Cost savings are a top priority in 2021 as companies work to regain their footing after a tumultuous year. One area ripe with opportunity to enhance cost optimization is vendor management and procurement.
Implementing a strategic sourcing process that provides structure and support for procurement strategies – whether it’s for a tool or a specific expertise provided by vendors – can help unearth significant cost savings and improve performance. With strategic thought behind these processes that govern vendor management and purchasing, companies can also close costly gaps in the system.
It’s important to take a step back and evaluate your processes to make sure they are helping, and not hurting, your bottom line regardless of whether you have little to no process in your vendor selection, or you make a big investment with structured processes and dedicated procurement teams.
The risk you run when you don’t have enough process
It’s a common challenge we see, especially with middle-market companies: a lack of structure when it comes to guiding decisions about vendor management. Some of the issues that can arise when you don’t have enough process include:
- Going all-in or giving preferential treatment to a vendor where there is an established relationship.
- Making decisions solely on one or two variables – like cost – without looking at the big picture and long-term benefits that might exist.
- Missing out on solving for the business problem at-hand while being too focused on the vendor’s capabilities.
- Focusing on a solution that does not support short- or long-term strategic objectives.
You don’t have to develop a complex process to tap into cost savings. Smaller companies in particular can set up a lean, basic process to evaluate vendors in a few steps:
- Identify the problem you are trying to solve for.
- Define the requirements. What skills or experience are needed to deliver?
- Evaluate the current state to see if there’s potential to create a solution from something that exists already within the organization versus investing in an entirely new solution.
- Research the market. Who has the skills and experience needed to solve the larger issue?Bring an objective outlook to alleviate any bias that might be at play when it comes to working with vendors you have a history with. Ask, with objectivity, if they have the skills and experience to deliver on the requirements.
- Evaluate costs, but don’t be blinded by hard costs. Sometimes the vendor who comes in with the highest hard cost is going to be the most efficient when you factor in soft costs like the long-term need or the ability to replicate over time. Depending on the solution, it might be a case of spending more now to save more later.
The risks you run with too much process
While you need some level of process to make sound investments in vendors, you can also end up missing out on value if processes are too rigid. This is something we see with larger companies that have strategic sourcing teams whose sole purpose is to save money by streamlining vendor management and procurement.
Make sure the processes aren’t limiting your potential. Approved vendors might save time when it comes to negotiating terms and rates, but don’t force a square peg into a round hole – hire the right person for the job even if it means more red tape with setting up a new vendor relationship.
It’s also important not to overlook the total cost of ownership. Large organizations often rely on sourcing departments, but if they are operating in a silo without the full context of the value of the solution or skill needed for the project, it is impossible to assess cost beyond those that are readily seen. Set up feedback systems to ensure sourcing teams have the big picture and are set up to look back at projects to assess how effective approved vendors are for given projects.
Whether you operate a small business or a large enterprise, processes can help ensure you are making right-sized evaluations for your vendor and purchasing decisions. Process ensures a greater level of transparency with vendors, and clearer communication, which helps to avoid surprises down the line; it ensures expectations are acutely matched to vendor capabilities.
Tips to make process work for you
- Ensure controls are in place to confirm alignment of business strategies. The products and services being procured should align with the overall business strategy, and a successful vendor management process should check for this proper alignment.
- Conduct a spend analysis. This also helps identify where you might implement new processes, or revisit existing processes to look for efficiencies. Establish your governance so you know where the threshold is – set spending limits – to ensure you have the right controls in place when you reach those limits. If your data shows a lot of spend with only a few vendors, that might be a red flag to regularly re-evaluate the relationships to ensure you continue to receive top value.
- Make sure there’s some level of objectivity built into your process. One way to accomplish this is to ensure you have interconnectivity in your business by inviting participation from different business units for checks and balances. Engage others to help you make sure you’re partnering with the right people to solve the right problem.
- If you have a dedicated vendor management department, involve them in the discovery so they have a better idea of the end goal. Make sure you have feedback loops set up with project close out meetings and internal collaboration to give your strategic sourcing department a better view of the gap analysis and total cost.
- Right-size your process for your company. The structure and level of formality in vendor management is going to differ company to company. Take stock of what your company needs to be successful and build your processes around those ideals.
Finding the right balance of process and rigor in your systems for vendor management can be difficult. Ultimately, businesses need just enough process to realize the maximum potential for cost optimization; enough rigor in decision making to align expectations and needs, but not so much definition or rigidity that your process limits your ability to be nimble and find the right fit to deliver on the requirements.