Managing your cost base

This imbalance has compelled senior leadership teams to make difficult decisions to ensure their organisation’s sustainability.

One effective strategy to manage expenses is to review and strengthen your organisation’s procurement controls. A robust procurement and tendering control framework is essential for managing costs and securing good value for money.

Our audits of numerous organisations reveal that cost management audits—focusing on contract management, procurement, and tender processes—are critical areas for review. High-impact recommendations in these areas have proven to help clients effectively manage their cost base.

Supporting organisational growth

Effective cost management is essential for the sustainability and growth of any organisation. Failure to manage your procurement, tendering or contract management processes can expose the organisation to a variety of risks which can undermine operational efficiencies, financial stability, and competitive advantage.

Some key risks associated with not managing procurement and contract renewals effectively include:

• Increased cost base from uncompetitive pricing.
• Poor standards of goods and services.
• Contractual disputes.
• Lack of alignment with organisational goals.
• Reduced competitive advantage.
• Financial risk leading to budget overruns or cashflow issues.

Some common reasons why organisations do not go out to procurement, or have constant review of existing contract engagements, include:

• Lack of awareness and understanding or no policy on procurement and effective contract management benefits.
• Time consuming and complexity of the process.
• Resource constraints.
• Good relations with existing suppliers or supplier dependence.
• Multiple purchase orders raised below the procurement threshold.
• Lack of data analytics and ineffective communication.

While there are numerous reasons why organisations might not undertake procurement or cost base checks, addressing these issues is crucial for operational efficiency, cost savings, and risk management.

Managing your cost base

To effectively manage the cost base, including existing contract commitments, organisations should implement a comprehensive set of controls. These controls ensure transparency, accountability, efficiency, and continuous improvement in procurement and cost management processes. Here are some key questions to consider:

• Does your organisation have an up to date procurement and contract management policy?
• Does your supplier get evaluated on a regular basis?
• Do your contract agreements have performance metrics to monitor supplier performance and quality?
• Does your organisation have a preferred supplier list?
• Is your approved supplier list market tested regularly for quality and price?
• Does your organisation have training and regular awareness on procurement and contract management requirements?
• Has there been data analytics on your purchase ledger to assess compliance with procurement and contract management policy? (Data analytics refers to looking at spend per supplier in a 12 month period and confirming compliance)
• Is there budget and actual monitoring of cost, and are overspends investigated without delay?

Asking these questions internally can provide an assessment on an organisation’s current cost management control framework. Effective cost base management not only strengthens financial performance but also supports long-term strategic goals and competitive advantage.

To find out how we can help with your procurement control framework processes, contact Rakesh Vaitha, Director and Head of Risk Assurance & Advisory Services.