Tackling Inflation in Corporate & Professional Services: Proven Procurement Strategies for Success

Understanding the Impact of Inflation on Wages and Procurement

The data indicates that wage growth is outpacing general inflation, which suggests several key points:

1. Employment and labor competition remain strong, even with higher interest rates implemented to combat inflation.

2. Wage growth and general inflation are inextricably linked. As inflation rises, purchasing power decreases, forcing businesses to pay labor more. A competitive labor market pressures firms to raise prices as these businesses now must cover increased operating costs.

3. Wage growth trends continue to suggest moderate wage growth through 2024. People-intensive services, such as corporate and professional outsourced services, will continue to experience upward pricing pressures for both established and new customers.

In a healthy economy, inflation is not a growth reducer. While high inflation and wage growth can indicate pricing pressures, low inflation rates are less detrimental. As economist Dean Baker opines, ‘Moderate inflation—in the range of 2-4%—can stimulate spending and boost demand and productivity in an economic downturn.” It is when inflation surpasses wage growth that it may signal economic struggle.

Adopting Strategic Procurement Approaches

Given the macroeconomic trends, inflation will likely remain 2.5-3%, and wage growth will be above 3-5% in 2024. To mitigate the impacts of service providers’ upward pricing pressures, consider the approaches below for your company:

1. Collect data:

   Conduct a deep dive into your company services spend to clearly see where costs are increasing year-over-year and which categories are most affected by cost increase pressures.

2. Make immediate adjustments:

   Make swift adjustments to procurement processes and policies, consider renegotiating critical contracts, explore alternative sources of supply, and optimize sourcing projects.

3. Negotiate improved price protection:

   Identify contracts lacking price protection clauses and negotiate to include these clauses. If you’re negotiating after-the-fact, you may not get everything you want in the price protection clause. However, something around capping cost-of-living adjustments would be a great start. Insist on these price protections—from the beginning— when negotiating new contracts.

4. Implement price-hedging techniques:

   Use forward contracts and options to lock prices for critical commodities. This can protect against sudden price spikes.

5. Invest in the future:

   Strengthen your procurement processes for the long-term by investing in technology, data analytics, and supplier relationships.

6. Seek supplier transparency:

   Ask suppliers to justify price increases. It’s more appropriate to apply adjustments to a supplier’s true input costs than an adjustment to a total price.

7. Get creative:

   Consider alternatives to price increases, such as bartering reference calls or speaking at vendor conferences.

8. Stay current with economic indicators:

   Leverage Consumer Price Index (CPI), Employment Cost Index (ECI), and Producer Price Index (PPI) in all your negotiations.

9. Proactively communicate the potential impact of these increases:

   Forecast and communicate potential price increases to leadership for better budgeting.

10. Rethink supplier relationships:

    Transform supplier relationships into partnerships, collaborating on joint cost-saving initiatives, exploring alternative materials, and negotiating more favorable terms.

Implementing Long-term Strategic Procurement Actions to Combat Inflation

From a long-term, strategic approach, companies can take several actions to reduce the impact of future inflationary pressures:

1. Diversify and strengthen supply chain:

   Identify alternative suppliers for critical services, conduct supply chain risk assessments, and create business continuity plans.

2. Focus on strategic pricing:

   Treat your suppliers as business partners to find new ways to grow the relationship, resulting in better pricing and negotiation leverage, as well as feedback on ways to improve the service.

3. Invest in efficiency-boosting technology adoption:

   Encourage providers to leverage technologies like Artificial Intelligence (AI) for repetitive tasks, questioning their current and future technology investments.

4. Renegotiate supplier contracts:

   Negotiate during the contract term, preferably before the contract anniversary, to reduce stakeholder pressure of not being covered for the service.

5. Streamline product or service offerings:

   Continually evaluate your service portfolio to determine what can and cannot be offloaded to a service provider.

Building Budget Flexibility in Procurement for Inflation Mitigation

Procurement and business lines should collaborate on multiple budget scenarios, helping determine the best cost options without impacting service quality. There isn’t one magic strategy that can work for all companies. Many companies use a mixture of the above methods. The most successful enterprises mitigate price pressure risks by partnering with the correct suppliers, maintaining clear spend visibility, accurately forecasting, and establishing strong executive-level guidelines. Staying on top of market trends, being agile, and analyzing spend data are the other essential elements of a successful inflation mitigation strategy.

As you incorporate these strategies, discuss with incumbent and incoming vendors how they are incorporating technologies such as AI, machine learning, and other automated capabilities to reduce labor demand and, consequently, pricing and inflationary pressures. Key questions to ask your vendors include:

1. Technology utilization:

   How do they plan to utilize cutting-edge technologies to reduce labor components?

2. Implementation timeline:

   When do they plan on implementing this technology for your needs?

3. Technology investments:

   What are the vendor’s current and future technology investments?

4. Technology partnerships:

   Are they partnering or developing the technology in-house?

With tactful and deft negotiation, procurement teams can minimize the impact of inflation and future-proof their spending outcomes. Redefining the value proposition with your suppliers presents new opportunities to save costs and mitigate inflationary price increases. Reach out to us today to discuss how we can help support these negotiations!

We invite you to join the LinkedIn discussion. Let’s connect and keep the conversation going!