Maximizing ROI in a Tight Economy

May 14, 2009
It is imperative that companies empower the CPO to undertake spend management initiatives.

While nobody is delighting in the economic pain caused by this global recession, there is one positive note. Organizations now have a significant opportunity to realign and improve their spend management practices. By doing so, they can achieve sustainable savings that can ensure the health of their business long after the recession ends.

Over the past several months, my conversations with procurement and finance professionals around the globe have been centered on addressing their needs to reduce costs and improve efficiencies. My analysis is that the manufacturing plant closures and layoffs we are seeing now are really just short-term reactions to uncertain market conditions. Spend management, on the other hand, is a continuous, dynamic process that can be refined and improved to meet and exceed an organization's drastically changing business challenges.

The technicalities of spend management are not as important as understanding a few best practices that can maximize spend -- not only during tough economic times, but at any time. These best practices, when implemented properly, can help businesses fuel growth and increase the bottom line.

Visibility is Vital

For many companies, the vital missing piece to spend management is visibility into an enterprise's overall spend. This may sound trivial, but it's not. It is fundamental to any organization's spend management strategy.

Let's use business travel spend as an example. Travel requirements vary across organizations, but for most companies travel is a considerable cost of doing business. This spend may look insignificant across one region or department and thus easily ignored. Why? Because many companies have multiple points where they track ticketing and payment, and often these costs are budgeted across several cost centers. However, if a company creates visibility into this significant overhead that has been distributed across the enterprise, a centralized process can be created to reduce the burden. This enhanced visibility will reduce the department's overall spend and proactively prevent overruns.

Over the years, I have observed several situations in which companies adopted sub-optimal processes and solutions to manage their analysis exercises. Most of these involved a manual approach that is time-consuming and costly.

This labor-intensive approach essentially counters the whole objective of ROI (return on investment), essentially becoming a cost center of its own. It doesn't have to be that way. Spend analysis can help global organizations with everything from sourcing to contract compliance. According to Aberdeen Group research, spend analysis initiatives it studied helped global enterprises attain:

  • Savings to the tune of 92% from sourcing activities
  • Increase in total spend under management of 39.4%
  • Increase in contract compliance of 30.6%

Significant numbers! But the most important point to note is that many of these companies reported an ROI in the region of 40%. This underscores the success and urgency associated with leveraging processes and technologies that embrace the best practices of spend analysis.

Leading the Way in Good Times and Bad

Another common challenge I have observed is the ability of organizations to leverage executive and enterprise support to maximize user adoption of spend management initiatives and tools. This is why best practices are so critical - they should be reviewed and refined to ensure they are applicable to each individual enterprise. I have found that taking a holistic approach to spend management across the enterprise works much better than placing sole ownership within one department, such as procurement. And the technology solutions chosen for spend management should be aligned so they mirror the goals and objectives outlined in the best practices.

Here's an example: A typical Global 1000 enterprise that has not used spend analysis usually can end up identifying on average wasteful expenditures that account for several million dollars. If we take a 10-year period, factor in the inflationary trend and higher input costs, these expenses soar into the hundreds of millions.

Surprisingly, the impact of this may go unnoticed as the overall performance of the company - top line and bottom line -- may have also improved during a period of rapid economic growth. But being prepared by putting an effective spend management program in place would potentially lessen the effects and minimize the impact of an enterprise during tough economic times like we are facing now. And even when the economic times are flush, these kinds of savings can improve shareholder value and provide a competitive advantage.

Fundamentals Form the Foundation

As I mentioned earlier, the essential first steps toward an effective spend management strategy is to achieve visibility and thorough analysis for all cost centers throughout the enterprise. Why? Aberdeen Group's research of companies that implemented spend management strategies found that the ROI from other ongoing spend management initiatives becomes easier to achieve if these fundamentals form the foundation on the front end.

Sure, the market conditions will continue to require some immediate and short-term actions such as plant closings and layoffs. However, it is the long-term strategy focused on managing your spend that will provide the most bang for your bucks both in the short term and over the long term. It is imperative that companies take note of this fact and empower the CPO to undertake spend management initiatives. At this juncture, the cost-benefit ratio far exceeds the cost of not taking action to see exactly where your spend lies.

And when the world recovers from the slowdown -- and some countries from the recession -- the market dynamics will have changed substantially, making spend management even more essential to corporate success. That's why it's in every company's best interest to prepare now by advancing their spend management initiatives in these trying times.

Anurag Dixit is the vice president of marketing at Zycus. Anurag helps Global 1000 companies implement best practices in their organizations that drive maximum user adoption, reduced cycle time and sustainable savings.

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