Decoupling savings from risk

By Harry John 04-Dec-13,

There are certain things that belong together – the reaction and the action, the chicken and the egg, In their own right, separate entities and concepts, however, in existence one thrives from that of the other. For procurement, cost savings and risk are similarly difficult to consider in isolation.

In their latest study, State of Flux recently announced risk as the number one business driver in procurement, with cost savings lagging behind for the first time. While I in no way wish to discredit the intentions behind the work undertaken, it’s worth examining the kind of easy assumptions that might be drawn from that kind of statement.

Far from evidencing a reduced focus on the need to minimise costs, could it not be the case that, after all the talk of a function taking the organisation by storm, procurement actually is moving forward beyond its most basic remit and reacting to the world around it and, in doing so, realising that cost savings go beyond some worn out notion of “beating up the supplier”. The trap here is that we see cost and risk as separate and having some kind of inversely proportional relationship, a kind of sliding scale that shifts as functions mature– it’s not that simple.

As disruptive world events unfold, procurement must – and apparently does – realise the immediacy of the need to implement proactive protective strategies. However, the notion that any risk-driven effort towards ensuring supply chain transparency so as to protect against a tier 2 factory fire, for example, is implemented in isolation from the need to minimise (albeit potential) costs is not only ridiculous but demonstrates a lack of understanding of business fundamentals.

So, how is it that when surveys of this nature are released, we might be tempted to giddily deplore procurement’s very necessary drive to affect savings, whether this be cutting costs in the here-and-now or protecting against future costs arising from any “missed trick”?

Perhaps it has to do with procurement’s desire to shake its rather unflattering image as a back-room function, disconnected from the wider business and the wider world – fair enough. If procurement professionals really do want to shake up the organisations they serve, however, perhaps it is time the community accepted that no one is bigger than the whole; that minimising costs will underpin most if not all that the function does. Risk and cost reduction have to live together on the CPO’s mission statement – savings never go away, the challenge just becomes more complex as the function’s role develops.

You might say that idea is another oversimplification – but possibly that’s because you can’t provide an un-ending solution, rather warn about the pitfalls that come with interpreting bold research. I cannot help but feel that treating the various aspects that drive procurement as contradictory, will in any way serve to push the function forward in realising its potential as a commercial asset.

Harry John is Research Analyst for Procurement Leaders. With a focus on indirect category intelligence, recent work includes detailed analysis of the fleet and software development services sub-categories. Follow Harry on Twitter: @HarryJohn_PL