Working from home due to the Coronavirus disease (COVID-19) crisis has been disorienting for many, and yet we have seen one bright spot emerging from it – the opportunity to automate critical operations online to replace time-consuming, manual tasks.
Let’s face it. Now that most employees were forced to work from home, the challenge becomes more critical than ever to create seamless, online communication to outline certain ongoing priorities with colleagues and employees. For example, finance and procurement teams follow common priorities, many of which can be aided with automated applications.
For both teams, most chief financial officers (CFOs) and chief procurement officers (CPOs) consider those priorities critical and expect goals for the year to be met on time regardless of the shift from working on-site to home.
So, it’s highly likely that managers in your organization know that they must continue to rapidly create new ways to work remotely from home that are just as effective as before. Research shows that even before the COVID-19 crisis, these leaders ranked the following three priorities among their Top 10 choices:
· Reducing costs,
· Managing risk, and
· Increasing cash flow
All three will be very critical in effectively recovering from the impacts of COVID-19.
But, despite having these common goals at heart, procurement and finance teams are still not well aligned. An ATKearney and CIPS report showed that “within the CFO and finance community, 71% report that procurement lags most functions in terms of the rigor and depth of performance tracking. Only 20% report that their procurement organizations have very clearly defined, well understood and widely respected performance metrics.”
Furthermore, about 60% of CFOs believe less than 50% of procurement reported benefits could be realized (assessed as profits or profitability gained), or even worse they believe procurement is uninformed about what was (or could have become) realized benefits.
It’s easy to pin down the reasons for this apparent discord to several deficiencies when it comes to these teams effectively collaborating.
The main issues stem from these teams and their leaders looking at different data, speaking a different language in operational frameworks and often suffering from a serious lack of company-wide agreement on what constitutes successful performance measurements in these focus areas.
Often, no visible link exists between the CFO’s strategy and the overall performance measurement that exists at a functional level. So, in such a case, no clear link would exist between purchasing performance and financial reporting.
Purchasing performance also often covers “softer” metrics that a CFO may not value. As a result, the organization would then lack effective tools to automatically collect metric data and show how all the metrics do impact one another.
A resulting lack of faith in the metric results can cause CFOs to hesitate to include CPOs in the planning phase, therefore CPOs have a minimal impact on setting up a savings target and generate a budget. This, in turn, makes it even more difficult for CPOs to respond to an action plan that they haven’t been involved in creating.
These are not new challenges. But, we can overcome them if we all get better at collaboration and if we expect to succeed in new remote, at-home working environments. Collaboration can no longer be taken for granted as an automatically fluid process. It must be formalized and spread over multiple defined channels of communication and data. Importantly, collaboration must be fluidly shared and commonly visible before we can work together effectively.
Specific areas and practical steps to overcome the challenges
Cost savings. Procurement and finance professionals will be asked to review and unearth new ways to recoup any losses suffered during this time of remote online working. There are many ways to capture and define savings, but they often differ for both the CPO and CFO.
Sourcing project. Let’s say as a procurement professional, you set about working on savings against last price paid (LPP) or purchase price variance (PPV). You put the goods out to tender (up for bid), and you find at least three quotes. The least costly offers a saving of $100,000. So, you negotiate with your preferred supplier and settle on $80,000 in contracted savings.
But, then, suppose the usage forecast is incorrect, or a global pandemic occurs, and you end up buying less. Or a major “value leakage” occurs, and no one will buy from the contract you spent such a long time negotiating. Either your savings will disappear, or you end up breaking even. If the budget is set based on last year’s expenditure and you don't come in with a bottom line saving against budget, your CFO sees all this saving as neutral or nil!
So, what do you do about it? It looks like this:
1. Start early with planning by ensuring all CPOs are actively involved in your budget and savings plan set up.
2. Align procurement metrics with financial goals and make sure they are visible.
3. Build clear key performance indicators (KPIs) into your “source to pay” seamless solution; the more automated the process of collecting these performance results, the better.
4. Minimize savings (value) leakage by using an automated workflow, particularly between sourcing and contract management and your procurement process. So, you can directly influence what people buy via the use of catalogues linked to negotiated contracts.
5. Consider tapping into group procurement organizations (GPOs) for improved purchasing power.
If you’re not using a cloud-based strategic sourcing tool to assist in running your savings projects, The Hackett Group has found that you can increase the percentage of recognized savings by up to 12%, or reduce the total cost of sourcing by 13% with efficient use of an e-sourcing tool. It certainly keeps all your documents accessible in the cloud and makes supplier management easier to manage the process from home.
What about cash flow?
Procurement is often a juggling act. We use decent supplier relationships, purchasing power, and any other tools in our belt to secure best payment terms, highest quality purchases at lowest price, or indeed best value, to ensure vital continuity of supply, against a backdrop of supply chains becoming ever more complex and ever more volatile!
All this balancing can happen while trying to keep an eye on cash flow and keeping our colleagues in finance happy. Finance may not always appreciate the balancing act going on. Where cash flow is their key metric, finance might view early payment discounts negatively in terms of impact to available cash.
How can better collaboration help here?
Extend your payment terms. Obviously, if you don’t really know what your payment terms are and whether you're really working to them, the next steps are not going to be of much use to you!
Extending payment terms frees up valuable cash flow to impact positively on the balance sheet to help fund investments. However, suppliers can’t always accommodate overly long terms and pushing this out can not only damage the relationship, add time to negotiations, but also can ultimately drive up their operating costs, which will in turn get passed on to you.
What can we do to balance cash flow needs of suppliers and buyers?
Using supply chain financing or a third-party funder results in an excellent win-win to ensure suppliers are paid early. And, as a buying organization, you can pay when you prefer on your finance-friendly extended terms. You benefit from holding onto the cash for the full payment term, but importantly the supplier gets paid when they need to. This can speed up pesky negotiations and ensure a satisfied CFO because cash flow is positive. Not always, but often, the funder will perhaps take a small cut, but that can often be paid for by potentially combining this with early payment discounts.
Using early payment discounts. Buyers agree to pay suppliers early in exchange for a discount. These can be fixed discounts (e.g., 2% discount when paid on or before Day 10 of a 30-day payment term) or on a sliding scale (dynamic discount) up to the invoice due date. The discount can add to the bottom line and a small slice can be used to fund any factoring necessary.
All this requires slick processes for managing your procure-to-pay process. If you don’t have an automated tool for managing this process, it will be very difficult to ensure you are paying on time, let alone have the flexibility to change up the discounting process. Of course, technology will massively help here, to both reduce cycle times, and to control and implement dynamic discounting with your suppliers.
A really important area to promote collaboration is risk management.
We can split risk (and associated data collected to support your understanding of it) out into two main buckets -- risk data that can be collected externally and internal risk data. Either way, a very good place to start is to correlate impact and mitigation at a supplier level.
Once you have individual supplier risk assigned with the right technology, you can then group this risk by any associated data collected against the supplier to see compound effects or translate it to financial exposure. If you have data recorded for a supplier, then you measure, mitigate or report against the data and start filtering it into meaningful groups in the event of crisis or time needed for risk planning.
External data might be as simple as automating and scoring the supplier’s financial information using data or via feed from external risk services. You might want to extend this across digital risk, plugging into new technology offerings. All are great and powerful tools to help you understand up-to-date changes in risk profile without using administrative time for most of the double checking that is normally done manually.
Unfortunately, even with technology, 65% of CPOs have limited visibility beyond their Tier 1 suppliers, so more work may needed to unearth hidden risk further up the supply chain.
Count on your own information being critically relevant. When you have a fully integrated platform (solution) pulling from one master data source, you can start to do some clever things by extracting real data within your own systems to discover what’s going on in other departments to keep everyone up to date, and do it all without relying on lengthy meetings.
For example, what if a supplier is always late paying, or worse, they’ve gone into insolvency? You want your buying team to know about this as soon as possible to reach out to them and consider their impact on the supply chain, make alternative supply arrangements and stop placing orders.
Flagging the visibility of a dispute for management, or translating it back to a negative score on the supplier’s scorecard is what ultimately brings value. Once an automated way of flagging risks is performed at a supplier level, you may want to improve tracking methods for measuring trends. This task is difficult to manage if you’re relying on manual processes or human judgement!
Ongoing supplier performance should be a careful balance of automatically collected data extracted from both internal and external sources. That doesn’t mean removing the need for human understanding of the data. You just need everything in one place to enable people to make informed decisions quickly.
What’s in it for you?
It may seem obvious, but collaborative working leads to a host of benefits for the organization. Aside from the fact that we now don’t have a choice but pay attention to how individuals and teams interact with one another, we really can measure the benefits of finance and procurement teams working together.
1. Share agenda to influence wider company performance. Finance traditionally has an overarching responsibility to report on, and exert company-wide influence over the numbers; procurement is responsible for total spend under management, with the ability to shape external spend. A partnership can improve management and control of financial activities, and in turn, positively impact the bottom line.
2. Get better control over cost and consumption. Procurement controls cost by selecting the right supplier and negotiating total costs and ensuring best value, while finance can influence overall consumption through careful budget management. Together, these two roles can combine to ensure optimal demand management and support broader economic objectives.
3. Improve visibility. Teams can execute more disciplined and accurate corporate performance management by working together. Setting aligned key performance indicators (KPIs) will mean you can better understand how procurement performance impacts financial results.
4. Increase efficiency. When procurement and finance teams work collaboratively, they can reduce duplicated effort and avoid much iterative, sequential planning, budgeting and approvals and spend less time reconciling data.
5. Understand price trends. By involving procurement earlier in the budgeting process, finance gains the ability to factor in price trends.
What have we learned?
Working from home restricts our ability to continue with the status quo when the status quo is a manual, disjointed process. Perhaps one benefit emerging from the COVID-19 crisis will be to make it a fundamental requirement of our businesses to prioritize automated and collaborative ways of working. One thing for sure is, those that have the tools to collaborate easily online certainly recover faster from having to work at home than those without online tools.