Walking the Extra Mile: Procurement Greets Finance
Walking the Extra Mile: Procurement Greets Finance They both work for the same organization, and their strategies are aligned along the same goal: they both are always finding ways to cut costs and increase savings. Yet, they both walk alone when they should be partners. Can you guess who are we talking about? Yes, you got it right, we're talking about 'Procurement' and 'Finance'. A.T. Kearney research shows that in their public remarks, CFOs discuss safety, sales force, and manufacturing performance roughly 400, 360 and 100 times, respectively, and far more frequently than procurement performance. McKinsey, in its new book “Procurement 20/20”, pointed out that lack of CFO focus on procurement excellence has a negative impact on the level of savings and organizational improvement that procurement leadership can bring. Collaboration between procurement and finance is necessary to mitigate risks, increase cash flow, manage working capital, cut costs and above all, bring more savings to the bottom line. In fact, in many organizations, procurement reports to the finance department, at least on the indirect front. Nonetheless, the differences in opinion prevail. According to a Gartner report (Establish a Savings Management Process to Drive Procurement's Financial Performance 2013), the key challenges marring procurement-finance collaboration are: Eas
t/W
est
South / North
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?
There is no universally accepted definition of savings.
The responsibility of ensuring that savings reach the bottom line, after the negotiation is concluded, is often unclear or even nonexistent.
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Many different factors, such as order scope changes, volume changes, currency exchange rate fluctuations, contract compliance levels and changes in market conditions, can impact savings before they reach the bottom line.
Apart from creating a process for savings management and obtaining agreement between the two departments, the Gartner report also suggested investing in a tool that is flexible, and has workflow and data integration capabilities, to support savings management. This would, in turn, facilitate better representation of savings generated by procurement on the organization's balance sheet.
So how can technology help bridge the gap between procurement and finance? Procurement is largely judged by the savings it generates through different projects. However, what procurement may consider savings, finance may consider cost avoidance. Thus begins the argument over what does or does not constitute savings. But, if for each project, savings are calculated by keeping finance in the loop, won't that help solve the problem? And this is where technology comes to the rescue.
Organizations can leverage a tool with a tracking system that:
Develops a functionspecific view into individual projects and associated savings. This increases the visibility into organization-wide savings – a key to improved resource planning
Maps forecasted savings to budgets through a project's multiple stages. It is important to be able to track forecasted savings vs. actual savings against the fixed budget at every stage
Establishes a common savings definition and a baseline agreed upon by finance and procurement, thereby defining success for both Procurement and Finance
Streamlines the savings approval process, thus ensuring the correct information reaches the applicable authority
Maps the impact of procurement savings by collaborating with the finance team
Tracks savings at a multi-dimensional level
For further details on how technology can be leveraged to streamline the entire process of mapping procurement performance, read “Making Procurement Performance Count - A 3 Step Approach”
Most of the existing savings tracking tools come with one big drawback – lack of integration with spend analysis. This means the user would have to manually enter baseline (past) data. Every savings calculation is based on baseline spend. For instance, one of the basic formulas being Baseline Spend - New Spend = Savings. The baseline spend could be for a period of 6 months, going back to the last 5 years. Manual entry of such data would lead to Longer cycle time Inaccurate data Incorrect savings result
With advancement in technology, it is now possible to do away with manual data entry by integrating the savings tracking tool with the spend analysis tool. This means the user will: Spend less time on getting the baseline data. Be it for 6 months or 5 years Have access to accurate information Get the savings result more quickly Be able to present a true picture of the savings generated from a project
In the savings tracking tool, after creating a new project and filling in the necessary details, the user needs to get the baseline spend. With spend integration, fetching baseline spend for every category is just a click away.
Hi, Sam
My Savings
My Projects
My Reports
Assigned Projects
My Configuration
You are here: My Projects
Edit Project
1 2 3
Edit Project Details Edit Project Scope Allocate Project baseline
Allocate Project baseline for the project here
4
Select Stakeholders
Initiate Project
Step 3: Allocate Project Baseline Allocate Baseline Spend Select Commodity
I do not have baseline spend data
CORE NETWORK
Baseline Spend
Unit Price
Quantity
INFORMATION TECHNOLOGY
0.00
0.00
0.00
Get Spend
NETWORK & ACCESS TECHNOLOGIES
0.00
0.00
0.00
Get Spend
MOBILITY
233.0
10.0
2330.00$
Get Spend
Divisions
TOTAL BASELINE SPEND
Action
2330.00$
Save Back Next
Cancel
Conclusion: E&Y, in its recent study, tried to identify if supply chain executives and finance executives are on the same page. The study showed mixed results, as shown below.
Are Finance and Supply Chain Executives on the Same Page Regarding Key Issues? Which of the following do you see as the single most important priority for your business over the next three years? Select up to three
Cost cutting and efficiency
22
Organic growth (e.g., investing in products, talent retention, research and development)
21
Inorganic growth (e.g., acquisitions, alliances and joint ventures)
17
6
Improving customer service
Survival
3
Finance Supply Chain
25
19
14
Improving product or service quality
27
25
14
6
% 0
5
15
20
25
Source: E&Y
While both departments share almost similar views on most of the parameters, there is a difference in what gets top priority. While improving quality was seen as the number 1 priority by supply chain executives, finance executives rated cost cutting and efficiency as their top priority.
Differences in perspective are always going to exist. Lately, the finance department is moving closer to procurement. But there is still a long way to go. Procurement needs to speak the language of finance to help finance identify its contribution. At the same time, finance needs to understand the impact procurement can have not only on the organization's bottom line, but also on cash flow. Having a structured process and investing in better infrastructure can help both functions to align their goals and save more money.
CFO
CPO
About Zycus
Zycus is dedicated to positioning procurement at the heart of business performance. With our spirit of innovation and a passion to help procurement create even greater business advantages, we have evolved our portfolio to a complete Source-to-Pay suite of procurement performance solutions which includes - Spend Analysis, eSourcing, Contract Management, Supplier Management, Financial Savings Management, and Procure-to-Pay. Behind every Zycus solution stands an organization that possesses deep, detailed procurement expertise and a
FINANCIAL SAVINGS MANAGEMENT
sharp focus on being responsive to customers. We are a large — 600+ and growing — company with a physical presence in virtually every major region of the globe. We see each customer as a partner in innovation and no client is too
PROCURETO-PAY
SPEND ANALYSIS
small to deserve our attention.
ZYCUS SOURCE-TO-PAY SUITE
With more than 200 solution deployments among Global 1000 clients, we search the world continually for procurement practices proven to drive competitive business performance. We incorporate these practices
SUPPLIER MANAGEMENT
E-SOURCING
into easy-to-use solutions that give procurement teams the power to get moving quickly — from any point of departure — and to continue innovating and pushing business and
CONTRACT MANAGEMENT
procurement performance to new heights.
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