From cost centre to value driver
From the August 2017 print edition
The evolution of procurement is moving quickly from tactical to strategic within most industries, a direction now seen as the best approach to creating value. Establishing a strategy that eliminates departmental barriers as a way to enable internal stakeholders requirement input is the way to go. That’s because executing the procurement process in an “enterprise” platform provides the finance department with leverage to plan appropriately and create value for the organization.
There should be an agile flow of information between the two departments to enable a best-in-class business process that will allow the organization to plan well and build resilient support systems with suppliers and business partners. The finance department needs to understand the requirements of the organization through profiling spend analysis, either quarterly or yearly. Teams from both finance and procurement need to establish a synergy to develop procurement budget spending, which will in turn give the finance department superior visibility on procurement’s spend profile. The involvement of finance team members early in all major procurements also retools the value chain. This must be consolidated through regular meetings to review the price impact in preparing the enterprise-purchasing budget.
Procurement and finance working together can easily create value that will benefit the organization in the long run. An important area of team synergy is increased collaboration between the two teams to establish a common knowledge base that can then help execute all strategic sourcing initiatives. This will translates into cost avoidance, cost reduction and continuous improvement of the business process. Executives are increasingly being tasked with developing avenues for departments to create value, including dollar value. Real value creation by procurement can never occur in a silo. Collaboration among teams, such as with finance, helps connect the dots of the organization’s value chain process. Increased visibility of information between teams also simplifies the process of aligning payment terms to every purchase order, contract purchase to an organization’s accounts payable to suppliers, vendors and contractors.
The advantages from cross-functional activities between procurement and finance—apart from cost savings, eliminating legal risk with vendors or suppliers—includes the enterprise sourcing platform of which finance is not just an enabler but also a process driver. Some of the benefits from this synergy include increased cost savings; cost avoidance; a simplified process among teams; better planning and increased speed of operational execution. Such collaboration also enables information visibility, which will support effective decision-making. Also critical is the ability of the teams to learn from each other, which will help support functional activities after the departure of any staff.
However, cross-functional activities risk conflicts of interest and and increased lack of cooperation among team members through job security fears, as shared information increases the skills of all team members. This can give an organization a leaver to lay off employees. Another challenge is a steep curve on how departments learn from each other. Developing application systems that harmonize deliverables between finance and procurement could be challenging with regards to extracting report system that can trigger false data, which translates to poor business requirement gathering. A lack of communication between accounting and purchasing reduces the leaver that serves as a competitive advantage to review payment terms.
These challenges can be overcome through establishing a clear standard operating procedure. Such a procedure will make it easy to capture deliverables like cost reduction when compared to the projected financial budget, because procurement has evolved from its traditional role to a value creator. Developing a good application system that pulls the critical functional requirements from both departments will help minimize or eliminate the challenge of cross-functional deliverables. It will also serve as great decision support information for the finance department.
Enabling cost savings requires a data mining strategy to profile financial spending during the previous year. Another way of resolving these challenges is deploying an application program allowing information visibility among business units. Cross-team training is another approach for managing functional activities that will enable organizational capabilities. This translates to retooling purchasing as a revenue generator, rather than a cost centre. Collaboration between finance and procurement creates variable payment terms between client organizations to supplier or vendor and synergy between finance and purchasing.