Sachin Sharma shows how weak cost controls cost companies 5-12% of addressable spend, which hits EBITDA valuations 10-12 times harder. Disciplined negotiation and approval processes recover 2-10% of spending and prevent the cascading failures that tank customer satisfaction and referrals.
I'm sure you don't think about this when you're thinking about cost control. To understand what you're losing, you need to have a cost control process. And if you don't have a cost control process, it's just a guess. Many companies don't even know what they're losing. And here is the reason for that, right? But it shows up in not just the expenditure, it shows up in many other ways which you might not be relating to. Right? So let's talk about some of them. So obviously one thing which is you're losing is because you're not reducing or are actually negotiating your cost, so you're not effectively looking at reducing your spend, right? So that could be, you know, 2 to 5% or 2 to 10%. I would say that's a range. Right. Right out of the gate. But what we kind of see is when you don't have strong control process, right? That is a symptom of lack of processes, right? So you probably don't have a process to do something and the process is a little bit, you know, all over the place. So think about now. Let's say you are a construction company, right? And your process is not well defined in terms of how you issue your purchases, requisition process, approval process and getting a PO out, basically. Now, one way to think about that is, okay, we might be buying it at a expensive rate because nobody's looking at it. And whatever the case is, I'm just using a construction hypothetical example. I'm sure people negotiate their costs with their preferred vendors and so on, but think about the impact of it. So if you don't have a process, you could have one client getting awesome experience because their product shows up on time and the work was performed on time, on budget, right? But the second client might now have an experience where the product would never ship. You know, was we got it on time because you never issued the PO on time. Or vendor has very different, I would say very variability in terms of the shipping. Like they ship once on time, then they don't ship on time. It's very variable, right. It's not a fix. So what is the impact of that? Now you have a customer whose job is getting dragged out, so you have more resources in involved in the project, right? So you gotta finish the job. And you might have to now start getting into expediting the request, reach out to 10 people, get it from wherever you can at whatever cost you can. And you know, you have that. You know, there are certain people who might feel Like a hero at that time. Right. We save the company, we save the client and so on. But what is the impact on that? So you. Higher cost, lower satisfaction on the customer, they might not refer you again to another prospective client. So these are the factors that play out, which are very hard to quantify. So that's why I say it's a great thing to measure. But it starts with the process. Once you have a process, you can start looking at is where else it is impacting and what is the impact of not having a good process is on the rest of the things which you do. Because procurement doesn't exist in isolation. Right. It exists along with every other part of the business. It's supporting what you're doing as a company to get revenue. You don't buy just for putting shit in a warehouse. You buy it because you have a need for it. Yep. And the need is to either run the operations or it's a raw material to build something for the customer. So companies who do not have strong cost controls are losing anywhere between 5 to 12% of their addressable spend. Think about the impact on your ebitda. And if you're thinking about valuations, that is not just the ebitda, then. And right, it's like, let's say you're a software company and have a 10x valuation and you know, you basically are from. On a profit basis. Right. Or EBITDA basis also. So it's getting multiplied by 10 or 12 at least. If you save, you know, five, like a million, you actually increase your valuation of your company by 10 to 12 million. Companies who have poor cost controls are not just, you know, losing 5 to 10%, they are losing 10x or 12x of that on the valuation.
