

“The single reason for us being credible, for us gaining strategic and professional status within the business is nailing the notion of whether something is a genuine cost saving or a made-up number,” says Stephen Wills, head of group procurement at AXA UK.

“The first thing that any procurement function has to do is get credibility around the single thing that I think it’s here to do, which is deliver savings. Fundamental to that is the ability to define what you mean by a saving.”

That definition has rarely been as important, as firms pour over balance sheets and budgets looking for potential savings.

“It’s an age-old debate,” says Alan McQuade, senior sourcing manager at Bank of America. “In direct procurement, specifically in financial services I’ve not really seen the cost savings debate and the methodologies really tied up and done brilliantly.”

“To a large extent sourcing groups are historically known for producing huge numbers in terms of savings and reporting them each yearbut then the business continually fail to see those numbers reflected in the bottom line. That’s a recurring argument that comes up across all sectors and all areas of spend.”

There may be a dispute about how cost savings should be measured, but there is certainly a consensus on its importance.

“Expense management is in the spotlight more than it ever has been in the past,” says McQuade. “It’s a fundamental area.”

For Wills, these cost savings measurements are also seen as the key barometer of procurement’s performance, with the methodology implemented by Wills since taking up his current role in 2004, having served to massively lift procurement’s standing within the business.

“It’s essential because without that people will always doubt if procurement are making a real saving,” he says.

With the economic turmoil likely to continue for some time yet, cost savings measurements are likely to remain a thorny issue. And unless cost savings claims are backed up with robust methodologies then questions, as well as eyebrows, will continue to be raised.