Category Archives: Procurement Innovation

Finance and Procurement Need to Collaborate, but Sometimes the Relationship Needs to go Beyond the Financial Viewpoint

A recent article over on Financial Executives on Why Finance and Procurement Need to Collaborate For Success made some very good points …

The article in question, which noted that how companies approach expense management will become a top priority with the economy heading into uncertain times summarized an interview with Matthew Smith, CFO & CoFounder of finetune, a full service expense management firm focussed on select complex categories (such as uniform rental, waste & recycling, pest control, energy & utilities, and security) for large clients. In addition to the baseline assessment, sourcing, implementation, and ongoing management (which many BuyDesk operations will do), they also do regular auditing, which is key to ensuring you get what you pay for because, as Matthew said, where the rubber meets the road in expense management is what happens after the contract is signed.

Matthew believes that expense management does need to be its own thing and that there has to be a coordinating element between the affected functions, which always includes Procurement (which is responsible for placing the order and managing the contract) and Finance (for paying the bill) and then the department(s) that are using the goods or services being procured. Especially since the vendors will give up a lot in the negotiations, and then do their best to get it all back through change orders and off contract-purchases of items not covered under the contract. In addition, analytics is becoming critical, but most organizations have bad data. However, without the necessary expertise, the data won’t be clean and the right calculations can’t be done. Procurement can identify the good data and Finance can identify the key analysis that needs to be done. (Not ChatGPT, which is hallucinating and getting all those bad answers and producing false information. Matthew’s words, but the doctor couldn’t agree more.) Furthermore, without a good understanding of the entire situation from multiple sides, you don’t know when incentive are good or bad.

Expense management is a key area where Finance and Procurement needs to collaborate because it takes both departments to prevent overspend, and the article was a really great deep dive in this respect, but it’s not the only area. Working capital management is also key. Managing expenses is a great start, but the goal should be improved working capital management. If both departments work together, and with other organizational departments, to appropriately predict demand and utilization, and optimize payment terms, then the organization can do accurate cash-flow forecasting and working capital can be optimized. And that can truly only happen when both departments collaborate.

A CPO Leading a Spend Management Strategy is a Key to Organizational Success

Not that long ago, the doctor gave you THE SIGN that you need a CPO which, directly put, was that your organizational spend was over 10 Million a year. No ifs, ands, or buts about it! Not long after, he found this article over on CXOtoday.com which pointed out that empowering business success was The Art of Mastering Spend Management. This article stated that companies should consider implementing a spend management strategy, regardless of their size and it made him happy (even though the article looks like it was written by a junior copy-editor* who just cut and paste standard spend management summary sentences from generic spend management publications as it was not very deep or specific) because CXOs need to hear this at a high level over and over and over again until they get it. (Note that the doctor doesn’t get happy often. Most articles just make him angry. Sometimes very angry, especially when the conscientious invoke their right to dare to be stupid and embrace artificial idiocy, but that’s a rant for another day.)

The article starts off by clearly stating that a spend management strategy plays a vital role in today’s economic reality as it enables companies to control costs, boost financial efficiency, and make informed decisions. It ensures resource optimization, agility, and long-term stability, enhancing competitiveness and adaptability in a rapidly changing business landscape.

This is most certainly true. And all one has to do to see that it is true, and it would have been so much better if the article said this, is remember the first formula they teach you in business school:
Profit = Revenue – Expense

Since Spend Management allows you to minimize expenses, this helps you maximize profit. And when you consider that
Margin = Sale Price – COGS      and that
Margin % = (Sale Price – COGS) / Sale Price      and that
Margin % for most industries <= 10%

This says that every $1 saved in expense generates at least as much profit as every $10 increase in sales. As a result, spend management is at least ten times as effective as sales or marketing and key to get a grip on early, even before you can afford the full time CPO. The CFO and COO should develop best practices for any decisions that result in spending, monitor the decisions, ensure corrections are made (and employees [re-]trained) when mistakes are made, and baselines generated for all recurring costs. Even though they might not realize the same level of success as an experienced and dedicated CPO, the baselines they generate and the knowledge they capture will be key when the CPO starts as the knowledge will allow them to dive in quickly and find near-term and mid-term opportunities for improvement (and cost reduction) and the benchmarks will allow them to not only prove it, but ensure that all bids received are competitive.

The only thing we want to note is that the important aspects of spend management, especially for smaller organizations, are:

  • strategy,
  • process (that implements the strategy), and
  • governance (that ensures the process is followed and the strategy implemented)

Technology is not critical (or even necessary), and only technology that supports the process (and collects the appropriate data) should be implemented.

This is important to note because this article is sponsored by a particular vendor in an effort to promote a particular product (which is only good for T&E spend, not all organizational spend) and you don’t necessarily need that technology (or any other instance of that technology) to have a spend management strategy and do proper spend management, especially if you are a smaller organization. (However, larger organizations do need good T&E spend management, and spend analysis, because flowers should not be $5,000 unless it’s a greenhouse.)

* but what should one expect considering it was sponsored by SAP to promote SAP Concur (and routed through their PR Agency)?

Need Some Procurement Principles? Balfour Beatty Published a Great Starting Point.

Google sometimes digs up the strangest things when you ask for Procurement News. One thing it recently dug up was the Balfour Beatty “Procurement Strategy” page, which wasn’t so much a strategy, but a set of principles that every organization should subscribe to. (Regardless of what industry they are in.)

So, if you’re wondering what principles you should adopt before you set your Procurement organization strategy, you can start with these seven principles:

  1. Become the customer of choice
  2. Ensure that we have the right, skilled people for the job, a strong talent pipeline and that we provide an environment where they excel
  3. Put in place processes that work, are compliant and transparent, making the best use of technology to deliver for our business and for our supply chain partners
  4. Mitigate and manage risk through early and closer integration with our supply chain partners
  5. Work together to identify market risks and forecasts
  6. Keep safety and wellbeing at the forefront of all that we do
  7. Prompt Payment for Suppliers

The great thing is they will lead to a great strategy as:

  • it covers talent, technology, and process transformation
  • it places importance on the supplier, the relationship, and the supplier sustainability
  • it covers CSR (corporate social responsibility)
  • it covers risk

In fact, the only principle that is missing is Sustainability, so if you add this eight principle

  1. Embrace sustainability in all that we do

We’re pretty sure that if you were to start here, you won’t go too far astray in the creation of your Procurement Strategy.

Procurement Performance is Relative …

… and, specifically, good Procurement performance is relative to how bad you’d be doing without a good Procurement department.

A recent article on the Supply Chain Management Review on how Procurement Costs Increase, But Top Performers See Increased Advantage which quoted a recent study from The Hackett Group, really drives the point home.

The recent Hackett study, which found that Procurement costs did increase in 2023 and now comprise 74% of total spend, as compared to 69% in 2022, for Digital World Class organizations, also found that these organizations did much better compared to peer organizations where costs increased from 89% of total spend in 2022 to 93% of total spend in 2023. In other words, Hackett found that world class organizations spend less overall while also operating at 21% lower cost than their peers and 32% less staff.

In other words, a good Procurement department staffed with educated and experienced buyers will save the organization more than it spends on the Procurement department, while keeping its overall costs below its peers. This means that any organization with a world class Procurement department can not only keep its prices below its peers in a cost conscious consumer environment, but also increase its organizational sales while its peers struggle to hold onto an existing customer base.

It may be hard to see the value of a leading Procurement department when you don’t have one, but these Hackett numbers should make it abundantly clear. 21% lower cost, and spend, on average than peers is substantial. This means that even though your spend will go up year over year in an inflationary environment, the rate of increase will be much less than your peers, giving you a significant advantage. Furthermore, if your organization acquires and installs the right affordable tools, as chronicled in our series on how much should you pay for Source-to-Pay, including our article where we explicitly said Yes Mid-Markets, 120K is More Than Enough for Source-to-Pay!, you can see multi-million ROIs in the 8X to 26X range, depending on your annual spend and Procurement maturity level (that determines how much spend you can push through the platforms).

In other words, while you can never put an absolute value on cost and Procurement value as that depends on constantly changing market conditions, you can put a relative value on best-in-class Procurement operations, and that value is 21% better than peers. Twenty One Percent. Think about that the next time Procurement asks for more senior buyers to put more spend under management or better platforms.

There are Three Primary Parts to Procurement Orchestration

Procurement Orchestration is the craze, presumably because Procurement shouldn’t operate in a vacuum. There are a number of startups just focussed on orchestration, a number of analyst firms are jumping on the orchestration bandwagon, and a number of enterprise automation platforms are all of a sudden claiming to be procurement orchestration platforms to get in on the buzz. But there’s a lot more to Procurement Orchestration than just application automation. A lot more.

Procurement Orchestration, which we included in our 39 Part Series to Help You Figure Out Where to Start with Source-to-Pay in Parts 34 to 36 and 39, MUST Address, at a minimum, the orchestration of:

  • procurement data
  • procurement process
  • procurement stakeholders

First of all, good Procurement needs to be data-informed. (Not data driven, data informed. Data driven means that all decisions based on the available data, which is never complete. You can accurately capture all bids in an RFP, previous OTD metrics, previous defect metrics, subjective quality ratings, ESG data, etc. but you can’t capture relationship data, innovation support, etc. and these are also factors that are important in Sourcing and Supplier Selection.) This means that all available data needs to available to the Procurement team. It doesn’t have to be centralized in one system or pushed to a data warehouse / lake / lakehouse, but the source system (that holds the golden record of truth) for every piece of data needs to be identified and integrations created to allow the necessary data to be accessed as needed by the Procurement system currently being used.

Secondly, good Procurement needs proper processes. That’s more than just application orchestration as not all Procurement teams will have applications for every step of the process, and even those that have major applications for every major stage (intake / need identification, spend analysis / opportunity / procurement process identification, sourcing, supplier onboarding / management, contract negotiation and governance, e-Procurement/PO Generation and Management, Invoice Management and OK-to-Pay) will still need to orchestrate intermediate process steps such as stakeholder collaboration, external vendor risk/ESG review, etc.

Thirdly, good Procurement needs to involve all of the relevant stakeholders. The category manager, the risk manager, the budget holder / executive, the in house counsel, etc. All of these individuals need to be able to interact with the procurement process and artifacts at the right time, and through their applications if they have special tools to do the risk analysis, budget analysis, contract review, etc. Thus, supporting procurement goes beyond just supporting procurement applications and processes, but peripheral applications and processes as well so that all stakeholders can be part of the process and effectively contribute their expertise and experience.

Remember this the next time a jazzy tool tries to lure you in with pre-built Procurement platform integrations or easy, visual, procurement workflows. That’s just part of the puzzle.