Losing Revenue?........ Focus on Profit Improvement!

Throughout the lock-down phase of COVID -19, many businesses took a huge hit to their revenue. Whilst some are on the journey to recovery, many are still struggling with the gap in their numbers and others have had no choice but to bow out.

Business will continue to focus on growth but whilst sales are struggling, to maintain the financial health of an organisation and keep the lights on, it is critical for organisations to focus on profit improvement and cost transformation.

The big question is, where to start?

Whenever we begin any procurement activity or a new project, we need to understand the current state of play, the current landscape and gain a holistic view. Once we have an understanding of the issues, we can start to build programmes, projects and action plans, set goals, objective and milestones. This is no different when planning a profit improvement or cost reduction programme; it should start with the analysis of third party spend data.

Typically, third party (supplier) spend is around 20-30% of total spend. Supplier spend will depend on the type of an organisation or the services offered i.e. care service organisations may be more resource heavy than a tech companies, therefore PAYE spend would be a greater portion of their overall outgoings. The challenge for many organisations is finding and extracting this financial information in the first instance.

The finance team can usually provide enough data to get out of the starting blocks. If the value and importance of this data to meet strategic objectives can be demonstrated to finance, then it can be worked upon and improved over time. Collaboration with finance is key to maintaining the quality of the data!

Once you have your data extracts, you will want to do some general tidying up. This is a resource heavy activity and whilst it can be done internally, there are benefits to using an external party with expertise and access to helpful tools. This can speed up the process and the improve accuracy of the output.

**TOP TIP** When using an external party, make sure you have the correct agreements in place to cover data protection and the relevant insurance

You will need to apply a taxonomy (or categorisation) so that you can group together different types of spend. When data in a readable format, there are many ways you can manipulate and view it to show meaningful reports and identify opportunities for quick wins or longer-term projects with more strategic impact.

5 Example reports you can produce:

1.  Addressable spend - This is spend that can be reduced through negotiation or re-tendering versus non-addressable i.e. debt, tax or a brand-new contract. For the addressable spend, a typical procurement saving can be up to 20%. You should calculate whether there is an ROI if you allocate internal resource to deliver it.

2.  Top spend suppliers - Typically, 80% of your spend comes from the top 20% of suppliers (pareatos law). If this top spend is also addressable spend you can build tactical and quick win plans. Often, you find you are buying more than you require due to lack of insight and analysis. As we all know, the best way to save money, is to not spend it in the first place!

3.  Tail spend - Tail spend is typically 20% of your overall spend but can deliver the quickest savings, in most cases switching off the supplier on the system and stopping rogue spending can make a big impact. This isn’t the most popular programme in an organisation, and we would recommend it is well managed when it comes to communications – keep stakeholders informed and onside.

4.  High volume of invoices - For efficiency improvements, you can find suppliers with an excessive number of invoices and help to reduce them. The costs associated with invoice processing time can be as high as ￡6 per invoice. For one of clients, we reduced invoices from one supplier from 897 to 12 (saving the company approx. ￡4k per year in invoice processing!

5.  Similar products/services - Another quick win opportunity is to look at suppliers where you buy similar items through multiple suppliers or where you have an existing contracted supplier that offers services that you go other parties for. By consolidating suppliers, you can negotiate better pricing, better terms and easier contract manage. You will benefit from increased efficiencies too.

Analysing your spend and suppliers data can seem like a daunting task which is easier to delay than work through. It’s better to start than never try. If you need support with this Novo-K can help. Contact [email protected] for more information.