Austerity Measures: Coming to a Company Near You? by Kelly Barner

Posted on July 24, 2012


Today’s economic updates are full of sour news – we hear about faltering stability in the Euro Zone caused by high debt to GDP ratios and high rates of unemployment in Greece, Spain and Italy. North America is dealing with their own economic contraction: both the U.S. and Canada face increasing unemployment, slow job creation, and a reduction in exports due to less spending by other countries.

Many governments in Europe are considering austerity measures: reducing national debt by spending less, particularly on public services. Depending on your economic philosophy, these measures either protect the solvency and credit rating of the nation in question or they hurt populations already struggling with high rates of unemployment. Either way, the uncertainty cuts consumption across the board, bringing the hurt to B2B and B2C segments.

While these problems seem far away, we learned in 2011 that turbulence in one economy or industry – like the disruptions that resulted from the tsunami in Japan – ripples out to affect many others. If there is additional/continued economic recession, what sort of an impact will it have on procurement? Most of the negative news is specific to the public sector, but governments are huge customers of private industry. Government cuts in spending on services will affect private companies in many industries.

If companies fear the current or forecasted economic climate, they will work to minimize their debt and limit plans for future spending. In small doses, this actually creates an opportunity for procurement. We can focus on longer payment terms to increase the amount of cash on hand at any given time, and we can once again trumpet our trademark ability to negotiate transactional savings.

However, if cash hoarding and spending patterns are changed to a more significant degree, procurement will face an entirely different situation. Deep corporate spending cuts will increase the gap between negotiated and realized savings – particularly in capital expenditure categories where cancelling large construction projects or investments in infrastructure wipe out sourcing results in whole categories of spend. When you look at savings on a per-unit basis (whether a unit is an item or a service hour), not buying means not saving.

If we find ourselves in this kind of environment, I can assure you no one in finance (or anywhere else in the organization for that matter) is going to care how much savings we negotiated. They will have much bigger problems to deal with, and as a result, so will procurement. I’ve never been much of a defeatist, so I believe there are steps we can take now that will benefit us whether the coming turn is upward or downward. Timing is the key; the same action looks proactive in one setting and reactionary in another.

1. Open a collaborative dialogue with finance

The best way to find out where your company stands on big picture economic challenges is to ask someone in finance. Have the conversation about what role procurement can play in an austere spending scenario. Displaying both an interest and an awareness will start a much needed conversation between the two groups and hopefully position procurement as a trusted partner if worst case scenario plans need to be put into action.

2. Do favors for colleagues in operations

When ‘it’ hits the proverbial fan, there will be a survivalist pecking order inside the organization. Sales and operations are likely to be the last and least affected, because if they don’t get what they need, chances of recovery evaporate quickly. Finding ways to be supportive of operations now, when they don’t need it as much, will pay dividends later on as procurement is viewed as a mission critical support function to the business.

3. Start working to change procurement’s performance metrics

If your procurement group’s evaluations are based on savings, there will be no way to succeed as spending grinds to a halt. Savings will always be a part of the equation, but there are other ways to measure our impact, such as spend under management, return on investment, etc. Working to make those changes now communicates value orientation to the rest of the organization. If you wait until the savings have gone away, the move will look defensive.

Regardless of what procurement does to improve their future position, we must take the time to assess our options and do SOMETHING. The time to prepare for challenges is before they hit, because once the impact is being felt, it will be nearly impossible to hold the attention of the groups whose support we need.


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