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.