Seven ways to maximize procurement savings
Discover seven powerful tactics for generating procurement cost savings that find the sweet spot between minimizing spending and maximizing vendor value.
Modern procurement is a balancing act.
Purchasing leaders must source vendors and procure products and services that maximize efficiency and quality and help create a competitive advantage.
However, they’re also keenly aware of minimizing spending to improve company profitability and drive a healthy procurement ROI.
Then, identifying opportunities to create procurement savings is critical for great procurement teams to master.
These are our seven powerful tactics for generating procurement cost savings that find the sweet spot between minimizing spending and maximizing vendor value.
What is procurement cost savings?
Procurement cost savings is the practice of identifying areas to reduce purchasing expenses.
It encompasses any activity or tactic you might use to reduce costs, such as renegotiating current contracts or sourcing new vendors entirely.
The benefit of focusing on procurement savings opportunities is simple: The less you spend—provided you can maintain the same quality level—the greater your margins and the higher your return on investment.
Procurement cost savings, in turn, create a more profitable business through a direct realization of profit or the ability to pass cost savings onto your customers and position yourself more competitively in the marketplace.
Types of cost savings in procurement
There are a few different ways to look at cost savings. How teams calculate cost savings can cause disagreement, so creating a consistent definition of terms is valuable.
Finance tends to look solely at profit and loss; for instance, “We spent $100k on this expense last year and $90k this year, so we saved $10k.”
Procurement considers savings holistically and includes mitigating potential future costs (cost avoidance) in its calculations.
Creating a common language and understanding procurement savings categories is critical to more effective interdepartmental collaboration.
Hard cost savings vs. cost avoidance
Hard savings is the category of procurement savings that finance teams tend to prioritize.
It is the most easily quantifiable form of savings, and it occurs when you reduce the total amount spent on a given expense.
For example, you currently spend $1200 monthly on your applicant tracking system.
By analyzing license utilization, you learn that several employees no longer use their accounts, meaning you can cut your user count and reduce your monthly bill to $1000. This analysis creates a hard savings of $200 per month.
On the other hand, cost avoidance mitigates potential future costs.
Through that same process, you might identify that every new hire to the human resources team automatically receives a license to use the applicant tracking system.
By implementing an approval system that requires the head of HR to confirm that the new employee requires access, you prevent unnecessary licenses from being created.
Avoiding maverick spend is a classic example of cost avoidance. You still create actual savings, but the amount is much harder to calculate.
Supply-side vs. demand-side cost savings
Another helpful binary for categorizing procurement savings are looking at savings opportunities that might exist on either procurement's supply or demand side.
Supply-side cost savings relate to the vendors you’re working with, such as:
- Replacing vendors with more cost-effective ones
- Renegotiating contracts with existing suppliers
- Increasing supplier diversity and creating competition between service providers
Demand-side cost savings are more about internal opportunities to cut costs, such as:
- Reducing software license count
- Consolidation of software platforms
- More pointed specification of sourcing requirements
Seven ways to generate procurement cost savings
1. Consolidate software licenses
Many organizations do not have a formalized SaaS purchasing process, leaving it up to department leaders to source the required software tools and enter into their vendor agreements.
As a result, it's not uncommon for companies to have overlapping software licenses, meaning they essentially pay for two platforms with the same functionality.
Identifying these areas of overlapping spending is a perfect place to create cost savings.
For example, two different departments each procure their project management systems. As a result, the company is now paying unnecessarily for two separate but overlapping systems.
Meet with department stakeholders to learn about their needs and feature requirements to solve this issue and reduce total spending. Then, consolidate usage into a single tool or cut both supplier relationships and source a new system that serves the needs of both departments.
2. Reduce consumption
A simple way for procurement departments to lower costs is by looking for opportunities to reduce actual consumption.
For example, you’re currently paying for 100 licenses for your CRM platform.
After digging through utilization data, you learn that 30 licenses have been inactive for the last three months.
Identifying and closing these licenses is an easy opportunity to reduce consumption.
3. Renegotiate supplier agreements
Procurement professionals should always look for opportunities to reduce costs through price negotiations.
Begin by reviewing agreements with no fixed terms or coming up for renewal soon. These are prime candidates for renegotiation conversations.
For instance, let’s say your contract with your CRM provider is coming up for renewal next month.
When you signed the contract a year ago, you had 35 users. Now, your user count has increased to 120.
When it comes time to renew, use this information to negotiate a lower per-user price, decreasing your total cost while maintaining the same level of service.
4. Improve sourcing specifications
Not all purchasing decisions go through a formal procurement process.
Consider, for instance, the sales manager responsible for sourcing their sales engagement platform.
Without constraints on purchasing approvals, they will likely choose the solution with the best feature set rather than prioritize cost management and reduction.
Where this is the case, analyzing existing software agreements and reviewing needs specifications help generate procurement savings.
You might, for instance, meet with the sales leaders to gain a deeper understanding of their requirements and which features and functions are non-negotiable.
Then, engage in market research and use price benchmarking data to determine if your current agreement is competitive or if you should assess new supplier options.
5. Increase supplier diversity
Creating competition amongst suppliers has immense potential for both hard and soft savings.
Increasing supplier diversity—sourcing a given product or service from multiple vendors—helps you avoid cost increases associated with supply chain disruptions.
If one vendor experiences a shortage, you simply switch to an already approved alternative rather than paying extra for goods sourced in an emergency.
Additionally, the increased diversity of vendors increases competition. It incentivizes suppliers to reduce their prices to secure more of your business, thereby creating hard savings through cost reductions.
6. Tackle and address maverick spend
Maverick spend—company spending that is not approved or falls outside of standard procurement procedures—considerably impacts profitability, with up to 80% of company spending falling into this category.
Maverick spend generally doesn't take a strategic sourcing approach. Those who make purchases commonly make quick choices or decisions based on personal vendor preference instead of looking for the supplier with the best prices.
Tighten up on maverick spending by:
- Creating transparent approval workflows
- Minimizing corporate card allocation
- Developing a list of pre-vetted and pre-approved vendors for teams to purchase from
7. Optimize transaction costs
One last tactic for creating procurement savings is looking outside the hard costs of each agreement and considering how much you spend on simply processing transactions.
Strategies for reducing costs here include:
- Negotiating early payment terms to receive a discount
- Outsourcing accounts payable to reduce your internal headcount requirements
- Automating invoice processing with an e-invoicing solution
Track procurement savings in real-time with Vendr
Finding opportunities to create procurement savings is a crucial responsibility of anyone in a procurement role.
Not only does it help improve return on investment and drive profitability, but finding ways to reduce company spending helps position procurement as a high-value department, not a cost center.
Gain a deep, real-time understanding of your cost reduction initiatives' impact on your bottom line with Vendr, the SaaS buying platform that pays for itself.
Benefit from advanced features like
- Approval workflow automation to speed up purchasing and enhance risk management
- Real-time spend analysis on a vendor, category, or department basis
- The most extensive data set of SaaS buying transactions to negotiate the best price possible
Find out how much you’re overspending on software today with our free savings analysis.