Spend Matters Procurement Predictions: Five Scenarios For the Next Decade (Part 6 – A)

See previous posts in this series here:
Part 1
Part 2
Part 3
Part 4-A
Part 4-B

The fifth and final scenario in our procurement predictions for the next decade is certainly the most dismal on our list. Simply put, this scenario posits that Core Procurement is Absorbed. It's something we've been thinking about at Spend Matters for quite some time, and one could argue that it's happening already. Consider, for example, core procurement's absorption in such areas as corporate Six Sigma or operations functions taking on supplier quality and development initiatives. Or look at how IT is often increasingly controlling larger amounts of spend that go beyond just software and hardware (e.g., broader BPO, call centers, etc.) These examples, alone, suggest that procurement is already having less and less of a role in core quality, buying and category management areas in certain organizations.

On the periphery of procurement, supply chain and supplier risk has grown as a major focus area in recent years. Yet if you look at which function is in charge, it's not always who you think may be best suited to it. Rather than relying on procurement leadership to tackle risk, supply chain/operations and finance groups are often taking on point responsibility for the issue. More often than not, Spend Matters sees finance take over supply risk, using former procurement resources that it believes are up to the task. Looked at more broadly, this may not be that surprising, given that for a good number of procurement organizations, direct spend, which is often the focus of supply risk programs, has never fully transitioned into the procurement or supply management function. It's stayed with the business.

Finance is also likely to step up to the plate in the area of supply risk because of credit line concerns and banking relationships -- inclusive of understanding overall supply chain banking exposure -- is a top priority for finance leaders (CFOs, treasury, internal audit, etc.) For example, such a reporting and control relationship can allow finance to spot banking-related risk factors that strategic suppliers might face and to step in and allow early payment financing in markets (e.g., Spain, Italy, Greece) where lending restrictions and the cost of capital is rising for certain or all tiers of suppliers.

Looking forward, it's clear that finance has the most to lose by not absorbing more of the procurement function. There are numerous reasons one could argue for finance to take responsibility for the function, starting with savings implementation vs. identification. In general, most companies have done a lousy job at implementing all of the hard-fought savings that procurement has battled to identify. But who is better than finance, which controls budgeting, to take a leadership role in driving implemented results? The success of savings implementation will also benefit finance in other areas, by generally providing greater visibility to forecasting earnings and mid-term cash flow based on receivables and other balance sheet impacting items (e.g., forward hedges that do not qualify for hedge accounting).

While we're on the topic of working capital management, it makes perfect sense for finance to take greater control of P2P initiatives as well, given the many levers such programs can have (when successfully) implemented at carefully managing overall spending and demand. For example, during an economic downturn, rather than eliminate new hardware purchases or impose blanket travel restrictions entirely across the broader company or P&L, a finance organization with tight P2P controls may carefully and swiftly tailor programs to only implement non-revenue generating functions and individuals.

But perhaps the biggest reason procurement will be absorbed by other areas of the business (especially finance) is that it has proven itself inadequate in speaking the language of business. Indeed, how often do you hear procurement refer to the margin, gross profit, EBITDA or OIBDA impact of their initiatives? How often does procurement talk about the tax, duty or VAT implications of a particular type of transaction or stockholding decision on a global basis? The answer in both cases is not enough. And for this reason alone, in an increasingly interconnected global business environment where capital and cash is likely to prove king in the next decade, we think that there is more than enough early evidence to suggest that procurement's influence may be declining rather than increasing inside many companies today.

- Jason Busch

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