StrategicCFO360 Q&A: The Power of Procurement
This article was originally published by Katie Kuehner-Hebert from StrategicCFO360.
With the pandemic’s supply chain issues exacerbated by inflation, finance professionals are more heavily relying on their procurement departments to not only save costs but also provide more value to the bottom line.
David Pennino, founder and CEO of LogicSource, a sourcing and procurement services firm based in Norwalk, Connecticut, shares how CFOs can best work with their procurement teams—whether in-house or outsourced—to create tangible results for their organizations.
How have recent events changed the role of sourcing and procurement within the enterprise?
The events of the last 24 months have significantly increased the profile of procurement. This new-found recognition has resulted in additional responsibilities, along with increased pressure to drive cost reductions. Procurement teams that were already under-invested and under-resourced now face significant challenges meeting the new expectations the organization has for the function: increased pressure to drive cost savings; increased involvement and workload to help business unit stakeholders mitigate inflationary increases; and increased challenges ensuring continuity of supply.
In addition, procurement teams are also having to contend with rapidly shifting needs for category expertise and market intelligence; increased need to support the finance function with budget/cost reduction forecasts; overseeing supplier diversity programs; managing supplier risk; and ensuring the organization meets its sustainability goals.
All of the above priorities have typically come with downward pressure on headcount for procurement teams. This situation has been further compounded by the fact that the talent market is at a peak and employee churn is at record highs – particularly in the procurement segment.
Procurement is starting to get the seat at the table that it has always wanted – its true value is beginning to be understood at the highest levels of the organization. With this recognition should come thoughtful investment; the returns can be significant in terms of EBITDA improvement, risk mitigation and ability for businesses to compete more effectively.
CFOs are often frustrated that savings initiatives touted by the procurement department do not find their way to the P&L. How are CFOs addressing this issue?
This is an all-too-frequent issue that, at its core, is driven by a lack of communication and partnership between all of the various stakeholders in procurement, financial planning and analysis, and the business units.
Procurement should bring transparency and drive alignment with its FP&A and business unit stakeholders on baselines for sourcing initiatives, as well as whether projected savings are to be taken to the bottom line, captured centrally, or re-invested by business units.
At the most tactical level, governance around the financials associated with project baselines is critical at the start of a sourcing initiative. This will ensure expectations are properly set with FP&A and the business units prior to executing the project.
Simple questions, such as “Does the project baseline match the budget?” are critical if the savings that procurement drives are to be realized to the P&L. A mismatch that is not understood at the start of the project will result in procurement claiming a different—and typically larger—savings amount than the one recorded by FP&A. This is the primary reason CFOs are frustrated with savings touted by procurement not finding their way to the P&L.
Driving this project-level governance through procurement ensures proper expectation-setting and clarity between finance and procurement. In many cases this exercise also drives improvements to the budgeting process for the following year.
Once the project is complete, governance around the treatment of the savings is again critical between procurement, FP&A and business unit stakeholders. Alignment on how the savings will be captured or reinvested ensures that finance maintains visibility and control of the savings generated by procurement, and that they are successfully realized to the P&L.
Ultimately, CFOs need procurement to lead the organizational change across business units and the FP&A function to develop policy and process around financial treatment of savings and manage governance to ensure transparency and accountability.
What is the role of technology and data in creating a best-in-class sourcing and procurement function?
There are many ways that technology can help procurement teams. Among the most critical, it can help them more efficiently execute sourcing events and supplier negotiations, by leveraging external market intelligence and benchmarks to ensure best-in-market pricing, service and innovation.
Leveraging technology can also help teams quickly and easily present consolidated and enriched budget, spend, supplier and external information to FP&A and business stakeholders to drive planning and forecasting decisions. It can provide a hierarchy of reporting so that FP&A and business stakeholders can easily understand progress against fiscal year targets, corporate objectives and status information at the tactical project level.
The number of different data sources, pace of organizational change, increased frequency of forecasting and continued additional responsibilities that today’s procurement organizations face—all without increased headcount—mean that technology is essential if teams that aspire to be best-in-class want to be able to deliver on their objectives.
Why are some CFOs looking to outsource the sourcing and procurement function while others are taking extraordinary measures to build the capability in-house?
The decision to outsource, or partially outsource, the sourcing and procurement function is typically driven by three key factors: the need to accelerate EBITDA improvement; dissatisfaction with the organization’s current capability or unwillingness to invest; and the desire for contractual certainty on performance metrics.
These criteria, coupled with today’s challenging market for attracting and retaining high-performing procurement talent, are most commonly the drivers of a decision to outsource the procurement function to a third-party provider. When considering an outsourced or third-party solution, CFOs have traditionally had three broad options: consultants, technology providers or large-scale BPO providers.
Today’s marketplace has evolved significantly. Procurement services and technology solutions are available that take the best of each of these models and consolidate them into a managed service offering.
Best-in-class providers will ensure cultural fit of dedicated resources, be able to scale operations through shared services teams, and offer market-leading technology powered with external market intelligence and benchmark data to ensure best price, service and supplier capabilities.
For CFOs considering whether to invest internally or outsource their procurement function, today’s environment offers a broad range of flexibility to achieve the three primary goals listed above. CFOs should evaluate carefully before making the decision to keep procurement in-house or outsource.
About the Author:
Katie Kuehner-Hebert has more than two decades of experience writing about corporate, financial and industry-specific issues. She is based in Running Springs, Calif.