We’ve covered quite a few organizational damnations to date. (Nine to be exact.) But, as with the other damnation categories, we’ve saved the best for last. Marketing was bad. Sales was often worse. Legal is a nightmare. But Finance. Finance controls the four horseman of the apocalypse. War, Famine, Pestilence, and Death — and they all fear the CFO. Because if he dies, then Death will forever have to listen to plans to increase productivity, decrease cost and profit from the dead. (Trust me, give former CFOs the opportunity and they’ll try.)

Finance brings War to the party.

Finance is not only the gatekeeper between the CEO and the various department heads but also the mediator between them, especially when there are budgetary disputes or strategic disputes in terms of corporate direction. That’s because money talks and Finance signs the checks. And if they decide that they don’t want to play mediator and problem solver and they want the department heads and/or CXOs to work it out, they can incite all out war, sit back, and see where the mortars fall. In the interim, Procurement is getting caught in the crossfire as every department makes contradictory requests and expects to get them fulfilled by Procurement.

Finance brings Pestilence to the party.

Finance has the ear of the CEO. As a result, they are always getting whispers from the COO, CMO, Chief Council, the VP of Sales, the VP of HR, and anyone else who runs a department. If any of them are making the CFO promises in terms of increased success, increased status, increased bonus, or, and yes this happens, lining in the pockets (direct or indirect kickbacks), your requests might fall on deaf ears. Marketing promises free trips to all of the global launch events. You promise an extra 10%, which may or may not materialize in the eyes of Finance, unlike those tickets to San Francisco, London, and Shanghai which can be in the CFOs hands as “guest speaker” tomorrow.

Finance brings Famine to the party.

Finance controls the budget. They determine how much money you get for talent, software, and services. Without enough money, you can’t get the talent; the talent in place can’t get the tools they need; and they definitely can’t get augmentation services or training, which they desperately need to do the job they are tasked to do. If Finance wants to bring Famine, they cut the budget, and your department starves. Famine is just one budget cut away.

Finance brings Death the party.

Not only can they starve you, cut you out, and subject you to contradictory requirements that you will be expected to unreasonably fulfill, but they can bring Death upon you. Unreasonable cost saving expectations. Unreachable metrics in terms of automated invoice processing or Spend Under Management in a mere 12 months. Impossible results from the supplier innovation program you are expected to launch. Followed by a pink slip when you don’t deliver (under the new mandatory right-sizing policy that cuts everyone who does not make their annual goals).

If the CFO doesn’t like the CPO or care for the Procurement department, the damnation that he can reign can exceed the damnation caused by all of the other departments combined.

Yet another damnation you’ve been waiting for. In our modern world, at least if you believe the futurists who think that cybernetics will eventually allow us to preserve our mind and live forever, it’s the only certainty left. Even if the government falls, a new order will rise up, and like every order that has come before — in some way, shape, or form — it will tax you. And taxation is not just a damnation for Finance, it’s a damnation for Procurement too.

Taxation Makes it Nearly Impossible to Answer the Ultimate Sourcing Question.

The pinnacle of strategic sourcing is to alway select the option with the best total value. When sourcing according to total value management you are sourcing to maximize the value to cost ratio. This requires a good grip on the value (total expected revenue for goods for resale, efficiency gain for products and services to support work efforts, knowledge or capability improvement for services, etc.) and the total (lifecycle) cost. Guess what a big component of that cost is. Export duty. Import tariff. Federal sales or value added tax if the good is purchased in the same country or union. State or municipal tax on specific products or services. Taxes on the fuel used by the trucks to transport the goods. Tax, tax, tax.

And it’s not just as easy as asking the seller what the applicable taxes are. On import, and sometimes even export (depending on when your organization officially takes possession of the goods), it’s up to your organization to know what the right tax rate is, file the tax forms, and pay it. But we all know how easy it is to interpret global H(T)S codes – where there are eight entries for the same item and it’s sometimes a matter of interpretation whether the 50% leather glove falls under leather gloves with synthetic materials, synthetic gloves with cow-hide leather, or leather and synthetic products and each has a different tax rate. If the customs inspector doesn’t agree with you, not only can you be subjected to a higher tax rate, but a large fine as well, increasing the expected total cost of the purchase even more!

Documentary Requirements make it onerous, if not unrealistic, to reclaim taxes the organization is owed.

Many of the taxes that your organization will have to pay will be taxes that your organization is not legally subject to and that can be reclaimed, if your organization can demonstrate it was not legally subject to those taxes. For example, in the EU, if the sale is a distance sale, then if the amount exceeds €100,000, the exporter should be charging VAT at the rate of the importing state. So, if you are buying from a locale where VAT is 25% but importing to a locale where VAT is 15% for sale, and the organization was charged 25% VAT, it is eligible to claim a refund of %10 VAT. In Canada, any business with revenue (or the expectation thereof) that exceeds $30,000 must collect HST on all sales, but businesses are exempt from HST on goods and services required for their operation. Typically, since it is expected HST from sales will exceed HST paid, the organization will be making an annual, quarterly, or monthly HST payment (depending on revenue size), but if the sole purpose of the Canadian operation is to manufacture goods for export to US consumers with no effective Canadian presence, its HST paid will (far) exceed its HST collected and it will be eligible for a refund. There are a number of other situations around the globe. But, of course, these refunds are not automatic. They must be filed for, the documentation required, in some cases, is extensive and must be complete, reviews can take 3 months to a year (or more), and if a detailed audit is requested, sometimes the cost of the internal effort exceeds the amount to be reclaimed. This makes it difficult to compute the total cost of ownership when there are a myriad of taxes that may be refundable, but each of which has a refund cost. (Do you discount the refund you expect to receive by X% or a fixed cost for manpower, do you discount it using a net present value calculation designed to estimate the loss in the value of the money owed to you as it is held in the taxation authority’s hands for an expected amount of time, etc.)

Trying to optimize the tax for value-added products and services is a nightmare and essentially impossible without strategic sourcing decision optimization.

Not only can there be multiple H(T)S codes that a single product can ultimately qualify for with different rates, but if the product is actually a bundle of individual products, which may or may not contain a “value-add” service component, there can be different tax rates as well. For example, there’s a reason that many printers come shipped with the cartridge separate — if the cartridge is pre-installed, in some locales, the importer has to pay a higher tax rate. Plus, in some locales, state or municipal service taxes are not always reclaimable while federal taxes are. It’s a complex sourcing model just to capture the taxes, the reclaimable portions, the (expected) costs associated with the reclamation, and the value loss based upon net present value when the organization knows it will be 6 months to a year before that money is back in the coffers.

Not only is taxation one of the few damnation that every organization in the world is sure to experience on a daily basis, it’s also one of the most complex and horrific.

Or, more accurately, outdated financial assumptions. Finance lives and dies by metrics that go by three (and four) letter acronyms such as CAPM, CFC, COGS, DSO, EPS, etc. If these don’t “add up”, Procurement can forget about ever getting any additional funding (and might even get rewarded with a budget cut by a CFO who thought that Procurement simply wasted his time with their last request), even though having these metrics “add up” isn’t always the right thing for the business.

Most CFOs are intensely focussed on CAPEX, COGS, DSO, DPO, ROI, and EPS. These have to look good because CAPEX and COGS take up most of the operating cash flow not swallowed up by salaries, DSO and DPO define how much cash flow there is to work with, ROI defines the return on using limited cash flow on an endeavour, and at the end of the day, all of this better add up to an acceptable EPS or the CFO can find himself in the unemployment line with the CEO if the shareholders get angry.

Now, the CFO is right to sweat these metrics because the organizational health depends on it, and it’s pretty much impossible to keep Procurement healthy in a sick organization, but if the metrics are misinterpreted or misused, and Procurement denied the budget it needs for talent, platforms, and services that will enable Procurement to deliver (significantly) more value (and bang for the buck), then in an effort to keep the organization healthy, the CFO will actually be making it sick by starving Procurement of the resources it needs to stay healthy.

Why would it do this? Because of outdated models and invalid assumptions. You see, most Finance organizations believe:

• Unless your business is leasing, CAPEX should be minimal because all assets should be as liquid as possible.
• COGS should be as low as possible, because minimizing COGS maximizes profit.
• DSO should be as short as possible because the more cash on hand, the better.
• DPO should be as long as possible because the more cash on hand, the better.
• Only the projects with the highest, short-term, ROI should be funded.
• At the end of the day, EPS has to increase quarter over quarter, year over year, because that’s what keeps the shareholders happy.

But not all of this is true. Do you know where the fallacies are?
We’ll give you a minute to think about it. And remind you to

Have you figured out where the fallacies lie? We’ll make it easy for you. Every single assumption is wrong. Why?

It’s not liquidity of the asset, it’s liquidity of the business. Sometimes it’s better to buy a valuable asset, and if cash is tight, use it as collateral against a low interest business loan than to lease at a rate that essentially doubles the cost of ownership over a 5 year period.

It’s not COGS, it’s POGS (no, not those annoying circular discs that plagued us during the mid-90’s) Profit On Goods Sold. If a few changes to the distribution and marketing strategy doubles sales, then it doesn’t matter that the COGS is increased 3% from 82% to 85%. 15% profit on twice as many units is much better than 18% profit on a base amount of units any day of the week.

It’s not DSO, it’s TSM – Total Sales Made. If increasing DSO allows a customer to buy more, well, if the organization has the war chest, or the credit rating to survive on a very low interest line of credit (compared to a weaker supplier or customer that might borrow at 12% to the organization’s 4%), then DSO should be increased for the right group of customers.

It’s not DPO, it’s TCO. If extending payment forces a supplier to take unreasonable loans or factor invoices at ridiculous discounts, that’s increasing their overhead operating costs considerably and, guess what, at contract renewal time, your rates are going up, up, up. Your short term gain translates into a long term loss.

It’s not always ROI, and the direct and indirect savings generated, sometimes it’s about the brand (image), such as switching to renewable energy or renewable materials which incurs a short term penalty due to the need to build new energy plants or switch to new processes, or about the knowledge gained, which would result from training, new systems, and the implementation of new processes. Organizations that stand still fall behind. Sometimes an organization has to take calculated risks and try a few high-risk investments to help it identify the best investments.

And while EPS is still the gold standard in the Wall-street led financial world, EPS cannot increase perpetually without investment, otherwise, at some point, the entire company will come crashing down. Remember, to continually increase EPS, one has to continually increase profit. To continually increase profit, that requires either continuously increasing revenue or continually decreasing costs, or both. Costs have a baseline that cannot be passed. And increasing sales almost always requires additional investment in marketing, which, at some point, will hit a point of diminishing return due to market size and consumable disposable income. And the faster one tries to grow, the faster the ceiling is hit, and the faster the rug is torn from beneath one’s feat when the dream comes crashing down. Just like leading Procurement organizations realized it’s not TCO but TVM, it’s not EPS, but VPS.

However, as long as Finance works on antiquated metrics based on antiquated assumptions, Procurement will be denied of the technologies, processes, services, training, and talent it needs to get the job done better. It’s damnation at it’s finest.

Bank Failure, which can be a result of fiscal crisis, is pretty bad, but the fiscal crisis that precedes it is often much worse. This is due to the fact that while a bank failure only affects the handful of companies that are using, and relying, on the bank, the fiscal crisis affects every company equally. No company is safe from a fiscal crisis — every company that does business in a country affected by the crisis is a company that is going to experience considerable supply chain impacts. Why?

Letters of credit become worthless

A letter of credit, which is a document from a bank guaranteeing that a seller will receive payment in full as long as certain delivery conditions have been met, is worthless in a fiscal crisis as sellers understand that the guarantee is only good as long as the bank is stable. But in a fiscal crisis, even apparently stable banks can become unstable so quick that a guarantee today might be worthless in a week when the bank, that over-insured buyers who are in danger of bankruptcy and in financial default, becomes unable to honour the letters of credit. As a result, no seller will be willing to take on additional letters.

Lending halts

As more and more companies begin to experience financial duress and become late, or default, on payments, banks will become very reluctant to lend additional funds as they will be short on cash and fearful of additional loss. As a result, companies that depend on that cash for payroll and day to day operations as they wait for customer payments will enter severe financial hardship, and their situation will worsen. These companies will then be unable to support their suppliers who will then be unable to deliver the products on time that the customers require before payment can be made, creating financial turmoil up and down the supply chain.

Corporations go into cash hoarding mode

As a result of the financial crisis that will result from the lending halts and the bank’s unwillingness to issue letters of credit, those corporations with cash will go into hoarding mode. Supplier payment cycles will be extended to 90, 120, and even 180 days and those companies that rely on the cash to survive, especially with few options, will be under even more undue hardship. So even if your company is okay, and doesn’t hoard cash and pays its suppliers on time, your suppliers could still be suffering as a result of most of their payments being delayed, and the actions of others puts your supply chain in jeopardy.

Consumers panic and stop spending

Eventually, when the fiscal crisis starts to enter panic mode, a large number of consumers, fearful for their jobs (as fiscal crisis almost always result in layoffs from cash-strapped or cash-hoarding corporations, take your pick), stop all unnecessary spending. As a result, any product line that your corporation makes that is considered unnecessary by a segment of consumers sees a drop in sales and all those nice rebates and discounts you negotiated based upon an expected volume commitment go out the window.

And since fiscal crises cannot be predicted, it’s another damnation that will drive you mad.