CPO & CFO: Getting Past the Sibling Rivalry with Spend Analysis
Understanding the rivalry between the CPO & the CFO
Those of us who have brothers or sisters know what it means to experience sibling rivalry. The younger siblings usually have something to prove to the older ones. There also tends to be a competition for attention and recognition from the parent figures and wider family relations.
In the case between finance (CFO) and procurement (CPO), using the analogy of the sibling rivalry helps us understand what has often gotten in the way of creating a positive relationship between the two. While the direct reporting of the CPO to the CFO varies by industry, the importance of this relationship for procurement is demonstrated by a recent Deloitte CPO survey that noted 96 percent of their respondents identified the CFO as the most important business partnering relationship for the CPO as part of the C-suite.
Based on its responsibility in terms of accounting, cash management, financial planning, treasury, working capital, and risk management, finance, as the “older sibling,” has traditionally gotten more attention than procurement. Since finance, represented by the CFO, manages an organization’s money, there’s also a great deal of responsibility in making the right strategic decisions, with more eyes watching its activities than perhaps any other part of the organization.
Meanwhile, procurement traditionally has gotten the back seat; and here the perception of procurement is not strategic, but tactical. As the “younger sibling” vying for attention, procurement has often had little exposure to corporate growth and innovation. Procurement is also often seen as a hindrance by the wider organization because it restricts the free choice of suppliers and extends the time needed to process orders, to name just a couple of reasons. While positive perceptions of CPO and the wider procurement profession have been on the rise for years, most are often still stuck with this label of being an obstacle, solely focused on managing cost.
Just like an older brother or sister, finance can often be procurement’s major obstacle. Despite procurement’s efforts to move away from cost savings toward other areas like creating strategic value (i.e., innovation), cost avoidance or other non-price-related cost reductions, cost savings hitting the bottom line is still procurement’s priority for finance. As highlighted by 2018 research from the Hackett Group, it would appear procurement’s efforts still go unrecognized based on a disagreement about the measured value being contributed and a misalignment in performance metrics and incentives between procurement and finance.
If you take a step back, the foundations of this disconnect are based on the standards for measuring success, where these different groups essentially speak different languages. For finance, accounting and financial terms like revenue or profit and loss are well defined and easily recognizable by any part of the business (think GAAP). This common vocabulary is essential for providing clarity in the communication of a business’s financial performance, both internally and to the wider market.
Procurement, unfortunately, has no such authoritative standards, and there are generally no commonly accepted ways of reporting from one organization to the next. Common procurement metrics such as spend under management, influenced spend or identified versus realized savings can vary widely and can create inconsistencies. As a result, getting buy-in and recognition from finance and the wider business becomes a much bigger challenge without a baseline to formalize savings methodologies, track realized savings and/or integrate wider budgeting processes.
However, in an age where information is the new currency, today’s procurement leaders must be ready to engage in real conversations with finance using a common language around spend. Since the dialogue between the CPO and CFO is so essential for ensuring that procurement has established trust and transparency with the wider business, creating this better alignment and agreement starts with consistency in fact-based storytelling with spend data. And the effort to create this alignment must start with a common ground on the products and services an organization actually buys – this is where spend analysis comes in.
By establishing a baseline for meaningful and practical taxonomies that can benchmark spend and establish a single source of truth of where all spend is going, spend analysis becomes the natural forum for examining better spend practices. If done properly, spend analysis offers the CFO real knowledge on the financial impact of organizational spend and the savings opportunities ready for the CPO to seize – a clear starting point for an effective dialogue between the two traditional sibling rivals.
Join the conversation in our upcoming webinar with Forrester Research and Freddie Mac, Why Spend Analysis Matters to the CFO, on Thursday, May 14th.