The document discusses the value of procurement and cost management in four key areas: ensuring value for money and savings, compliance, minimizing business risk, and ensuring optimal cost structure and maximizing share price. It provides benchmarks showing that organizations with mature procurement teams generate significant savings. Additionally, maintaining margins through cost management is important for share price, and leading companies clearly communicate margin targets to investors and link procurement's role in achieving those targets.

1. Value of Procurement and Cost
Management
4C Associates

2. Value of Procurement and Cost Management
The value of Procurement and cost management falls into four main areas.
1. Ensuring value for money and savings delivered to the business
1. A good team should be able to deliver incremental savings of between 3 and 10 times their cost
2. Ensuring that the prices are value for money
3. Ensuring that the service is specified well and fit for purpose
2. Ensuring Compliance, procurement should ensure that all of your suppliers are compliant with relevant
legislation including:
1. Tax
2. Bribery and corruption
3. Health and safety
4. Ethics and child labour
3. Minimising business risk
1. Ensuring liability for problems is documented and clear
2. Ensuring the supplier base has the appropriate flexibility, for example termination
3. Ensuring continuity of supply where required
4. Identifying and elimination of other risks
4. Ensuring optimal cost structure and maximising share price
1. Margin is a key driver of share price and good procurement can help manage margin
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3. High level benchmarks
Organisations with mature purchasing organisations have a spend per person in their
procurement team between £18m and £25m and generate savings of between £0.5m and
£2.0m per person
Average company spend per Average savings per person in
person in procurement (£m) procurement (£m)
30 2.0
25
1.5
20
15 1.0
10
0.5
5
0 0.0
1 2 3 4 5 1 2 3 4 5
Benchmark Company Benchmark Company
Source: 4C Procurement survey
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4. Impact of Cost Management/Procurement on
share price
• 4C research has shown that there is a strong collation between margin and PE ratio (e.g share price)
- Increasing margin increases PE ratio, this is seen both across companies and in time series data for
companies
- There is a disproportionate increase in PE ratio for the highest value company in the sector
• Maintaining margin is therefore a critical component of maintaining share price, being able to increase or
maintain margin will have more of an impact on share price than simply the expected increase in profit.
• There is also the risk that expansion, if it reduces margin, will not increase overall share price, margin
must be maintained, also if margin drops below the level of competitors this will have a disproportionate
impact on value
• A focus of procurement on maintaining margin will therefore be high value to the company.
• In addition, communicating margin or cost targets to the market has been shown to have a positive
impact on share price.
- For example BG Group, have ‘Top Quartile Costs’ as a strategic objective
- AstraZeneca communicates a margin target and then gives detailed updates on how it is meeting
these objectives
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5. Relationship between margin and share price :
High Street Gaming example
There is a strong correlation between margin and share price…
Among competitors at a point in time… ..and for an individual company over time
PE Ratio and Margin PE Ratio and Margin
2010 2007-2010
25 25
20 20
15 Paddy Power
15
PE PE
ratio ratio Ladbrokes
10 10 William Hill
William Hill
Paddy Power
5 5
Ladbrokes
0 0
0% 10% 20% 30% 0 20 40
Margin Margin
Procurement and cost management is a key lever to managing value
Source 4C research and analysis
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6. Market Communication
Leading companies are setting clear cost or margin targets to the market in investor
presentations, then link these back to procurement and cost management. There is
evidence that this approach is rewarded with a higher share price
BG Group AstraZeneca
• BG Group, a FTSE 100, oil and gas • AstraZeneca, a pharmaceuticals
exploration company, sets and measures a company, has ‘Business Shape’ as one of its
‘Top quartile cost’ objective as one of its four strategic objectives. The key Shape
strategic objectives. objective is a core operating margin
• They are able to demonstrate clearly measure
demonstrate meeting this objective through • AstraZeneca provides detail in its investor
an output based benchmarking approach presentation and also in Q&A on its
procurement activity
4C Research and analysis 6