Aligning procurement to the business: five key points for success

Procurement has come a long way to being recognised as a strategic function that can deliver bottom-line savings. However, in some businesses, the value added by procurement has plateaued as it struggles to align its activities with the wider business and specific CFO’s needs.

We recently discussed this issue with Global CPO Steve Kirk from QuintilesIMS, who outlined five key points he believes are fundamental to ensure that the procurement function is aligned with the business and the CFO, and therefore be recognised as a key driver in business success.

1. Be clear on how procurement reports savings

Procurement can often report savings that do not accurately reflect the actual savings made by the function. In extreme cases, the savings may even exceed what the company has actually spent. Too often procurement functions try to use cost avoidance or project savings as a real measure of the financial value that they provide to the company. Procurement plays a vital role in cost containment so soft savings should always be highlighted but when the CFO is looking for year over year budget impact, there is the risk of losing credibility if the soft and hard savings are not clearly differentiated in total savings.

2. Alignment

Once you have clarified the hard savings, these should then be shown to have a tangible impact on your stakeholder’s budget. All too often you see the savings from one supplier fund the new unbudgeted project or offset the unplanned overrun of another. Steve pointed out that a conscious decision must be made by the business to determine whether the savings can be reinvested or reallocated. As the finance function will directly manage the budget it is essential that they assist with these processes but ultimately procurement is responsible for shifting the mindset in terms of how the savings are reported and is accountable for governing the decision making. Procurement functions need to report their hard savings in real terms and illustrate to the CFO how these are affecting the budget to provide tangible bottom-line impact.

3. Consider the overall spend

Procurement typically targets a percentage of addressable spend. Even if 80-90% of spend is addressed, it is also important to know what increases have taken place in the remaining 10-20%. Has that increase had a material impact on the savings achieved? To add real value to the business’s bottom line, Steve believes that procurement should be reporting the good and bad news, and look at the total spend over the year and how it’s reflecting back into the budgets and forecasts.

4. Use technology

Often within procurement, teams use their own spend analytics tools that are either directly linked to the procurement-to-pay data or invoice data. This data is categorised to align with the procurement definition of spend. Steve highlighted that it is crucial for the procurement function to keep in line with the internal business’s terminology used in budgets and to ensure spend can be mapped back to the business structure. He also added that while it is acceptable to talk about spend in categories, the data has to be aligned with the business. When you maintain this link between procurement spend and the overall business budget, you can have meaningful planning conversations with the budget holders and also track savings back to the business to see the impact it has year on year. 

5. Create aspirational and tangible measures

Depending on the nature of the business, it can be easier to align innovation to research and development, sales leads from marketing outcomes and in manufacturing, product development or speed to market as a revenue driver. Steve discussed that procurement should be wary of soft measures that do not have a tangible outcome as it creates scepticism around the function and can distract from the hard savings goals. He reaffirmed that at the heart of the procurement function is the need to effectively manage suppliers to ensure they deliver on time, at high quality and at the right costs. Once this is done, the procurement function can create aspirational and measurable value targets.

Conclusion

It is essential that procurement is aligned with the business which more often than not means the CFO. Understanding what is relevant for the CFO is critical if you are going to develop a relationship that enables procurement to add true value. The five points raised by Steve are far too often missed but as with most things, it comes down to strong stakeholder engagement and commercial thinking.

If you would like more information or to discuss how we can help with your recruitment process, get in touch for a confidential discussion.

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Steve Kirk has over 21 years' experience in automotive, telecoms, utilities, consumer goods, pharmaceutical, healthcare and information and services sectors.