How Finance and Procurement can collaborate and contribute to a company's operational and financial performance objectives.
Although finance and procurement have been historically siloed, they actually have more in common than not.
Satya Ramamurthy, Head of Management Consulting, KPMG in Singapore, opened the 5 October Procurement igNite session by highlighting some areas where procurement and finance are likely to have conflicts. He noted that finance and procurement do not always speak the same language.
For instance, ‘savings delivered’ is usually a key KPI for procurement. Often, finance would make an incorrect assumption that when procurement professionals report cost savings, these would immediately translate into an increase in profits. The basis of savings measurement thus becomes a source of contention. Saurabh Mehta, Director of Channel Sales at Ivalua, agreed that there is a huge delta between identified savings (by procurement) and realized/actual savings. He reckoned that part of the responsibility falls on procurement to ensure that what is negotiated is what is required for savings.
Satya also pointed out that a stronger alliance between procurement and finance provides many benefits across the enterprise. Procurement has been increasingly involved in managing categories like marketing, insurance, audit and legal, which previously had minimal involvement from procurement. As a result, procurement has more strategic influence on the financial performance of the organization in recent years. Both functions can play the role of business partner and strategic advisor to the CEO.
Saurabh noted that in order to forge a more strategic partnership between the two roles, communications is essential. This point resonated strongly with Mark Crouch, Global Head of Procurement in a technology company. To him, the value that procurement professionals bring to the organization needs to be better communicated, and in commercial terms that finance and other business units can understand.
Collaboration is the way to go in order for CFOs and CPOs to work better together. Sebastian Chua, Head of Procurement at Health Promotion Board, recounted that in his early days as CPO, his CFO and himself would spend hours discussing and debating, trying to understand each other’s stance before finally coming to terms on the true meaning of collaboration. Collaboration occurs when all parties come together to jointly develop solutions to support the company’s shared objectives, even if it may involve trade-offs for some; but as a whole the company will still be better off. Sebastian shared that it was a long journey but one that was well worth his time and energy, as this collaborative culture is still defining procurement and finance relationships in his organization today. However, he also cautioned that to be successful, both functions have to deliver business outcomes and drive innovation with the end customer value in focus.
Saurabh pointed out that most procurement professionals believe that if they are helping with the company’s bottom line, it ultimately improves topline. However, while this is generally true, if the savings are not in line with the CFO’s goals, it is a futile exercise. Sebastian strongly concurred and in his words, “procurement and finance should focus on delivering the top-line performance where there is unlimited opportunities”.
Jean-Philippe Gauvrit who is APAC & Japan CFO at Nokia highlighted that the role of the CFO and CPO would evolve and converge even more as we enter Industry 4.0. He envisaged a closer working relationship between CFOs and CPOs, due to trends such as changing customer expectations and digital disruption. In his role as CFO, he has increasingly been looking to his procurement professionals to provide him with detailed spend analysis and ideas to improve the organization’s bottom line.
Finally, Mark shared his model for procurement, where Quality + Service + Risk + Flexibility = Power of 3 (Price + Performance + Profit). As a basis, the formula can help CPOs better articulate their value to the CFOs, and bridge the communications gap between CFOs and CPOs. Only with clear metrics can businesses understand the true impact of procurement on the organization.
In summary, there is synergy between the two critical corporate functions. CPOs need to align their goals with CFOs’ priorities in order to drive value for the organization.