Procurement and Finance: an Elite Group

A regular contributor to Spend Matters, Gerard Chick, chief knowledge officer at procurement outsourcing experts, Optimum Procurement Group, looks at what could be gained from a finance/procurement alliance.

Alignment between finance and procurement seems a natural enough partnership as there is cross over between metrics, numbers and processes. However, for procurement to build a strong alliance with CFOs, Treasury and Financial Control, CPOs and their teams must not only be able to put themselves in finance’s shoes and support their objectives but also go beyond the numbers.

Procurement needs to work with finance more closely and take ownership of how spend is used as well as reflecting how these activities meet the needs of the business. Clearly a shift in mind-set is required. CPOs need to consider consumption, delivery and quantity, and have the capability to impact strategy by suggesting ‘what is really needed’ to achieve an outcome.

So how can CPOs and CFOs move towards such an alliance? The roots already exist! Procurement must build on today’s leading strategies: a category manager could team up with a financial analyst, the two of them working towards and tracking savings-approaches and commodity-level bookings. Moreover, an analyst, working in tandem with a category lead, could suggest ways of reducing volatility and risk through hedging, treasury and related strategies that go beyond the traditional siloed approaches we see today.

Such activities might also include working to develop longer-term ‘off-take’ agreements with suppliers at lower tiers in the supply chain or perhaps working with raw material suppliers. A more collaborative approach could see procurement and finance jointly taking ownership of forecasting as well as developing intelligence regarding when and how specific correlations may break down.

For finance’s perspective, while they continue to play a key role in expanding the influence of procurement into areas where it is greatly needed – think professional services, capital equipment, facilities and healthcare – the joined-up ProcFin team can go further in opening up new avenues such as the involvement of procurement in M&A due diligence and post-merger integration.

A ProFin team can facilitate far-reaching Supplier Risk Management activities such as capacity planning, commodity risk, geographic risk, geopolitical risk, environmental risk, regulatory risk and so much more than traditional models allow.

A commercially astute and analytically robust team can come together to deliver to the organisation and at the same time influence organisational strategy with the aid of innovative procurement-led programmes to bring competitive advantage to the business.

For example, if procurement were to collaborate with product engineers not simply to streamline specifications regarding cost and availability, but more broadly taking on risk, performance and even market dynamics.

What’s to be gained from an alliance?

We’ve previously worked with a global organisation that wanted to implement a decision-making model for procuring complex goods and services. At the heart of their system they wanted a capability that would enable finance and procurement to access all operational cost and risk metrics for procurement.

As part of this project, the company expressed a need to be able to evaluate the cost/benefit trade-off for paying more up-front, which could deliver savings and benefits.

The linkages between finance and procurement have developed an ethos with the organisation which delivers way beyond the traditional metric of savings to the bottom line. The two SBUs have begun to rethink and reprioritise opportunities for value-based outcomes which will be recognised across the business and by their customers.

The company established a finance/procurement hub to create opportunities such as gaining tax advantages and even the creation of new markets through an entrepreneurial mind-set amongst its procurement team and a collaborative mind-set between procurement and finance.

Moreover, they developed a process by which they can concurrently explore the potential of flexible payment programs by examining various permutations between the use of third party and in-company financing. This resulted in unparalleled savings, with the flexibility to use its own capital or not, as well as the potential to create saving which could then be actualised by the company as income.

A source-to-pay (S2P) tool facilitates the foregoing; a system which the client can grow to incorporate increased features such as a touchless procurement process creating a step-change in procure-to-pay (P2P) and vendor management. Finally, built-in intelligence facilitates approval and workflow activity, enabling procurement staff to focus on strategic issues rather than activities such as labour intensive reviews and routing activities.

How can you do this?

Your journey may start by CXOs looking to build trust within the business. For example, the CPO might extend an empathetic hand and an open mind to work with spend owners to improve business outcomes by an exploration of the ways that demand specifications, buying decisions and supplier engagement activities are carried out.

Or perhaps it will start with the CPO presenting themselves as the go-to-person for risk management activities. The CPO would be financially fluent and able to converse with colleagues regarding commodities, currencies, political/regulatory and other emerging areas of risk. They would do this with a view to both opportunities and threats.

Whatever happens, procurement must step up to the challenges businesses are now facing. It must develop a mind-set that incremental changes won’t cut it and that it must earn the trust of the business to fully succeed.

More than anything else, procurement’s horizon must go far beyond the thinking of today; it must leverage creativity and knowledge; it must have an eye to the change needed within, and an eye on its obligation to the business.

We are talking about an elite group. We are talking about procurement which must transform itself and in so doing transform business capability. It must do this now or die.

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