Controlling Your Costs During The Recession
The UK is undoubtedly heading into a severe recession as a result of Covid-19, one which is likely to be more damaging than the last one in 2008. One effect of this is that suppliers are in the same boat and keen to future proof their own business income which gives us all an opportunity to control our costs better – not just to reduce unit pricing and rates but a time to improve payment terms, reduce invoicing, reduce risk and exposure, better compliance and so on – all day to day costs to any organisation.
Spending more effectively in a recession
According to the OECD, (Organisation for Economic Cooperation and Development), the UK faces deeper recession than any other country in the developed world, predicting that;
- The UK economy will shrink by more than 11% this year – or >14% if a second wave of Covid-19 infections hits
- The UK will see its economy shrink more than that of any other country in the developed world as a result of coronavirus
- GDP will collapse by 11.5 per cent this year, more than Spain, France and Italy, which have experienced some of the worst coronavirus outbreaks and have implemented stricter lockdown conditions than the UK
- And perhaps more worryingly, the intergovernmental organisation of wealthy countries predicts that if the UK economy contracts by >14% with a second spike of Covid-19 cases, the global economy will take a 6 per cent hit, by far the biggest drop of any projection in the organisation’s 60-year history.
With that in mind, many organisations 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 business units
- Which business units 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