4 tips to recession-proof your category in 2023
Breaking news – supply chain disruptions are no longer the top concern of procurement pros. The bad news is inflation has taken its place, according to our our ‘Procurement Under Pressure’ Research report. The threat or promise of recession is on the horizon as well. Many companies feel like they’re rebounding from one recession to the next, with very little recovery time in between.
As the cost of commodities and finished products increases, enterprises face compromising the security of supply, and reliable and timely delivery. Enterprises must move forward amid financial and operational uncertainty, which jeopardises their ability to achieve financial targets.
According to our ‘Procurement Under Pressure’ Research report, 87% of respondents said inflation was a significant-to-severe risk to the global economy. In a recent survey in the UK, 55% of business leaders said they were under pressure to deliver annualised savings – up 10 points from the previous year. When prices for everything are trending skyward, flat costs may be the new savings KPI.
Old-school procurement practices were built on squeezing pennies out of every supplier. According to Jimmy Anklesaria, a procurement consultant, company founder, university professor and ISM Shipman Medal recipient, those days are gone for good. Given supply chain issues, pricing may not be as important as a reliable, consistent supply. The concept of leverage in the buyer-seller relationship has shifted.
“Leverage is always about power and has nothing to do with recessions or rising prices,” Anklesaria says. “Discounts off the average market prices supposedly give companies with large volumes a competitive advantage. However, supplier relationships are equally important, and I’ve seen companies with relatively minimal leverage getting better prices than those with high volumes.”
As costs fluctuate, it’s imperative that procurement work with functional leaders like IT, HR, and Finance to understand and align on the tradeoffs. For many organisations, delivery of digital initiatives is a top priority to drive revenue growth, so IT service procurement has to be a high priority. Often the CIO is willing to take a cost increase to keep the development engine running.
For example, one tactic to balance cost increases with savings may be to shift commercial models with providers – moving “run” activities into managed services while paying more to attract digital talent for “build.” This strategy requires buy-in and heavy collaboration with the business.
Another factor to consider for outsourced services and contingent labour is that hiring freezes and uncertainty tend to drive up the size of the external workforce. Think holistically about strategically shifting between hiring, outsourcing, and contract labour. This often requires breaking down the traditional silos between HR’s internal talent model and procurement-led external labour categories.
If they haven’t already, then procurement teams should shift their scorecard to focus on more than savings. Covid showed us that supply assurance could not be taken for granted, and it brought visibility to the importance of risk management and innovation within the supply base.
“If we are still being measured only by savings, we’re leaving a lot of value on the table,” Amy Fong, partner with the Everest Group says. “The wrong incentives will drive teams to disappoint our stakeholders and ultimately harm the business.”
While automation is often touted as the answer to navigating through volatility, the algorithms may ignore the value of relationships during disruptive events.
“Automation, and especially AI, is becoming increasingly important, but we should never forget the importance of personal relationships,” Anklesaria says. “In volatile markets, assurance of supply is key. Automation can help in quickly providing information about the inventory of supplies. However, automation cannot ‘jump the queue’ and get an allocation of scarce resources when there is a crisis of supply.”
In some categories, the latest cognitive procurement tools can help greatly with forecasting the impacts of price changes, negotiations, and shifting supply. Procurement should ensure their technology strategy is helping them optimise the solutions available today.
The market has come a long way in the last few years. Tools like contract performance management can also ensure service providers meet their obligations, and invoice analytics tools can watch for out-of-line charges. “Tools can help us find opportunities we may otherwise miss,” Fong says.
Services procurement faces similar inflationary challenges. In this category, the competition for talent has driven up labour costs. Providers have been requesting unprecedented mid-contract price increases since the end of 2021. Accelerated digital transformation efforts have increased the need for IT services, which means the effect is amplified on both demand and supply sides, according to Amy Fong, Everest Group.
She offered these tips for procurement to leverage to manage prices:
Action #1: Take a surgical approach to identify the “justifiable increase” in existing deals instead of a broad-brush approach.
Procurement should understand how competitive their deals are as a baseline – if you’re already paying 80th percentile rates, you’ll have better leverage than if you’re in the 20th percentile. The same applies to the wages service providers pay their staff in this competitive talent market.
Not all service areas and locations are equally impacted. For instance, offshore rates for specific advanced digital skills have increased 24% since 2017, while BPO rates have gone up only 4% in that time. If you’re working with a supplier that delivers work for both Finance and IT, you’ll want to evaluate rates role by role.
Using rate benchmarks can help ensure a fact-based discussion between buyers and suppliers. Many large contracts have benchmarking clauses where both parties have agreed to allow a third party to advise on rate adjustments based on market changes.
Action #2: Consider where more is better than fewer.
Supplier consolidation has been the primary method to leverage volumes for cost savings. However, in this market, it’s a blunt instrument that may cause more harm than good. If your suppliers are pushing for price increases and facing high attrition, it may be a good time to evaluate the portfolio.
For example, specialist IT providers may have access to the unique talent you need. The same applies to delivery locations: while the market is tight in certain popular countries like India, there are emerging markets with more long-term availability of skilled talent. Besides the cost benefits from competition, creative options to differentiate the supply base can help to balance risk and assure supply.
Action #3: Choose the most suitable approach to calculate and incorporate Cost of Living Adjustments (COLA).
These clauses used to be common in outsourcing contracts, but many procurement teams eliminated them over the last few years. That’s not always the best approach for the long term, and it could affect service levels in today’s economy.
There are a few common approaches to calculating COLA adjustments, and we most often see variable index-driven or cap-and-collar methodologies. These terms help to balance risk across both parties and adjust costs up AND down with the market. Especially important as we anticipate recessionary conditions in some markets. No one wants to be locked into higher prices when the market turns, so adding flexibility to contracts is wise. The indexes used can matter too. We generally recommend government CPI indexes over private HR consulting firm-issued anchors.
Action #4: Use FX as an ally, as high inflation is often accompanied by exchange rate depreciation.
In this case, Procurement can use foreign exchange rate fluctuations to negate some impact of COLA. For instance, recent changes in India have defrayed the effects of labour cost increases for offshore work. Category managers should pay attention to these essential indicators and refresh their cost models frequently.
Now is the opportunity for procurement to shine as we help the business to navigate cost increases during a time of uncertainty that shows no signs of letting up.
To understand more about the pressures currently facing procurement and supply chain professionals, the outlook for 2023, and what you can do to tackle these market challenges, make sure you download our ‘Procurement Under Pressure’ Research report. We teamed up with Ivalua to survey 170 procurement and supply chain leaders on the pressures and conditions they’re experiencing in 2022 and their outlook for next year. Click the link to download Procurement Under Pressure.
Read more at Procurious:
- Read our “Procurement Under Pressure” report
- How To Keep Your Career On Track During A Recession
- What are the top pressures facing procurement and supply chain in 2023?
- Five ways manufacturers can mitigate the impact of inflation
- Let’s Face It: You’re Under More Pressure Than Ever Before
- Category Management – What’s The State of Play?
- One inflation fighting innovation your company must have
- Is Inflation Killing Your Supply Chain?
- Breaking the Groundhog Day Mentality: Enabling A True Category Management Mindset
- 16 Harsh Realities To Get Used To
- Three Imperatives Of Every Successful Category Manager
- 6 Elements Of A Robust Category Management Strategy
- Overcoming the Impact of Global Inflation