The Role of Procurement During a Recession

Posted: 07/27/2019 - 05:43
How Procurement Can Navigate a Recession

While many fundamentals suggest the U.S. economy remains healthy, there are also looming signs of a slow-down. If a recession takes place, procurement and finance professionals are likely to be the first in their organizations to perceive and deal with the impact. Suplari has conducted the study "Plans & Tactics to Recession-Proof the Enterprise: A Survey of Procurement & Finance Professionals" to give practical and proactive insights about their peers’ concerns, preparedness and coping tactics for an eventual recession or economic downturn. We've also designed part of the survey's questions to assess if a recession could impose on procurement teams to become overly focused on short term and tactical cost-savings goals

Is a recession on the horizon and are companies preparing for it?

Procurement and finance professionals are predicting a recession on the horizon. A majority (55%) of respondents believe a recession will take place within 18 months, before the end of 2020. Interestingly, the percentage is even higher (70%) when considering only the responses from executives in C-suite or VP roles. With regard to proactive preparation, an encouraging 61% of respondents demonstrated confidence in their companies’ preparedness. However, there remains an alarming 30% that feel unprepared or unaware of their organization’s ability to cope with an upcoming recession. The remaining 9%, although also feeling without preparation, simply don't foresee a recession on the horizon.

When asked about their top concerns if a recession were to occur, respondents were most likely to cite impacts that directly affect their departments, in the form of budget cuts and headcount layoffs. The next big concern is that their procurement and financial teams will be pressed by the C-suite demanding to quickly find cost savings. As a matter of fact, more companies are already focusing on cost savings this fiscal year, with 8 in 10 companies having established savings goals. Among the companies that do have savings goals, the majority aim for 5% to 14% in savings. 

Delivering Needed Cost Savings while remaining well-rounded across tactical and strategic impact 

Procurement as a function has come a long way from the days it was seen purely for its tactical and procedural contributions. Progressive leaders in procurement have built their organizations to deliver both on tactical results as well as strategic impact. That core idea was well articulated in the article "May I vent? Let's change how we talk about procurement" by Dawn Tiura, President and CEO, SIG. "Savings is not all we do," mentions Dawn in the article. "We improve service levels and quality, bring in value-added services, all while (generally) reducing total cost of ownership. But the real point is that we have the unique ability to impact not only bottom-line savings but also top-line growth. We have insight into all lines of business as they are making decisions, not in the rearview mirror. And, we have relationships with suppliers who are incented to bring innovation to us." 
When we crafted the survey, we were curious and wondered if a recession could force Procurement to overly focus on short-term tactical duties. The study results suggest that respondents can still strike a well-balanced act across operational and strategic contributions. That was reflected in these three passages in the report:
  • When asked about what typically happens to cost-savings found by procurement, 61% said that savings go straight to the bottom line. Still, an even larger number (67%) claimed the funds will be reinvested in long-term projects. And those two destinations are not even mutually exclusive, as 37% of respondents actually mentioned both.
  • Next, in the list of top concerns, respondents pointed out aspects related to those service and quality levels in Dawn's article. They pointed out the risks of supplier business continuity and solvency, and the related preparations to assess vendors and possible new suppliers, if or when needed.
  • The report also showed alignment in the answers across procurement and finance. Finance is usually perceived as strategically focused on the enterprise financial health, measured on the basis of not only savings, but also cash flow, margins, working capital and ROI of business initiatives. Procurement leaders share those imperatives. 
Putting that all together, it seems like a sound demonstration of procurement having the right plans, or at least intention, to stay well-rounded with regards to tactical and strategic focus to propel their businesses forward. 
If pressed to realize quick savings, what are the key tactics that procurement and finance professionals plan to pursue? 
According to respondents, the main “go-to” tactics or levers to optimize spend and risk will be contract renegotiation and vendor consolidation. It’s worth noting that different industry sectors ranked other preferred tactics specific to their business. The manufacturing sector, for instance, is more likely than average to delay project expenditures. Retailers, as another example, plan to further scrutinize their PO processes. Across the board, there is also large focus on avoiding maverick and bypass purchasing. 
With such high importance, it astonishes me that many companies still struggle to manage contract renewals. Large supplier bases, contracts scattered in shared folders and clunky systems are all imposing performance obstacles, highlight process inefficiencies, compliance issues and risk exposure.

When asked about categories that could get tightened in case of economic need, respondents ranked travel as the most scrutinized category. Listed next were facilities expenditures as well as office equipment and services, which did not surprise me. Companies have large amounts of dollars flowing through travel and expenses (T&E). Left unchecked, T&E programs can invite managerial concerns, and even actual cases of fraud or non-compliance.
Recommendations to Cope with a Recession 
Now is the time to examine spend categories, your supplier’s stability and upcoming contract renewals. Companies should get proactive to find spend optimization opportunities beyond the group of top suppliers alone. There is significant opportunity to also optimize tail spend and suppliers. 
The study "Plans & Tactics to Recession-Proof the Enterprise: A Survey of Procurement & Finance Professionals" is now available. Readers can join the conversation and share comments at Suplari’s LinkedIn company page.

About The Author

Alberto Sutton's picture

Alberto Sutton is SVP of Marketing at Suplari and has 20 years of multidisciplinary experience in business technology and services. Prior to Suplari , Sutton held leadership roles in marketing, product and channel management at Onvia, Pyramid Analytics, Nintex, and Microsoft. He also served as business consultant for Ernst & Young and PwC. Sutton earned his bachelor’s degree in Production Engineering from Escola Politécnica de São Paulo and holds an MBA from the Wharton School of the University of Pennsylvania.