Ultimate Guide

to Procurement
Cost Savings
WHITEPAPER
 Executive summary
Savings and cost reduction 1. Hard Savings—bottom line, EBITDA
savings.
remain a top priority for
2. Total Cost of Ownership (TCO)
procurement. Planning for Savings—streamlining and
the impacts of stockouts, optimizing procurement.
inflation, and market 3. Working Capital Optimization
volatility matter as much as Savings—savings through
cost-efficiency. Analytical increased cash flow.

capabilities and actionable 4. Spend Under Management—

gaining visibility into spend and
insights will be prerequisites centralizing procurement.
to achieving savings targets.1 5. Soft Savings—value-leading
strategies for procurement.
As procurement organizations become
more complex, savings are harder to
identify. A systematic approach is Under each approach, you’ll find
required to track and verify savings to several different ways to pursue
combat value leakage between savings. In addition, this guide
identified and realized savings. discusses how to improve
Even so, Procurement and Finance can Procurement-Finance collaboration
still interpret savings in multiple ways. and how to report savings. By aligning
In many organizations, the suboptimal on savings calculations, you’ll increase
collaboration between Procurement the recognized contributions of
and Finance is the root cause for Procurement.
undermining procurement contribution
to savings. By implementing the principles of this
guide, you’ll be able to increase the
This Ultimate Guide to Procurement savings in procurement that affect the
Cost Savings explains the five major whole organization. You’ll improve the
approaches to cost savings in ability to communicate those savings,
procurement. These strategies range collaborate with internal and external
from hard savings to soft or cost stakeholders, and create motivational
avoidance approaches and everything systems that improve procurement
in between. This guide breaks down performance metrics.
the following savings strategies:

1 The Hackett Group (2022), 2022 Procurement Agenda: Key Issues to Address and Critical
Actions to Succeed

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 Savings methods
in this guide
Hard Savings
Competitive tendering
Supplier benchmarking
Commodity benchmarking
Discounts
Rebates
Should-cost modeling
Price negotiation with data

TCO Savings
Operational costs & delivery performance
Productivity improvements
Insourcing, outsourcing
Re-specification

Working Capital
Optimization Savings
Payment term optimization
Reducing inventory carrying costs
Currency optimization

Spend Under
Management Savings
Maverick spend
Tail Spend
Centralizing procurement
Category structure
Supplier relationship management

Soft Savings
Cost avoidance
Risk management
Procurement value creation
Reducing value leakage

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Savings
as a priority

Organizational maturity is a major

factor in the level of realized
savings.”

Atro Ranta-Aho
VP, Value Enablement
(Customer Success)
 Savings in Procurement:
The top priority?
The main goal of procurement is to leaders need to grasp all the
possibilities for savings in
ensure products and services are
procurement. The idea of savings can
bought at the right price. But how
be interpreted in many ways. New
does procurement demonstrate value?
savings are harder to find and secure.
In most organizations, value delivery is
It takes analytics maturity, data, and a
demonstrated through savings.
keen business understanding to
identify new saving potential. The
As time goes on, cost savings and cost
purpose of this guide is to offer the full
reduction are still the key performance
spectrum of options so that you have
indicator for CPOs. Ask any CPO any
all the choices at hand.
year, and they will tell you one of their
key issues was to “reduce spend
cost”.2 Deloitte’s ten-year review of
the annual CPO survey report +30%
consistently demonstrates this: Since Cost of Goods
Profit
2011, cost reduction has been the #1 Sales Increase
-8%
CPO priority.3

For the first time in ten years, “driving

operational efficiency” has taken the Everyone knows how difficult it is to
top spot in the industry-standard increase sales. Many companies turn to
standard Deloitte CPO survey and savings to see an impact on their
Hackett Group’s 2022 procurement bottom line. Our estimates indicate
survey—but reducing costs was still a that achieving an -8% reduction in
strong second.4 5 Whether cost spending can be comparable to a
savings is the focus or not, +30% increase in sales.6 This is
procurement leaders will always go especially apparent in industries with
back to the basics during times of large, fixed materials costs.
uncertainty. That’s why procurement

2 The Hackett Group (2021), 2021 Key Issues

3 Deloitte (2021) Global CPO Survey 10 Year Lookback
4 The Hackett Group (2022), 2022 Procurement Agenda: Key Issues to Address and Critical Actions to
Succeed
5 Green, W. (2021) Cost-cutting knocked off CPO priority top spot, CIPS
6 Internal Sievo estimates based on customer data

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 Savings in Procurement:
The top priority?
But what can be considered savings, Procurement would ideally like to
and how can they be measured? In record savings at the point of
financial terms, savings are measured negotiation or on confirmation of a
through bottom-line savings and are signed contract when they can sit
often referred to as “hard savings.” back, relax, and hand over the
Procurement prefers to look at cost contract to business for execution. But
savings as the negative change from that doesn’t translate to actual cash
the previous cost paid to the new savings—it only tells us what is the
negotiated cost. In the absence of a savings potential. The realized savings
previous cost reference, savings could hit the P&L only later, and those are
be calculated from the first offer dependent on the level of business
received or market benchmarks. activity and stakeholder compliance to
Often, a baseline price and a year-on- contract as well as external factors
year expenditure history are required that are outside of procurement’s
for quantifying the savings. control. Make sure to avoid value
leakage and ensure your identified
What about savings that don’t have an savings see daylight.
established baseline yet? What about
the cost efficiencies you
identified through negotiation and re-
scoping? What about unexpected cost
Sievo will help you, but
increases you avoided with organizational maturity
procurement tactics and expertise?
“Soft savings” refer to the cost also matters.
avoidance initiatives and procurement
value delivery that may not be directly
At Sievo, we’ve built a procurement
visible in the profit and loss (P&L)
analytics platform to help you achieve
account.
and report savings from multiple
angles as well as track the realization
Procurement and Finance often report
of contracted savings. But analytics
differences in savings. Procurement
alone doesn’t solve everything,
organizations pursuing cost savings,
unfortunately. Next, let’s examine how
optimizing processes, reducing
organizational maturity can impact
maverick spend, and practicing agile
savings initiatives and prevent value
purchasing may still report over 40%
leakage.
more savings than Finance sees.

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 Organizational maturity
impacts savings
The level of Here are some indicators of
organizational maturity:
organizational maturity
o The breadth of focus on savings
directly impacts the (focusing on only hard savings vs.
gap between identified holistic value engineering)
o Level of alignment internally
and realized savings. (especially between Finance and
Procurement)
o Continuity of value delivery
(Recurring savings vs. one-off
initiatives)
o Use of external data (e.g., vendor
intelligence, market prices)
o Partnering with suppliers (as a
source of innovation vs. negotiating
for that extra 1% savings)
o Leveraging technology (the time
spent with value-add activities vs.
operational reporting)

Aligning People, Processes, and

Technology (the “PPT model”) will
allow for more sophisticated
performance measures and increased
transparency regarding savings. Let’s
now dive into the cost savings
methods and how we can help you
achieve them.

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Hard
Savings

Savings are one of the most effective

ways to improve a company’s
profitability. When there are
opportunities to reduce costs those
often take less effort than reaching the
same amount of profits through sales.”

Saana Kivimaa
Product Manager,
Savings Lifecycle
 Hard Savings
When talking about cost like core raw materials or labor cost.
This leaves out one-off purchases and
savings, Procurement investments.
usually refers to price
reductions. There are two basic ways to achieve
hard savings on ongoing purchases:
Procurement will claim savings negotiating for a cheaper price with
achieved through cost avoidance in the current supplier or finding a
many organizations, but the Finance different supplier with a better offer.
department may not agree with the But to be more specific, some
definition and reporting. Finance techniques can be employed to
requires savings that are quantifiable identify and achieve these types of
in realized budgets. Put simply, Hard savings.
Savings is defined as a reduction from
a previous period’s spend that has an
immediate impact on the balance
sheet (EBITDA). Hard savings are
calculated by multiplying the
difference between the current price
and the prior period price times the
quantity purchased.7

(Old price – new price) * quantity

purchased = Hard Savings

Hard savings are considered “precise”

because both the quantity and price of
the prior period of spend are known
with certainty. For budgeting
purposes, this level of accuracy is
required. But this definition is seen as
too limited for measuring procurement
impact and improvement in
processes and consumption patterns.
Hard savings only apply to recurring
purchases as they measure the
reduction in the unit cost of operation

7 Huber, B. (2017) Cost Avoidance vs Hard Savings:

How to Better Measure Procurement’s Impact, GEP

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 Hard Savings
Competitive tendering Benchmarking your category suppliers
based on their quality, performance,
and cost competitiveness enables
Tendering is the process of inviting choosing the best-contracted supplier.
multiple suppliers to compete for a Active management of strategic
contract against a certain specification suppliers and consolidating the total
and terms. Advanced e-sourcing and number of suppliers are critical to
e-auction solutions in the market aid maximizing procurement savings.
procurement in the effective tendering Dual sourcing uses two (or more)
of standardized products and services. suppliers for a given component, raw
material, product, or service. Dual
sourcing enables flexibility, added
capacity, and price optimization at a
Sievo Tip given time for each order or batch.
The Sievo Price Opportunities
dashboard uses historical spend data
Spend analytics with Sievo can to offer at-a-glance savings
be used to identify competitive opportunities.
tendering opportunities. For
instance, if you are ordering a
material that is also used in
Commodity
another unit, you will be able to benchmarking
compare data on realized prices
from alternative vendors used
Comparing your procurement prices
across the organization.
to market indexes offers a new way of
assessing your performance. Having
visibility into how current supplier
prices measure up with competitive
Supplier benchmarking market prices provides leverage in
price negotiation. Negotiating lower
unit prices that reflect market changes
The supplier benchmarking process is
ensures you are not paying above the
the act of reviewing contracts or
market.
comparing suppliers to highlight low
competitiveness. These suppliers can
The example on page 11 shows gaps
be approached to reduce their costs
based on real-time Cost Index data
in line with the market or can be
from external data providers in the
changed for more competitive
Sievo platform.
suppliers.

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 Hard Savings

Track cost indexes to discover savings opportunities in Sievo

Discounts Should-cost modeling

Everybody loves a good discount! Should-cost refers to a data-driven

Discounts in procurement refer to method of approximating how much
reduced unit costs based on total an item “should cost” to negotiate
contract quantity, minimum order lower prices. The cost of
quantity (MOQ), loyalty, contract manufactured goods depends on
length, referral rights, brand visibility, several variables, including, but not
or other agreements. Terms for and limited to, raw material costs, local
validity of a discount should be agreed labor (market) costs, (local) energy
upon in advance with the supplier and costs, and other manufacturing
communicated internally to avoid overheads (which are often dependent
unwanted surprises when the on the production technique used).
conditions are not met. Should-cost analysis involves using
available data to develop the best
Rebates are a discount type, which cost assumptions and presenting them
entails purchasing a set goal from a as a dialogue starter to the supplier.
supplier and receiving a “kickback” or
positive invoice to send money back. Should cost analysis can be insightful
Tracking these rebates can be done for the supplier, too. If the supplier
with spend analytics, for instance, to exposes its raw material costs, the
see when you meet the threshold or data can show if a supplier is likely
how you line up in the spend tiers paying more for a raw material than it
established in the agreement. should be. With enough historical data

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 Hard Savings
for both the product and the
component raw materials, the
organization can determine the impact
commodity market changes have on
supplier pricing.

Price negotiation with

data

Modern procurement leaders use data

to back up their argumentation in
negotiation. Coming prepared to a
price negotiation ready to discuss any
of the above considerations—backed
by data—can be a reliable way to
achieve hard savings. Get to know the
market, understand your negotiation
position, and use data to find cost-
saving insights. Hard negotiation and
“walk away” tactics may be effective
once or twice, but more collaborative
approaches where parties understand
each other’s cost structure and seek
savings together are gaining
popularity. This collaborative
approach provides sustainable results
over a more extended period.
Sievo offers you the opportunity to
create a cultural change in
procurement.

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Total cost of
Ownership
Savings

TCO looks at the bigger picture

and considers the total value of
the product or service over time.”

Atro Ranta-Aho
VP, Value Enablement
(Customer Success)
 TCO Savings
Acquisition costs Maintenance and
Research Repair operations
Sourcing
Ordering (MRO) costs
Receiving Servicing

Freight costs Life span costs

Shipping The costs over the expected
Handling lifetime of a product

Warehousing costs Recycling costs

Storage (impacted by delivery Collection and disposal
cycle)
Safety and insurances
Operation costs Fines, Incidents
Use costs (electricity, fuel) Insurance fees
Lost productivity

Total Cost of Ownership (TCO) So how can you make these costs be
considers all the direct and impacted by procurement? Savings
projects can be defined and tracked in
indirect costs involved in
any way you decide with Savings
acquiring and operating a Program Management. Addressing
product or system over its TCO savings through procurement can
lifetime. be a great way to demonstrate
broader procurement value.
Unlike hard savings, this savings
method can impact multiple upstream Note: while these savings types aren’t
and downstream costs. Therefore, it is often tied to bonuses and reward
more holistic and requires more systems, they should be considered if
implementation to achieve. the goal is to expand Procurement’s
Common cost elements include savings contribution. Let’s now
support services, transportation, address some of the activities that
insurance, maintenance, repairs, and tackle TCO savings.
recycling.

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 TCO Savings
Operational costs and
delivery performance Sievo Tip

Proper procurement planning helps With Sievo’s Delivery

reduce costs by ensuring the best use Performance, it is also possible to
of administrative resources. These share the reports with your key
include tracking delivery performance, suppliers to let them know how
optimizing buffer stocks, and inventory you see their performance and
levels. Delivery performance measures help them perform even better.
the delivery accuracy (on time and in
full) and delivery quality (no returns
necessary, no mistakes).

The more delivery mistakes, the higher

frequent and similar orders, can save
the costs for returns and re-orders.
many wasted human hours. This is why
Poor planning leads to expensive
trends such as predictive ordering
emergency procurement actions and
have become a key development in
high transport costs. By streamlining
purchasing practices.8 Improving
the internal P2P processes, whether
forecasting accuracy and mitigating
automated or not, you can reduce
overpaying for rush delivery or
transactional costs and additional
emergency substitutes for out-of-stock
documentation.
materials can also drive savings. There
are many implications to productivity
Productivity improvements, including higher
improvements efficiency, reduced labor hours, and
more for less!

Productivity improvements address

the speed and efficiency of your
Insourcing/ outsourcing
procurement organization and your
The make-or-buy decision-making asks
suppliers’ impacts on costs.
whether it’s cheaper to produce a
Continuous improvement of
good or service internally or continue
production and processes should be
sourcing it. Sometimes insourcing
vested in company culture.
results in lower TCO compared to
Streamlining ordering, especially
previously outsourced activities.

8 Zagorin, E. (2022). Why predictive procurement is already THE supply chain trend of 2022,
Spend Matters.

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 TCO Savings
Insourcing is the practice of using own specifications and packaging are often
personnel or other resources to based on supplier proposals or set
accomplish a previously outsourced with one particular supplier or brand in
task. mind. If one material component
becomes increasingly expensive,
Outsourcing is a strategy through procurement can suggest finding a
which non-core activities or functions substitute.
are transferred to specialized external
providers. It is especially suited to This requires a good stakeholder
indirect procurement categories such relationship with the
as facilities management, security, product/engineering department and
transportation, and logistics, but also an understanding of what brings value.
for non-critical procurement activities This proactive savings method puts
too. The cost reduction benefits of procurement in a strategic position.
outsourcing some non-critical Requirements based on expected
procurement activities are: performance or outcome allow for
increased competition by a broader
o Lower costs due to the outsource range of suppliers.
partner’s economies of scale by
aggregating customers’
requirements
o Outsourcing low value/high volume
purchases free up expensive internal
resources
o Access to global expertise and
market knowledge in categories
where there is little in-house
capacity or experience
o Specialists manage time-consuming
negotiations and contracting

Re-specification

With re-specification savings,

procurement should ask: do we need
this product or service? Once that is
settled, analyze the extent of the need
and, on that basis, review the
specifications or design. Product

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Working
capital
optimization

Sievo payment process analytics

enables you to spot improvement
potential and take action to improve
your working capital.”

Saana Kivimaa
Product Manager,
Savings Lifecycle
 Working capital
optimization

Trade Inventory Cash and bank Trade payables

receivables balance

Procurement savings can be achieved There are times when additional

by freeing up cash on hand or working working capital must be found to fund
capital. Working capital is the money obligations to suppliers, employees, or
used in day-to-day trading operations other third parties while waiting for
in your business. Working capital payments from customers. So,
optimization means optimizing the consideration of all these components
balance between assets and liabilities can avoid less than ideal cash flow
and effectively managing cash flow to hiccups.
meet a company’s short-term
operating costs and debt obligations. Sievo has all the tools you need to
optimize cash flow, from Payment
The components of working capital Terms Scenarios to Purchase Order
are trade receivables, inventory, cash Analytics. These are the best ways to
and bank balances, and trade achieve procurement savings through
payables. One of an organization’s working capital optimization: payment
primary obligations is to pay suppliers’ term optimization, reducing inventory
invoices on time, but there is more to carrying costs, and currency
it than that. An organization must also optimization.
consider new incoming receivables,
the appropriate inventory level, and
the cash balance to optimize working
capital. The efficient management of
these components ensures any
business's profitability and smooth
running.

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 Working capital
optimization
Payment term benefit most from negotiating better
terms without introducing risk.
optimization

Payment terms are expressed as a

time interval when full payment is due. Sievo Tip
Optimizing payment terms affects cash
flow, profitability, sales growth, credit,
and supply risk. There are several With Sievo's Payment Terms
methods to go about optimization module, the most promising
through payment terms: opportunities for savings can be
identified or different scenarios
o negotiating longer payment terms can be simulated, where the
with their suppliers potential for renegotiation can be
o implementing shorter payment seen. Procurement teams can
terms for their customers evolve from a cost-saving
o creating incentives for early function to a cash flow-
payments, and generating function by better
o applying invoice financing methods. managing payment arrangements
with suppliers.
Pay attention to prices and their
validity, though: suppliers may
propose price increases to
compensate for later payments. Reduce inventory
Performing detailed analysis through
carrying costs
procurement software on payment
terms allows companies to streamline Keeping inventory overhead low
and harmonize their policy within the through just-in-time logistics methods
procure to pay (P2P) process. Doing a can be a solid choice for achieving
“what if” analysis can establish the savings. From the financial
financial effect, for example, when perspective, you would like to keep
terms of Net 30 are changed to Net inventories low and regularly monitor
60. Procurement teams can identify the value of the stock holdings.
supplier relationships that would

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 Working capital
optimization

Bridge the gap between procurement and finance and prove realized savings

This way, your cash is not lying on the Currency risk comes about when
warehouse shelves at a cost per exchange rates must be considered in
square meter. Just in time (JIT) purchasing. It is good practice to have
strategy may be optimal for your cash clauses that allow for opting out of an
flow, but Procurement’s role is to agreement, for instance, when
understand the needs of stakeholders currency movement changes up to 5%.
as well as how stock-outs affect
operational realities. Stock-outs and A Currency Performance Dashboard
emergency orders may become gives a good overview of spend
costly. distribution in different currencies and
helps you recognize which categories
Currency optimization or suppliers are purchased using other
currencies. You gain transparency on
foreign currency purchases, such as
Taking advantage of currency changes foreign exchange risks.
proactively is a great way to benefit
from currency rate changes. You can
make considerable savings with big
one-off purchases by agreeing on
optimal currency with the supplier.

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Spend under
management

Indirect spend often has a widespread

group of stakeholders who have an
impact on spend decisions, so
visibility is a must to maintain
compliance.”

Moramay Barinoff
Product Manager
Spend
 Spend under
management
Spend under management is the Top 10 Reported causes
amount of spend managed by
procurement out of total company of maverick spend by
spend. Targeting areas of unmanaged end-users
spend is one way procurement leaders Source: The Hackett Group9
can deliver value and maximize
savings. Unmanaged spend is that 1 Lack of self-service/ guided
portion of impactable spend that is buying tools
not currently under the control, or
direct influence, of procurement. It is 2 Resistance to behavioral change
spending that occurs outside of the despite official policies and
defined procurement cycle and procedures
policies. These categories of spend
may have been untouched or avoided 3 Non-compliant mentality
due to other priorities or perceived
difficulties. Lack of visibility to these 4 Processes are complex or
spend areas could be the reason. require training to follow

Leading enterprises want to follow 5 No catalog of goods and

their spend under management to services available for purchase
harness these benefits and avoid the
so-called maverick spending. Maverick 6 No access to marketplaces for
spend is spend which does not follow ad-hoc purchases
company purchasing policies.
Minimizing maverick spending is about 7 Lack of communication and
getting those better prices and terms purchase-to-pay policy
you have negotiated and ensuring
legal and CSR compliance through 8 Lack of high-touch assistance
approved suppliers. The percentage of when needed
spend impacted is a key performance
indicator (KPI) used as one of many 9 Policy requiring purchase orders
measures of procurement success. to be used for every purchase
Unmanaged spend can only be
addressed if it is visible. 10 Inability to filter categories
based on user profile/ corporate
role
9 Basware (2018), Perception vs. Reality: a Report on
Maverick Spend

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 Spend under
management
Maverick spend Tail Spend
Tail spend in procurement is the
Maverick spending refers to
amount an organization spends on
unauthorized purchasing outside
purchases that make up approximately
preferred suppliers and negotiated
80% of transactions but cover only
contracts. It is also sometimes called
20% of total spend. Tail spend can
rogue spending, off-contract spend, or
include spot or one-off purchases,
buying from non-preferred suppliers.
purchases outside preferred supplier
Across all types of organizations, there
contracts, or low-value purchases that
is a wide range of between 25% - 80%
bypass the agreed procurement
of total spend that has been attributed
processes. The biggest challenge in
to maverick spend. It can account for a
managing it is the lack of data
large percentage of all purchases.
visibility. There are many causes of tail
Without a centralized purchase-to-pay
spend: multiple in-house or
(P2P) procurement process, it can be a
proprietary systems in use,
significant impediment to cost savings
departments or divisions working in
initiatives. Maverick spending means
silos, poor supplier master data, and
not benefitting from the agreements
decentralized purchasing activities.
and price discounts you worked hard
Transparency to even the smallest
to negotiate. These purchases may not
spend items enables you to improve
all be intentional; some may be
the coverage of spend under
genuine mistakes or lack of
management systematically.
knowledge. In the best-case scenario,
maverick spend is minor leakage from
negotiated supplier contracts. At its Centralizing procurement
worst, it is uncontrolled, rebellious
buying. Visibility from spend analysis In a decentralized procurement
will highlight this unchecked spending. structure, the areas of opportunity for
Then, controls such as e-catalogs and savings are not visible. The chance of
purchase requisitions can be duplication of purchases and maverick
implemented to reduce maverick spending is high even if the global
spending. procurement organization is center-
led. Centralizing procurement enables
a unified global sourcing strategy.

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 Spend under
management
However, implementing a spend
analysis tool globally can offer many of
Supplier relationship
the same benefits. A rationalized management - the
supplier database leads to increased
competition among suppliers and
gainsharing approach
reduced supply costs.
Supplier relationship management
(SRM) is a systematic approach to
Category structure developing business relationships,
steering the realization of desired
objectives, and actively managing
The main objective of category
costs. Working with your key suppliers
management is to group and manage
transparently and collaboratively
each type of expenditure holistically
ensures both can benefit from cost
through the entire procurement
efficiencies.
lifecycle. Allocating spend consistently
Gainsharing in procurement is a
into categories makes the data easier
system of management in which
to navigate, interpret, and understand.
procurement seeks performance
Category structures and taxation
improvement and cost efficiencies by
should be revised frequently to
motivating and involving its suppliers
account for market dynamics. Total
and partners. Gainsharing means
spend on a commodity or service can
sharing the wins essentially. This could
be leveraged to offer larger volumes
mean a % portion of identified savings
or scope to key suppliers. When
or a one-off bonus for the supplier.
organizations can prioritize their top
After all, the supplier has the best
spend categories, it helps them
visibility and understanding of its cost
identify and forecast savings
structure.
opportunities. By drilling into their
spend data, procurement professionals
also gain a deeper understanding of
their spend categories.

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Soft
Savings

Procurement should be tracking both

hard savings and soft savings to
capture and communicate the total
value delivered to the business, even if
it might not be recognized by
Finance.”

Saana Kivimaa
Product Manager,
Savings Lifecycle
 Soft savings
Soft savings are hard Cost avoidance
to measure, but an Cost avoidance means the difference
incredibly valuable between the lower cost and the cost
that would have been otherwise
savings method. Soft realized if the cost avoidance actions
had not occurred. Such activities can
savings are simply best be negotiating proposed price
practices for increases, preventing out-of-pocket
repair expenses with extended
procurement and warranties, or sourcing a more suitable
alternative for a product that has
should be part of every increased in cost due to labor cost
person’s toolkit. They changes. Cost avoidance is often
referred to as soft savings.
are “soft” because they
don’t show up on the Risk management
balance sheet Risk management is a broad strategy
impacting EBITDA. often managed at the corporate level.
The role of risk management within
procurement means ensuring that the
proper management controls are in
place. The dependence on a sole
supplier for a critical item or service is
one of the most significant risks in
procurement, and there should always
be a mitigation plan.

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 Soft savings
Procurement value Mitigating runaway savings requires a
systematic approach to savings
creation pipeline and contract management.
That’s why cost-avoiding CPOs pursue
In essence, procurement value various initiatives in risk management,
creation means creating more business sourcing, forecasting, supplier
value with the same cost. relationship management, and more to
Procurement, sourcing, and harness and secure savings from
negotiation competence directly multiple angles.
impact improving return on
investment (ROI). Simply put, you get
more with the same money.
Systematic supplier relationship
management drives cost management,
continuous improvement, sustainable
business conduct, and innovations.
Contract management and proper
execution save you from value
leakage.

Reducing value leakage

For many CPOs, value leakage is a big

concern. Value leakage means the
difference between identified savings
potential and actual realized savings.
The realized savings depend on any
change in the level of business activity
and stakeholder compliance with the
contract. Value leakage can be caused
by suboptimal design, poor savings
measurement, weak adoption, poor
change management, and inefficient
execution of the contract. The factors
outside your control impact cost level,
including changes in raw commodity
prices, currency fluctuations, and labor
cost index level.

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Savings
calculations

At Sievo, everything starts from Spend

Analytics. In the journey from savings
idea to cash, spend analytics is the
first step to identifying opportunities
and risks.”

Moramay Barinoff
Product Manager
Spend
 Procurement & Finance
The role of procurement is Critical reasons for misalignment and
conflict between Procurement and
still misunderstood in many Finance include: lack of common
businesses. It is not about language and terminology when
getting the lowest price talking about savings; measuring only
contracted savings rather than all the
today but achieving value steps of the savings lifecycle model;
for money from its supply and focusing only on proactive savings
base over the long term. projects while neglecting external
factors.

There is often a mismatch between Too often, Procurement and Finance

Procurement’s claimed savings and work in silos. Organizations are not
what Finance sees when it studies the aware of their overall external spend
profit and loss (P&L) account. The role and the potential for cost reductions.
of procurement is to spend the Poor historical spend analysis and
organization’s money to the best insufficient attention to supplier
advantage. Business value for money management lead to ineffective
can be delivered with a wide range of sourcing and money wasted.
activities and processes that
procurement is specialized in. It’s up Suppose there is a significant gap
to everyone in the profession to help between actual and budgeted
Finance understand the broader spending. In that case, you could ask
purpose of procurement and how collaboratively the budget was
appreciate how it maintains and constructed, how careful the initial
improves business performance. assumptions were, and how actively
the budget was updated to consider
Financial leaders are concerned about possible market changes. These
profitability, working capital, and cash mismatches could be partly avoided
flow. They want to see that the cost with active dialogue, expectations
savings delivered by procurement are management, and higher levels of
measured and reported accurately so transparency. However, the level of
that they will have a positive impact collaboration between finance and
on the bottom line. Budget procurement varies in organizations.
accountability requires attention to When the Procurement function
detail and setting realistic reports directly to the CFO, agreeing
expectations. on the budgeting and savings
calculation principles is relatively
straightforward.

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 Improving collaboration:
Guiding principles
Start with open Establish common
communication language

The relationship between the CFO and A standard savings language for
CPO can be one of the most powerful Procurement and Finance is a crucial step
alliances in an organization. Some people to building trust and accountability
say that Procurement and Finance should among stakeholders and end-users. As
be like a married couple, where they partners, they need to agree on
support one another through good and measuring and reporting cost savings
bad times. Finance and Procurement before initiating cost reduction programs.
teams need to be in constant Procurement people have been
communication in all types of traditionally poor at promoting a positive
organizations at all levels. Opening up the image of their achievements, and they can
communication lines can have a powerful do more to build their internal reputation.
effect on the company’s success, leading On the other hand, finance professionals
to more savings, improved demand need to communicate their strategic goals
planning, and a better understanding of to procurement to ensure alignment. Cost
the supplier base. savings may be the primary aim of
Procurement, but managing risk, building
Identify savings ideas supplier relationships, and streamlining
processes are common ground with
through spend analysis Finance. When Finance focuses only on
budgets and hard cost reduction, they can
drive procurement into behavior that does
Finance cannot adequately plan and not deliver user satisfaction.
prepare budgets without analyzing and
understanding the external spend.
Procurement can provide valuable insights
on opportunities for improvement and
predictability with this historical
transaction information.

© Sievo 31
 Aligning on savings
calculations

Our view on how procurement savings can be processed and verified,

from “ideas to cash”

There is no right or wrong method for These are the type of questions to ask:
calculating savings, but these three
tips will clear up some potential o Do you set baselines by category or
challenges. commodity or by cost center?
o What is the baseline for savings you
Formalize and agree on will calculate savings against?
o Are you considering verified market
savings methodology cost changes?
o Are you considering cost avoidance
as saving or only focusing on hard
Successful savings calculation starts
savings?
with deciding on standard methods.
o Over what period will you measure
Regardless of the saving type, it’s
and report savings? Monthly or
essential to continuously align the
quarterly, or annually?
savings with finance so that savings
o For multi-disciplinary sourcing
can be identified in the financial
projects, who gets to claim the
statements, the way the savings will
savings?
be visible.

© Sievo 32
 Aligning on savings
calculations

The Sievo Savings Bridge methodology10

Sievo uses the “SavingBridge” model straightforward: invoices are tracked

to connect Procurement and Finance for an agreed period after a contract
thinking. Savings Bridge links this has been executed to validate exactly
year’s spending to last year so that how much money has been saved.
finance can also easily distinguish the However, many well-negotiated cost
savings figures from the numbers. savings may be lost during a contract
External factors such as currencies and due to value leakage. Actual purchases
commodity prices are considered to need to be monitored via paid
see the actual procurement invoices to ensure the accuracy of
performance year over year. cost-saving claims.

Tracking Realized Savings Savings tracking can be complex if

there is a large amount of data and
multiple rules applied to different
At what point is it fair to claim a types of savings. Sievo is fully
procurement saving? The concept equipped to give you an edge on
behind realized savings tracking is realizing savings.

10 Explained in detail in Sievo’s full-length eBook Procurement Loves Finance, available for free
on sievo.com.

© Sievo 33
 Aligning on savings
calculations
Reporting realized
savings accurately Aligning on savings
between Procurement
Reporting to Finance should focus on the & Finance:
hard savings, which can be proven and
eventually find their way into the accounts
Best practices
and impact the balance sheet and future
budgeting. When reporting savings to
other stakeholders and showcasing their 1 Agree on a common language and
impact on the business, including those terminology when talking about
soft savings achieved through cost savings
avoidance initiatives is also possible. Even 2 Practice open communication
if Finance might not recognize it,
Procurement should track both hard and 3 Provide insights for savings
soft savings types to capture and opportunities through spend analysis
communicate the total value delivered to 4 Formalize the savings
the business. methodologies and calculations
It is crucial to track planned vs. actual 5 Track realized savings
savings from a procurement perspective. 6 Showcase the impact of savings
What matters for your business’s bottom initiatives on the business through
line is that identified savings opportunities reporting
through spend analysis are translated into
reduced expenses. This information helps
with future resource planning as well as
performance management. Understanding
savings achieved by the cost center or
division highlights where the savings
contributions are coming from.

© Sievo 34
 “Combining Savings Program
Conclusion
Management (SPM) and Realized
Savings Management (RSM) in Sievo
gives you a great way to identify the
sources of value leakage: what are
the actual categories and
organizations this is coming from,
and in some cases, you can track it
to the project level. We provide
efficient tools of identifying those
and point customers to the right
place.”

Atro Ranta-Aho
VP, Value Enablement (Customer Success).
 Word from the authors
Cost efficiency and planning for cost level while the market is
inflation and market volatility will be experiencing dramatic changes and
strongly represented on the inflation, avoiding cost increases to
procurement agenda and priorities. their best ability. Company reward
42% of companies expect higher price programs are designed to motivate
and cost volatility to be an enduring and retain those most successful in
characteristic of the post-pandemic their efforts and perform well.
business environment.11
Rewarding your procurement team
In our experiences implementing based on hard savings only can be
procurement analytics in hundreds of seen as discouraging or even unfair
enterprise companies at Sievo, we’ve between the categories with varying
seen all sorts of procurement savings market conditions when several
initiatives. For some, there are still elements are simply out of
untouched areas of spend with low- Procurement control. Top performing
hanging savings potential to harness teams are built on open and fair
simply by improving spend visibility reward mechanisms. As Procurement
and identifying potential with relevant practices evolve and data fuel more
spend taxonomy. Even for those with mature savings methods, we
proper spend reporting in place, encourage companies to continue
identifying savings opportunities will developing their reward programs to
be more challenging. Hence, the reflect valuable contributions better.
automation of routine procurement
activities and enabling professionals to We hope you have enjoyed this
invest their time in preventive work as Ultimate Cost Savings Guide! Our goal
well as turning insights into action will was to provide the most
be key success factors. However, comprehensive guide on different
reward systems may not always be savings types in procurement, how to
geared towards the cost avoidance communicate them, and recognize the
and procurement value adds we’ve valuable contributions that come in
discussed. many forms. We welcome praise,
critique, suggestions, and comments.
It's good to remember that savings
tracking directly influences the
professionals who work to make them
happen. Procurement is often
negotiating hard to keep the current

11 The Hackett Group (2022), 2022 Procurement Agenda: Key Issues to Address and Critical
Actions to Succeed

© Sievo 36
 About the authors

(Left to right)

Saana Kivimaa Product Manager, Savings Lifecycle

Saana leads the development of Sievo's Savings Lifecycle solution that enables enterprises to
track savings opportunities and initiatives. She has a background in IT and product
development and holds a master's degree in Industrial Engineering and Management from
Aalto University.

Moramay Barinoff Product Manager, Spend

Moramay has an IT background and 10 years of experience working with different stages of
the P2P process and Analytics. She is responsible for driving the strategy and development
of Spend Analytics solutions in Sievo.

(Not pictured)

Atro Ranta-aho VP, Value Enablement (Customer Success)

Atro has worked with large enterprises in Europe and the Americas. He is experienced in
Procurement Practices with a focus on Analytics and is passionate about helping in
procurement organizations gain maturity with advanced software solutions.

© Sievo 37
 Endnotes
1. Hackett Group (2022), 2022 Procurement Agenda: Key Issues to Address and Critical
Actions to Succeed, https://www.thehackettgroup.com/2022-procurement-key-
issues-2201/

2. The Hackett Group (2021), 2021 Key Issues

https://thehackettgroup.imagerelay.com/share/1bf830f25d234cbc896826accac4d5d5

3. Deloitte (2021), Global CPO Survey 10-year lookback

https://www2.deloitte.com/content/dam/Deloitte/us/Documents/process-and-
operations/us-global-cpo-survey-10-year-lookback.pdf

4. Hackett Group (2022), 2022 Procurement Agenda: Key Issues to Address and Critical
Actions to Succeed, https://www.thehackettgroup.com/2022-procurement-key-
issues-2201/

5. Green, W. (2021), Cost-cutting knocked off CPO priority top spot, CIPS.
https://www.cips.org/supply-management/news/2021/april/cost-cutting-knocked-
off-cpo-priority-top-spot/

6. Internal estimates based on customer data.

7. Huber, B. (2017), Cost Avoidance vs Hard Savings: How to Better Measure

Procurement’s Impact, GEP https://www.gep.com/white-papers/cost-avoidance-vs-
hard-savings-measuring-procurement-impact

8. Zagorin, E. (2022). Why predictive procurement is already THE supply chain trend of
2022. https://spendmatters.com/2022/02/04/why-predictive-procurement-is-
already-the-supply-chain-trend-of-2022/

9. Basware (2018), Perception vs. Reality: a Report on Maverick Spend.

10. Explained in detail in Sievo’s full-length eBook Procurement Loves Finance, available
for free on sievo.com. https://hub.sievo.com/resources/procurement-loves-finance

11. See 1.

© Sievo 38
About Sievo
The procurement
analytics solution
for data-driven
enterprises.
We’re big enough to deliver,
small enough to care.

We master the art of extracting, classifying and

enriching data across all ERPs, procurement systems
and external data sources. Since our founding in
2003, we’ve pushed the boundaries of spend
analytics for two decades – and we’re just getting
started. Sievo’s SaaS procurement analytics solutions
include: Spend Analytics, Savings Lifecycle, Contract
Analytics, Materials Forecasting, and CO2 Analytics.
Spend Matters “50 to Know” Procurement Vendor
since 2017.

Learn more at sievo.com.