This time last year, pound sterling strength was nothing more than a pipe dream as the UK economy and its currency were still on the road to recovery. However, data showed a surge in business inward investments helped the British economy grow much quicker than expected, effectively boosting the strength of the UK currency. There are, of course, many perks that come with having a strong UK currency. To a great extent, a strengthened pound indicates a well-established and strong UK economy – much better than our G7 peers. It’s also great news for British holidaymakers who are travelling abroad. They’ll find their spending money stretches much further than in recent years.
However, not everyone gains from the strength of the pound. If a company’s accounting system is based in the UK and measured in pounds, any revenue that is in euros (or other currencies) is now less than what it would have been a year ago. The euro to pound exchange rate is exactly 6.7% weaker now than it was this time in January 2014. Furthermore, the implications of the strengthened pound have had a huge impact on the revenue of big businesses. For example, WPP, the British communications giant published a statement claiming that its billings were down by 3% to US$55 billion, but would have increased 5.7% without the effect of exchange rates.
From working with our customers, I’ve found there are four ways to mitigate the effects of the strengthened pound:
1. Buy Cheaper
Procurement professionals should be more proactive in predicting business needs and anticipating them - rather than reacting to requests as they come in. There are several ways to enable you to be more proactive and buy cheaper:
• Monitor currency fluctuations – buy in bulk when the strength of the currency your business operates in is strong;
• Buy from new markets – a successful procurement team helps its business maintain a competitive edge by extending its sourcing reach. Low Cost Country Sourcing is a highly effective way of releasing trapped cash and improving profitability;
• Supplier networks – more and more buyers are using supplier networks to meet other companies in need of the same product/service. By pooling resources together, they can afford to buy in bulk at a discounted price.
2. Encourage Supplier Innovation
A good way to start is to extend your supplier base. Increasing the number of suppliers that you invite to tender can greatly increase the quality of ideas that are brought to the table. Even better, run an eAuction. The eSourcing marketplace is expected to grow by 10% in the next year alone, and enables a collaborative working relationship between buyers and a larger (yet still relevant) selection of suppliers. Nothing increases productivity and creativity more than a little competition!
Secondly, try an outcome-driven service. This will encourage your supplier to focus on the results it achieves, rather than an input-driven service where a supplier focuses on the service it provides. So, rather than asking your supplier for what you think your business needs - let’s use pens as an example - challenge them to find something to write with as an alternative and see what solutions they can offer you. Put out the idea to the rest of your suppliers to see if they can provide it at an even more affordable price.
3. Change Management
Although this option tends to offer the lowest return on investment, it can still be a more affordable and an effective alternative to realise new savings. To manage a team or department successfully, you have to think about where procurement can change in order to drive greater value. Based on my experience with Xchanging customers, here is my advice:
• Centralise procurement activities and utilise shared services to cut costs and improve output;
• Implement open processes such as RFPs that invite solution ideas as opposed to product specifications;
• Automate your businesses procure-to-pay (P2P) cycle, you can produce quick business benefits for a relatively small investment;
• Implementing a procure-to-pay system.
4. Tail-end Spend: Next Generation Savings
Finally, most large companies realise that they should be putting a system in place to manage their low value spend because Tail-end Spend totals up to a fair amount of money and potentially a large amount of savings. In fact, inclusion of Tail-end Spend in procurement outsourcing increases savings potential by 1.5 times.
Yet it’s rare to find an organisation that has put a system in place to manage low value spend and not enough of them are taking action to manage this area or spend efficiently. Historically, procurement organisations apply the Pareto Principle where the focus is on trying to manage their strategic spend – the 80% of spend that represents around 20% of their suppliers. However, Tail-end Spend Management focuses on the 80% of suppliers that represent 20% of spend and can generate savings between 15% and 17% – the benchmark on procurement savings is around 8%. So what’s stopping you?
Ultimately, the strong sterling will have an effect on revenue if you’re headquartered here in the UK but operate in different countries, but all is not lost. Businesses must challenge their systems, which will ultimately minimise the sting of the strengthened pound. Testing your suppliers and asking what solutions they can offer will push innovation and encourage competition, meaning realised savings can still be found.