Most companies only scratch the surface of procurement efficiency. Those that dig deeper discover that the savings can be dramatic. External purchasing is the largest single expense category for most firms, averaging 43% of total costs. Bain research shows that world-class procurement organizations can reduce a company's purchasing cost base by an average of 8%-12% and deliver additional annual savings of 2%–3% (see Figure 1).

A talented procurement team can provide leadership teams with valuable data, analysis and insights that influence what a company buys and how it buys. But many organizations wall off procurement from the rest of the business, treating it as a non-strategic service. Procurement managers that have a mandate to think strategically about what a company buys and spends can make the business case for change. But overcoming organizational silos takes time, and procurement needs to earn a seat at the table with business unit leaders.

Successful companies achieve greater savings by creating a collaborative partnership between procurement and the business, and making both accountable for results. Collaboration enables smarter, proactive purchasing decisions. One example: Procurement can provide regular feedback to business unit heads on where their spending is less efficient than the competition's. That's powerful intelligence.

Collaboration is also vital to making sure procurement savings really stick. Often, they evaporate before finance can book the gain. Why? Procurement managers seek to cut category costs (such as travel and entertainment expenses) that typically span multiple budgets, so the savings are difficult for finance to track. As a result, procurement claims large savings that never show up in the company financials—a major point of frustration for CFOs and business unit managers. When procurement and finance work together, they can create systems that reliably capture these gains, delivering real cash savings to management (see Figure 2).

Another important step is building the capabilities to lock in long-term savings. Even when companies achieve significant purchasing savings, many cannot sustain the process. Giving procurement a strategic mandate requires behavior change across the entire organization. Successful companies understand that and invest in the talent and tools to find new opportunities year after year.

Buying and Spending Better

When companies set out to trim procurement costs, they typically focus on the two areas of savings that procurement offices control directly: price negotiation and supplier selection, which both help companies buy better. Negotiating lower prices for everything a company buys may sound obvious, but many companies struggle with how to do this when the offering is more customized, as in certain service categories.

For instance, a global chemicals company achieved breakthrough service savings by benchmarking the labor rates and markups it was paying suppliers against industry standards. That allowed the procurement team to renegotiate labor service contracts, yielding $75 million in savings.

Streamlining suppliers is just as important. When the same company launched a procurement transformation in 2013, one of the first moves was a strategic sourcing process that consolidated 2,000 suppliers worldwide for maintenance and repair equipment down to one main supplier. By doing so, the company won a 20% price reduction, netted more than $10 million in annual savings and improved management efficiency.

Buying better is critical, but spending better can double a company's procurement gains or more. Bain research shows that techniques for spending better—which focus on what companies are buying, not just what they pay for it—can produce 60% of total savings. Companies that do both—buy better and spend better—canvass the entire landscape of opportunities.

Three guidelines can help companies spend better:

  • Get a grip on demand. Leading companies streamline purchasing. By examining specific categories, procurement teams can put a spotlight on unnecessary spending.
  • Design to cost. World-class purchasing teams also make sure design teams are not over-engineering new products. They embed procurement managers in the R&D team to assess the cost of different components and consider alternative options that may be more cost-effective.
  • Reduce system costs. Successful companies evaluate the total cost of owning expensive items. Paying more upfront can be the more economical choice if savings over time outweigh an initial higher cost. They examine their supply chain to understand whether it makes more sense to produce items in-house or buy them from someone else. And they work with suppliers to reduce supplier complexity and bring costs down.