Is it Time for the Convergence of Finance and Procurement to Drive Spend Control Projects?
Disconnect of Procurement & Finance
Procurement has emerged as a strategic function within the organisation in recent years. And whilst CPOs report to CFOs more often than not, many do not yet fully (although not openly) see Procurement’s role as a major contributor to the bottom line.
This may be because the financial stewards of the organisation are not fluent in the language of procurement or that internal finance teams are focused on the hard numbers rather than the fine art of procurement (e.g... negotiated contract savings, supplier performance, supplier enablement, or even spend under management).
The impact of this perception may cause many of the pressures currently experienced by Procurement including misaligned policies, insufficient budget and poor end-user adoption of best-value procurement practices.
Equally, the CFOs focus on headline cost initiatives in a deteriorating global economic climate such as reduction in headcount, and dismissal of procurement as a means to achieve immediate cost savings, represents a lost opportunity from more hands-on procurement initiatives.
To address this challenge is more than technology.
CPOs need to increase their profile in the organisation, especially in a climate where Return on Investment and Earnings per Share are the name of the game. CPOs are challenged to demonstrate the impact of their efforts in well understood enterprise financial terms and this isproblematic.
For example, Procurement must intersect with so many different processes across the organisation from R&D, packaging and logistics to warehousing, receipting and payment etc; making it difficult to demonstrate tangible value in financial terms e.g. putting a tag on improvements in misaligned processes.
Much of the process of getting procurement costs savings to the bottom line still involves a bit of artistry.
The first step is to ensure that Procurement KPIs are linked to financial goals. This may include areas such as negotiated cost savings, % total spend under management, supplier performance in terms of price, delivery, quality, service etc., contract compliance and requisition, PO and invoice transaction volume. All well and good however, Procurement should focus on the top few KPIs that deliver value to the enterprise without blinding the organisation in science.
In doing so, they should have in mind the drivers of a CFO and blend their procurement objectives for maximum advantage thereby removing the disconnect between the CFO’s focus of shorter achievable financial and cost benefits; and CPO’s softer process-driven, best-practice approach.
The CFO objectives are to reduce risk and liability and control spend. They want greater financial visibility of the cost pipeline, to maximise working capital management and eliminate inefficient administration overheads etc.
CPOs also have the same objectives but with a different slant on the agenda; they want to reduce supplier risk, realise value from negotiated agreements, and introduce best practice procurement initiatives. They also want to improve supplier base intelligence, enable transparent processes and reduce administration overheads etc.
Therefore, arguably the best approach is to drive Spend Control projects out of Finance with a right-hand-man CPO who is well versed in financial practices. This should be a situation where CPOs have continuous interaction with Finance and a relationship of trust with the CFO. In addition, a spirit of partnership with budget holders, to ensure spend is accessible to Procurement and that they are heavily involved in the budgetary process.
This should ensure CPOs are not lost in the intricacies of procurement as a discipline. They can tap into the CFO’s extensive sphere of influence. They can also negotiate with budget holders around topics that are close to their hearts, and in language that they understand.
In turn, Procurement can represent one of the first places CFOs can look at making cost reductions (and ongoing cost savings), which positioned correctly plays well to those active in Spend Control. For example:
Up to 80% of administration overheads can be reduced by simply automating the supplier on-boarding and cleansing process via a Supplier Portal. This also enables you to streamline supplier information management, the supplier policing and performance monitoring process and provides greater insight into supplier risk and auditability of adherence to corporate supplier guidelines.
Put bluntly, right now how much is it costing your organisation to manage a myriad of supplier relationships. Are you holding multiple inconsistent entries of the same supplier in the finance systems (e.g. BT or British Telecom)? Is spend allocated to ‘miscellaneous’ or ‘other’? Does that reflect an opportunity not only to rationalise your supplier relationships (or recruit where you are exposed to a single or sole source) but to improve your knowledge of supplier performance?
Equally, would your CFO not then want to consider how to drive savings via better interaction with suppliers, for example enabling larger more sophisticated suppliers to send invoices directly from their back-end systems, or smaller vendors to pick-up purchase orders and ‘flip’ them to send an electronic invoice via an online portal? This offers the potential to significantly reduce the time and effort spent manually re-keying paper invoices?
Other quick wins include getting a handle on spend under management; and this means enterprise wide spend management – not just core spend management that is accessible in discrete systems or spend management that is under the direct control of Procurement. (You could for example, dictate a universal ban on ‘manual’ after-the-event purchase orders. With everything accounted for, you will have an instant picture of what you are spending and drive efficiency to the heart of finance operations.)
Also getting to grips with contract information and to schedule event and timeline reporting, prompting team members to review contracts in plenty of time for contract renewals and reviews.(How many times have simple mistakes, like the overrun of a significant contract cost the business?) Equally, ensure Finance have visibility of the contracts, terms and payment schedules to benefit from the good work Procurement has done upstream.
Sourcing activity, negotiated pricing and other contractual terms is a classic big-ticket win. Hopefully, the organisation is not running riot in maverick spending and there is some form of specialist sourcing activity in place. (Picking up the Yellow Pages and ordering stationery from yet another new supplier would not be a problem if staff were using the most appropriate source from a list of preferred suppliers with negotiated terms. And the simple but costly maverick’s option of buying a PC on the stationery budget would be wiped out if everybody was compelled to follow corporate policy). Fully realising the negotiated savings may however take a little more time to filter through the process and realised on the bottom line.
The list of goes on for potential cost savings in Procurement.
Technology as an Enabler
Whichever initiative the CPO chooses to start with; leading-edge technology is however critical to address opportunities and threats facing them on their path to supporting the Finance function. Procurement is one of the few departments that have been automated.
Current disparate systems for different processes and spend categories only result in bottlenecks in visualising data and hampering the ability to leverage Spend Control and Procurement initiatives.
The resulting technology solution should also extend beyond partial supplier relationship management applications (including sourcing, contracts, and requisitioning etc.) and provide full scope with strong linkage to spend analytics, and seamless integration with existing finance and ERP suits; supporting the full cycle from sourcing to payment.
No doubt the CPO will see the new system as an enabler for evolutionary change. The CFO will see it as a mechanism for rapid cost saving with the scope for refinement once ROI has been demonstrated. However they are not mutually exclusive visions. These are merely the same objectives under the guise of slightly different agendas.