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Finance And Procurement: Mind The Gap

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In this guest post Kristin Ruehle, procurement offering lead at Accenture Operations, discusses how procurement and finance can work closer together to stop the loss of savings and drive out increasing amounts of value for the business.

 

Leading companies are now realising how much potential value can be driven out from optimising their procurement processes.

 

But the fact remains that indirect spend—the dollars spent on goods and services that help companies run their businesses, but don’t go into their end products—represents 15% to 40% of revenues depending on the company.

 

Despite the size of the prize, many companies are only in the early stages of tackling the indirect procurement opportunity. More troubling, however, is that many companies that do tackle indirect procurement are in for a nasty surprise—the savings they identify fail to fully materialise and reach the bottom line.

 

A recent survey of CFOs and CPOs by the Manufacturers Alliance for Productivity and Innovation (MAPI) underscores this problem as respondents claimed that their two biggest procurement challenges were the ability to track and validate compliance as well as the verification that the identified savings hit the bottom line.

 

The root cause of this problem is lack of follow-through in the form of poor processes that cause the loss of savings. Organisations may have attempted to address two of the three biggest challenges to optimising procurement—gaining access to as much spend as possible by using category specialists rather than procurement generalists; and levelling the playing field with suppliers by tapping into market intelligence. But with poor source-to-pay processes, weak compliance, lack of stakeholder engagement, misapplied pricing and lack of visibility and enabling technology, those savings are degraded.

 

Tighter partnership between procurement and finance at all stages is the best way of closing this gap and delivering more value to the business.

 

Here are a few of the biggest missed opportunities.

  • Access to spend: The number one lever of driving value from procurement is access to spend. The typical company professionally manages only about 50% of spend. Best in class is closer to 90%. Add deep category market intelligence and strong process to this and the best-in-class company drives 5 times the value of the average company. The CFO can help broker relationships with key budget stakeholders and help the Procurement organization gain access to more spend.
  • Optimised accounts payable processing: Finance and procurement each touch the accounts payable process, but from their own silos. With closer alignment, procurement can help finance optimise capital efficiency by helping analyse the trade-off of early payment discounts vs. optimal accounts payable timing. A major bank accelerated payments for certain vendors netting $4m annually in early payment discounts. A major software firm added $10m through the same process.
  • Contract compliance: Compliance will never be 100%, but organisations potentially lose money with every purchase they make due to a number of factors: use of non-preferred suppliers, mis-applied pricing and discounts and lack of visibility to stop these mistakes before they are made. A study by The Hackett Group found that companies could generate $9m in savings per $1bn of spend by closing these compliance gaps—yet another tangible argument in favour of closer CFO/CPO collaboration. One way to ensure alignment is to measure savings at the point when spending occurs—i.e., how much of the savings that were identified at the front end were actually realised. This will highlight how much savings leakage has occurred, and provide a common jumping off point for finance and procurement to jointly innovate on how to establish the proper metrics, processes and checkpoints to eliminate leakage due to non-compliance.

Many companies rightfully focus on the front-end strategic sourcing and negotiation process, but without a solid source-to-pay process in place, many gains will evaporate. A tighter partnership between the CFO and the CPO can help companies realise the bottom-line value they expect from optimising procurement. At the same time, the procurement department will be better positioned to deliver better, timelier information and data and proactively monitor for and stop non-compliance.

 

Kristin Ruehle is procurement offering lead at Accenture Operations

 

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