“Economic uncertainty” is the phrase occupying the minds of many executives these days. No one seems to know which way the economy is headed. One moment there are promising signs inflation is easing, the next there are statistics showing labor costs continuing to rise. One moment you’re looking at strong GDP growth, the next you’re hearing an economist predict a recession.
We’re also seeing a disparity in outlook between Wall Street and Main Street. On Wall Street, the S&P 500 is on the rise after a decline in 2022 and IPO markets are beginning to re-surge; on Main Street, consumers are seeing inflation erode their standard of living and are feeling more cautious about spending.
In this environment, how should a business approach cost control? The start of 2023 was marked by a wave of layoffs, particularly in the tech sector. However, it feels like companies have rapidly reached the limit of what can be achieved through headcount reductions. Cost-conscious executives must pivot their focus to alternative cost-reduction measures. Here are four key actions CPOs and procurement teams can do to impact their organization’s cost in 2024:
The first is understanding where you are on cost in relation to your competitors and the marketplace more broadly. Benchmarking your spend by category is a great place to start to ensure that your efforts are appropriately targeted. By applying data-led rigor to this process, you can gain a clear picture of areas where you are over-indexed on cost, which will then allow you to see a path to progress.
The second piece of the puzzle is valuing every dollar of spend. Too often I see companies who have rigorous processes in place for their top 50 contracts but then comparatively little control of the spend that sits outside of those contracts. Taking a holistic approach will allow you to identify areas that, while individually smaller, deliver outstanding value when addressed as part of a comprehensive program.
Thirdly, there are spend categories where we have seen market trends creating favorable conditions for buyers to negotiate better pricing and terms. IT spend is always a prime candidate when it comes to looking for areas of inefficiency, as it is often controlled outside of Procurement. This is particularly the case in the current environment, where Tech sector firms are hitting stagnating growth.
There are four questions we always seek to find the answers to when evaluating opportunities in the IT category.
- Have you paid a fair market price? This comes down to benchmarking and knowing where you stand in the market. We have seen many businesses that, for a variety of reasons, have not performed due diligence when taking on a contract and have been paying a vastly overinflated price for too long.
- Do you need it? You should analyze if the business has done the work to determine if a product is a ‘nice to have’ or a ‘must have’. Often you can find significant levels of IT spend on products that are firmly ‘nice to haves’ – in many cases, that spend can be reduced, potentially by switching to a cheaper product that performs a similar function, or removed, by implementing spend control towers that guide decisions around, for example, software purchases.
- Is it being fully utilized? We’ve seen countless instances of companies being charged for 500 licenses of a product, only to find that 200 or so are being used and the business is missing out on huge savings.
- Does it duplicate another service? In large companies, you often see different departments buying different products that do the same thing, or sometimes, even the same product has been sold to different departments. Procurement can play an important role in identifying this and eliminating these costly duplications.
My fourth and final piece of advice to CPOs and procurement teams is to work closely with your finance teams and track rigorously how savings translate into the bottom line. If you’re in a growth company, the savings may result in spend being deployed into R&D rather than straight to bottom-line savings, but whatever kind of business you are in, it is crucial that finance understands the full extent of the value your procurement team is delivering.
In an uncertain economic environment, there will always be much that you cannot control – whether that’s consumer sentiment, weather events, or geopolitical events – but one thing you can better control is your spend, making this a key recommended focus in preparing for a stronger 2024 .
