Simon Geale

24 August 2022
Topics in this article
  • Cost Optimization
  • Risk & Resilience

As we stumble inevitably towards recession, you can feel budget holders across the world starting to feel the pressure in anticipation of the calendar invite entitled “Budget Review.” It’s coming, and if it isn’t, it should, as while recession can break businesses, it can also make them. When demand takes a dive, spending smart becomes even more critical. There are zombies out there. Don’t be one. Accept the invite with positivity, and if you haven’t had it, send it. Surviving a recession is, after all, a “top table” corporate objective.

In search of productivity  

Research from Bain & Company conducted on businesses during downturns concluded that businesses that bought better in downturns recovered faster than their peers and enjoyed better long-term health. The Bain research focuses in the main on productivity. “The difference between winning and losing in this environment is stark: Emerging winners are keeping costs below the inflation line, and in some areas, they are even generating P&L gains while also assuring supply security and quality. At the other end, for some companies, inflation and supply shortages are puncturing earnings.” 

The precedents are instructive: Top-performing companies that accelerated out of the last period of high inflation were those that made productivity improvement a top priority (see Figure 1).”

This conclusion is unlikely to come as a surprise, but conclusions can mask the difficulties in the front-line implementation of boardroom strategies. Productivity isn’t easy to come by and certainly isn’t optimized through indiscriminate cuts. Productivity gains come from understanding how inputs contribute to desired outputs and applying gains that can be achieved through simplification, eliminating waste, adopting tech, doing things differently, etc.

Productivity invariably means being bold, doing things differently, and thus putting yourself on the line. It often benefits from an ‘outside in’ view, which is why so many look for inspiration from suppliers and partners before applying too much perspiration. External parties bring something different, be it data, insights, capability, or something else, and this difference is often required.

With an average of 70% of corporate expenditure (Research: The State of Spend) spent with suppliers (rather than on labor), greater productivity gains should be targeted from the “external enterprise.” That’s not to say that businesses should completely discount internal cuts, these can be quicker and easier to measure than affecting change in the supply base, and waste must be tackled top to bottom. Still, the more significant gains will come from the suppliers. Let’s call this productivity spend.

Beyond Productivity 

There is other research, of course, which evidences the importance of maintaining focus on the things that will help to spring out of the downturn; let’s call that growth spend. Growth spend refers to whatever is needed to acquire customers, service them and grow sales. So, we could be talking about raw materials, goods for resale, customer acquisition, or something like branding. In a downturn, where demand is suppressed, the bold will be thinking about how to protect core supply relationships and maintain a brand dialogue with customers to be there, ready to scale and serve when the time is right. But they may also be thinking about where to dial back investment in growth where demand is simply not there.

Further strategies? There’s also a school of thought, predominantly from those that sit in the “price setters” bucket, that you should maintain focus on new product development – “So I think the winners in a recession are the people who produce new technology that does things better, which people really want.” ~ James Dyson. Let’s call that innovation spend.

The secret sauce – Informed spending

Generally speaking, there are three ways out of a downturn:

  1. Trade your way out.
  2. Cut your way out.
  3. Somewhere in between.

So, these three approaches make sense on paper, but strategy without organizational context can point you in different directions without cause.

The right approach is tailored to your sector and your unique ‘organizational context’; market positioning, demand pipeline, risk appetite, supply chain health, cash position, ESG commitments, etc. This brings us to our last two (illustrative) categories, risk and compliance spend and purpose spend, which are near-ubiquitous as corporate objectives today.

So, the secret sauce isn’t so secret. Understanding why you spend (objectives) and testing it against organizational contexts, and that’s even before you start applying procurement thinking and approaches. What is the business value behind each new and current supplier relationship? What do you expect to achieve from every purchase order or contract lifecycle? Why spend it now, like this, and how to gauge success?

If it sounds simple, why is it so difficult? There are often hundreds if not thousands of people in every organization buying from or working with suppliers to do their day’s work, and optimizing costs is in their hands as much as is it yours. An organization needs to become “cost-conscious” as a whole, meaning that everyone, top to bottom, end to end, thinks about what and why before spending, rallying around common objectives. Perhaps this is why looking at spend through a different, simpler lens can be so powerful.

That’s also why being ready to spend well is vital at any time, but above all, when heading into a downturn. And be ready to spend well starts with understanding how every £$ delivers on corporate objectives (strategy) and is relevant at that time (context).

Cost committees – Unnecessary bureaucracy or just misunderstood?

Cost committees get a hard time, and why not? They slow things down, adding points of process nobody wants or needs when enjoying the good times, but these aren’t good times. A cross-functional cost committee is critical to move beyond uninformed cutting into informed spending. It does this by providing that organizational context when testing the purpose of the expenditure at times when data may be incomplete or outcomes uncertain. In short, the cost committee has got your back – maybe just change the name to something more fun than a committee.

Real-time pressure testing our thinking

When done well, i.e., invested, agile, and decisive, cost committees are there to support. Cost-conscious means zeroing in on how what we buy delivers against what we need or intend at that precise moment in time; it also tests our commercial thinking and, consequently, where we can reduce waste, being leaner in pursuit of the objectives of the day.

And let’s be clear, there is waste everywhere, organizations have changed, and markets have moved too fast for there not to be. Waste might not always translate into price savings, but there is waste; a lack of speed, an over-specification, a deferred need – all things where the impact might be affecting the organizations planning or P+L beyond the price paid. A business-wide view provides this organizational context.

So, with a different lens, we should test why, what, and how we spend our money. What are some of the simple things to be asking yourself?

1. When thinking about spend in the Risk and Compliance bucket, we are thinking about where the supplier is helping us to meet regulatory needs or provide prevention, protection, or remediation against certain risks than might impact our brand or ability to operate.

  • Is this in keeping with our risk appetite, and is our risk appetite right?
  • Can we simplify the process we go through?
  • Can we co-innovate alternate solutions with peers or partners?

2. Purpose is now integral to every business strategy. Logically it connects with customers and wins business. Emotionally it is the right thing to do and a vehicle through which we can all make a difference. But let’s be honest, purpose is often an early casualty.

  • What is the commercial and reputational impact of our spend?
  • Do we ringfence purpose spend, increase or pull back?
  • Can we co-develop/ create with peers to spread cost & increase impact?
  • Is there an innovation/ point of differentiation opportunity?

3. Revenue & Growth spend is all about being able to profit on what demand is there, deliver to customers and be ready to outperform the competition when demand springs back. It means figuring out the dialogue needed with the value chain.

  • How do we deliver brand impact to customers to be front of mind?
  • Where do we scale back in the face of falling demand?
  • How do we respond to a sudden demand change?
  • How will our key suppliers cope with us reducing demand?
  • What is, and how does this impact our pricing strategy?

4. Innovation is simple but also difficult. Often used to describe a hodgepodge of initiatives, innovation works best when focussed and precise. There are usually opportunities to scale back around core programs, but grace consequences of getting it wrong?

  • Where are we innovating as a growth enabler?
  • Will our customers respond as per the initial business case?
  • Where should we reduce or elongate active programs?
  • Should we co-create or collaborate to reduce cost and increase speed?

5. When moving on to productivity we are considering how what we spend enables us to function. This is a broad category that might cover everything from equipment to facilities, but in essence

  • How do we balance risk, resilience, and responsiveness with cost?
  • Are there opportunities to outsource or automate?
  • Can we re-use, recycle or extend lifecycles?
  • Can we re-engineer the volatility of the profit pool?
  • Can we plan better, simplify, or re-spec to create meaningful demand?

Now vs. next – that’s the balancing act

The days of indiscriminate spending are over, and smart spending is a balancing act, not least complicated by price & availability challenges in the highly volatile supply chains of today. Whilst sharing many of the same principles, Smart Spending shouldn’t be confused with Zero Base Budgeting. We’ve all learned a form of ZBB over the last two years, but we also need to challenge the here and now. Planning is a real-time activity today, and in the absence of jazzy systems and hyper-connected data, a lot of that planning is done by real humans, seeking to make informed spending decisions and, of course, supported by procurement.

Cost optimization is real business value

For an industry that has spent years trying to move away from being measured solely on savings, now is our opportunity to remind everyone that delivering real commercial value is still in our kit bags. More than ever, procurement thinking needs to be applied to every spending decision, but also every in-life contract and make vs. buy consideration. A lot of businesses are already ahead of the curve, with cost committees in place and a line of business cases outlining more daring and structural cost optimization ideas.

This is going to provide CPOs all over the world with a huge capacity and capability challenge when needing to do more and more complex work at the same time. The best businesses in the next ten years will be those that optimized productivity, innovated, or grew their way out of this recession, all the time maintaining their focus on purpose and resilience. CPO’s must be thinking about investing to save, a tough but timely business case to make. Read more in our latest report, “Getting Recession Ready” click on the link below.

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