How are you forecasting your budgets in the recession?
The way this recession is evolving means there is no realistic way, yet, to forecast an ‘end-date’ by when the economy will return to some sort of normal and start the long recovery process to reverse the damage that has been done.
This uncertainty means that forecasting what budgets need to be set for your different departments becomes a lot more difficult as much of it will be volume-based and suppliers are inevitably taking the stance of passing all the risk on to you as the customer. Or putting it more simply, they’re applying price-hikes on the assumption that supply chain issues caused by Brexit, the recession and the situation in Ukraine will continue and they price accordingly.
Structuring your Contracts To Mitigate
This is sometimes just opportunism & too often goes unchallenged, but even where there’s some justification the Agreements can and should be constructed differently to normal to mitigate this and these clauses need writing in at the negotiation or renegotiation stage.
Variation clauses could be included within agreed volume parameters, clauses for retrospective rebates may be relevant or clauses for volume discounts to be applied as the Contract rolls out, depending on the nature of the goods/consumables Consignment Stocking may be the better option for you and so on – there are many different ways to Contract for the same thing and many of these will give you better scope for pricing and delivery under the current circumstances – and help to take some of the uncertainty out of trying to predict requirements.
Institute of Fundraising – (PwC, CFG, NCVO)
On average, charities are reporting that they are expecting a 24% reduction in total income for the year which equates to a £12.4 billion loss in total
- Charities received 29% less income than they’d budgeted for
- 84% of charities reported a decrease or significant decrease in their income
- 92% of charities reported a fall in trading income during the lockdown
Forecasting ahead the research shows that those charities:
- Expect to see their total income significantly reduced, with their total income on average 24% lower than forecast
- Are planning on an average fall of 57% on trading income
- Have revised their expected voluntary income for the year down by an average 42%
With that in mind, many charities are starting to look at their cost base more closely – something that has often previously come a poor second place to the focus on income & turnover
‘Cost Reduction’ can be something of a misnomer. It’s not just about buying the same thing for a lower rate but should encompass a Buying-Smarter approach. This will include increasing quality, taking out duplication of effort, understanding and applying Whole Life Costing, better payment terms, reduced invoicing, reducing risk and exposure, working more closely with your key suppliers, better compliance and so on – all costs to your organisation
Given that the recession will be hitting all of your suppliers as much as it is you as the customer, there are significant opportunities to use the economic climate to mutual benefit
6 Simple Procurement Ways to Reduce Spend in the Coronavirus Recession:
- Contract Renegotiation: Identify contracts where you may be able to renegotiate on more favourable terms. Many people are uncomfortable with renegotiating mid-contract, but this is perfectly normal with the agreement of both parties and if both sides are happy with a proposed win-win outcome, then that would absolutely be the way to go
- Supplier Consolidation: Analysis can identify the number of suppliers providing a similar product by offering a single “preferred” supplier more volume in exchange for price concessions. Organisations can often see a 10-20% reduction in unit price in exchange for more volume and security. This will also reduce your admin costs with fewer invoices, fewer POs raised, fewer suppliers to manage and so on
- Delay project expenditures: When there is financial uncertainty, the easiest decision is to delay large spends. To do this effectively, CEOs need clear visibility into spend trends, contract renewals, contract commitments, and exposure and open purchase order data
- Avoid maverick spend: These occur when budget owners use a non-preferred supplier, instead of the preferred supplier with whom the business or procurement has negotiated favourable terms. Off-contract spend averages a 5-20% higher price than the same purchase with a ‘preferred’ supplier. Again it also increases the number of invoices you need to raise, the number of POs and suppliers to be managed, risk and so on
- Put more of your spend under the microscope: The wider the analysis of the spend, the more effective sourcing, tendering and contracting will be. Knowing what’s being spent, by whom and with which contractors will always identify areas to find better suppliers and leverage better rates and T&Cs
- Buy smarter: According to CIPS, the average cost of raising and paying for a Purchase Order is somewhere between £50 – £75 to the organisation. If the cost of what you’re actually buying is lower than that the admin is costing you more than what you’re getting. It’s very, very common but can be addressed by having better ways to procure, such as creating call-off contracts, estimated Quantity orders, using Purchasing cards, and so on.
Having someone map your spend, and regularly updating that map, will give you as CEOs valuable insights including;
- Knowing what your total spend is
- Who is spending, on what and with whom
- Which vendors supply multiple departments or budget holders
- Which departments buy the same or similar goods and services
- What your committed exposure and Risk is
- What portion of your spend is with the core suppliers (e.g., top 5 or 10) and the total number of one-off and small value transactions suppliers
- How many actual transactions your organisation processes and the associated administrative cost
- What ‘critical’ suppliers you have, (i.e. what they do is key to your being able to deliver your product or service) – what their financial health is month to month and so what Risk you’re carrying should they fall victim to the recession
Good spend reviews aren’t just about identifying which suppliers to beat over the head for a reduction in unit costs, but should offer a much wider analysis of opportunities. Particularly in the current climate if a supplier of yours went under there are the issues of continuity of supply on top of the costs of having to resource that requirement. Suppliers want to future-proof their income as much as anyone at the moment so contracts can be restructured mid-term and create much more of a ‘Partnership’ approach where applicable where both sides work together over a longer-term.
If you would be interested in ProVantage Procurement working with you on a free granular spend review to see where we could suggest areas to reduce your direct and indirect costs, please contact Peter Roberts on 07827 014303 or peter.roberts@provantageprocurement.co.uk