Don’t get stung by a WASP
Spotlighting savings can shortchange your strategic sourcing efforts. Instead, focus on producing highly optimized best-value contracts that users champion, and trust that savings goals will fall in line.
Tragically, hard-dollar savings typically define the success of a strategic sourcing initiative. However, measuring and emphasizing savings can negatively impact the decisions that lead to those very savings. For example, if a strategic sourcing effort successfully delivers goods for less but falls short in meeting the core business needs of contract users, it’s unlikely that the contract will be adopted readily and that savings will be realized.
What we measure drives results. Here’s how an overemphasis on savings can play out in a strategic sourcing environment.
The charge of strategic sourcing is to maximize efficiencies and economies. But how should the resulting savings be handled? Theoretically, any endeavor resulting in operational efficiencies and economies could be translated into savings. However, most would agree that it would be largely unthinkable to effectively tax a business unit whenever a newly introduced innovation results in savings.
Even so, some believe that tying a budget cut to strategic sourcing savings is the key to reeling in overpriced off-contract purchasing. However, deploying a stick without a carrot fails to appreciate the necessity for enterprisewide buy-in of the strategic sourcing initiative. If the enterprise perceives that budget cuts are associated with strategic sourcing, you can bet that division heads will greet the initiative with rebellion and contempt. Nonetheless, to ensure that customers use strategic sourcing contracts that promise savings, it’s not uncommon for budget cuts to be issued and tied to the strategic sourcing savings.
WASP only yields a statistical projection
To account for budget cuts, procurement departments will be obligated to track savings—an effort that can be a huge drain on staff resources and budgets. Any hint of future budget cuts will prompt division heads to contest savings reports, as a weighted-average savings percent (WASP) is typically used as the basis for projecting (not accurately calculating) hard-dollar savings.
It works like this. Historical sale prices and quantities of repetitively purchased goods are extended and totaled. Using the same quantities, new contract prices also are extended and totaled. The percent difference between the two represents the WASP, which then is applied to follow-on sales to estimate the savings realized. Plus or minus a few percentage points, a WASP offers a superior alternative to analyzing every line item of every invoice of every sale to accurately report savings. Nonetheless, using WASP only yields a statistical projection—making it difficult to validate and defend the hard-dollar savings reports.
It’s important to recognize that the benefits of strategic sourcing extend beyond achieving hard-dollar savings. Strategic sourcing also promises to yield a host of efficiencies and economies that can be difficult to quantify but are meaningful just the same.
For example, a strategically sourced contract may result in a dramatic reduction of administrative overhead by streamlining transaction processes. Best-of-class terms and conditions may boost on-time deliveries and thereby minimize the cost associated with project delays. Minimizing the array of similar products being purchased by leveraging standardizations also may reduce the expense of maintaining a spare-parts inventory while reducing customer training and support cost as well. It is unlikely that such efficiencies and economies would ever materialize without the input, innovation and participation of highly energized and synergistic sourcing teams.
Culture shift is critical
To achieve breakthrough results means that the enterprise not only must support the initiative but also must be motivated to contribute—instead of just being rewarded with a budget cut. Enterprisewide buy-in is best achieved when the procurement department is viewed (justifiably) as a trusted partner instead of the scapegoat for budget cuts. Effecting an enterprisewide culture shift is an imperative that requires the successful execution of a sound change management plan, especially if budget cuts are associated with the effort.
It’s been my privilege to work for a progressive organization that tenaciously pursues sound stewardship principles and that is never satisfied with perpetuating the status quo. This was best exemplified when our agency (the Washington state Department of General Administration) spearheaded the state’s strategic sourcing initiative. In so doing, we learned that although the discipline itself is tried and true, it doesn’t adequately address the art of successfully managing the political landscape with regard to change management.
Not long ago, senior management emphasized that deep down every employee wants to be successful at his or her job. It’s been my observation that the same holds true for a strategic sourcing team. Once the Enterprise Contracting Team began harnessing this simple yet profound truth, our strategic sourcing program really gained traction.
Our Enterprise Contracting Team continually refines strategic sourcing skills, but the program plan now emphasizes collaboration and winning customer confidence and support. To that end, we hire attitude and aptitude along with an affinity for forming a consensus within a group.
We’ve discovered that only when sourcing teams are not preoccupied with budget cuts will they be best positioned to produce highly optimized best-value contracts. In such an environment, teams attain the success that they crave while contract utilization soars as these influential team members champion the resulting contracts throughout the enterprise.
This realization prompted Washington state to rethink the way that strategic sourcing success is measured.
Use adoption rate as your repellent
The term “adoption rate” is used to describe the degree by which a contract has been embraced across the enterprise. Total “contract sales” divided by total “category sales” equals percent “adoption rate.” It’s important to note that measuring adoption rate by no means minimizes an emphasis on achieving savings.
A WASP still is used and regularly updated to project aggregated enterprise savings, and analysis is conducted to quantify and document other economies and efficiencies. Various strategies are deployed as a result of ongoing feedback, analysis and research to reel in off-contract purchasing and strengthen contract appeal. Measuring overall adoption rate also is more cost-effective than producing the detailed savings reports that division heads demand and often dispute.
For a contract to be well-received, it must offer, first and foremost, the quality goods and services that satisfy the needs of contract users. Then, through the application of strategic sourcing techniques, the contract will achieve best value. Such a combination will translate into optimum contract utilization and thereby improved savings.
Alternatively, if customers elect to not use the contract, then perhaps it missed the mark on one or more of these fronts, prompting an appropriate response. Accordingly, de-emphasizing savings and measuring contract adoption rate not only promises to maximize collaboration, contribution and utilization but also savings.
Few will deny that leveraging collective buying power through the application of strategic sourcing principles promises many rewards, including savings. The reward of realizing meaningful savings is the foundation on which a strategic sourcing program is built, and a WASP offers a statistically sound tool for providing management with the savings reports that they require. However, although there is no remedy to budget cuts, associating them with strategic sourcing efforts makes little sense if the effect negatively impacts the goal of achieving savings. Therefore, if management is mulling the idea of a strategic sourcing initiative that includes budget cuts supported by a WASP, consider applying adoption rate as your repellent. Otherwise, you might get stung.
About the author
Steve Krueger, CPPB, is enterprise contracting unit manager for the state of Washington Department of General Administration. He can be reached at [email protected].
