As cost-cutting options narrow, chief finance officers and chief procurement officers must utilise each department’s expertise to find a way forward.
According to a research released by Basware and Professor Adrian Done of the IESE Business School, the lack of collaboration between finance and procurement pose clear risks as spend visibility is vital. However, both professions see benefits in improving relations.
The analysis shows CFOs and CPOs of large organisations worldwide struggling, despite reports of economies beginning to lift out of recession as they 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% of businesses associate financial risk with procurement, the latest published report provides compelling insight into how large organisations across the globe 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 also identifies a growing trend for increased levels of finance and procurement collaboration, as well as transparency amongst businesses seeking to overcome finance and purchasing challenges. Key findings include:
• CFO / CPO tensions – Departmental tensions between finance and procurement are common, though the absence of good relations is lamented by both CFO and CPO respondents. The lack of collaboration between these groups pose clear risks as spend visibility is vital. However, both finance and procurement professions see benefits in improving relations. There is a clear emerging trend towards using technology as a way of overcoming operational challenges and harmonizing ‘buyers’ and ‘payers’ within the business.
• Risk not reward – While the majority of respondents are aware of the instability caused by constant cost-cutting efforts on the supply chain, they are struggling to find another way to meet their business goals. Organisations are also focusing on discrete risk while failing to address the more likely and potentially disastrous scenario of sequential risk in the supply chain.
• Automation needs – The need for urgent, tangible cost-savings place automation of finance processes at the forefront of business IT needs. The report shows 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 there is little confidence moving into 2010. Organisations 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.
“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," comments Done.
"This mentality is a big disruption as decision makers fail to see the sequential risks of suppliers struggling to meet demands, whilst obsessing about discrete insolvency episodes and their impact on short-term operations.”
Basware’s Steve Muddiman adds that as cost reduction and control become the ‘new normal’, automation will continue to be a key component of realizing cost savings via operational changes. "However, when headcount reductions and unit cost savings are harder to realize, businesses must turn their attention to address more systemic inefficiencies. Organisations that will thrive going forward will be those that lift themselves out of purely reactive cost-cutting directives and begin to think more strategically, adding a more systemic approach to address supply chain risk,” says Muddimman.
• 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 its execution across the supply chain.
• It is imperative that organisations 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 organisation has 100% spend visibility – both direct and indirect – can they make informed and effective financial decisions.
• Develop integrated and collaborative relationships with 1st and 2nd tier suppliers to better evaluate and control risk in the supply chain. Fostering closer relationships with preferred suppliers will enable an organisation to tap into supplier expertise to identify the source of potential threats.