When presented with cost savings opportunities by third parties, or by others within a company, too often those opportunities are turned down. Instead of sharing savings (gainshare) people would rather try to achieve the savings themselves.
Too often this myopic, “not invented here” mentality results in either the realization of little savings or, more likely, the failure to realize any savings at all.
Procurement teams must put their pride aside and understand that additional savings can accrue to them if they engage in gainshare partnerships instead of trying to horde all potential savings to themselves.
The Short Sighted Savings Mentality
After several meetings to sell Supply Chain services to the leadership of a Manufacturing company, I was asked to give my proposal to the company President.
The selling proposition was simple. We would extend our spend leverage to reduce their costs below what they could achieve on their own. Savings would be shared between us.
We had gone through several rounds of detailed cost reviews across many different spend categories. We had engaged our suppliers in partnership to leverage our spend to generate savings for this new potential customer. And the COO and VPs of Operations and Finance acknowledged that after their own due diligence we could extend savings to them that they could only dream of achieving on their own.
In our meeting with the President he was excited to see the savings potential but quickly decided they could achieve these savings all on their own. He made the flawed assumption that any savings that could be realized could be achieved by his team, and his team alone. He would use our proposed savings as to stick to push his team on his own. Our proposal to help this company died right there.
Over time we checked back with the company just to maintain that relationship. We learned that they were not able on their own to achieve any of the savings that we had proposed. The President clearly did not understand the situation and his ignorance and myopia cost his company a lot of opportunity. As it turned out the company descended into a financial mire that it would take a long time to climb out of.
In another case we were meeting with a company to sell them on logistics services. Simply we could extend our vast logistics spend leverage and preferred relationships to smaller companies that could avail themselves of the better rates and service levels that we brought to the table.
We meet with the leadership of the company with this proposal and our analysis revealed that we could deliver much needed double digit savings to that company, while at that same time making a healthy margin for ourselves.
The company leadership wanted us to then present our proposal to the logistics team of the organization. For that meeting I brought in our logistics experts, who were well renowned in the industry and world class in their experience.
It was quickly apparent that our logistics experts were far more seasoned, experienced and knowledgeable than their peers on the other side of the table. We went through our proposal which was a win-win offering.
But soon we realized that the logistics people at the company were threatened that somehow we were trying to destabilize their jobs. They made several very weak arguments that we refuted. Still they could not be budged. The proposal died right there as they argued that they could get these savings themselves.
Over time that company failed to achieve any logistics savings at all. Pride and myopia cost that company a lot of money.
The reality is that there is always someone else who can negotiate better than you. There are many reasons for this: people skills, negotiation expertise and tactics, spend leverage, personal relationships, experience, different terms and conditions, geography, allegiance, timing, seasonality, length of contract, …
Given that on any given day someone else can always negotiate better, Procurement people have to accept this fact. Procurement people however are very proud, and they don’t want to hear that someone else can negotiate better. They feel threatened, they feel their job is at risk, and they feel inadequate.
The thing is that all of those reasons are emotional. They may feel real to those faced with that situation but they are signs of a lack of self confidence, a lack of self awareness, and a lack of maturity.
A more enlightened Procurement mentality is to realize that your objectives include achieving cost savings, and to leverage any and every way of achieving those savings. Smart Procurement teams leverage others collaboratively to generate savings.
More and more companies offer Procurement services, or Procurement as a Service. Their premise is that based on their spend leverage, pre-established relationships, and processes they can extend savings to your organization beyond that which you can attain yourselves.
But in exchange for extending savings to you these companies want to gainshare those savings. The savings might be split 50-50, or some other formula is agreed to. The bottom line is that the savings are shared.
That business model seems more than reasonable. The client cannot achieve the proposed savings on their own. The service provider is extending savings and wants to be remunerated for the value that they are bringing. Everyone wins in this scenario.
But far too often, as we related earlier with a couple of real life examples, the very idea of sharing savings or even getting savings created by someone else is so repugnant that Procurement teams will put up obstacles to block any of this from happening. The result is lose-lose. The client doesn’t get any savings and the service provider loses the business opportunity.
The Obstacles to Collaborative Cost Reduction
The failure to accept gainshare opportunities because of twisted desire to retain all savings is a result of many different obstacles:
Procurement people are proud and feel that if someone else says they can do a better job in negotiating, no matter how irrational, pride will cause them to sabotage any external efforts to provide savings.
A sheer lack of practical knowledge causes many to think that any savings put on the table can be achieved by anyone. They ignore other realities such as spend leverage and experience and relationships
Size matters, at least when it comes to awarding business. As such if you have more spend then you have more leverage. And this leverage extends across commodities, not just with specific suppliers.
Small to medium sized companies may have great Procurement teams, but if they don’t have any spend leverage then their negotiating job is made much more difficult.
Threat of Job Loss and Loss of Control
Unfortunately when an external party proposes better cost savings too many people in Procurement interpret this as meaning that someone else can do their job better, and their job security is under threat.
This couldn’t be further from the truth. The use of external assistance should be interpreted as the intelligent leverage of all resources to achieve cost reduction objectives. Unfortunately there are poor leaders who do threaten people with their jobs, fuelling the uncertainty of job loss that lies under the surface.
Loss of margin
Uninformed people assume that in a gainsharing model that the portion of savings that is shared with the service provider means that they are losing margin. They ignore the fact that they couldn’t achieve any of their retained savings without this service.
So instead of getting some savings this argument assures that they will get no savings. Very short sighted.
It still holds true that many people are resistant to change of any kind. Anything that upsets their status quo is problematic. Even if a service provider offers a gainshare savings opportunity this is a change, and change is to be resisted at all costs.
Procurement Mentalities and Flaws
Nobody can do everything. Anyone can negotiate better than anyone else on any given day in any given circumstance.
Intelligent Procurement teams understand this. They proactively reach out to and encourage third parties to provide collaborative cost savings proposals. And a gainshare model makes the delivery of results a win-win scenario.
But far too often Procurement personnel want to retain all the potential savings instead of gainshare, even though they can never achieve all of these savings on their own.
So let’s be smart Procurement. Procurement as a Service is a service offering that will only increase over time. You can either gainshare larger savings or be left behind and enjoy your smaller, more meagre savings.
It’s your choice.