What CFOs and Procurement Need to Know to Collaborate
With more CPOs starting to report to the CFO, and renewed calls circulating in the trade press for finance and procurement to collaborate, it’s time for finance and procurement to get to know each other better. These two functions have been siloed for so long, they may not even recognize each other as fellow finance professionals, with more in common than they realize. Once these two groups better understand each other, they can form a stronger alliance with many business benefits.
The first misconception to clear up: Procurement is not just about savings and price. Too many procurement people hang that out as the most important thing that they do, but by focusing solely on that outcome, they’ve pigeonholed themselves. It’s up to procurement to educate the finance organization about what they really do.
The Last Thing You Should Say
Literally the last thing procurement should talk about is savings. Unless savings are clearly defined within your organization, people are very skeptical about savings numbers. It’s also among the least compelling and the least credible positioning for the CFO.
When talking to the CFO, we should talk about our processes. We should talk about how we do sourcing, including making sure there’s competition for our business. We should talk about our contracting methodology, and how we make sure that we're protecting the organization. And how they’ll have one party to hold accountable if procurement is involved.
We should talk about demand management, because if you get the best prices, but people are consuming too much of the product, or you bought the wrong product, you're wasting money. We should talk about how we build supplier relationships and handle reciprocity.
And of course we should talk about how we support revenue growth. If we save a buck but bring product in late and the delivery and service isn’t any good, nobody’s going to care about the savings because revenue is going to take a big hit.
“But Wait - There’s More!”
That’s a lot bigger scope, and by the way if you do all of that right, you're going to save some money. Savings is the "but wait, there's more" in the conversation. That’s much stronger positioning because usually nobody's going to be able to argue the value of all those other activities. But they will argue the savings number either because they want to hold onto the money or they want to take credit for it, or both.
CFOs are not opposed to savings. They want to spend the right amount of money for the right product, but compliance, governance and control are often much nearer and dearer to their hearts than savings. Once they start to understand how procurement helps with contracts and governance, it usually becomes clear that they are an ally.
Avoiding the Mandate
For best results, this should be a mutually supportive alliance. Procurement needs the CFO to bring them to the table with organizational leadership. People in procurement often talk about getting a mandate – top-down orders for all purchases to go through procurement. Partnership trumps mandates every time and if you deliver consistent value, you don’t need a mandate.
It’s much better to partner with the CFO and finance and have their support in getting you to the table to demonstrate the value proposition. If you're able to do that, people will invite you in. If you don’t have that support, it will be a struggle to get people to work through procurement, even if – or especially if - you have a mandate.
You also need the CFO’s help managing expectations around what will be done with any savings achieved. If every time "savings" are generated, finance comes in and claws it back out of their budget, people will quickly decide that procurement is the rat in the process. Procurement tells the CFO they saved the business money and then the CFO picks the business’ pocket. That’s not going to help procurement, and it's probably going to hinder them.
Partners in Budgeting
A better approach is to catch it in the next budget cycle. If you look at prior years and trends within categories of spend, you can then reduce budgets based on the run rate in that category.
In fact, budgeting is an area where a strong alliance between procurement and finance can bear fruit. Most budgets are a compilation of fixed line items submitted by department heads. But many categories can also be budgeted by units, and procurement can help with that. Where a department head putting in a line item of $180,000 for desktops based on demand of 3,000 desktops and an average price of $600, this can be changed 3000 desktops, with an allocation of up to $180,000.
If procurement is doing a good job, they're going to get the desktops for less than $600 each. The IT organization still gets what they need, and any money left over stays in those accounts because they're not spending based on dollars. They're spending based on consumption.
Are you going to use this approach in every category? No. In office supplies, you're not going to say, "You're only going to be allowed to buy so many pencils." But you can look at spending together and identify average office supply expense per employee, or per hundred employees, and create some ratios that you're able to manage to and refine over a period of time so that budgeting becomes more of a science than an art.
In my experience, this concept and process is much more familiar in procurement circles, so they may have to introduce it to finance, but it’s something they can collaborate on for the benefit of the organization.
These are just some of the ways procurement and finance can work together once they get to know each other’s capabilities and strengths. A happy collaboration and good business practices may result in savings, but really, that’s the least of it.