High-performing sourcing organizations continually achieve direct-spend cost savings. How do they do it?
To find out, SAP benchmarked 616 enterprises across 15 industries, using annual savings rate (ASR) as a primary performance indicator. Annual savings rate is the self-reported percentage of savings from the prior year to current year of all addressable direct spend.
A detailed analysis of the benchmark data reveals two primary observations:
- Top performers exhibit a 56% higher annual savings rate, compared to average performers (5% versus 3.2%)
- Top performers spent 83% less on engineering changes than average ($1,600 versus $9,500)
What are the behaviors of these top performers? Here are the four leading indicators of annual savings rate that distinguished top performers from average performers, based on the wide delta of performance from average to top performers.
1. New contract creation time (weeks)
New contract creation time is the time from initiation of a contract (usually by the sourcing or supply chain team) all the way to execution (final agreement/signatures). When measured in weeks, top performers exhibit a 38% improvement over average performers, down to 4 weeks from 6.5 weeks.
They accomplished these results by:
- Leveraging an integrated software suite
- Performing collaborative rather than confrontational negotiations
- Establishing processes that encourage category managers to immediately involve and collaborate with the contracts organization (legal)
2. Addressable spend under management
Addressable spend under management refers to spend actively managed by sourcing and supply chain teams and leveraging strategic sourcing processes and technology. While 81% is admirable for average performers, the 23% higher addressable spend under management for top performers is what sets them apart from the pack.
Such results emerged when businesses had:
- Holistic end-2-end spend processes
- Clear roles and responsibilities
- Integration from a technology and process level with different functional silos
3. Maverick spend
Top performers have maverick spend so well under control that any maverick spend is very small due to:
- Holistic spend visibility, or in everyday terms: Know where, when, and how every penny is spent
- Established preferred suppliers and spend governance
- Defined policies and procedures
- Automated and intelligent workflow approvals – in everyday terms, making sure approvers do not “rubber-stamp” approvals; enabling the system to enforce compliance with policies
Addressable spend under contract is similar to our second metric, addressable spend under management; however, “under contract” refers to spend represented within a contract management solution. It is important to realize that such a solution is not only a basic repository for PDF files; a modern contract management solution will do more for the business than storing documents. Individual elements of contracts such as expiration dates, volume discounts, and payment terms are extracted and leveraged throughout the entire contract lifecycle. This provides organizations capabilities such as advance alerts of impending contract expirations and notification of off-contract activity, thus achieving higher compliance to negotiated contract terms.
Some other factors that help:
- Integration from multiple phases of the source-to-settle process; for example, direct the resources of a sourcing award (suppliers, agreed-upon prices/terms) into the contracting management system.
- Contract models that help ensure that terms, item specifications, and pricing can be leveraged across other processes.
- Future sourcing events that leverage existing contracts as the basis for future negotiations.
Different organizations across various industries can have different challenges and may need to prioritize certain metrics based on these challenges or on the maturity of individual processes. But the aforementioned metrics can represent a starting point for determining which processes to explore and improve.
Start analyzing the business processes that are measured by these four metrics and be careful to realize that multiple processes may affect more than one metric. Moreover, the opposite holds true: One metric can be impacted by multiple business processes.
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