Procurement and finance should sing in the same key.
 
By Tim Snow
 
The procurement department is often viewed by those outside as being adrift on its own in the world of business or trapped in its own ivory tower. This segregation of procurement from the rest of the organization, particularly the finance department, means that a great opportunity is being missed to save money and streamline business operations.
 
The process of integrating procurement more efficiently with other departments will not happen overnight, nor is it likely to be a completely smooth transition to co-operation, but the overall benefit should outweigh any misgivings and initial road-bumps.
It might seem obvious that the procurement and finance departments should co-operate more, but what benefits come from engagement between the two? The key to this relationship is alignment—not just to create balance so that one department isn’t contributing less than the other, but to ensure that both are on the same page in various sectors.
 
Initially, both departments need to ensure that they have a coordinated view on how best to manage and control costs: This might seem obvious, but it is essential to ensure that both agree on something as important as costs. This also extends to how costs are presented to stakeholders to make sure that no inaccurate numbers are presented, which can result in unnecessary confusion and subsequent mistrust, with repercussions for the organization. Both departments also need to work together to get under the skin of spend—to understand how spend and costs are accounted for, so that they can get the most out of deals, by considering tax, risks, and accruals processes.
 
The earlier that the procurement and finance departments collaborate, the better. A major benefit of this will be the resulting support network for projects, mutual supporting messages for work and targets. Building a robust relationship based on mutual understanding and trust will provide strong foundations to grow each department, and root the organization in a sound financial and procurement position.
 
It isn’t nearly enough to just talk to each other at the start of any new project or issue. Regular contact and updates need to be given to ensure that everything continues to run smoothly—and that any issues and queries can be resolved before they become major issues. This needs to be done not just on a project-by-project basis, but also more generally.
 
The alignment of both departments might initially encounter resistance from both parties. This is why it is essential that the right message be given about communication from the top down: The financial director and procurement director need to meet regularly, and at the start of any new project. High-level meetings promote full and frank discussions about respective department strategies and how they can be successfully aligned. This means that on subsequent discussions with their respective departments, unified communications and a united front can be presented. More importantly, with the department heads meeting regularly, other departments will be encouraged to meet up with their counterparts in the opposite team to discuss any arising issues, and to solidify the relationship. The department heads lead by example, and this will encourage communication from the top down.
 
However, this isn’t to suggest that all will be smooth-sailing, and that complete agreements will be had. It is essential to remember that both departments have specialities in different areas. Both departments need to remove any preconceived ideas about the other at the start of this “new relationship.”.  One such example is that many people might think that they can ‘buy,’ but do they have the influencing and negotiation skills to deliver, and not just that, but deliver a good deal for the company? Procurement knows the tricks of the trade and has strong relationships with suppliers—all-important for the best deal.
 
It also isn’t just a case of making sure that people solely engage with the directors of departments; relationships need to be built at all levels. Everyone has knowledge that they can bring to the table and could be valuable to the project.
 
 
Why Engage?
The procurement department should be clear on the skills that add value to the business, and then communicate that effectively to others. What successes has procurement had in the company—what has the department learned, where does it have relationships outside the organization? Procurement (and any other department, for that matter) needs to make the time to listen and answer any questions that others may have. Although procurement will be experts in what they do, others won’t be.
 
Procurement departments are able to understand stakeholder needs, as well as supply markets, dynamics, and services that suppliers can and do provide. In addition, procurement can effectively assess value for money through a good understanding of cost drivers and benchmarking data. This is particularly important when coming out of a recession—simply achieving the cheapest price can be a false economy.
 
These skills of understanding the true value of money means that the procurement department can put itself in the strongest position possible when it comes to negotiating deals, and influencing the right departments. Coherent and persuasive arguments are presented to other departments and suppliers themselves to get the best possible deal. Understanding of legal and risk management further enhances value. All of these skills mean that procurement can help the finance department understand how the business operates, and the cost basis on which it does so.
 
Procurement departments frequently also have a wide and detailed understanding of stakeholder needs on a more micro level, which can aid finance as often finance has a top level understanding of costs, but limited detail. The same can also be said for costs, cost drivers, and market dynamics—the nature of procurement is to be able to analyze multiple dynamic areas for the best value possible.
 
In the end, the true test of procurement’s value will be through the project results they achieve—results that will be enhanced with collaboration with the finance department.
 
The Wider Benefits of Integration
The business as a whole stands to gain huge benefits from a better relationship between finance and procurement departments. A balanced finance, risk, and commercial view on products can be given, to ensure that the best course of action is taken. This balanced view means that projects are more likely to be successful, due to all factors being considered.
 
Both departments need to be sure that any relationship they develop is continually worked upon and enhanced. This is particularly important when either department has any change in strategy or approach. If the other department isn’t informed and updated, the relationship could be put back to square one and become unnecessarily confused.
 
 
Top Tips for Successful Procurement Outsourcing
According to Johan Denekamp, Group CEO for 4C, a number of significant points will determine the eventual success or failure of a procurement outsource provider to deliver the expected benefits to the organization.
 
So what are the ingredients for building a successful relationship? Our top five tips for a winning recipe include:
 
1. Pick the “right” supplier to start. As in any relationship, the fit needs to be correct. Ask yourself the question—will you enjoy spending the next few years working side by side with these people? Will your business stakeholders feel comfortable sharing their goals and objectives with these people? Meet the team that will actually be delivering your service.
 
2. Ensure “skin in the game” for both sides. Don’t fall into the trap of entering a contractual relationship where either side has little to lose. Think about the importance of this revenue stream to your outsource provider— will they do what it takes to make it a success when the going gets tough?
 
3. Use an appropriate commercial model. Whatever payment model you decide to use, it is critical that the commercial incentives of your procurement outsource provider are “aligned” to your organization’s business objectives and your procurement function objectives. Any misalignment of these will result in tension and relationship breakdown over the medium term.
 
4. Create a spend scope for success. Give your provider a chance to succeed by ensuring the category scope gives them enough “meat on the bone” to go at. Just handing over the small spend, low-risk categories to a third party will not enable them to demonstrate their true value.
 
5. Build in flexibility. Scope and requirements will change many times over a multi-year period. Ensure that the resourcing and commercial models allow for flexibility in the resource mix (skill sets) and size, as well as location (on-site vs. off-site).
 
 
Tim Snow is senior manager for 4C Associates.