Procurement and Finance: In partnership

Last time I wrote about the journey of the Procurement function in its maturity towards strategic importance and a major part of this is the developing relationship between Procurement and Finance. Continual wrangling over savings and methods instead of collaboration does little to benefit the organisation as a whole, particularly when in reality there is enormous alignment between the two functions in terms of vision and goals.

So how can Procurement and Finance work together to release organisation wide value?

Agreement on reporting standards

So often the bugbear of both functions is the differing meaning behind the term “savings”. Finance hear the term and expect to see a reduction to the bottom line and Procurement professionals often see them as simply price reductions. Not every price reduction is reflected on the income statement and as such doubt arises as to Procurement’s cost savings claims. Mutual agreement of standards warrants against unwanted surprises and generally makes the reporting more believable. The two areas can’t operate together in an effective and collaborative manner unless this point is addressed. An underlying trust needs to be created.

KPI Alignment

Finance and Procurement have developed at different rates and have, to a certain extent, only really come together over the last five years or so. As a result they have differing and occasionally contradictory KPI’s and often operate in siloes. If the two are truly to operate together it is important that the KPI’s align and move beyond the historical view on just savings. Performance should be measured on performance to budgets, supplier performance and compliance to contracts as well as just cost savings, to name but a few.

Use Technology

Modern technology can provide a platform by which the two teams can set common objectives on savings and track and monitor those savings. The transparency afforded by technology ensures that there is a single version of the truth which enables finance to forecast and book savings in an accurate and timely manner.

Budgeting and Planning

It is up to Finance to drive the budgeting process but Procurement involvement is the key in ensuring that the savings they have identified are implemented and finds their way to the bottom line. Procurement involvement doesn’t just have to be historically focused though. As a link between a hosts of business functions they can work with Finance to offer insight into potential savings from existing and future cost reduction programs, helping to set realistic budget and planning targets for the coming period.

Education, Training and Understanding

The majority of Procurement professionals are not Finance professionals but that doesn’t mean they shouldn’t be provided with at least a basic understanding of some of the metrics used by their Finance counterparts. Terms like return on invested capital (ROIC), days payables outstanding (DPOs) and days sales outstanding (DSOs) are vitally important to Finance teams and, in aligning KPI’s and goals, should also mean something to Procurement. Wider knowledge of how to budget and plan, report on variances, actuals and forecasts should be part of the day to day life of the procurement professional. Even if they aren’t engaged fully with their internal Finance team the chances are when dealing with suppliers they are meeting with their Finance teams and being able to read a balance sheet in terms of payables can help build internal and external relationships.

There is benefit in Finance becoming more understanding of the ways, means, goals and objectives of Procurement as well…it’s not just about savings. All in all a more empathetic approach all round to each other’s roles will help build links.

Supplier Performance Management

Finance may be interested in things that Procurement aren’t necessarily such as the overall supplier financial health, seasonality and the balance of trade and as such there is value in approaching supplier management collaboratively. Finance may also be able to support Procurement in exploring flexibility in the relationship by offering early settlement discounts etc. which may not have previously been considered as a lever to pull on.

There are clear issues to overcome in aligning the two functions and a good degree of difficulty given the years they have spent apart but in working together Procurement and Finance can offer value to a business greater than the sum of their parts.

Ozzy and Sharon Osbourne as a case study for Procurement and Finance

I imagine that being a celebrity couple comes with its difficulties. Often forced together as it seems convenient and faced with the constant enticement from tinsel town, many treat marriage as a temporary arrangement between film roles.  There are however still a few examples of famous couples whose love and commitment have endured through tempestuous and tumultuous times and the Osbournes are a great example.

In many ways Procurement and Finance are like a celebrity couple (bear with me) and of all the celebrity couples I could think of probably most like the Osbournes.

Why?

Well first of all why exactly are they like a celebrity couple? Procurement has at various times had flings with the CEO, CFO, CAO, COO and CIO, more than enough to keep the tabloids happy. Procurement and Finance were put together primarily because they both had a shared interest in numbers and savings but it wasn’t exactly a bond considered binding – more of a mutual hobby than anything else – and a marriage of “convenience”.

Differences in the way both sides approached the hobby caused ructions. Procurement would talk about millions of savings delivered, of cost reduction, negotiation and low cost country sourcing. Finance would talk about the bottom line, reporting, inventory management and credit goals. So there was a common goal but a different approach to getting there. I’m going to try and relate this back to golf...

Procurement has grown up and has become more strategic and mellowed. Whereas in years gone by it would walked onto the course and swung away it’s now more interested in improving its handicap and sees merit in some of the things Finance was doing before.  It submits accurate scorecards for example and plans out its approach in advance.

As the two have become more aligned the two parties have grown to accept each other, the value that they can offer as well as their foibles. Procurement may have previously wandered from department to department but has now found its true home. The relationship has value and is beginning to endure.

So onto the Osbournes. There aren’t many celebrity couples that last and particularly not many that have been so (publically) stormy. It’s a relationship that has survived because together the two of them are undoubtedly stronger as a pair, share a common vision and goal, have both come to appreciate each other’s values and faults and have both mellowed with age.

As Procurement moves up the value chain and becomes more strategic it has a natural ally in Finance. Over the next few weeks I will be writing about how the two can better collaborate and integrate for the benefit of a wider organisation.