Redefining Procurement Series: Bottom Line Impact
If I can, for a moment, direct your attention back to one of my previous posts around reducing stakeholder scepticism. The post talks generally about how to better engage with your stakeholder, gaining their buy-in, enabling you to increase your influence over their budgetary decisions. This is the first step towards being seen as a strategic partner of the business.
The next step, once we have been let into the party, is to prove real business impact.
Over the past 2 years, many businesses have felt the outcome of reduced consumer and business confidence through a huge reduction in spend. Shrinking top-line growth alongside increasing costs (particularly rising commodity prices), has forced many businesses to look at their external expenditure and reduce where possible.
Thus there has been an increased impetus to drive downward pressure into the supply market to get more value for money – squeezing suppliers rather than working together (focus on quick cash wins - not long term effectiveness).
Between early 2009 and late 2010, there was a drastic reduction in M&A activity which signalled that businesses were looking inwards, focusing on their current state, which resulted in:
- Greatly reduced budgets / spend at the departmental level
- Pay Freezes (which resulted in a decreased ability to retain key talent or attract new talent into the business)
- Reducing head count in many cases meant losing key knowledge, expertise or skills from the business which had a knock on impact on capability (employees overloaded often covering their missing counterparts work load)
- Greater focus on core activities – focus on what they do best and cut away (or move externally) non-core activities or tasks.
The CFO, being at the helm of much of this change, was primarily interested in cost and cash – and where the business could best drive out economic efficiencies. Naturally, the CFO meandered on over to the procurement department, poured a cup of tea, pulled up a chair next to the CPO and said “let’s talk shop… plus we need to prove procurement is making an impact to the bottom line”.
Proving bottom line impact
Firstly, and fundamental to proving procurement’s impact, is the need to ensure everyone is agreeing on the absolute savings that are being made – whether they hit the bottom line or not.
Getting the stakeholder (finance, marketing, HR, IT etc) to acknowledge a saving through a formal sign off process encourages them to come to procurement in the future – which your CFO will be happy about as, in most cases, continual savings will mean the potential to review departmental budgets.
A word of caution - it may not always be wise to bank the saving.
For example, in Sales & Marketing would you prefer the business to invest savings to generate greater profits? It may be wiser to allow Sales & Marketing to keep the savings so that they can get more out of their budget – these savings should still be signed off and attributed to procurement’s work.
Stephen Wills, Director of Group Procurement for AXA provides a live example of an effective sign off process “Overall the transformation was led by operations who ensured finance and procurement worked closely in setting the budget, setting the target, and then reconciling the savings. Every saving that is delivered, I approve it, the finance expense controller approves it, and then the business signs it off. So you’ve got that three way approval process before it’s reported on the savings system.”
On top of this formal sign off process, you need to create effective metrics and measurements. Reporting on standard Purchase price Variance (PPV) and cost avoidance metrics is a given within procurement – but it’s not where procurement’s true value lies. If procurement only focuses on in-year savings, then that is all they will deliver. The real value comes from procurement focusing on delivering long term value to the business – focussing on improving this year's profit, as well as future profit.
Stephen Wills also stated “there’s always been a little bit of tension between finance and procurement – mainly due to the challenge from finance as to whether the savings were real savings. Procurement has very different categories of contribution to the business, what you could class as benefits, it was a case of really aligning with finance as to what they were going to measure as a true saving to the expense line”.
A common mistake, in pursuit of proving procurement’s impact, is to charge business units for the cost of Procurement. Don't. Take the cost centrally and encourage the business to come to procurement more frequently for spend advice and project involvement.
How are you proving procurement’s impact on your bottom line?