10 need-to-know procurement cost saving strategies
Battle inflation, risk, and uncertainty without compromising vendor relationships.
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Reducing costs and growing savings are top priorities for procurement teams everywhere—but the challenges they face make a complex problem even harder to navigate.
Between inflation woes, labor shortages, and supply chain complexity, the list of uncertainties facing these teams keeps on growing. Exacerbating things is growing pressure from stakeholders to demonstrate the scope of savings and value procurement provides.
As challenging as it can be to demonstrate value in an environment where traditional savings on the balance sheet reign supreme, procurement professionals are always looking for ways to find strategic solutions that let their organizations maximize savings.
In this blog, we’re shedding some light on the different ways businesses can leverage cost savings strategies in their procurement operations and how you can build a greater understanding of cost savings throughout your organization.
Cost reduction vs. cost avoidance
Before we dig in, let’s recap some key differences in how you can measure cost savings.
Cost savings come in many forms. In the procurement process, the top determinants include cost reduction and cost avoidance. Historically, cost reduction has dominated the conversation around cost savings; after all, most savings are measured through bottom-line reductions, more commonly known as “hard savings.”
These reductions are realized through gained efficiency within the tangible current costs of doing business. In other words, if you’re able to reduce balance sheet spend when compared to spend in a previous period, then you’ve got a great cost reduction KPI you can report to other stakeholders.
But by its very nature, this definition rules out a whole category of business-critical cost avoidance initiatives. While these savings may not be directly visible in the profit and loss accounts, they’re no less important, nor any less valuable.
Cost avoidance strategies focus on actions that avoid future incurred costs—the difference between a lowered cost and the cost that would have otherwise have been incurred if these actions had not been taken. These are commonly known as “soft savings.”
By its very nature, cost avoidance encourages proactive procurement practice, and they’re heavily dependent on the level of stakeholder engagement found in contract compliance.
Far from being in opposition to one another, cost reduction and cost avoidance strategies are complementary techniques that help businesses establish a common language around the full scope of cost savings.
With that out of the way, let’s take a closer look at some key cost reduction and avoidance strategies you can employ within your procurement activities.
Cost reduction strategies
The most obvious step towards cost reduction in the procurement process is to cut unnecessary spending—but while slashing budget line items will have an immediate effect on your bottom line, without a big-picture perspective, you’re only addressing immediate pain points without looking at deeper causes.
Effective cost reduction is dependent on your ability to identify deep insights into:
- Maverick spend
- Vendor performance
- Project progress
- Category level insights
- Risk management
In other words, you need to analyze your procurement operations to address the processes and policies that lead to greater expenses—one of the best ways to accomplish this is with new technology solutions that automate manual tasks to empower you with accurate data about your procurement activities.
From there, you can start looking at specific strategies to reduce costs strategically.
#1 End value leakage
Procurement teams put significant time and effort into securing strong contracts that maximize value—but that doesn’t mean much if contract compliance isn’t being enforced. Without visibility into contract compliance, you may be leaking value.
Value leakage most often occurs through lost volume discounts, compromised safety, contract term discrepancies, or gaps between completion and invoice closeout that restrict access to working capital.
Spotting these leaks has traditionally relied on manual “stare and compare” approaches to contract compliance—a wildly inefficient approach.
Organizations are, more often than not, adopting robust technology solutions to help procurement leaders with a range of contract-related challenges, including:
- Ensuring the promised percentage of workers on specific WOs/POs.
- Maintaining expertise across projects.
- Paying trade classes at appropriate rates.
- Automating timesheet review to ensure fair compensation.
- Informing project owners of holdback requirements.
Ditching manual processes for automated solutions makes it possible to flag issues as they occur, making it easy to take corrective actions early.
#2 End cost leakage
If money leaves your organization without authorization or planning, you’re experiencing cost leakage. Cost leakage is most often the result of unclear processes, miscommunication, and a lack of visibility into contract management data.
Outdated procurement systems and manual processes are major contributors to cost leakage. Putting an end to cost leakage starts with understanding how it happens. Common offenders include:
Duplicate billing
Mistakes happen, and it’s not uncommon for vendors to send the same invoice twice. In fact, vendors may resubmit an invoice if payment takes longer than expected—and when paired with manual systems and processes, it’s not uncommon for the same invoice to be paid twice.
Each of these mundane errors nonetheless adds up to significant admin time (if they’re discovered at all), creating headaches when reconciling duplicate payments.
Gate billing
Managing on-site contractors can also be a challenge. Late arrivals, early exits, or “ghosts” on the job site (as in, workers are present on records but aren’t showing up) where the vendor bills for the entire day add up fast. This can cost an organization millions of dollars every year if left unaddressed.
Living out allowance (LOA) billing
Not monitoring contractual obligations around living out allowance (LOA) expenses costs more than you might realize, and these small errors add up quickly as they accumulate across multiple workers or project days.
The most common LOA errors include:
- Incorrectly applied LOA (such as for local workers)
- LOA based on the wrong work classification, union, or contract agreement.
- Incorrect unit hours (for example, days input instead of hours)
Proper oversight of LOA billing ensures compliance and prevents unnecessary cost leakage.
Overtime billing and rounded billing
In some cases, workers who swipe out late are often mistakenly paid expensive overtime rates—even if they’re only a few minutes past shift end. In isolation these errors are minor, but across a full workforce and project duration, this can rapidly eat into your bottom line.
Workers running late when they should be checking out isn’t just expensive, though—it can also contribute to greater fatigue, ultimately putting their safety and the safety of others in jeopardy.
Furthermore, when vendors default to minimum billable increments (per quarter or half hour), billing rounds up in the worker's favor. Even staying one minute late could mean each worker is paid for an extra half hour each day.
Marked up billing
To keep their own businesses viable, vendors must strike a balance between bidding their best offer and covering their own overhead—trucks, tools, equipment, fuel, and administrative costs—to retain a net profit at job completion.
Yet there needs to be a way to measure and prove any vendor markups are fair for your business while respecting the vendor’s own requirements. The challenge here is that it’s hard to get even this kind of visibility in the first place, let alone correct any identified issues. Leveraging new technology solutions can help you make this critical data more available, in turn helping you address this problem.
#3 Prevent maverick spending
Maverick spending refers to any unauthorized purchases that occur outside established procurement processes or agreed-upon contracts. Despite its name, it’s not so much about employees going rogue with the company credit card, but rather a lack of understanding about the policies and procedures employed by procurement teams.
At best, this lack of understanding results in one-off incidents that cause minor value leakage; at its worst, though, it’s an indicator of uncontrolled vendor spend behavior and serious gaps in procurement’s influence and wider company culture.
In fact, research shows that a third of all maverick spend is the result of poor communication about these policies; over 50% of maverick spend is due to confusion over how these processes work or a lack of direction.
Mitigating maverick spend risks requires complete visibility into vendor spend and clearly defined due diligence processes. To accomplish this, you should:
- Increase compliance monitoring with assistance from automated solutions like PayShepherd.
- Implement effective onboarding processes that establish accountability and responsibility within your organization and amongst your vendors.
- Communicate expectations and policies to all relevant stakeholders.
Clear communication and proactive oversight are essential for maintaining control over unauthorized purchases.
#4 Negotiate collaboratively
At its core, traditional negotiation is about maximizing value from an agreement with your vendors and suppliers—but there’s a tendency to approach negotiation as an adversarial, zero-sum process.
Negotiation is really all about maximizing value for all parties involved, and taking a collaborative approach to these discussions with vendors and suppliers can actually help you unlock greater efficiencies or identify mutually beneficial areas of improvement.
Collaborative negotiation requires trust and transparency—typically enabled by centralized data available to both parties. By leveraging this data, you can:
- Highlight areas for process improvement on both sides—this could help reduce material costs, as an example.
- Foster open dialogue that leads to greater productivity—for example, sharing demand forecasts allows you to optimize production schedules, leading to greater cost savings.
- Incorporate vendors into projects earlier, leveraging their expertise to access additional cost benefits.
- Continuously improve the relationship by benchmarking data year-over-year.
Building trust through collaboration leads to better outcomes for both your business and your vendors.
Cost avoidance strategies
Now that we’ve looked at cost reduction strategies, let’s take a closer look at cost avoidance strategies you can start employing in procurement.
Effective cost avoidance supports the bottom line by preventing future costs. While these savings are often thought of as intangibles, because they don’t always reflect on the balance sheet, they still have a positive impact on business profitability.
Procurement professionals achieve more valuable cost avoidance when they're empowered with better visibility for insight-driven preventative initiatives, including:
- Reducing a proposed vendor price increase.
- Optimizing preventive equipment maintenance schedules to avoid downtime.
- Having a roster of high-performing and trusted vendors to draw from.
- Monitoring contract compliance to avoid worker fatigue and protect safety.
- Identifying potential disputes at the early stage before they escalate out of control.
The strategies outlined below provide key opportunities for procurement teams to drive organizational cost savings through cost avoidance.
#5 Revisit contract terms
The vendor contracts secured by procurement professionals establish the foundation of the business partnership, outlining all terms and conditions in black and white to protect both sides.
But the vendor contract is rarely a one-and-done deal; terms must keep up with shifting economics, changes in operational costs, and other fluctuating conditions. Revisiting contract terms is a vital part of these partnerships, but it’s made more difficult by this state of flux.
Accessing accurate contract data is critical for regular reassessment. With it, you’re able to:
- Determine if pricing is competitive and up-to-date
- Account for changes in the economic environment
- Apply the latest market data and benchmarking to negotiate fair pricing
- Identify key negotiation opportunities based on past performance
Removing the tedium of these manual tasks is critical to unlocking additional contract value. Automatically identifying and enforcing contract terms lets you streamline contract compliance.
#6 Track vendor performance
One of the top risks when it comes to depending on an external workforce is the potential lack of control over daily performance, operational costs, and issues, as well as any out-of-norm spend.
If there's no way to effectively monitor, track, and measure vendor performance, the risk of losing control rises. Access to clean, up-to-the-minute performance data and KPIs lets you review performance live. Instead of addressing identified issues at project close, you’re able to take action in the moment to prevent more serious issues from arising.
Disputes are diminished, costs are reduced, internal-external communication is enhanced, and everyone gets more valuable time back in their schedule.
#7 Improve risk management
Vendors and employees are, increasingly, strategic assets that bear risks of their own. Labor shortages, issues in your supply chain, and shifting market conditions increase these risks. To that end, you need to effectively manage your risk with appropriate controls and mitigation plans.
Many procurement leaders are working to adopt collaborative approaches to risk management that allow for positive discussions and results that benefit all parties.
The first step to establishing that collaborative foundation is a well-designed contract. As projects progress, automated monitoring of contract compliance and vendor activity will ensure discrepancies and non-compliance are flagged instantly. This way, vendors can take corrective action early, or project managers can intervene before smaller issues escalate into larger problems.
#8 Automate the payment process
The need for quality vendors is at an all-time-high. With such high demand, being able to pay your vendors in a timely manner is more important than ever before. Traditional invoicing processes are often tedious, increasing the likelihood of an error—and an error can damage the existing relationship, making it harder to work consistently with vendors.
Digitizing payment processes helps ensure your workforce gets paid on time—but it also helps you spot errors and non-compliant submissions in real-time. The end result? Fewer disagreements, more repeat business.
#9 End cost overruns
It’s become an accepted truth among project managers that cost overruns are simply part and parcel of doing business—but the reality is, with the right tools and team, cost overruns can be a thing of the past.
Most cost overruns occur as a result of:
- Incorrect project budgeting or scoping.
- Mistakes in estimates or incomplete data.
- Scope creep or changes in project commitment.
Much of the work required to mitigate these risks and the potential for cost overrun starts in the planning phase. Real-time visibility into the project management process is critical to preventing overruns. This allows for early intervention, correction, or at least mitigation that lessens their impact.
#10 Retain top talent
Securing top talent is now a requirement for modern businesses, especially in light of the ongoing global labor shortage. There are more job opportunities than there are workers to fill them, so being able to keep talented staff in-house is vital.
But beyond this immediate need for your own workforce, it also means that suppliers and vendors are in sharp demand. It’s more important than ever that businesses like yours foster and maintain strong relationships with these third-parties, because they’re a crucial component of your production capabilities.
Procurement professionals should prioritize retention by working closely with vendors and employees alike to identify potential areas for joint improvement. Part of this enhanced collaboration requires greater data availability and sharing between teams, but it also offers an opportunity to reduce (if not remove) the administrative burden through greater automation.
It's people that are a company's best resource and external workers hold massive potential to achieve cost avoidance savings.
Focusing solely on cost savings is dangerous
With those strategies explained, we wanted to leave you with a few final thoughts—and one warning.
First, your procurement strategy is about so much more than cost savings. Focusing on cost savings alone is dangerous—measuring procurement value in purely financial terms will paint an incomplete picture of just how much procurement adds to an organization.
Procurement has a hand in a wide range of activities:
- Improved ESG performance and metrics.
- Increased revenue through strategic partnerships, technologies, and transformation.
- A more robust and resilient supply chain.
- Rock-solid relationships with mission-critical vendors and suppliers.
Procurement leaders are helping drive industries forward by leveraging cost savings KPIs in service of continued improvement. Far beyond savings, procurement is a crucial leader in maintaining quality, operational efficiency, safety, and innovation.
Crush your cost savings KPIs
The margin for error within cost and value leakage is shrinking fast in an increasingly uncertain and competitive environment. Procurement teams have their hands full in the pursuit of securing cost savings. But they're also working to set the foundation for mutually beneficial relationships that stand the test of time.
We have an incredible respect for these professionals and the daily effort it takes to lead an organization into a more sustainable and profitable future.
PayShepherd was born out of a boots-on-the-ground understanding of the downfalls of manual vendor monitoring. We know how much time and money it wastes, and we’re committed to a better way forward.