While not all mid-sized organisations will have a dedicated procurement function or a c-level purchasing professional, the transition to a large enterprise is likely to be the time when this becomes the case for many. Where procurement may have once been a subset of finance it will be a separately directed and managed team.
It is vital the relationship with finance is synchronised in order to deal with three common growth-related challenges. We have termed these ‘complexity’, ‘control’ and ‘cost (of process)’. Although all three of these challenges impact the procurement and finance function in different ways there are common solutions providing a benefit to all. But what is essential is both parties understand the others’ position on these challenges to make successful headway.
Increased complexity is a natural side effect for most organisations as they grow. But the change from mid-sized company to large can involve crossing a huge divide. This is because the intricacies of knowledge and information required to manage the business, in particular its finances and spending, become so much more pronounced.
For the CFO business complexity increases the pressure behind driving performance. What was once a sound and simple financial strategy may well be left floating without paddle due to big waves of change. These may include trading and reporting in a large range of currencies, having to account for global market conditions and regulations, and also dealing with higher reporting due diligence demanded by shareholders, venture capitalists and other external investors.
For the CPO complexity drives a different pressure, achieving value for the organisation. As a smaller, simpler entity, an organisation has to worry less about ensuring people are buying the right products at the right price from the right suppliers. No area of spend is likely to be so significant to justify investment ways to optimise purchasing, review suppliers or oversee transactions in order to save money. As spend becomes larger and more complex across departments, locations and people however, procurement’s job of dealing with complexity also grows.
Increased complexity also launches a domino effect of needing to achieve greater control across finance and procurement.
The CFO’s control challenge is about budget decentralisation. Budgeting would once have been a centrally managed and relatively high-level job. It was usually easy to ascertain needs and set a budget against business goals. As organisations grow, budgetary responsibility is inevitably pushed down and outward across teams and departments. But it is vital the CFO’s control and visibility doesn’t leave with it, otherwise knowing money is being spent within the framework of the business plan becomes nigh on impossible.
The CPO needs to control spending against contracts. General increases in the amount of money being spent, the number of people and departments requisitioning goods and services, and that desire to achieve best value across all categories of spend, drives a need to get to grips with maverick activity. Where are people failing to use preferred products, services and suppliers in favour of their local provider? How is this lack of spend control disabling carefully sourced contracts? Does procurement actually have the ability to analyse spend and determine where greater control is needed?
Cost (of process)
The cost of process challenge is again double-edged for finance and procurement. As organisations get larger, more complex and in greater need of sophisticated control measures they are faced with two cost issues. The first is that size makes organisations more aware of scales of inefficiency. Increases in paperwork and process timescales become apparent when once relatively controlled manual interventions like invoice approval swell due to huge increases in transaction volumes. The second is that these larger scale inefficiencies make justifying the cost of automation easier. Once again this is a challenge that the CFO and CPO can work together to solve.
The CFO is concerned about turning manual transaction processes, such as issuing purchase orders, managing approvals, invoice matching and payments into automated ones because the cost of employing financial administrators to push paper is increasing and taking resources away from higher value financial strategy. When the organisation was smaller, automating this type of process, which might have been contained within the work of one or two AP clerks, was not a justifiable decision.
Process can also be a killer for the newly established procurement function. The business wants senior advisors, tactical sourcing and purchasing skills and deep category experience brought into play, but manual financial processes can render procurement a second costly administrative function. Like his CFO counterpart, the CPO needs to seek control through automation – so procurement can help people buying the right things rather than simply administer their often poorly judged purchases once it is too late.
The synergy that exists between finance and procurement as mid-sized organisations grow is plain to see. Rather than take opposing stances I believe the success of the new enterprise rests on the ability of the CFO and CPO to collaborate and solve their challenges together. Achieving this and seeing that each others’ point of view contributes to a set of common goals is at the crux of continued success.
In my view it is often the ownership and cost of technology solutions that fuels a lack of collaboration. There are stark differences between the ERP-driven deep reporting requirements of finance, versus the transactional and real-time visibility needed by procurement. But the technology landscape is also changing, offering mid-sized organisations greater choice as they blossom into the leading enterprises of tomorrow.
☛ Daniel Ball is director of Wax Digital