Savings Is a Lie

"Earlier in my career, I reported two point four million dollars in procurement savings. Then my CFO asked me to show her where that number appeared on the balance sheet. She wasn't being dismissive. She was being precise. And the honest answer changed how I measure everything."

In this episode, I break down why "savings" as procurement traditionally reports it is structurally misleading, why chasing it distorts behavior, and what to measure instead. I introduce Total Value Contribution (TVC), the two-pillar framework I actually report to my COO, and Procurement ROI, the metric that proves a good procurement function more than pays for itself.

This one is for the CFOs and CEOs. But if you're a supplier still leading every pitch with price, you need to hear this too.

In this episode:

• Why Procurement's savings numbers rarely reconcile to the financial statements
• Three ways the savings obsession backfires on organizations
• Total Value Contribution: Hard Savings and Value, explained
• Procurement ROI: the 3x metric that reframes procurement from cost center to investment
• What account executives get wrong when they pitch on price alone

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New episodes every Monday. 

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Website: https://procurexcellence.com 

Email: robert@procurexcellence.com 

Topics covered: vendor proposals, procurement rejection, discovery process, risk management, mission-driven purchasing, stakeholder alignment, supplier relationships

Transcript

SPEAKER_00 0:01

Earlier in my career, I saved an organization$2.4 million. At least that's what the report said.$2.4 million in documented cost savings, negotiated rate reductions, competitive sourcing wins, contract consolidations. It was all there line by line in the annual procurement performance summary that I presented to the CFO. And when I finished walking through the numbers, the CFO looked at me and said, That's great, Robert. So where is the two point four million? I paused. Because she wasn't being dismissive, but rather she was being precise. She was asking me to show her where the number appeared on the balance sheet, in the budget, in the actual financial statements of the organization. And the honest answer was it didn't. Not directly. Not in any place she could point to and say, there it is. That moment changed how I think about the most sacred metric in procurement. And that's why I'm making this episode. Because savings, as procurement traditionally measures it, is a lie. Not a malicious lie, not a deliberate deception, but a structural one. A metric that sounds precise and looks impressive and obscures more than it reveals. If you're a CFO, a CEO, a COO, or a board member who's been evaluating your procurement function based on how much they saved this year, I want to challenge you to reconsider what you're actually measuring, what behavior that measurement is driving, and whether there's a better way. Let me start with the problem. The way procurement calculates savings is in most organizations fundamentally disconnected from how finance measures financial performance. Here's how it typically works. A supplier quotes you one hundred thousand dollars. Your procurement team negotiates it down to eighty five thousand. Procurement reports fifteen thousand dollars in savings. Makes sense on the surface. But if you ask yourself, did the organization's expenses actually decrease by fifteen thousand dollars? Almost never. Because the baseline, that original hundred thousand, was the supplier's opening ask. It wasn't what the organization had budgeted, it wasn't what we spent last year. It's a number the supplier invented as a starting point for negotiations. And now, procurement is measuring its performance against the supplier's first offer. That's kind of like a car buyer saying that they saved ten thousand dollars because the sticker price was forty and they paid thirty. You didn't save ten thousand dollars, you spent thirty thousand dollars. The question is whether thirty thousand is the right number or the right price for what you got. Now procurement professionals hearing this might push back. They'll say, hey, we also track cost avoidance. We track year over year rate reductions. We benchmark against the market. And yes, that is true. Some organizations have sophisticated savings methodologies. But even the best ones share a common flaw. They measure procurement's value primarily through the lens of cost reduction. And cost reduction, as a primary metric, distorts behavior in ways that can actually hurt the organization. Let me show you what I mean with three examples. In the first example, a procurement team at a healthcare nonprofit was under pressure to show strong savings numbers for the fiscal year. They found an opportunity to renegotiate a contract with their document management supplier. The incumbent was reliable, implementations had gone smoothly, the relationship was strong, but a competitor came in at fifteen percent lower on price. The procurement team ran a competitive process and awarded the contract to the lower cost supplier, and reported the savings. On paper, it looked like a win. In practice, though, the migration took four months longer than it planned. Staff had to be retrained. There were compatibility issues with existing systems that required IT to allocate additional resources they hadn't even budgeted for. And the new supplier's customer support was so poor that the operations team started routing complaints through the procurement office. By the end of the first year, the total cost of switching, including the disruption, the productivity loss, the unplanned IT spend, and the management time consumed exceeded the savings by a factor of two. But the savings number was still on the board. Nobody went back and adjusted it, because the savings methodologies almost never account for switching costs, implementation risk, or operational disruption. They measured the deal. They don't measure the outcome. In a second example, a nonprofit was negotiating a multi-year agreement with a professional services firm. The procurement team pushed hard on the rate reductions and got an hourly rate down by twelve percent from the prior contract. That's significant savings, and they reported it proudly. But here's what actually happened. The supplier facing compressed margins staffed the engagement with less experienced consultants, in other words, the B team. The quality of work declined, the internal team spent more time reviewing and correcting the deliverables, the project took longer, and within eighteen months the organization brought in a second firm to supplement the work the first firm was undelivering on, the total spend in that category actually increased, even though the per unit cost went down. That's the savings paradox. You can reduce the rate and increase the cost. You can win the negotiation and lose the outcome. And if the only metric your leadership team is watching is the negotiated savings number, nobody catches it until the budget review. And a final example, and this one is subtler. A procurement team was evaluated annually on total savings generated. The target was 5% of addressable spend. This is not unlike a lot of organizations. That target shaped every decision they made. They prioritized categories where the savings were easy to document, commodity purchases, renewals with clear rate benchmarks, anything with a competitive market. Meanwhile, the categories where procurement could have added the most strategic value, complex technology implementations, sole source consulting relationships, enterprise software negotiations, those got deprioritized. Not because they didn't matter, but because the savings in those categories were harder to quantify. How do you measure the value of structuring a contract so that your data rights are protected if the supplier gets acquired? How do you measure the value of building an exit strategy into a cloud migration agreement? Those things don't fit neatly into a savings report, but they're worth far more than a 5% rate reduction on office supplies. When savings is the primary metric, procurement teams optimize for what's measurable, not what's valuable. And organizations end up with a procurement function that's very good at reducing unit costs and not very good at protecting the enterprise. So what is the alternative? What should organizations measure instead? This is where I want to introduce something I've built into my own practice, and it's a primary metric that I actually report to my COO. I call it total value contribution or TVC. Total value contribution starts from a fundamentally different premise. Instead of asking how much did we reduce cost? Instead it asks, what is the total measurable value procurement delivered to the organization this period? And it rests on two distinct pillars. The first pillar is actual savings. A lot of companies will call this hard savings. This is the traditional metric, but with a critical adjustment. It's validated by finance. If procurement says we saved two hundred thousand on a contract renewal, finance confirms that the budget or forecast reflected the higher number and was adjusted downward. If the number can't be validated against actual financial plans, it doesn't count. This is the most important discipline in the entire framework. It forces procurement to stop measuring against supplier proposals and start measuring against organizational budgets. Hard savings are real, tangible, and verifiable. They're the number that should show up on the balance sheet. And when they're reported with the level of rigor, they earn instant credibility with any CFO. The second pillar is value. Most organizations call this soft savings. And I understand why, but I don't like that term. Because it implies the contribution is somewhere less real. It's not. It's just harder to trace to a single line on the P ⁇ L. Value is where procurement's full impact lives, and it takes many forms. Cost avoidance is probably the most familiar. A supplier raises their price by eight percent, we negotiate it to three percent. The avoidance is five percent of the actual contract value. That is real. But it only counts if the price increase was legitimate, meaning market driven or contractually triggered, not just the supplier testing whether we'd push back. The rigor here matters because cost avoidance is the category most prone to inflation. Every procurement team has been tempted to count a rejected price increase as savings, even when the increase was never going to stick. Then there's the value of negotiated additions. When procurement negotiated extended warranty coverage, additional training seats, or implementation support hours into a contract at no extra cost, that's value. The organization would have paid for those services otherwise. It doesn't reduce an invoice, but it reduces the next purchase order that would have covered those services separately. Every CFO understands the concept of getting more for the same dollar. That's the concept, documented and qualified, quantified. There's also consulting dollars saved through internal resources. When a stakeholder comes to procurement asking for to hire an outside firm for a project, and we connect them with an internal expertise or an existing contract that covers the scope already, those are real dollars that didn't get spent. A department was going to write a check to a consultant. Procurement found a way to solve the problem with resources the organization already owned. That's value then never appears in a traditional savings report because there's no competitive bid. There was no negotiated rate reduction. There was just a smarter way to use what we already had. And there's value also through process improvement. When procurement redesigns an intake process that cuts the requisition time in half, or consolidates suppliers in a way that reduces the number of invoices finance has to process by thirty percent, or standardizes the contract templates some legal review goes through goes from two weeks to three days, those improvements have measurable operational value. They free up time, they reduce errors, they let other departments operate more efficiently. That's not savings in the traditional sense, but any organization that ignores it is ignoring a significant part of what procurement contributes. The point of the value pillar isn't to make procurement's numbers look bigger. It's to make them look complete. Hard savings and value together tell the full story of what procurement delivered. Separately, each one is incomplete. Now, let me tell you what happened when I started reporting this way. The first reaction from our finance partners was skepticism. They were used to seeing a single savings number, a big number ideally, something they could put on the on a board report. When I came in with a framework that included value along with hard savings, the initial response was this feels soft. Can you just give us the savings number? Fair question. And here's how I answered it. I walked them through a specific contract, a multi-year technology agreement worth about one point two million annually. Under the old methodology, procurement's contribution would have been measured solely by the rate we negotiated. And the rate was good. We came in at about 7% below the prior contract. But total value contribution told a much bigger story. The rate reduction was there on the hard saving side, but we also negotiated data portability provisions that would have the save the organization an estimated three hundred thousand in migration costs if we ever needed to switch providers. We secured performance guarantees tied to service levels that in a prior contract had no enforcement mechanism. We restructured the payment terms to align with our fiscal calendar, improving cash flow timing. We built an annual rate cap that protected us from the kinds of escalation that burned the organization on similar agreement three years earlier. And we negotiated six months of additional implementation support that the supplier originally quoted at$75,000. None of that shows up as savings. All of it protects the organization. All of it has measurable or estimable value. And when the finance team saw the full picture, the response shifted from just give us the savings number to why weren't we tracking this before? That's the moment I want every CPO to be working toward. Not the moment where leadership is impressed by a big savings number. The moment where leadership understands what procurement actually does. And that brings me to the second metric that makes this framework stick. The one that answers the question every CFO is really asking. Is this department worth what it costs me? I call it procurement ROI. And it's simple. You take the total value contribution for the period and divide it by the fully loaded cost of the procurement department itself. Salaries, benefits, tools, training, everything it costs to run the function. In a well-run procurement organization, that number is generally above three to one. For every dollar the organization invests in a procurement function, procurement delivers three or more dollars in total value contribution back to the organization. Think about that from a CFO's perspective. What other department can demonstrate three times return on its operating cost? Not as a one-time project, but as a sustained, measurable annual contribution. When you frame procurement's performance that way, the conversation changes entirely. You're no longer justifying the cost center. You're demonstrating an investment with a quantifiable return. And when procurement asks for an additional headcount, or a better sourcing tool, or a seat at the strategic planning table, the business case writes itself. The question isn't whether the organization can afford to invest in procurement, it's whether it can afford not to. Because here's the uncomfortable truth that savings obsessed organizations need to hear. If the only metric you use to evaluate procurement is cost savings, then you will get a procurement team that is very good at reducing prices and very bad at everything else. You will incentivize your team to chase competitive bids on things that don't need them, and ignore the strategic work that does need them. You will reward the deal and ignore the outcome. And you will eventually find yourself in a situation where you have great rates on paper and operational problems everywhere. I've seen this pattern play out across multiple organizations, and it always follows the same trajectory. The CFO sets a savings target, procurement delivers against it, leadership feels good, and then quietly in the background, supplier relationships erode, contract risk accumulates, innovation slows because nobody is incentivized to take the time to structure a deal that enables something new. They're incentivized to negotiate it cheaper. Total value contribution or TVC and procurement ROI together break that cycle. They give procurement teams permission to spend time on the work that matters most, even when that work doesn't produce a tidy savings number. And they give leadership two clear lenses for understanding procurement's contribution. One that shows the full range of value delivered, and one that proves the function pays for itself. One more thing, and this is directed to my fellow procurement leaders. If you're going to adopt a framework like TBC, you have to be rigorous about it. The whole point is that it's more honest, transparent, than traditional savings. If you start inflating value numbers or claiming credit for things you didn't actually influence, you've just replaced one misleading metric with another. The discipline is this. Every component of total value contribution needs to be documented, defensible, and wherever possible, validated by a partner outside of procurement. Hard savings is value validated by finance. Cost avoidance is reviewed against market data. Negotiated additions is confirmed by the supplier's original quote. Process improvement is verified by the stakeholder who experienced it. When the numbers are real and the validation is cross-functional, the metric earns trust. And trust is the currency that procurement needs most. So let me bring this home with specific guidance for each audience. If you're a CFO or CEO, the next time your procurement leader presents an annual savings number, ask two questions. First, how much of this is validated against our actual budget or forecast? If the answer is less than half, you have a measurement problem. And the measurement problem is masking as a strategy problem. Your procurement team might be doing excellent work, or they might be running a cost reduction program that's disconnected from your financial reality. You can't tell the difference if the only metric you're watching is the headline savings number. Second, what is procurement ROI? Ask your CPO to show you the total value of their team delivered divided by the cost of running the department. If the answer is three to one or higher, you're looking at one of the most efficient investments in your organization. If nobody's ever calculated it, that tells you something about how the function has been positioned. Either way, the answer reframes the conversation from what did procurement save us to what is procurement worth to us? Those are very different questions. If you're a supplier or an account executive, I need you to hear this clearly. A good procurement organization is not solely concerned with cost. Some of the most important engagements I manage will never generate a single dollar of hard savings. A consulting firm that helps us to redesign a critical process, a technology partner that builds capacity we've never had before. A specialist who fills a gap that no internal resource can fill. Those engagements are pure value. And the procurement leaders who understand their craft. will recognize that and will champion it internally. So if your entire pitch is built around saving less money, you're speaking to only half of what we care about. And sometimes honestly, it's the less important half. Widen your approach. Show me how you reduce risk. Show me how you accelerate outcomes. Show me how your team's expertise means that we don't have to hire a second firm to finish what you started. Show me that you understand the difference between being the cheapest option and being the most valuable one. The procurement leaders you actually want as long-term clients are evaluating you on total value, not just your rate card. Meet us there. If you're a procurement professional, start building your case now. Even if your organization isn't ready for a framework like TBC, you can begin documenting the non-savings value you deliver on every major engagement. Track the risk provisions you negotiated. Track the operational improvements that came from supplier consolidation. Track the stakeholder feedback on deals where procurement's involvement changed the outcome. Build the evidence base so that when the conversation about metrics does happen, and it will, you're not starting from scratch. And if you're on a board of directors, especially at a nonprofit, the next time you see a procurement savings number on a board report, be curious about what's behind it. Those numbers represent real work, but they represent a fraction of the value a good procurement function delivers. Ask about risk. Ask about supplier performance. Ask about contract compliance. The answers will tell you more about whether your organization's spend is well managed than any savings figure ever could. Savings as a metric isn't useless, but it is incomplete. And incomplete metrics lead to incomplete strategies. The organizations that figure this out, that start measuring what procurement actually contributes instead of just what it costs are the ones that will get the most from a function and the people that run it. In the next episode we're tackling one of the most important and most complicated relationships in any organization. What happens when legal and procurement collide, red line wars, risk tolerance mismatches, and how two protective functions learn to protect the same thing together. Thanks for listening. I'm Robert Brindall and this has been the other side of the table