Is it time for convergence of Finance and Procurement to drive spend management projects?
The convergence of Finance and Procurement that has defined the evolution of effective spend management as a global corporate goal should have been a natural process: a meeting of similar minds and shared objectives. In practice, it has more often been a collision, sparking the spasmodically promising but rarely fulfilled realisation that more closely aligned agendas could deliver substantial benefits to the bottom-line of the business.
Strategic alignment between functions
The lack of consistent strategic alignment between these vital functions means that Procurement's potential role as a vehicle for cost saving is frequently underestimated by Finance, and undersold to budget holders across the organisation. Many CPOs now report directly to CFOs, but the relationship is still misfiring.
CPOs tend to think that big-ticket items should be the main focus of any indirect cost control strategy, and fail to realise that more efficient day-to-day spend - increased automation, a widely-adhered-to spend management policy, and improved supplier performance - is actually the key to instant and substantial savings on the bottom-line.
At the same time, CFOs are so focused on the instant hit of attention-grabbing cost-saving projects that they fail to spot Procurement's potential for delivering constant, reiterative savings through an integrated, automated spend management strategy.
Too often, their respective agendas - the CFO's short-term desire to reduce risk and liability through a more visible, streamlined purchase and supply process, and the CPO's longer-term fixation on the intricacies of best practice and supplier management policies - are allowed to drift along in parallel. As a result, they lose sight of the fact that their objectives are actually similar, if not identical.
Both sides are missing a major opportunity. Finance never moves beyond its necessary obsession with hard numbers to a closer understanding of Procurement, and may even ignore its possibilities as a cost saving centre altogether. And Procurement continues to come under increasing pressure from misaligned processes, badly conceived policies and entrenched policy evasion.
CPOs working more closely with CFOs
The solution itself is straightforward enough in theory. CFOs need to shift their focus from being pre-occupied with identifying a series of quick, cost-saving measures and realise the merits of driving ongoing cost control projects. And CPOs need to work more closely with CFOs to raise their profile within the business. They need to become more successful champions of their own contribution to the organisation's profitability, looking outwards at how their initiatives can impact directly on the bottom-line and how they can use automation to achieve tighter integration with budget holders across the business. And they need to acquaint themselves far more intimately with the heartbeat of the organisation.
This might mean translating the quality of their interaction with a number of business processes - everything from research and development, packaging and logistics to human resources, warehousing and accounts payable - into financially quantifiable benefits.
If an interaction has a price that can be reduced by improving the supporting process - through rationalising the supplier base, for example, or generating benchmarks that will help control 'maverick' spend - the Board will understand its value to the bottom-line more readily. Sitting at the CFO's right hand side, the CPO has a golden opportunity to exploit this new and relatively untapped sphere of influence.
In practice, of course, the picture is more complex and the solution will almost certainly require a more concerted and creative alliance between the two functions if it is to deliver on its promise.
To begin with, the CPO should make sure that procurement KPIs are linked to specific financial goals, and that the emphasis is on KPIs that are widely understood across the organisation: supplier performance, negotiated cost savings, volumes of purchase order and invoice transactions, for example.
This is the most obvious way for a CPO to realign their softer, process-driven, best-practice approach behind the CFO's agenda of rapidly realised financial and cost-saving benefits. By allowing Finance to help drive spend management projects, the door will be opened to a more productive and mutually trusting partnership. The CFO will see a way to improve the under-management of spend and cut out inefficient administration costs, and the CPO can deliver this while addressing their complementary agenda of reduced supplier risk, properly negotiated purchase agreements and improved supplier intelligence.
At the same time, the CPO can become the established intermediary between budget holders, negotiating with them to ensure that their interests are represented when procurement policies are defined.
As the relationship evolves, the CFO will almost certainly see the CPO as a priority port of call for short and long-term cost savings rather than merely a transactional gatekeeper. The evidence to support this will start to accumulate immediately.
The cost of supplier management
Pre-rationalisation, supplier records are usually a minefield of duplication and inconsistency - all contributing to administration costs and inefficiencies. Something as simple as creating a supplier portal could slash as much as 80% off the cost of supplier management, just by automating the appointment and list cleansing process.
For the CPO, this will be the foundation for supplier policing and performance monitoring, generating risk intelligence and an audit trail of adherence to corporate supplier policies. For the CFO it opens up the possibility of driving savings through more efficient, automated supplier relationships - by introducing direct, electronic invoicing, for example, and practically eradicating the cost and inefficiency of manual processes.
A host of further, rapid cost-saving benefits will follow, not least enterprise-wide spend management with the potential for banishing paper-based processes, enabling the real-time visibility of spending status across the organisation and the instant identification of anomalies and inefficiencies.
With automated policies in place, the CFO can drive specialist sourcing with a list of preferred suppliers and pre-negotiated terms in place, taking the Yellow Pages out of the equation and cutting the 'maverick' spender off at the pass by removing their easy option of buying a new PC from the stationery budget.
Contract overruns - widely accepted and taken for granted - could be another target as the CFO wakes up to the benefits of closer alignment with Procurement. Automation will generate timeline reports and trigger alerts that prompt contract managers to review progress well ahead of any unnecessary and costly renewal.
Technology: the primary enabler
Clearly, leading-edge technology is the primary enabler for these shifts in strategy and influence. And here, too, the CFO might need to adjust their attitude towards procurement.
With past involvement in extensive ERP implementation projects, they might consider themselves well versed in procurement technology. But the procurement module lurking dormant in the existing ERP system may not be the optimum choice.
In fact, the status quo is probably a disparate array of systems for managing the various areas of management across the organisation, rather than a specific, best-in-class platform fit for the purpose. What's required instead is a system that extends beyond fragmented supplier relationship management applications to deliver comprehensive spend analytics, derived from tight integration with relevant financial and ERP suites and supporting the arc of the source-to-settle cycle
Such a system will answer both the CFO's need for a mechanism that delivers instant cost saving, a demonstrable ROI and scope for further refinement and the CPO's desire for a vehicle that can drive evolutionary change. Again, though, it will meet their shared objectives.
And it will facilitate the necessary shifts in attitude. Armed with the intelligence generated by the system, the CFO will have a new appreciation of Procurement's strategic value to any spend management project; and the CPO can be more open to the benefits of pragmatism in supporting the CFO's quest for short and long-term efficiency gains.
Together, and united properly for the first time, they can drive the benefits of spend management projects directly to the bottom-line.