The Hidden Costs of Cost Management

Adam Walker
Adam Walker
February 7, 2023
August 19, 2022
min read
The Hidden Costs of Cost Management

The predominant decentralized model of enterprise procurement and spend management is rife with hidden costs, and drains organizations of millions of dollars each year. But a new generation of forward-thinking procurement teams are using platforms like Tonkean to create delightful employee purchasing experiences and expose opportunities to streamline their processes.

Decentralized and unmanaged procurement processes are silent killers for procurement teams.

For example, software purchases made in silos and without the involvement of procurement slowly create loads of operational debt and incur lots of intangible costs that are not typically accounted for when estimating procurement expenses.

The good news is, this often undervalued expense can be easily avoided. In fact, reducing it even stands as an opportunity to significantly improve the internal buying experience for employees at your organization.

But to improve the procurement process, you need to understand it. So, what is decentralized procurement, and where is most prevalent?

Decentralized, ineffective procurement is most commonly found in small or early-stage organizations where there is no centrally managed procurement function. These are organizations where procurement activities such as software purchases are made in isolation and led by the business stakeholder. One issue with this is that kind of buyer often approaches procurement without a strategic perspective or broader consideration for organizational needs.

But that’s only the beginning of the issue. As organizations grow and evolve, their software consumption increases, and over time becomes a substantial cost center for the organization. This has started happening even faster thanks to the shift to remote working, which has increased the consumption of SaaS dramatically, and in turn further complicated procurement. (Most organizations have by now amassed large portfolios of applications and tools, all purchased by various stakeholders to enable business continuity.)

As all this has occurred, the need for centralized, cost-effective, and more strategic procurement operations that adequately address the many procurement needs of the organization has only increased further. Today, it’s veritably paramount.

Failing to improve your procurement operations can have dynamically damaging effects. When different business groups make uncoordinated purchases of multiple comparable applications, it creates redundancy. Often, software that was purchased is no longer being used (and still being paid for) as the business sponsor has left the organization or the original business needs have changed.

Inadequate purchasing processes also create an unpleasant employee experience. Employees typically make purchases infrequently and are reluctant to engage with a procurement function as the process is intimidating, not accessible, overly complicated, convoluted and unaligned with their business needs. (Which is a shame, because improving the employee experience is an opportunity to increase employee retention and galvanize company culture.)

What are the risks of a poorly designed procurement operation?

Ultimately the outcomes lead to a bad employee experience, increased expenses, and regulatory compliance risk. Let’s dive into some of the pains of decentralized procurement:

  • Inexperienced buyers: Procurement leaders need to be mindful that most buyers at the organization are inexperienced and make infrequent purchases. Often these buyers will operate impulsively (and naively), opening up the business to risks that are not optimal for the organization.
  • Purchasing leverage: As buyers operate in silos, making purchases within the context of their own individual or team needs, multiple comparable purchases are made in parallel. This is harmful to the purchasing leverage of the organization as consolidating purchases from across business functions can serve as a strong bargaining tool for price negotiations.
  • Surplus and redundancy: Organizations lack visibility into existing software purchases that have already been made, which can lead to duplication or inefficient selection of providers. Often there are vendors that have already been vetted and provide other services that are not being leveraged. The purchasing process can be expedited by working with a vendor that your organization already has a relationship with.
  • Negative employee experience: Often there isn’t a clear entry point to the procurement process. Buyers do not know which stakeholders and processes in the organization need to be engaged. Navigating this uncertainty can result in resentment towards the organization and reduce employee engagement.
  • Suboptimal procurement resource investment: Lack of good process visibility and accessibility increases the risk that resource investment into the purchasing effort will not be fruitful and create value. Buyers are invested in the evaluation of solutions, without vetting basic prerequisites, in terms of organizational policy around budget and vendor standards.

What needs to be done?

Procurement operations should be made to revolve around the employee experience.

We can learn from a similar shift in customer experience. In most industries, companies that pursued excellence in their customer experience achieved a strategic advantage over their competitors, as their customers proved more inclined to engage consistently with the business over time.

The same principles can be applied internally within organizations to create an operational advantage by applying an employee-obsessed mindset and allowing the employee experience to become a driver for good operational design. The outcome is increased employee engagement, higher satisfaction, and increased adoption of procurement processes.

Every policy and process needs to be designed around human behavior. When a process doesn’t account for human nature, people simply don’t adopt it. Instead, they ignore or find ways to work around the process, even if it has valuable objectives, and even if the process was initially designed to serve them. Such processes end up archived as documentation, and create little impact or value.

Consider, for example, government processes and policies, which although often well-intentioned, end up proving in practice notoriously slow to adapt and detached from the real needs of the people. Policies that were designed to protect people often end up becoming archived documentation with no real impact or value. One excellent example are the privacy processes that were formulated in the 60s. As human behavior changed and data became predominantly digital, the process was not adapted and ultimately they became useless. There was no practical way of complying with the regulations, and so service providers largely ignored them, at least until new policies were introduced that aligned with modern data standards.

So what can procurement teams do to make the procurement process more human-centric—and in turn improve their procurement operations as well as the employee experience?

You should start by capitalizing on low-hanging fruit that any procurement team can easily reach:

  • Seamless intake: It’s important that procurement workflows meet employees within the tools they are already using. Empower employees to kick off the procurement process from any communication channel they choose, including Email, chat applications such as MS Teams and Slack, or from a Procurement portal. That said, ensure that all those channels are monitored and converge to a single point on the receiving side so process managers can maintain a high standard of manageability and responsiveness.
  • Transparent and available process documentation: The process must be easily accessible and documented clearly. Education and knowledge transfer are key to the success of employee purchasing initiatives. Make sure key information such as vendor prerequisites, budget requirements, key stakeholders and estimated timelines are all included in your documentation.
  • Visibility into status and progress: Don’t expect employees to chase down information or work hard to support the process. The process needs to be proactive with updates and status information so that it is simple for the employee to be reactive and support the process without additional cognitive load required on their part.
  • Structured information collection: Information collection is an important part of the procurement process. Make sure that relevant information is formalized and structured as part of the intake process, use well-designed forms and allow users to access their submissions and update information at any point during the process.
  • Early and automated approvals: Make sure to reject unlikely purchases with a low chance of success during the early stages of the procurement process. Automating approval weeds out purchases that are easily identified as non-compliant and allows employees to focus their resources on purchases with a high chance of success, improving the employee experience and saving time for all the parties involved.

A technology partner you can rely on.

Another potentially key step is to partner with a technology provider that can help facilitate all of the above through an intuitive, accessible, and powerful intake, triage, and coordination platform. Tonkean has been in operations for many years, serving customers such as Google, Netflix, Lyft and Hyatt, and is now focused on revolutionizing the procurement space. Our vision is to enable procurement teams to shift to an “Employee first” mindset by putting the employee experience at the heart of the procurement process. Tonkean is all about automating the mundane, asking for less investment from employees, while delivering human workers more value.

We’ve recently put together supplementary resources to help procurement professionals get started improving their procurement processes. The Tonkean Procurement Blueprint takes operational best practices from across multiple industries and ingratiates them into the whole procurement lifecycle from Intake -> Triage -> Coordination (ITC).

Tonkean converges intake from your organization’s communication channels, such as Email, Teams, Slack, Google Chat, Web forms, allows you to make information transparent through custom procurement portals and applications, and empowers you to centrally manage and consolidate your purchase approvals based on intelligent policies and custom-made business logic and request-handling—all with zero code!

Learn more about the Tonkean Blueprint for Procurement Teams.

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