Friday Rant: When Finance Takes Over Procurement

In my spring 2010 "predictions" conference presentation (which I've now given almost half a dozen times), one of the scenarios I posit for the future of procurement in the next five years is that finance will take a much more active stance and roll within the procurement function. I don't think I'm alone in this thinking. At Ariba LIVE this week, I saw continued messaging towards finance professionals as well as significant main-stage and track emphasis on both working capital management and the intersection of invoicing, supplier management and procurement. But what might a resurgence of finance involvement in procurement look like? And why will finance take a more active role, if not from a direct reporting perspective, a functional and process one?

For one, if you look at research reports from The Big Five, Hackett, McKinsey and others, it's pretty clear that managing volatility (e.g., demand, commodity, currency, banking) is a top concern for both CFOs and treasurers. Moreover, the intersection of these areas falls squarely on the supply side of the business as much as the buy-side. Today, far too few procurement organizations have proven themselves to be effective managers of volatility. Given this, I think it's fairly clear that we'll see finance get more involved in overall supply risk and volatility management. In addition, finance organizations have begun to realize that they're better at forecasting sales -- that's right, revenue that they haven't necessarily already sold or booked -- than earnings and mid-term cash flow in their business. Hackett has some great data on this, and I'd suggest you contact them directly if you're curious for the exact numbers. Regardless, it's clear that CFOs need procurement to forecast payments and related / potential liabilities that much more effectively.

In addition, credit lines remain tight for many businesses -- especially in the middle market -- and managing banking relationships, not to mention understanding overall supply chain banking-related exposure, is growing in priority levels. Yet few procurement organizations (without finance involvement) have the ability to tackle supply risk related to supplier capital and banking challenges, let alone the insights into how their own organization's working capital management strategies might impact supplier relationships, payment terms, etc. in the coming quarters and years.

Along a similar vein, I highly suspect that P2P will strike back in a major way in the coming years, as finance gets more involved in working with procurement and IT to select technologies that close the working capital loop around contracting, requisitioning, invoice management and cash/treasury. Early generation P2P environments and the core capabilities of ERP provider today, even within procurement, simply don't afford the type of visibility companies need in this area. Moreover, banks can't provide it either, even with their own supply chain finance capabilities (at least not as a total solution tied to eProcurement and broader supplier management programs).

The last reason that I predict finance will continue to involve themselves more in our business is that cost containment is a major issue that is not going away. And in general, procurement organizations still don't do a good enough job at translating results into the context of overall impact on margin, gross profit, EBITDA, OIBDA, RONA, ROIC, etc. As long as a translator is needed, I think it's a pretty sure bet that finance is going to mind the supply-side house more closely.

- Jason Busch

Discuss this:

Your email address will not be published. Required fields are marked *