Daily Archives: August 7, 2011

An Idea for Aligning the Non-Competing Finance and Procurement Agendas

About two weeks ago, in What Competing Agendas, SI pointed out that, where Finance and Procurement are concerned, there are no competing agendas. Furthermore, as far as the doctor is concerned, whomever said that the dynamics and sometimes competing agendas between finance and procurement are widely known doesn’t get it. At all. Remembering that the ultimate goal of any organization is to derive value for the stakeholders — employees, customers, and shareholders alike — both organizations are trying to find the right balance between cost cutting and value generation to meet the company’s goals and shareholder return. Just because Procurement is always spending while Finance is always trying to cut spend doesn’t mean that the departments are in opposition. Finance knows better than any other department that companies have to spend money to make money, as long as the money is being spent wisely, and a good Procurement organization has better spending as its ultimate goal. There is no competing agenda.

However, since Finance and Procurement sometimes speak a different language, because Procurement hasn’t learned to Speak the Language of the CFO, the agendas aren’t always aligned. And while they both plot a route to the same goal, the routes barely intersect. And any good financier as well as any good sourcerer knows that taking two planes from New York, New York to Mumbai, India with one routed through Frankfurt, Germany and the other routed through Sydney, Australia, is wasteful. Thus, the agendas have to be closely aligned for optimal performance.

But how do you align the agendas?

One idea could be to use balanced scorecards as a shared framework. Back in the early days, SI ran a post that asked if you need a Chief Strategy Management Officer. Back in 2006, CFO Research Services published a short paper that summarized the highlights of their annual executive conference in New York, New York. Part of that report was a mini-paper on aligning the finance function to strategy execution based on a presentation by Robert S. Kaplan, co-developer of the balanced scorecard and co-author of Alignment: Using the Balanced Scorecard to Create Corporate Synergies with David P. Norton.

At the conference, Kaplan discussed various approaches for aligning the finance function more strategically with the goals of business units and corporate leaders, including:

  • the use of balanced scorecards as a shared framework to run the business, guide the operating agenda, and evaluate progress against strategy
  • the use of activity-based budgeting to link the strategic planning capability of Balanced Scorecards with the operational budgeting mechanism of a time-driven ABC (activity-based costing) model

And, as I suggested in my original post, I think it’s a great idea. And I still see no idea why it can’t work for Procurement. In the process of creating a balanced scorecard, Procurement and Finance will have to agree on budgets and savings / avoidance targets, payment terms, working capital objectives, inventory turnover, and a host of other supply management issues. And by scoring themselves on the same metrics, they will have to stick to the plan to collectively succeed. Now, getting the right scorecard might not be easy, but the exercise will get the organizations to a deep alignment that will pay off in the long run if each goes in to the discussions with an open mind and a true desire to work together.