Procurement teams report savings every quarter, and every quarter the CFO asks the same question: if we saved 20 million, why is it not in the margin? The question is fair, and the answer is rarely that the savings were invented. It is that a negotiated price is the start of a chain, and value leaks at every link between the negotiating table and the general ledger.

From negotiated to realised

A typical year for a company with 600 million of addressable spend: buyers negotiate 20 million of savings against the previous prices. Following those savings through to the P&L shows where they go.

From 20 million of negotiated savings to 9 million realised in the P&L: savings lost to contracts not implemented, off-contract spend, lower volumes, specification changes and budgets that re-spend the savings. Illustrative company.
  • Not implemented (−3.0): the new price never reaches the purchase order, because the contract was not loaded into the ERP or the old catalogue is still in use.
  • Off-contract spend (−2.5): users keep buying from the previous supplier or from whoever answers the phone. This is "maverick" spend, and it typically runs at 10% to 20% of a category.
  • Volume (−2.0): the saving was calculated on last year's volume; activity fell, and so did the absolute saving. This is a real effect, not a loss, but it must be shown separately.
  • Specification creep (−1.5): a cheaper part is replaced within months by a "better" one at the old price.
  • Budget re-spend (−2.0): the saving lowers the actual cost of a cost centre, which then spends the difference on something else before the year ends.

Less than half of the negotiated value reaches the margin. Most of the leakage is not a procurement failure but a governance one: nobody owns the path from the contract to the ledger.

Close the loop in the budget

  1. Agree the baseline with finance before the negotiation. Price, volume and specification, signed off, so that the saving is measured the same way by both functions.
  2. Report price and volume separately. The price effect (old price minus new price, times actual volume) is procurement's result; the volume effect belongs to the business.
  3. Take the saving out of the budget. Validated savings reduce the budget of the cost centre that benefits. That single step stops most of the re-spending.
  4. Track compliance monthly. The share of spend on contract, by category and by business unit, is the indicator that predicts whether next year's savings will arrive.

Not every category deserves a price negotiation

The second reason savings disappoint is that the same tool is used for every category. Peter Kraljic's matrix, first published in Harvard Business Review in 1983 and still the most used segmentation in purchasing, classifies categories by their impact on profit and by the risk of their supply. Each quadrant calls for a different strategy.

Spend categories positioned by supply risk and profit impact, with bubbles sized by annual spend: strategic, leverage, bottleneck and non-critical quadrants. Illustrative company.
  • Leverage (high impact, low risk): packaging, logistics. Competitive tenders and hard negotiation; this is where price savings come from.
  • Strategic (high impact, high risk): steel, energy. Long-term partnerships, joint cost reduction, hedging. Squeezing price here can cost far more in supply security than it saves.
  • Bottleneck (low impact, high risk): specialty chemicals, spare parts. Secure supply: safety stock, second sources, redesign to standard parts.
  • Non-critical (low impact, low risk): office supplies, travel. Reduce the cost of buying: catalogues, cards, automation.
BS

Bartor S.

Founder

All insights