Linking Finance and Procurement – an integrated process

Chris Doxey, Author, Internal Controls and Risk Management, Consultant and President of Doxey Inc.

Collaboration between Finance and Procurement departments leads to better savings, more informed insights and decision making, better planning and a better understanding of the supplier landscape. Though the two business functions are different, the relationship between the two is intertwined. The Procurement function is essentially how and where a company’s money is spent, according to specifications, needs and contracts. The Finance function focusses on internal controls, budgets and reporting accurate and timely financial information.

New responsibilities of each function grow with the market, recent examples being building partnerships with the CEO, CFO, and other internal stakeholders; developing local, sustainable, and ethical sources; collaborating with suppliers to create innovative products and services. All while delivering cost optimization to the organization.

The process partnership challenge
Everything about spend management (the end-to-end Source-to-Pay process) is evolving. The market continues to expand; stakeholder expectations have become more demanding. No surprise then that a procurement leader’s job becomes more difficult with every new order. Increasingly, procurement is viewed as more than a series of supply and demand transactions. The process has actually become a strategic advantage and catalyst for business growth.

Fortunately, supporting technology is keeping pace with global changes.  While there’s no shortage of disparate systems that connect specific supply chain and payments processes, there are only a handful of end-to-end spend management tools. For many organisations, the current state is a patchwork of processes, systems, and networks which actually cause friction between finance and procurement.

Establishing an end-to-end partnership
The spend management process incorporates the procurement, receiving and accounts payable functions. Implemented in finance alone will have an emphasis on financial processes. Implemented in procurement, it will focus on the purchasing and acquisition process. So, what needs to happen to drive a truly integrated and transformed process? 
  1. Functional approach: Some companies have implemented spend management strategies that functionally report to the CFO or the CPO. This structure can work as, long as common metrics and goals are established.
  2. Going virtual: Some organizations have implemented a “virtual” strategy, whereby reporting relationships don’t matter, but the behaviors focus on a common set of deliverables and key performance metrics with well-defined accountability.
  3. Internal controls: Most organizations establish internal controls for the end-to-end process because they realize that controls are not effective in a silo approach. The spend management concept ensures that dependencies and interdependencies are defined and understood since they have a tremendous impact on operating effectiveness and control.
  4. Digitizing Source-to-Pay: Often, spend management is implemented naturally as an outcome of transformation project. To implement a digitally transformed process, the stakeholders from finance and procurement need to be aligned to define and implement the solution. Many of today’s automated solutions provide new insight to data and analytics.
Achieving transformation
Contenders in today’s hyper-connected global economy need the edge that digital technology can provide. The majority of companies still tend to adopt digital technology in an ‘a la carte’ fashion which include a network here, an ERP or payables system there, resulting in a patchwork of processes. Digital transformation will need more aggressive action – supported by the finance and procurement partnership – to focus on identifying and closing process gaps and building the partnership.

There are also gaps around payments processing. Goldman Sachs identified that every new transaction requires a dozen or so unwieldy steps, causing 65 percent of CFOs to view the accounts payable process as costly and laborious. This is a driver for either establishing shared service centers or outsourcing accounts payable. Additionally, some systems automate purchase order and payment processes, but skip invoicing. In others, the payment process flows through their own ERP system, separate from both POs and invoices.

Spend management digitization helps to reduce the risk of processing duplicate invoices, paying an incorrect amount, or paying the invoice to an incorrect supplier as the same data is shared in eInvoicing and eProcurement processes.  An automated accounts payable process removes possible financial exposure for the company since invoices are paid on time impacting the accuracy of accruals.

Connecting a buyer to a supplier with purchase order to invoice conversion technology allows a buying organization to send a purchase order electronically to a supplier and then allows the selling organization to convert the purchase order into an electronic invoice. The seller can then submit the invoice immediately back to Accounts Payable. This process facilitates greater accountability and visibility to supplier data for accurate and timely decision making.

Summary
The complexity caused by isolated and siloed solutions impacts spend management in two ways:
  • There is a lack of data integrity.
  • Processes can be overly complex and redundant.
Disconnected systems and departments create an environment of chaos where there is the inability to obtain timely and accurate buyer and supplier reports and analytics. Companies can reduce this complexity by considering the recommendations made above and understanding the value of the Finance and Procurement partnership which is also critical to the success of an organization.

More from Chris Doxey
Chris explains how automation supports financial processes.