Stamford, CT — November 18, 2009 — The relationship between businesses and suppliers is hanging in the balance as cost-cutting options narrow, and chief financial officers (CFOs) and chief procurement officers (CPOs) of large organizations continue to struggle, despite reports of the economy beginning to lift out of the recession, according to a new research report released this week.
According to the report, from procure-to-pay solution provider Basware and leading academic Mark Frohlich, associate professor of operations management at the Kelley School of Business, CFOs and CPOs continue to apply existing approaches in cost control to tackle the ongoing demands of a tough economic climate.
Following a study of CFOs conducted in June 2009 that showed only 28 percent of businesses associate financial risk with procurement, the latest report provides more insight into how large organizations are struggling with risk evaluation and cost control. Cost control and reduction has become "the new normal" going into 2010, with the urgency for reactive cost-cutting measures continuing to supersede longer-term investment-driven directives, the report suggests.
The report, called "The Cost of Control: The Real Price of Cost Cutting," also identifies a growing trend of increased levels of finance and procurement collaboration, as well as transparency among businesses seeking to overcome finance and purchasing challenges.
Key findings from the research include:
Risk not reward — The majority of respondents are aware of the instability caused by constant cost-cutting efforts in the supply chain, and they are struggling to find another way to meet their business goals. Organizations also are focusing on the discrete risk of a major disruption while failing to address the more likely and potentially disastrous scenario of the sequential risk of incremental, smaller problems that arise in the supply chain.
CFO/CPO tensions — Departmental tensions between finance and procurement are common, though the absence of good relations is regretted by both CFO and CPO respondents. The lack of collaboration between these groups poses clear risks as spend visibility is vital. However, both finance and procurement professionals see benefits in improving relations. There is a clear emerging trend toward using technology as a way of overcoming operational challenges and harmonizing "buyers" and "payers" within the business.
Automation needs — The need for urgent tangible cost savings place automation of finance processes at the forefront of business IT needs. The report suggests that procurement is more likely to make an impact on commercial goals if high levels of automation and integration are applied in tandem.
Neutral outlook, open future — Views taken on the state of the economy show that there is little confidence moving into 2010. Organizations less impacted by the downturn treat the climate as "business as usual," while those companies that have been more challenged say they see no "green shoots."
The study also shows that a tight and embattled commercial environment is driving large businesses to seek support from peers and the wider market in order to resolve the challenges of supplier stability, cost control and future environmental and financial legislation pressures.
Commenting on the report, Professor Frohlich, said: "Businesses are looking for 'tsunami' events in the supply chain but failing to keep track of the 'soil erosion' that takes place day-to-day. This mentality is a big disruption as decision makers fail to see the sequential risks of suppliers struggling to meet demands, while obsessing about discrete insolvency episodes and their impact on short-term operations."
Basware's Ari Salonen, general manager, North American market, said that as cost reduction and control become the "new normal," automation will continue to be a key component of realizing cost savings through operational changes.
"However, when headcount reductions and unit cost savings are harder to realize, business must focus on addressing more systemic inefficiencies," Salonen continued. "Organizations that will thrive going forward will be those that lift themselves out of purely reactive cost-cutting directives and begin to think more strategically, taking a more systemic approach to address supply chain risk."
To help tackle the challenges identified in the report, Basware recommends a three-point plan for CFOs and CPOs alike:
- As cost-cutting options narrow, finance and procurement must utilize each department's expertise to find a way forward. CFOs need the knowledge residing in the realm of the CPO to fully grasp the issues involved, and likewise, CPOs will need to take a more active part in formulating corporate strategy and be more innovative in executing it across the supply chain.
- It is imperative that organizations push levels of spend visibility, cost transparency and general openness to unprecedented levels in order to unleash significant new areas of cost savings. Only once an organization has 100 percent spend visibility — both direct and indirect — can it make informed and effective financial decisions.
- Develop integrated and collaborative relationships with first- and second-tier suppliers to better evaluate and control risk in the supply chain. Fostering closer relationships with preferred suppliers will enable an organization to tap into supplier expertise to identify the source of potential threats.