Aligning Finance and Procurement to Strengthen Corporate Financial Health
By Ari Salonen, Special Contributor -- Supply Chain Management Review, 8/11/2009
The recession is causing many firms to re-think their business processes. One area that is getting a closer look is the connection between finance and procurement. In too many organizations they work independently, resulting in missed opportunities as well as potential problems. The recent Cost of Control study that Basware conducted in collaboration with Mark Frohlich, associate professor of operations management at the Kelley School of Business, found that only 46 percent of CFOs see real integration between purchasing and finance processes, and less than half see any level of integration between the procurement and finance teams.
Many issues arise when one hand doesn’t know what the other is doing. Without the proper visibility and control of end-to-end purchase to pay functions, companies aren’t aware of their unrecorded liabilities, they cannot effectively manage spend or cash flow, nor benefit from volume discounts and other advantages. The two departments are inextricably intertwined: While procurement can capture the spending plan of companies, it is in accounts payable where organizations can see where their money is actually being spent.
The executives overseeing these areas—often Chief Procurement Officers (CPOs) and CFOs—share common goals, such as: achieving rapid savings; monitoring and controling risk; and leveraging technologies and processes for greater transparency and value. By working together, procurement and finance can effectively cut expenses, streamline transaction costs and mitigate potential liabilities.
Best-in-class companies recognize the importance of aligning procurement and finance to achieve results. Following are best practice strategies of leading companies that you can implement in your organization:
Assess your current purchase to pay processes. Determine baseline performance by measuring key performance indicators (KPIs). Use a KPI tool to identify inefficiencies, problem areas and potential root causes. Where are there opportunities for improvement?
Determine what the specific metrics your organization wants to achieve, e.g., achieve X percent savings in particular spend categories, get X percent of spend under management. Establish an action plan for accomplishing this.
Look at the solution holistically. Focus onconnecting procurement and invoicing operations through an intertwined business flow (purchase to pay) that automates the entire process from identification of a need, and planning and budgeting, to procurement and payment. This will provide efficiency, visibility and added value throughout the financial supply chain.
Establish purchase to pay processes and systems that increase visibility and control, and provide key benefits, such as: reducing off-contract purchases; improving operating efficiency in procurement and accounts payable; bringing greater spend under management; saving costs; and improving supplier relationships. Large companies might consider establishing Shared Service Centers (SSCs) to benefit from economies of scale and gain greater control over processes organization-wide.
Implement the right tools to drive best practices and enforce controls. By implementing easy-to-use procurement technology, for example, organizations can increase widespread adoption of catalog purchasing and reduce the problem of maverick buying (when a requestor buys items or services outside the preferred process or system). Invoice automation technology enables companies to gain visibility and implement controls for corporate policies, reduces the time and cost of processing an invoice, captures all invoices upfront to eliminate surprises and reduces the problem of unrecorded liabilities. Companies benefit from higher productivity, accuracy, visibility, and auditability needed for compliance and financial agility. In the Cost of Control study, CFOs in businesses with highly automated purchasing processes were more likely to be satisfied that procurement was delivering on cost savings targets (62 percent) than businesses that had low levels of purchasing automation (47 percent).
Continue ongoing measurement so you can improve processes, gain efficiencies and find ways to save money.
Actively monitor key supplier behaviors and indicators on a frequent basis to mitigate supply risk. It’s important to look for warning signs of supplier risk, such as frequent calls for payment before invoices are due, quality problems or late deliveries.
Improve working capital management. Using information captured on spend, cash flow, supplier performance and scheduled payments from automated purchase to pay systems, strategically assess your payment options with each of your suppliers. Determine which suppliers you want to work with to negotiate early payment discounts and when it may make sense to hold onto capital and pay under traditional terms.
While it makes sense for procurement and finance to collaborate, it’s not always easy to break down current processes or organizational barriers. Following are strategies for facilitating the cooperation between finance and procurement:
Enlist support of key stakeholders. Build a strong steering committee, including the manager of finance, manager of procurement, CFO and others.
Determine clear metrics and get consensus on the objectives you want to accomplish. Make sure the roles and responsibilities are carefully defined, and that the steering committee meets regularly to accomplish its goals.
Ensure that you are all using the same data from the same source. Often, procurement and finance departments have separate databases and are looking at different information. Best-in-class companies make sure that they are viewing the same, real-time data for all spend, supplier, payment and other related information.
By working together, finance and procurement can help companies achieve better working capital management, cost reduction and risk mitigation. This will not only help them survive the recession but also become strong and well poised to take on the new opportunities that lie ahead.
Ari Salonen is General Manager, North America for Basware, a leading provider of software solutions that automate the purchase to pay process for enterprises around the world. For more information, contact info.us@basware.com, or call 203-487-7900.
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