The Budding “Procure-mance” Between Finance and Procurement
In the spirit of Valentine’s Day, procurement and finance can show the business world what a strong, positive, collaborative relationship looks like. They work great together – when they speak each other’s “love languages.”
While procurement and finance are on opposite ends of the procure-to-pay (P2P) spectrum, they work diligently to pursue the organization’s best interests. They seek to maximize the organization’s operational and financial performance, respectively.
Despite how critical procurement and finance are to the success of any organization, they’re often disconnected on executing tactical business processes and achieving strategic objectives. That can even occur when procurement reports up to the CFO, versus the CPO and CFO as executive peers. Failure to align can lead to suboptimal business decisions, greater costs and risks, and missed opportunities to drive more value for the organization and thrive.
Procurement and finance need to better align to drive shared success.
Understanding Your Partner’s “Love Languages”
The term, “love language” was coined by Dr. Gary Chapman, Ph.D. for his best-selling book, The 5 Love Languages: The Secret to Love that Lasts. The basic principles for couples to thrive in their romantic relationships can also apply to business relationships: to fulfill both of your needs, you need to understand those needs and how they differ; then you must communicate your needs and collaborate with each other to fulfill them in mutually beneficial ways. Nobody wins unless everybody wins.
When business teams communicate well with each other, they can provide visibility into their current performance, illuminate areas that are out-of-synch (such as organizational, process, technical, etc.), re-state their values and needs, and ideate on how to fulfill them. They can then align on mutual goals and collaborate to help each other achieve them.
For procurement and finance to communicate and collaborate effectively to achieve common goals and fulfill each other’s needs, they must understand and speak each other’s language.
Procurement’s needs include improving spend under management and on-contract spend, mitigating supplier risk, sourcing new innovations while meeting spend stakeholder requirements, and more recently, driving more ethical and sustainable sourcing decisions and complying with ESG laws and regulations. Finance’s languages include everything from managing profitability, shareholder value, and EBITDA to balancing budgets, ensuring compliance and good financial governance, and reducing financial risk.
The benefits – and criticality – of procurement and finance collaboration are clear. By working together, organizations can make more informed business decisions, create a more efficient and effective procurement function, spend smarter, save more money, and improve their bottom line. The procurement-finance relationship is even more critical when the business faces uncertainties and unpredictability, including economic recessions, supply chain disruptions, geopolitical concerns, and pandemics.
Here is how procurement and finance can collaborate better together to build and maintain a strong procurement-finance foundation to weather the highs and lows:
Communication and Alignment to Build Trust
By knowing each team’s own success drivers, needs, and gaps, and communicating them to each other, procurement and finance can begin to be better partners. They can see how their business processes and outcomes affect one another. And they can then align on how to improve process workflows, unblock data silos, and frame out a healthy “give-to-get” dynamic that can drive their mutual success.
Find Common Ground Using Data for Decision Support
You can’t improve what you can’t see. For example, procurement can use spend analysis to drive visibility into an organization’s traditional performance measures, such as spend under management, contract compliance, identified and realized savings, and category optimization. It can provide invaluable spend intelligence that uncovers opportunities to optimize sourcing, purchasing, and payment decisions, drive compliance, and reduce risk for both teams, and the organization. Finance can see all the same data as well.
More Strategic Sourcing and Buying
Procurement can leverage spend intelligence to reduce maverick spend pull more spend under its influence, and work with finance on goal-setting for new initiatives. Procurement can also leverage this intelligence to drive procurement performance management (PPM) – to prioritize and track internal sourcing projects (e.g., with diverse, ethical, and sustainable suppliers) and enterprise-wide impact beyond traditional procurement performance.
Examples of closer, more effective procurement-finance collaboration include establishing joint responsibility for savings measurement – specifically, co-constructing savings calculation rules, which tend to be more efficient and sustainable in the long term when jointly established. Another example: creating a Purchasing Cost Controller function, which formalizes the procurement-finance link through a dedicated PPM position. This role is to jointly guarantee the indicators that will be used by both functions to drive and measure performance.
Benefits of a Strong Procurement-Finance “Procure-mance”
Procurement and finance can more effectively collaborate when they’ve harmonized their “love languages.” They can align on meeting shared business goals, objectives, and deadlines, such as contributing to quarterly performance reports, financial reports, and due diligence disclosures. It can also facilitate better agreement on technology investments that are needed.
Greater collaboration can also help each team be better value drivers. Procurement can provide supplier due diligence and risk management insights that help the company comply with internal and external regulations. Finance can help identify which vendors to pay early to take advantage of early-payment discounts (between 1% and 2%) or to pay with external financial capital (i.e., supply chain finance) to keep more cash on hand. Together, they can identify potential process/efficiency improvements to decrease purchase-order processing costs.
Procurement and finance’s “procure-mance” can, in their unique ways, preserve and even boost the company’s bottom line. And they can change the common view that they are mere cost centers for the organization into value drivers.
No relationship is perfect; partners may not always understand each other’s languages. But procurement and finance will see tangible benefits by collaborating and aligning on mutual goals and performance metrics. What’s more: level-setting on the best solutions and data that will optimize their performance enables procurement and finance to provide each other – and the wider organization – with the visibility and transparency they need to succeed. Having the right digital partners is an essential step for both teams to build mutual trust and move forward together to drive value for the enterprise.