How to Communicate Addressable Spend Opportunities to Finance
It’s no secret that Procurement and Finance have different perspectives on spending. While both departments are focused on keeping organizational spend under management, that goal looks quite different for each, both in practice and in philosophy.
This can lead to frustration and miscommunication on both sides. For Procurement, there’s nothing more exasperating than Finance seeing a cost increase where Procurement sees a successful negotiation. And from Finance’s perspective, Procurement never seems to have holistic data or transparent processes.
However, ESG, inflation, and complex supply chains have forced the two departments to become more interconnected than ever. To capitalize on addressable spend opportunities and maximize their impact in today’s economy, Procurement leaders must learn how to adjust to these changes and communicate with Finance.
Thankfully, after decades of working in and with Procurement teams all over the world, we’ve learned a thing or two about bridging this gap. Here are four ways you can build an iron-clad relationship with your Finance Department.
What is addressable spend?
Addressable spend refers to the portion of a company’s spending that Procurement can manage, negotiate, or strategically optimized to better control costs. This includes addressing:
- Contract opportunities
- Tail spend
- Maverick buying
- Price increases
- Subcategories without preferred suppliers
1. Filter everything through your organization’s goals
Because Finance usually sits near the top of the organization, the best way to get the team on your side is to look for addressable spend opportunities that directly contribute to executive priorities. If your organization is dedicated to increasing sustainability, focus on identifying suppliers with effective carbon reduction programs, even if it comes at the expense of a cost savings.
However, if the business is looking for cost reductions in a specific category, make that a priority zero. Identify contract opportunities, root out maverick spend, and propose key efficiency improvements before tackling other initiatives. By impacting core business goals first, you’re sure to place your alignment with Finance on an upward track.
Objectives and key results (OKRs) are a great place to start. If your organization has clearly defined, easily-accessible OKRs, you can use them to guide your search for addressable spend opportunities. If your organization doesn’t have clear OKRs, schedule quarterly touchpoints with Finance leaders. During these meetings, you can sync on projects, compare outcomes, and discuss each other’s challenges.
Another way to align around goals is to set spend under management targets with Finance. Take time in your quarterly meetings to ask leaders what their financial goals are and then work together to create a specific, strategic procurement plan. Then maintain a progress tracker that everyone can see so that you can demonstrate a pattern of continuous improvement. If you can sync with Finance early and often, you’ll create a feedback loop that fosters the collaboration that will drive the business forward.
2. Model the data
As we’ve already discussed, sometimes Finance sees losses where Procurement sees wins. It’s possible to bridge this gap, but it’s crucial to present data in a way that’s easy to understand. The best way to do this is with visual representation.
Let’s use a price increase negotiation as an example. If you negotiate a price increase from 30% down to 18%, you’ve saved the company a lot of money. But if you simply show the new numbers at the end of the quarter, Finance will wonder why you let an 18% increase happen!
Instead, model the data on a graph so you can show what you would have spent compared to what you actually spent. This way, your impact on the company’s finances will be easy to see.
Another factor that you can’t forget to present is the cost avoidances that you’ve secured. Cost savings are usually easy to see because they positively impact cash flow statements. Cost avoidances are harder because financial statements don’t reflect expenses that you prevented. When it’s time for your touchpoints with Finance, make sure to prepare a chart or graph that shows what costs would have been without these cost avoidances. Otherwise, some of your most significant and impactful wins will fly under the radar.
3. Report ROI
Could your Finance Department quote how much money you’ve saved the organization this fiscal year? If not, then you probably have different views on how Procurement is handling addressable spend opportunities. However, if you make a point to measure and report the results of your spend management projects, it will be much easier to get on the same page about what success looks like.
There are a few ways you can report your return on investment. The first is financial impact. If you negotiate a small parcel contract that saves $100,000 a quarter and improves delivery time and satisfaction, report both of those metrics! Likewise, some of your decisions will raise costs slightly but increase reliability, sustainability, and profitability. Don’t forget to communicate those wins when you report outcomes.
You should also report ROI when discussing the value of digital transformation. Modernizing your procurement function requires technological investment, but it comes with a price tag. Therefore, it’s important to have clear numbers on both the expected and realized return on your software investment.
Finally, some procurement outcomes can be hard to measure financially—risk mitigation, vendor relationships, ESG initiatives, etc. You can report on uptime, quality improvements, financial incentives, and corporate reputation, but the best way to communicate results is to ask Finance what they want to know. Not only will this make sharing successes easier, but it will also go a long way toward cementing interdepartmental relationships.
4. Give Finance a window into your operations
As we discussed earlier, the inner workings of Procurement can be a mystery to outsiders. Without transparency, inflation and supply chain disruptions can make the function look inefficient and disorganized. Letting this perception take root is the perfect way to resign Procurement to a tactical function.
Thankfully, the solution is simple: make Finance a partner by giving them a window into addressable spend and how you’re managing it. Show them your strategic Procurement vision by inviting them to your meetings, setting regular touchpoints, and consulting them on projects. But most importantly, give Finance direct visibility into your daily operations with a strategic procurement platform that blends spend analytics and procurement performance management.
When Finance is only a click away from comparing the realities of organizational spend to your project pipeline, cultivating a collaborative relationship becomes easy. Finance leaders don’t have to wait for quarterly check-ins or request the latest versions of spreadsheets anymore. They can simply log in and get the data they need, whenever they need it. If that doesn’t create partnership, nothing will!
Of course, we could talk about this strategic platform all day; we invented it to do everything we’ve talked about here. But why not see for yourself how it can empower your relationship with Finance? Click below now to schedule a demo and get a personalized walkthrough of the tool that more than 500 businesses are using to transform how they partner with their colleagues in Finance.