Preserving Cash and Maintaining Liquidity in the “New Normal”
As a 25-year veteran in procurement and a value consultant here at JAGGAER, Bruce Logan is well versed in strategies for reducing spend and maintaining liquidity. That’s why he recently hosted a webinar called Money in Hand: How to Adapt Promptly and Conserve Your Cash. We want to share some of the questions that he received during the webinar to give you practical knowledge for managing cash during this ongoing crisis.
How do organizations without a centralized procurement team decrease maverick spend so that they can start to conserve their cash?
That’s a great question, because with too much maverick spend you’re going to see a significant impact on liquidity. I’ve worked with a lot of organizations that don’t necessarily have a single procurement office that everything flows through. The key is being able to reach out and communicate effectively. Everyone in the organization should understand that you have negotiated prices. Be upfront and honest with your organization that one-time purchases might seem cheaper in the moment, but there are things like tiered discounts and thresholds for additional savings.
Spend under management doesn’t just save money for the procurement team, either. It helps each department stay within their budget, so it’s in their best interest, too. Clearly communicating this helps the organization see procurement less as a gatekeeper or rule enforcer, and more as a strategic partner. You want to create that unity, especially in a time like this. It’s okay to be clear about your intent and say, “Hey, we need to increase liquidity for a while. Help us out here.”
Is that also the best way to increase spend under management?
First off, it’s important to note that increasing spend under management and preventing maverick spend are related, but they’re not synonyms. In a lot of cases, procurement teams might say that they have very little maverick spend, because when they look at the spend they’re managing, most of it is going to contracted suppliers. But there could be a whole portion of spend they never even see.
Think about departments like marketing or facilities. Does marketing go through procurement every time they need to make an ad purchase or have collateral printed? Does the facilities team always go through the dedicated catalog when they need a one-time vendor or new coffee machines in the break room? At some companies, yes. But at others, that spend is completely outside of procurement’s view, so it’s not under management at all. And then you have no way of making sure it’s on contract, which, as we established, is key to maintaining liquidity.
One of my roles here at JAGGAER is doing value assessments. I dive deep into the financials of a company and find that in a lot of cases, procurement might only be managing 30% of their addressable spend. That’s a big problem. You could have every penny of that going to an on-contract vendor and you’re still missing 70% of your potential savings. You need to get involved with departments where you don’t have as much oversight. Look at your overall addressable spend and see how much of it you’re really addressing. In my experience, 60-80% of the cost of goods sold is spend. So make sure that you’re managing it.
You talked a lot about your experience with supplier negotiations. What advice would you have for the actual negotiation process itself?
Yes, negotiating rates with your suppliers will be key to your liquidity goals. First and foremost is to come armed with data. You have to have a thorough understanding of what your position is and why. But any good sales person sitting across the table from you is going to tell you they don’t believe what’s in the stack of papers you’re holding.
Try to align your negotiation strategy to the ‘low-hanging fruit’ early on in the process. Start off by agreeing on something, no matter how small. Everyone wants a win-win, so set that tone right away. Another important factor is understanding that everything has value, whether you’ve put a number on it or not. Information has value. Understand what the value of non-price point information has to you and your supplier, and then use that as a starting point to negotiate.
How can organizations take some of the techniques you’ve mentioned to maintain liquidity, like what-if scenarios or regular contract reviews, and use them as long-term strategies?
Yes, looking at contracts for things like dynamic discounting will help increase liquidity. What-if planning will help develop plans for the future. Use this event as a learning opportunity. Build the knowledge of how to do these activities. That muscle memory is important because once that fatigues, you’re starting all over again from square one. Once things stabilize a bit and you have some sense of normalcy back, take the time to strategize a little bit. How do you really use these new skills that you’ve learned and make the most of them?
There are so many different ways to look at revenue streams and expenses. If you haven’t done those things before, you probably are now because you need the cash. So some of these outside-the-box techniques are now part of your toolbox. They’re all repeatable, so take some time once things settle to examine where and when they’re best used.
How do you manage resources and split them between the short term solutions and long term planning?
A lot of procurement teams are strapped for resources. There are always too many things to do and not enough time. It’s important to be realistic about what you can accomplish. You can’t do everything at once, and you probably can’t do everything that you want to this week.
I try to view things as portions of time and really block out my schedule for specific tasks. That way you’re making some progress on everything concurrently. Block three hours on one day to focus on short-term tasks, and then two hours the next day to work on future planning.
You might find that some tasks take longer than you expected, or far less. But over time you’ll start to understand that and better predict the timelines, so you can continue to make progress. And you will get through it eventually.