Finance and procurement teams. The CFO and the CPO. They’re both focussed on making savings and delivering value to their company, but are they a match made in heaven?
For as long as both the Chief Financial Officer and the Chief Procurement Officer functions have existed within organisations, there has been a debate about recognising business savings through procurement. One of the main reasons behind this is that finance teams aren’t able to clearly see that the savings have a direct impact on the company’s budget.
Making savings reflect in the budget is, of course, easier said than done. In practice, it requires a change in behaviour and processes – not just for procurement, but across the business. However, if these two functions find a middle ground, they can achieve far greater forecasting accuracy and outcomes, providing a more tailored approach to budget management and delivering better results across the business.
Simon Whatson, VP at Efficio, spoke to John Mahony, Senior Finance Manager at Irish bank, Permanent TSB, to understand how finance and procurement teams can work together to deliver better results for the business.
CONSTRUCT A FINANCIAL AND PROCUREMENT FRAMEWORK THAT WORKS FOR EVERYONE
First, and perhaps most crucially, is the need for Finance and Procurement to develop a consistent and reliable budgeting framework that suits the needs of the business. Mahony believes that understanding the baseline is the most important element of any framework.
“We do a data gathering process for the different business units across the bank, and we ask them for their input,” said Mahony. The baseline provides a holistic overview of suppliers that will guide estimated spend for the year and prove incredibly useful for forecasting.
At this early stage, a member of the procurement team should work collaboratively with Finance to review supplier inputs and ensure the baseline accurately reflects the expected spend. Failing to do so can undermine the work of procurement. “Too low or too high can create problems,” if a lower than feasible spend is attributed, any savings that Procurement secures are eroded and difficult to prove, because an incorrect baseline deducts from this.
From a procurement perspective, it makes more sense to bake in the expected savings before the budget is confirmed. This encourages each department to get Procurement involved in supplier negotiations and breaks down one of the biggest barriers for the procurement team, by incentivising teams to actively seek the help of Procurement in securing savings. Of course, Procurement needs to be trusted by the business to play this role, and there needs to be openness and transparency of what savings Procurement wants the business to bake in – and vice versa.
PLAN FOR A DEGREE OF FLEXIBILITY IN YOUR PROCUREMENT PROCESS
If finance teams want to work in tandem with their procurement counterparts, it’s critical that they step out of their comfort zones. Budgets are built ahead of the financial year and, unfortunately, this means they are rapidly outdated. Furthermore, there are often factors outside of the company’s control that can impact whether savings are made against the budget.
A great example is the impact of COVID on projected spend. “We would have seen a reduction in some areas of spend because all of our staff are working from home,” says Mahony. “So, we see less printing happening in the office, and we see fewer stationary costs, so they would have been things that were not on our radar pre-COVID.”
Mahony acknowledged the need for Finance to be prepared to stand down and embrace a degree of flexibility. “[Permanent TSB] are constantly trying to increase our digital capabilities and technology infrastructure,” he said. “When we set the budget at the start of the year with the best of intentions, a couple of months later things move fast, and we do have to put our funding into something else."
Likewise for Procurement, savings may initially be baked into the budget against certain suppliers, but factors such as rising commodity prices or a long-term contract coming up for renewal can all impact the savings made throughout the year.
The key is for both departments to keep sharing knowledge and communicating risk. Ultimately, if Finance and Procurement insist on only going after savings on spend that was budgeted for, they may end up severely restricting the value they can bring to an organisation. Sometimes the biggest, most critical spend is unbudgeted.
I’ve really seen first-hand the value that the procurement function can bring. Reporting plays an important part in the procurement process because it highlights the work that’s been done, and it helps to build trust.
THE CFO AND THE CPO: BUILDING TRUST THROUGH TRANSPARENCY
The most vital component of any successful partnership is frequent and transparent communication. Measuring procurement savings is something of an art, and it’s not uncommon for procurement functions to feel undervalued.
Permanent TSB’s procurement team is on track to exceed the original savings target by 20%, which will be used to invest in its people, digital initiatives, and other strategic opportunities.
“I’ve really seen first-hand the value that the procurement function can bring,” said Mahony. “Reporting plays an important part in the procurement process because it highlights the work that’s been done, and it helps to build trust.”
Putting tangible frameworks in place at the earliest stage possible is key. Laying the foundation of what is expected, plus frequent reporting and communication between procurement and finance, keeps the budget on track and ensures you are all clear on the objectives before you start the process. Therefore, it’s essential to agree a savings methodology for each initiative at the start of the project. It should be one that Procurement, Finance and the business are all aware of and accept and can return to in times of uncertainty.
Without this methodology or vision for the project, doubt or a lack of trust can begin to creep in. Similarly, if this crucial step is left until the end of the process when the initiative is already complete, you may discover that the three different parties may all want to refer to a different calculation methodology that best serves their interests. For example, procurement teams could want the savings number to be big, while the business might want it to be small so that budget doesn't get taken away from them.
It cannot be overestimated how important it is to do this before the initiative starts, to build trust throughout the project, and ensure the process is smoother, and more successful when you reach the end.
4 key takeaways for delivering stronger procurement savings, together
- Construct a logical framework and baseline, with both parties agreeing what is possible
- Be prepared to adapt and update the budget, as priorities change
- Bake in savings to ensure full co-operation across the business
- Report regularly and accurately, highlighting any potential concerns at the earliest stage
For more information about the practical steps you can take to improve collaboration between Procurement and Finance, read The appliance of alliance: Reaping rewards from closer ties between CFOs and procurement from Issue 8 of The Source.