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Help Your Teams Do More Cost Analysis Across the Portfolio

Procurement functions will benefit greatly if they conduct cost analysis for more than just 'top-tier' purchases, but managers must first make it clear that's what they want, and make it easier for their teams to do so

Category managers and others in procurement teams are used to using their analytical skills on the big ticket items a company buys, such as multimillion dollar piece of software. They often enjoy the chance to work on such an important and far-reaching project.

But when it comes to less important purchases – what are referred to as middle- or lower-tier “buys” – procurement teams are much less likely to delve into the reasons why a vendor is charging the costs it is, and whether or not this provides good value for the buyer.

It may seem sensible that procurement teams put more resources into the most expensive purchases, but the line managers doing the buying won’t necessarily see it that way. They understandably see their work and their teams as important, and will expect the same level of consideration for a broader range of purchases beyond those with the highest spend, high complexity, or high risk. They want procurement teams to weigh quality against price across the portfolio.

And it’s important that procurement teams take this observation on board as, at many firms, the function’s reputation is taking a hit for its lack of support for less critical purchases (see chart 2 in this post).

Time for a Change – Two Steps to Take

Procurement staff won’t investigate the drivers of cost for more than top-tier buys if they believe their managers want them to concentrate on other priorities or if it’s too burdensome to do so. So it’s up to senior procurement managers to create the climate to help them see things differently.

The good news is that there are steps procurement leaders can take to show staff why cost analysis is important, and to make it easy for them to do more of it. And procurement teams that get this right will deliver a more valuable service across more of their portfolio.

Right now, however, this approach is a rare one: only 42% of category managers agreed that their function supports an active approach to cost driver analysis, according to CEB analysis.

The best way to get employees changing their approach to cost analysis is to help them make the right trade-offs in their day-to-day work, and for that there are two steps

  1. Tools and processes: Managers need to provide resources for staff to conduct cost analysis and make it clear when to do so — and what, exactly, to do.

  2. Signals and messages: Managers must make it clear that cost analysis is a priority. They need to talk the talk and walk the walk by aligning their message to employees’ work and incentives.

Together, these two steps exert more influence than any other factor on whether or not procurement teams do more cost analysis (see chart 1).


Relative impact of staff, functional, and category characteristics on whether staff actively investigate the drivers of cost

Chart 1: Relative impact of staff, functional, and category characteristics on whether staff actively investigate the drivers of cost  n=145 category managers  Source: CEB Category Manager Cost Visibility Survey

Note: The model explains 47% of the variance in staff likelihood to actively investigate the drivers of cost in a multivariate regression (R²=0.47). The relative impact of each of the variables was calculated using relative weight analysis, which calculates the percentage of each variable to the R-squared of the seven variable model.


Make It Easier

Procurement teams need to make it easier for employees to execute cost analysis if they want them to do so with more buys. Currently, procurement leaders offer resources to conduct cost analysis for top-tier buys, leaving only limited support for other purchases (see chart 2).

Under these conditions, they’re unlikely to expend the effort required to look into cost drivers for middle- and lower-tier buys. Instead, they tend to pursue alternative approaches that require less effort — like brute force negotiations — for a more certain return.


Leadership support for employees' cost driver analysis efforts

Chart 2: Leadership support for employees’ cost driver analysis efforts  n=145 category managers  Source: CEB Category Manager Cost Visibility Survey


Show Staff You Mean What You Say

Procurement managers tell employees cost driver analysis is important.  But that isn’t enough, as the message is often drowned out by other signals from the function’s leadership (see chart 3).

For instance, procurement teams base most incentives associated with day-to-day execution on savings, so staff naturally conclude that’s what’s most important, and then go into middle- and lower-tier negotiations looking to make costs as low as possible.


Emphasis of procurement managers during different types of staff interaction

Chart 3: Emphasis of procurement managers during different types of staff interaction  Source: CEB analysis


 

 

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