What Does The CFO Think Of Procurement? Why Aren’t We Asking About Finance’s Impact on Procurement?!

Pay-Off

There’ve been numerous studies that have asked finance executives to rate procurement effectiveness, with a focus on the credibility of the procurement savings and whether the results are dropping to the bottom line (I even led such a study over 5 years ago). Not surprisingly, there are clearly some capability gaps here.

But, is this really the right question to be asking finance folks?

First of all, you have to consider why these gaps occur at all. Is finance helping fund the needed capabilities in spend visibility, contract visibility and savings visibility? Are the processes, policies and metrics for procurement-led value creation not only clear, but also effective? Do they align with the CEO agenda for growth and innovation? If you do some root cause analysis, you’ll find that many of these capability shortfalls can tie back to the lack of leadership in finance.

I want to make a few points here right off the bat:

  • I have absolutely no problem with finance professionals personally, and this topic is not about whining about the plight of the downtrodden masses living under finance’s evil regime. I’ve worked with (and advised) a lot of finance folk. They generally work very hard and try to do the right thing.
  • This being said, there are many areas where the finance profession is not living up to its potential (e.g., in the area of true total cost management or in how potential investments are evaluated from a true economic value added approach) – and procurement is certainly not helping itself if it finds itself kowtowing to finance and emulating some of its adverse “behaviors” (of which finance professionals might not even be aware of).
  • Finance, like any business function, has the same pressure to do more with less – just like procurement – and it’s important to know their situations and motivations if we are to help them rather than just casting judgment on them.
  • All functions take many of their cues from C-level leadership, and unfortunately, the relentless focus on short-term profit seeking is something that can originate from the very top, especially in public companies.
  • It would be naïve to ignore the inherent differences in power between finance and procurement – especially when many procurement groups (or parts of them) may report into finance. Still, this power structure can suppress some of the real disconnects that need to be brought to light and eradicated.

Finance, like procurement, is a service function. Both groups must serve the business and serve each other.

Finance offers services in treasury, tax, risk management, etc. And it actually runs “spend management” in terms of “spend planning” (i.e., financial planning and analysis – or “FP&A” for short), spend control (via “controllers”), and even the actual execution of payments (A/P) for that spend.

Procurement, for its part, helps safely tap supply markets to meet business objectives. It offers “supply management” services, and since “spend” is the opposite side of the coin to “supply” (i.e., spend is what you pay and supply what you get), you would think that procurement’s spend management services (for spend on third parties) would fit hand in glove within finance’s processes – at least for indirect spend in G&A (or operating expenditures) and capital expenditures).

Spend Matters/ISM Study

Unfortunately, procurement and finance are misaligned in numerous ways, and this misalignment is costing companies a lot of money (which is ironic because no 2 functions are more “value-focused” than procurement and finance!). But, how much money? And what specific misalignments are the biggest issues? And how are the best firms fixing them? That’s the subject of this multi-part series and the subject of the latest research that we’re conducting in collaboration with the Institute for Supply Management (ISM).  The study link is here:  http://bit.ly/ProcurementFinanceAlignment2015

In future posts, I will describe the study, its approach, and its specific content, but the general idea is to take a cue from the movie Jerry Maguire and the quote “Help me… help you.” The idea is to help procurement help finance understand all the misalignment areas and the value distraction caused by them – and then work collaboratively to become realigned. This study will not be about procurement complaining about the lack of resources and whatnot, but it will take courage and leadership to make this frank assessment, and to solve it jointly. This courage and leadership will also need to be exhibited by finance. In fact, you can think of this study partly as the internal customer satisfaction survey that finance never asked procurement to do! Truly progressive finance organizations should, in fact, embrace this study because the ultimate guiding light for it is to identify opportunities for value creation (or put in another way: eliminating potential sources of value destruction).

I am personally very excited about this study, and there is much much more to come. We have actually just finalized the survey and participants in the full version of the study will also be entered in a drawing for an Apple Watch or 1 of 10 free monthly passes to SpendMatters PRO.

First Voice

  1. Anu Gardiner:

    Excellent topic Pierre. The maturity level of the two disciplines – Procurement vs Finance – is out of step by about 25 years. As more Finance professionals become conversant in what Procurement does, there will be better alignment.

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