Most savings in procurement come from supplier negotiations

Procurement is full of assumptions about what drives success. Some still hold true, but others can limit the value organizations create in today's complex business environment.

One of the most common myths is that the greatest savings come from supplier negotiations. While negotiations are important, they are often not where the most value is created. The bigger opportunity starts earlier, when demand is defined. End users know what they need, but they may not always specify those requirements in the most cost-effective way. As a result, unnecessary costs can become embedded in specifications and scopes of work before Procurement even engages a supplier.

According to the Procurement and Supply Chain Management Institute (PSCM), analysis across Fortune 500 organizations shows that for complex purchases, up to 18% of total cost can be unintentionally embedded at the specification stage.¹ That's far more than most organizations achieve through negotiations alone. Demand optimization therefore represents one of Procurement's largest, and most overlooked, opportunities for savings. And these savings don't replace traditional sourcing efforts. Once unnecessary costs are removed from demand, Procurement can still negotiate with suppliers to drive additional value. Organizations that want to consistently meet and exceed savings targets need to focus earlier in the process. The first step is identifying how unnecessary costs enter specifications and scopes of work, and eliminating them before they become part of the spend.

End users often take significant pride in their work, which can lead to a preference for building solutions from the ground up. After all, recognition is rarely earned by selecting from a catalogue of standard options.

However, this inclination toward customization introduces substantial cost and risk. It shifts the organization away from proven, market-tested solutions and toward unproven designs that require suppliers to deviate from established, efficient delivery models.

In many cases, these added costs do not translate into incremental value for any stakeholder, they simply create inefficiency across the system. As a result, custom solutions should be rigorously challenged. Where viable standard alternatives exist, they are typically superior: lower cost, lower risk, and significantly faster to deploy.

To mitigate risk, end users often overengineer solutions, adding complexity without delivering meaningful risk reduction. A well-known example illustrates this dynamic: the U.S. Air Force historically required weekly stripping and rewaxing of all hard floors. This approach far exceeded what was necessary to maintain performance, akin to washing a care multiple times a day. By reframing the requirement around outcomes rather than the prescribed activities, they significantly reduced service frequency and cut contract costs by 50%.²

This highlights a critical challenge: overengineering is largely invisible. When a solution performs as intended, no obvious signals indicate overdesign or overspecification. As a result, the issue rarely surfaces without deliberate intervention. Procurement is uniquely positioned to uncover these inefficiencies.

One effective approach anchors discussions on performance metrics and engages suppliers directly: given the desired outcomes, is the solution optimally designed?

This not only offers opportunities to simplify and reduce costs but also creates alignment. When suppliers help shape a more efficient approach, they are inherently more accountable to it, strengthening both commercial and delivery outcomes.

End users frequently specify features, capabilities, and components that are rarely, or never, actually required. Several factors drive this behavior, including fear of missing out, limited clarity on true requirements, a tendency toward “gold plating,” and, in some environments, the need to exhaust budgets before fiscal deadlines.

The result is systematic over-specification, with each additional feature incrementally increasing cost without a commensurate increase in value. To counter this, Procurement must anchor decision-making in outcomes.

Starting with the key performance indicators (KPIs) that define success for the purchase, teams should rigorously evaluate each requirement against its contribution to those outcomes.

• Which KPI does removing this feature impact?
• To what extent does it impact performance?

• Is this requirement necessary?
• Has the solution been overengineered?
• Does this need to be customized?
• Is there a viable standard alternative?
• What business outcome are we trying to achieve?

This is the inflection point where procurement evolves from a tactical sourcing function into a strategic driver of enterprise value. Every dollar of unnecessary cost eliminated at the demand stage delivers a full 100% savings on that cost, before negotiations even begin. These savings are then additive to any value captured through supplier negotiations. Organizations that embed this discipline do more than meet savings targets, they consistently and materially outperform them.

In our next blog, we’ll be debunking Myth #2: Cost savings achieved in negotiations are inherently parasitic.