Corporate Purchasing Confidence Presents Risks for Long-term Savings, Research Warns

Report from BravoSolution indicates economic downturn has created corporate purchasing opportunities, but many focused on short-term gains while ignoring long-term concerns

Malvern, PA — April 17, 2009 — The continuing downturn in the global economy has led to a strengthening in the position of chief purchasing officers (CPOs) within their organizations, but the strategies that many are pursuing could have negative consequences over the next 12 months, according to research findings unveiled by spend management solution provider BravoSolution.

The research, conducted by independent research consultancy Loudhouse, surveyed the views of 400 CPOs and purchasing directors of large organizations across five countries (U.S., U.K., France, Spain and Italy). It indicates that 74 percent of organizations have seen an increased need for cost savings over the past 12 months, while 44 percent anticipate wider mandates for cost control and 38 percent see an increased strategic input for procurement over the next 12 months.

REACH Readiness AssessmentIn addition, 78 percent of purchasing professionals stated they have seen unexpected opportunities as a result of the economic downturn. For example, 51 percent believe they are now in a stronger negotiating position with suppliers, and 48 percent state they have more flexibility when it comes to reviewing existing contracts. Meanwhile, 40 percent also noted that cost cutting priorities have increased at the board level.

Risk Evaluation — Trouble Ahead?

There are underlying concerns that could destabilize current procurement confidence. For example, 69 percent of purchasing professionals have yet to examine the impact of the last six months on their supply management strategy, leaving them exposed to potential long-term problems. Of the 31 percent that have examined the impact of the recent economic downturn, almost three-quarters (72 percent) are introducing changes to their supplier management strategy, indicating that there is a fundamental need for purchasing professionals to evaluate the risks that recession has created if they are to effectively manage future changes.

Of those purchasing professionals that have introduced new systems and processes to their supplier management strategy over the past 12-24 months, a large proportion report a clear return on investment within six months: 41 percent have seen savings from greater supplier performance management, and 31 percent witnessed improvements from e-sourcing tools and templates, along with general process improvements.

"When costs need to be cut and supplier contracts renegotiated, it is clear that procurement can play a leading role in steering their businesses through the current economic turbulence," said Nader Sabbaghian, CEO of BravoSolution. "However, our research clearly shows that many purchasing professionals are currently following short-term strategies that could lead to long-term problems."

Short-term Distractions

Sabbaghian said that some CPOs have become distracted by these short-term strategies and have failed to evaluate the full impact that the last six months has had on their businesses. "Overlooking risk in the mid-term and lacking investment in process efficiencies, many businesses will feel pain in the next 12 months with the potential of supplier flexibility drying up," Sabbaghian said.

"Purchasing professionals find themselves in a unique position during the downturn," said Billy Hamilton-Stent, director at Loudhouse Research. "They move towards center stage within corporate strategy and are empowered as a result of supplier instability. However, this is not sustainable. Future planning, risk assessment and innovation must take precedence in the coming months if large businesses are to build sustainable purchasing strategies in leaner times."

With 40 percent of businesses agreeing that procurement is viewed as an area to invest in during the downturn, the majority of organizations may face internal budget challenges over the next 12 months. Only 12 percent of businesses expect purchasing (operational) budgets to increase in 2009 and 2010.

Evolving Business Strategies

"CPOs can deliver cost savings today by hard negotiation. However, tomorrow's efficiencies must be realized through evolving business strategies and addressing the top three procurement challenges of 'cost saving,' 'speed' and 'visibility,'" continued Sabbaghian. "Ignoring this necessity will make change all the more difficult in future, especially with purchasing departments facing the challenge of doing more with less."

In all, 52 percent of respondents felt that the economic downturn had created negative obstacles that had prevented them from achieving their procurement goals, with unstable supplier credit the biggest challenge (29 percent). Supplier bankruptcies (22 percent) and lack of negotiation confidence (10 percent) were also highlighted as areas of concern.

The research was conducted by Loudhouse Research and consisted of 400 telephone interviews with purchasing professionals in the U.K. (100), U.S. (100), France (65), Spain (65) and Italy (70). Interviews took place in February and March 2009. The minimum turnover of each organization was $250 million, and 25 percent of the sample had a turnover in excess of $1 billion. Average spend per organization was $480 million per year.