Equivalent Revenue: “Added Value” By Another Name

Traditionally, one of the inherently daunting challenges in Procurement and Sourcing is to quantify and report on cost savings, cost avoidance and/or cost reductions, which can be collectively referred to as "added value."  One very effective way that I have been able to successfully communicate added value and metrics to many C-suite members is by positioning it in a different way. I have found that by using the terminology and calculation for “Equivalent Revenue,” it is generally better received. Since it is a much more common business term and quantification, the C-suite can relate to it and it can be directly measured against the company’s overall revenue. As such, it is more widely accepted than trying to describe such value as only cost reductions or savings. 

Perhaps most importantly, it is really as simple as taking the actual quantified “added value” and dividing that figure by the company’s overall net profit. A quick example: If the total aggregate added value amount is agreed to be $10 million, and the company’s overall net profit margin is 8%, the Equivalent Revenue needed to generate the same amount of that net profit would be $10 million divided by 8%, which equals $125M.  By representing the figures in this light, C-suite members can readily identify and appreciate how much time, effort and expense would be needed to generate the same amount of sales revenue, and therefore clearly recognize the importance of an efficient and effective Procurement and Sourcing organization. 

Of course, the main basis and key to all claimed “added value” amounts still lies predominantly within the credibility of the calculated values, so always try to have agreed upon parameters and guidelines to ensure clarity of the added value figures. In addition, the terminology and methodology of Equivalent Revenue on a conceptual level, has proven to be a positive way to further enhance Management's support for the Procurement and Sourcing function, even before providing the actual results. And at the end of the day…isn’t that what we need most to be successful?

Guest Blogger, Dave Gallaer, Head of Procurement and Sourcing, NatWest Markets/Royal Bank of Scotland Securities, Inc.

Dave is a Naval Academy graduate with an MBA in Banking and Finance and a long-distinguished career in all aspects of strategic sourcing, procurement, spend management, contract negotiations and related systems.  Dave’s prior positions include leadership roles as a US Navy Contracting Officer, and at entities such as Unisys, Pitney Bowes, Revlon and Yale University. Dave is currently the Head of Procurement and Sourcing for NatWest Markets/Royal Bank of Scotland Securities, Inc.  His experience includes the creation, transformation, and leadership of start-up and legacy purchasing groups into best practices category spend management organizations.  Dave is considered to be a trusted advisor to executive management with optimal stakeholder engagement, leadership, innovation, negotiation and team building skills.