Perception gap obscures business value created by Procurement organizations
Over the years, procurement organizations have evolved from focusing only on achieving cost savings to becoming a key driver of continuous business growth.
To be sure, cost savings continue to remain an important goal of global procurement organizations; and due to evolving business scenarios, Procurement organizations increasingly contribute to an organization’s success -- both directly as well as indirectly.
However, the business value created by the procurement team is often not appreciated by other verticals within the organization. Significant among such perception gaps is the one that involves procurement and finance teams where the level of friction, resistance and lack of synergy is high.
According to a recent survey by consulting firm Protiviti, nearly 50 percent of finance leaders are of the view that 20 percent or less of procurement savings drop to the bottom line.
Also, according to the same survey, one in three procurement leaders rate their function’s sourcing process in delivering value and cost savings as very effective, while finance leaders rate these capabilities even lower.
Of course, we need to remember that such friction can possibly take place in an organization structure where procurement doesn’t report into CFO.
Also, more than corporate finance teams, there is a high possibility of friction between procurement teams and accounts payables.
Contrary to the perception gap that exist between Procurement and Finance teams, a study done by Beroe shows that Best-in-Class procurement organizations in fact do help their companies in creating shareholder value!
However, this fact goes unnoticed because of lack of communication.
Nevertheless, efforts need to be made by the procurement community to create an ecosystem where there is scope for constructive engagement between the two functions.
According to a research report published by Redshift on behalf of Wax Digital, senior managers across major verticals have differing perceptions about the role of procurement organization. (http://beroeinc.co/2ljfW3F)
Procurement is viewed as an administrative function rather than a strategic one, and finance teams usually view procurement organization as a “cost center” rather a profit generating entity.
Moreover, managers of other verticals view procurement as a hindrance to achieving their objectives. This was in sharp contrast to the responses coming from the procurement side where a majority of responses claimed to have a synergetic relationship with the finance team.
Business functions such as engineering, HR, sales or marketing, being long acknowledged for their strategic role, are already using networking and collaboration to build symbiotic partnerships and gain cross-industry knowledge.
However, a 2012 McKinsey survey of more than 100 large global companies on supplier collaboration practices found that although over a third of the respondents said they collaborated with suppliers, fewer than 10 percent could demonstrate systematic efforts on supplier collaboration.
Also, according to a more recent survey conducted by 3M, 70 percent of the 237 suppliers interviewed pointed out that a majority of their customers lack strong models or practices to encourage collaboration, leading to a constant need for development improvements and a loss of efficiency. The findings reflect broad supplier sentiment and are not specific to 3M.
This shows that Procurement, in general, is a reticent function. More efforts need to be made in communicating and collaborating with both internal and external stakeholders.
Conversation that is not oriented around business benefits
The rationale behind this perception is the lack of two-way communication on how procurement organization can enable business stakeholders achieve their strategic objectives. A CFO’s office would appreciate this viewpoint and the onus is on procurement organization to come up with strategies in terms of sourcing right fit suppliers and managing the spend in such a way that it is aligned with the business objectives. Lack of such initiatives from procurement folks can lead to an increase in maverick spend as well as signing up of risky contracts which can severely impact the ROI. This can end up leaving no option for the finance team but to implement budget cuts that can potentially impact the organization’s momentum.
Procurement’s intervention in supplier choices and spending freedom
This is less of a perception issue and more a relationship model that procurement follows when it comes to controlling and influencing other business functions within the organization. Rather than building strong relationships and demonstrating its skills in terms of better purchase with less money, procurement tends to end up being the “bad guy” when finance slashes budgets, which could potentially lead to run-ins with the accounts payables team.
“In order to avoid such situations, the CxO level management teams should start considering how they can build a co-existing relationship between accounts payable and procurement. It is also important that the management identifies as well as recognizes different priorities of each of these departments. Once the priorities are identified it becomes absolutely critical for accounts payable and procurement teams to map out the end-to-end process as collaborative effort,” said Rahul Devarakonda, Senior Procurement Practitioner and Head of Beroe LiVE Business Unit at Beroe Inc.
Maximizing business performance through greater collaboration between finance and procurement
Let us consider a scenario where procurement can demonstrate its strategic capability. There is a request from the in-house IT team for laptops for staff strength of 500 and with a budget of $1000 per laptop. The total budget works out to be $500,000.
If procurement can negotiate a contract at $800 per machine with total budget of about $400,000, it can then pass on the savings to IT function. This will enable the IT team to use the savings for other associated equipment purchases which in turn will strengthen the relationship between both departments, and also demonstrate business value to finance function. Or procurement can choose to pass on the savings back to the finance team.
This kind of transformation is possible only if procurement organization streamlines its process and improves its communication -- enabling greater freedom for other teams to source and buy without intervention.
The first milestone to accomplish in this transformation is to focus on establishing ownership parameters. Also, creating governance mechanisms, mitigating potential liabilities, establishing clear ownership and accountability is very important. This will ensure that each function gets its due credit for their performance.
Both procurement and finance teams generate a wealth of data which when optimized can help them analyze historical data on the spend patterns, supplier profiles and identify areas for improvement or even innovation -- in effect improving the quality of service internally.
The next area for improvement relates to increase in collaboration between finance and procurement verticals in matters of business importance. This aids the procurement team to become a strategic partner. However, a better understanding of the business objectives is imperative to the success of this strategy.
The power and influence of CFO at the board level is close to what the CEO enjoys. CPOs need to take a leaf out of this and take steps that will have a positive impact across the company.
“You will only have a seat at the table if you are a trusted advisor. If you are not a trusted advisor you will always be in a catch up mode. Also, since procurement has visibility at a line-item level, they can begin vendor identification even before the start of a financial year, which can help CPOs to commit to a stretch target,” Devarakonda said.
Procurement and finance synergy
The ideal maturity model for procurement dictates that it is always commercially focused, tuned to profit, anticipates risks well in advance and is aligned with the company’s business goals. However, to achieve this, procurement needs to collaborate better with all the business functions, even more so with finance. This will pave the way for streamlining the existing processes and create better cash flow visibility. If the goals and objectives of finance and procurement converge then it could eventually lead to better business outcomes such as an increase in shareholder value.
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