How can financial directors help procurement be more strategic?
One of the biggest areas of spend for companies is procurement, so how can financial directors ensure procurement teams provide more value back to the business?
This represents both a huge level of investment but also a great potential opportunity to reduce costs as well. For financial directors, getting more control over procurement processes can save money and help them be more strategic.
Why is this important to understand? Many firms have already stripped back their staffing levels and reduced their direct spend where possible. However, indirect spend – the goods that all companies have to buy in order to run their operations, but not necessarily linked to the product they sell – is often not optimised. This can include everything from office consumables and support staff through to transportation and utilities.
Spend management is one area where there are still opportunities to improve results. Not having the full picture of spend is a challenge for both the procurement team and the financial director that sits above them.
There can be a number of reasons why spend is not under management. For example, employees might not be following the right procurement frameworks and rules that are in place. Humans will naturally gravitate to the ‘path of least resistance’.
Alternatively, there can be unforeseen business requirements that mean goods have to be bought quickly outside normal rules. Whatever the reason, the problem is that the business does not get the best possible deal for its investment.
Spend under management is in itself potentially problematic to define. The most common definition of spend under management is “all spending where there are contracts in place to cover the purchases”. However, even when contracts are in place, unplanned invoices are often still received or expenses incurred without the available discounts being applied.
One definition that is potentially more accurate is “spend where savings have been optimised,” as this demonstrates that the whole process for managing spend has been applied and the necessary savings have been created.
So, how do companies go about getting more spend under management, and what is the role of the financial director in driving any programme to be more successful?
The first point to understand is that procurement teams are more than just responsible for cost cutting and lopping a few percentage points off each purchase. These teams can provide more value back to the business, so what is holding them back? How can you get more control over spend and costs if individuals across the organisation won’t use the approved channels?
Financial directors have to look at why the existing channels don’t get used. Are the systems too difficult to use, or not accessible when people are out of the office? Making it easier for people to follow the rules can increase the amount of spend that can gain discounts, and more importantly ensure that this spend can be tracked and analysed later too.
Increasing the volume of spend under management ensures that the volume of money going out of the business can be reduced. Improving the end-user experience around spend can help ensure that compliance on purchasing activity is in place and rules are followed, while getting more insight into spend patterns and requirements can help the procurement function to be more strategic as well.
Getting the full picture of spend offers the opportunity for financial directors to identify more cost-saving opportunities for the company as it does business. Using cloud computing and making processes easier for the end-user can help get more spend under management, which in turn both increases spending power and the value of the spend that is in place.
Increasing the adoption of ‘official’ procurement systems and processes can significantly increase the amount of spend under management. The discounts that procurement has already negotiated can therefore lead to more savings for the business. This can be a real opportunity for financial directors to generate value for the company and its stakeholders.
Helping procurement departments be more strategic around spend by using insights into indirect spend data and implementing best practices can significantly increase the volumes of discounts, providing a direct return on investment back to the business.