Maximizing benefits and reducing costs— the major challenges for companies today. Procurement acts as a lever to increase profitability and trim down costs of the products and services. But, more often, the efforts of the procurement team in bringing profits are shadowed by limited clarity. When the finance team wants to see the cost savings earned, the procurement team faces challenges to show how the savings they confirmed a match to P&L benefits.
The communication gap between finance and procurement is experienced by almost every company. Finance always asks the procurement to provide clarity on their potential savings and cost-benefits. Hence, the procurement team must get themselves involved during the initial phases of sourcing projects and work together with them to make sure the P&L savings are from procurement efforts and initiatives.
Procurement professionals typically use historical prices and do not work with the finance team to define the basis of the budget and discuss all the pricing and volume assumptions. Alternatively, most commonly finance doesn’t engage procurement team during budget organization. Also, the finance team opposes reflecting procurement’s savings in annual business plans, since if the procurement professionals fail to achieve the projected targets, their projects and annual expenses are at risk. However, another aspect steering the vague savings achievement is the resistance from the stakeholders to undertake budget adjustments and use the incurred savings to purchase bigger scopes or volumes, keeping finance out of the strategic decision on how the savings should be used.
One priority for procurement is to start engaging with their financial counterparts, specifically during the early stages of sourcing project(s). Early engagement with finance team can help develop the integrity of savings anticipated and accomplished at the project closure. A good union between these two areas enables procurement to access information on estimated prices, volumes and planning projects in which procurement can involve and contribute at the initial stages itself. Finance decides expense goals and sometimes does not consider the prices of some fluctuating commodities. By collaboration of these two areas, more realistic goals can be set. Also, procurement and finance can work collectively to achieve the anticipated savings and benefits to the P&L. The association of finance and procurement helps bring the efforts of procurement into the light and also their role in achieving company objectives.
Procurement function needs to be considered as a strategic partner that helps in optimizing profits and limiting the costs. But, in order to attain complete credibility and visibility for their efforts, procurement team needs to work hand-in-hand with the financial counterparts, support the budgets and should maintain a complete log of achieved savings in the financial statement.
It has become quite obvious that “communication” and “collaboration” are crucial to bringing finance and procurement inline. This necessitates more than simply arranging a monthly meeting, but essentially understanding how each function works and how to put their unique skills to use. Once this handshake is achieved, shared processes and objectives can be realized to deliver shared benefits.
So, how do you ensure effective collaboration between finance and procurement teams in your company? Please share your thoughts in the comments section.