Governance
Is Focusing on Savings the Dumbest Idea in the World?
January 24, 2017
Jordan Early
2 minutes

Jack Welch, the former CEO of General Electric (GE) is a much lauded leader. So much so that he was dubbed the Manager of the Century by Forbes Magazine. Welch is so deeply respected because he was able to deliver on analysts’ expectations and this in turn enabled him to maximise shareholder value.

Welch’s ‘management of expectation’ was uncanny. Under his reign, GE hit analysts’ forecasts to the exact penny in 41 of 46 quarters. The quarters they ‘missed’ analysts’ forecasts they beat the projection by 2 cents once, beat it 1 cent once and fell under the projection by 1 cent once and 2 cents once. Mere rounding errors.

Positioning for future success

There are two ways to look at this performance. One is to stand in awe at the accuracy and achievement of the GE team, the other is to wonder what they could have achieved if they were not bound by managing analysts’ expectations. Did they leave value on the table? Did they set the company up for the future? Or were they too focussed on short term metrics?

A quiet reminder: Since Welch’s departure from the business 60% of GE’s market capitalisation has been eroded.

So the question stands, could Welch have done more? He certainly thinks so. On March 12, 2009, he gave an interview with Francesco Guerrera of the Financial Times and reflecting on his achievements and said,

“On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company.”

Is procurement next?

A similar logic can surely be applied to the procurement cost savings paradigm. Rather than focussing on meeting this short term metric and achieving 12-month targets, we need to ask ourselves, what else can we achieve? What are the longer term benefits our corporate relationships can provide? If a supplier comes to us with an innovative idea that will have negative impact on this year’s savings figures, should we ignore it or invest in it?

The process for determining costs saving goals is more often than not straightforward. A total cost saving target is established at the beginning of year, often with little real connection to the value that gets built from this cost reduction. This target is then divided up and allocated out to teams who are expected to achieve their allocation of the cost savings pie. Too often, this target allocation is still flat, with low considerations about where the strongest and lowest value potentials sit in the supply base. This usually reverts back to achieving an x% savings with suppliers across the board.

The work that we’ve done so far is incremental but the challenge that faces the procurement function is to understand how we can multiply our impact and become more relevant to our businesses. In order to uncover the true potential of our function and start delivering a ‘return on relationship’ we need to stop talking about costs and start talking about investments. Investments in our business partners and investments in suppliers that will ensure these groups are able to positively impact our longer term success.

Welch also famously claimed that if you take care of your customers, in the long run, your profits will take care of themselves. The same surely goes for procurement based on the assumption that by looking after your relationships, your suppliers and your business partners, generating procurement value will take care of itself.

So some questions to ponder… Could working towards cost targets be narrowing your focus meaning you’re missing broader ideas that might impact the ongoing success and longevity of your business? Is your cost focus setting your businesses up for GE-like stumble? Or are you working towards strengthening your relationships both with your suppliers and your customers to ensure that you can deliver value and growth beyond the next cost savings cycle?

To learn more about Jack’s take on procurement and how you can transform your relationships to deliver business value rather than cost savings, download our Return on Relationships white paper.

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