Gartner for Finance Leaders

Proactive Cost
Driver Analysis in
Procurement
2 tactics for generating better cost driver
insight, faster
Getting better insight into what makes costs go up can be especially difficult
during times of uncertainty. But if procurement staff continually conduct
analysis, your company will be ready to move quickly, minimizing risk or
capitalizing on new opportunities when changes hit — at any stage of the
economic cycle.

Typically, procurement employees only Tap Unused, Low-Confidence Data for

investigate cost drivers for the most critical Hidden Insight Into Supplier Pricing
buys with the highest spend. They see these
purchases as most important to their function’s Most procurement teams use only
strategic objectives, and they don’t feel they information in which they have high
have time to carry out this process for every confidence to build cost models —
routine transaction. data verified through benchmarks, for
instance. But not being sure about
But procurement needs to cover more ground. certain pieces of intelligence (such as
A lack of understanding about the broad conflicting perspectives from subject
spectrum of buys means the team may make matter experts) doesn’t mean they’re
the wrong decisions. If procurement pushes a not useful. The key is to consider the
vendor for additional savings, for instance, the source.
supplier might trade off another critical priority
(such as quality or safety) that could harm your Procurement at one food and
business. beverage company, for instance,
gave its staff a set of guidelines on
Procurement teams must find out what how to use different information
influences costs for more than just the few most types based on the level of precision
critical buys. They can learn more — faster — (see Figure 1).
with two tactics:
Procurement leaders at this company
• For higher spending caused by didn’t leave it at that, however; they
suppliers, show employees how to use pushed the team to improve the
imperfect data — information that can accuracy of the information at Levels
provide valuable insight but that they’re 2 and 3. Employees had to put
likely neglecting because they don’t together improvement plans for those
fully trust it. drivers (see Figure 2). They could do
• For higher spending caused by the more to buttress a guess or estimate,
business, collaborate with suppliers and such as scheduling a supplier site
business partners to identify behaviors visit.
that contribute to elevated prices.

1 © 2019 Gartner, Inc. and/or its affiliates. All rights reserved.

Figure 1: Application Guidelines for Different Levels of Cost-
Driver Accuracy

How to Use When Best to Use It Why It Is Useful

Level 1: Fact Drive Always Enables staff to be prescriptive in their
discussions. interactions with business partners
and suppliers throughout the entirety
of the sourcing process
Level 2: Test data • RFXa Positions staff to test cost
Estimate hypotheses. • Negotiations assumptions with business partners
and suppliers during decision-making
• Supplier evaluations phases of the sourcing process
Level 3: Best Learn basic • Market analysis Prompts conversation that broadens
Guess information. • Supplier site visits staff understanding of cost drivers
during research phases of the
• Supplier identification sourcing process

Source: Adapted from Accuracy Co.*

a
Request for X (e.g., information, proposals)

Figure 2: Data Accuracy Improvement Plan Process

Cost Driver Summary

Before Fact: 2 Most cost drivers are either
Improvement Estimate: 4 estimates or best guesses, and staff
Plan Best Guess: 4 have low confidence.

1. What’s your plan? Data Accuracy Improvement Plan: IP

2. Are you on track? Data Accuracy Improvement Plan: Labor
3. How will you get Approach: Test data hypotheses.
Data Accuracy on track? 1. Improvement Steps:
Improvement a. Schedule a supplier site visit.
Meeting b. Compare data with past buys.
2. Timing: 3 weeks
Manager Staff
3. Contingency Plan:
a. Consider benchmarking data.
b. Seek an internal subject matter expert.

Cost Driver Summary

After Fact: 6 Most cost drivers are fact, and staff
Improvement Estimate: 3 have high confidence.
Plan Best Guess: 1

Source: Adapted from Accuracy Co.*

2 © 2019 Gartner, Inc. and/or its affiliates. All rights reserved.

Find Out What Effect the Business Has on Procurement should concentrate on the
Costs actions that will lead to the most savings.
To discover which options to home in
To determine internal stakeholders’
on, procurement staff should ask:
effects on costs, procurement leaders
should brainstorm potential issues like • How significant is the impact on
these and ask suppliers for feedback. supplier operations?
Use questions such as: • How willing or able is the business
• How do these particular situations to change the cause of this issue?
affect your work with us?
To record their answers for easy
• Are there other factors not listed comparison, staff can use a template
here that affect your costs? like the one in Figure 3.
• What changes could we make that
would reduce costs?
This white paper is adapted from an article
Then, procurement can discuss the in the Q3 2019 issue of Fi.r.st. Quarterly
impact with the business, asking Journal. Download the latest journal at
stakeholders probing questions about gartner.com/en/publications/first-journal.
what factors underlie their behavior.
That will give the function insight into
which actions it can change.

Figure 3: Internal Cost-Driver Assessment Template

How Does This Driver Influence

Internal Cost Driver Estimated Percentage of All the Sourcing Activity? What
(Examples) Internal Cost Drivers Levers Can We Pull to Manage
These Drivers?

Poor Contract
Management

No Demand Planning

Late Payment

No Audit or Control
Over Costs Charged

Contract Leakage

Other

Source: Internal Inc.*

* Pseudonym

3 © 2019 Gartner, Inc. and/or its affiliates. All rights reserved.

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