The Good Spending

The comparison—where a $100K sales win gets a $10K bonus, but saving $100K on a procurement contract gets nothing—might seem like a compelling argument for unfairness at first glance. However, this comparison oversimplifies the complex roles of sales and procurement teams. Let’s unpack this misconception from different angles. Different Objectives and Impact While it’s tempting to see a $100K sales win and a $100K procurement savings as equivalent financial achievements, their impact on business objectives diverges. Sales teams are revenue-generating and focus on top-line growth—bringing money into the business. A $100K contract directly boosts revenue, essential for business growth, performance metrics, and investor confidence. This tangible addition to revenue is why sales bonuses are usually tied directly to contract wins. Procurement’s role, however, centers around savings, cost efficiency, and risk management. A $100K savings may not affect revenue but enhances profitability by im...

The role of cost avoidance in procurement savings management Cost-saving has always been an essential and high-visibility priority for the procurement function.  Despite the declared accountability for efficiency and effectiveness , the cost-saving goals remain the primary procurement performance measure. Meanwhile, cost avoidance remains largely an internal KPI known to executive stakeholders but needs to be measured and reported consistently. This post will examine some essential prerequisites of cost avoidance recognition and apply the renowned economic theory to the procurement process.  Agency Theory Agency theory (or principal-agent model) is one of the building blocks of the  Theory of the Firm.   An agency relationship is created when a person (the principal) authorizes another person (the agent) to act on their behalf. Then, the firm is viewed as a set of contracts between self-interested actors seeking to maximize their personal (economic) gain....

In today’s cloud-driven environment, businesses face increasing pressure to balance performance, reliability, and cost in their cloud infrastructure.  This post will explore an example of cloud storage optimization in which a company must meet storage capacity and service level agreement (SLA) requirements while minimizing costs.  We will walk through the process step by step, including how to derive constraints and how Pareto front analysis can help visualize trade-offs between price and performance. Cloud storage optimization problem A company must combine public and private cloud storage options to meet its storage requirements, minimize costs, and ensure an SLA of at least 98%. • Public cloud: $1000 per TB/month, SLA = 95%. • Private cloud: $1400 per TB/month, SLA = 99.8%. • Total storage required: at least 700 TB. • Objective: minimize costs while achieving an overall SLA of 98% or higher. Mathematical problem formulation To solve this optimization...

In procurement, buyers are constantly faced with a variety of strategic decisions. Should you negotiate harder for lower prices, cooperate to build long-term partnerships, or optimize processes for efficiency? More importantly, how do you decide based on the risk and impact of the item being procured? While traditional procurement approaches often focus on linear strategies like negotiation or optimization, Game Theory offers a more dynamic framework for decision-making. This post will explore how Game Theory principles apply to different procurement strategies, helping buyers optimize their actions across risk and impact scenarios.  Buyer Actions and Game Theory Procurement decisions can be viewed as a series of strategic games in which both the buyer and the supplier have competing (and sometimes aligned) objectives.  The critical buyer actions— negotiate, cooperate, optimize, or terminate—all have varying payoffs based on how suppliers are likely to respond.  Let’s app...

Outsourcing contracts are all based on relationships. You cannot overestimate the value of relationships in outsourcing .  Since the contracts shape relationships between economic actors , they become the indispensable instrument of mutual trust and commitment building - if used right!    The definition of a contract A contract is a legally binding promise to act in the future , e.g., delivering goods or providing services. It is mainly required for four reasons: the geographical distance between parties makes it impossible to coincide the performance and acceptance of obligations by the parties; provision of credit by either party; risk allocation between parties; relationship-specific investments should make the exchange more profitable due to lowered costs or increased benefits. Economic exchange  is a transaction where goods or services are transferred from the provider for a return of relative value (compensation) from the receiver in a manner that advances the...