17 January 2012 | Adviser Q&A
I am searching for benchmarks on the difference between spend managed through a contract against off-contract spend. Is there a rule of thumb to say if spend was via a contract you expect x per cent better value for money?
Procurement manager, Cornwall
Andy Collopy, global procurement director, downstream, BP
In my experience, on contract/off-contract spend measurement usually only defines whether the spend has passed through the procurement department or not.
It does not measure the percentage improvement in savings delivered or contractual terms. Contract coverage is a good indication of how in control you are of your total spend, not how commercially effective this coverage is. Most commercial benchmarks refer to the relative percentage improvement of using, say, strategic sourcing as opposed to traditional sourcing, such as ‘three bids and a buy’. A number of studies have shown this to be in the range of a 10 per cent incremental savings improvement, with a further 8 per cent (18 per cent in total) possible through the deployment of e-auctions, where applicable.
It is important to deploy a balanced scorecard approach to procurement activity to ensure improvement across the end-to-end process. Good scorecards measure savings, compliance and capability to improve both the commercial and risk positions within the corporation.
Victoria Woodward, owner, Brilliant Buying
There are no published benchmarks that define cost savings available by formalising spend through a contract. There are so many variables that it would be virtually impossible to create a representative and reliable set of data for this purpose.
Your enquiry does not state a specific area of spend or industry sector. But from my experience, it is entirely realistic to target an aggregated average saving of
20-25 per cent of the influenceable spend across all categories.
This assumes the organisation has no pre-existing contracts and has not undertaken strategic procurement activities. The saving provided in each category may be more or less than this. In some circumstances a spot purchase may deliver a lower cost price than the same purchase through a contract and this should be taken into account when determining savings opportunities.
I recently worked with a local authority with a printing department. Paper substrates were obtained at a lower cost by approaching paper mills and merchants for prices on a spot order basis.
Chris Ayscough, purchasing director, SITA
I have not come across a direct benchmark, but it has been a topic in a number of organisations I have worked for. Logically the higher the compliance, the deeper the penetration of the procurement team to create an opportunity to deliver greater bang for buck.
Previous pitches have argued average saving per negotiation, ROI per head in purchasing, and so on. but all these are normally based on the actual track record of the team.
I find the business can be sceptical around taking the leap on external benchmark data, and it’s a game of building on previous successes.
I am not sure there is a single right answer to convince sceptical stakeholders. It depends on the context and the mandate of procurement. Assuming most of us need to ‘sell’ our value add, my preference is to gain respect doing what we do well – using our professionalism and commercial skillset to deliver the optimum business outcome. I find taking an indirect route, finding a small low end project, to demonstrate ‘how we work’ can be a useful way to build up a relationship.
Key facts
1. Do employ a balanced scorecard approach to buying activity to ensure end-to-end procurement
2. A realistic
target for aggregated saving is 20-25 per cent of influenceable spend
3. Gain respect by using the procurement professionalism and skillset to deliver optimum results
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