Right now, as the COVID-19 pandemic takes its toll on jobs, consumer spending and the global economy, many businesses are scrambling to adjust to a new financial reality. They are also coming to terms with the fact that the path to recovery remains long and mostly uncertain. Experts, including Deloitte, predict that the United States (US) economy will not bounce back until mid-2021. The Bank of England is anticipating slower recovery, as late as the end of 2021, for the United Kingdom (UK).
Within organisations, the Chief Financial Officer’s (CFO) voice is one of the most critical during a crisis. But contributing directly to a firm’s financial resilience is the Chief Procurement Officer (CPO), who has a strategic role in leading a firm through the tough times ahead.
Spend Matters spoke with a CFO who has many years of experience across corporate finance and public accounting, and is currently the CFO of spend management firm Jaggaer. Spend Matters asked Jeff Laborde how he sees Procurement and Finance best working together to drive benefits across a business, given their natural overlap in priorities and responsibilities.
In which ways does Procurement’s role best help navigate these difficult times?
I see Procurement as the main line of defence against many of the challenges facing companies in the current crisis. The convergence of supply chain risk, economic uncertainty, business continuity issues and, for many companies, balance sheet liquidity elevates the mission-critical nature of Procurement and spend management. The function is well-positioned to mitigate the varied impacts of the crisis by helping organisations to better manage their supply chains, to cut costs and to mitigate contractual, operational and financial risks.
Companies that are able to compete in times of crisis, and that will emerge from the pandemic the strongest, will be those that have been able to deploy capital most effectively while reducing risk – both of which are core to Procurement.
What do you see as Procurement’s current priorities?
The first priority is the bottom line as a proxy for cash flow and to ensure business resiliency. Uncertainty remains high right now – and most organisations are looking to preserve cash to guard against prolonged economic insecurity, financial stress and the still unknown risks in our new COVID-19 impacted business reality. Developing a ‘war room mentality’ as an executive team, and clearly breaking down the cash-in and cash-out flow into daily and weekly increments, can ensure consistent and optimal spend management while focussing the attention of the management team, not just Finance, on needle-mover business drivers.
Procurement’s second priority is risk management, with risk defined not only in terms of supply chain and logistical exposures, but also vendor viability and spend commitment flexibility. We are a long way from the end of this crisis. Our procurement customers are focussed on improving visibility, managing a growing and dynamic list of risks, strengthening supplier relationships and optimising sourcing strategies to protect against whatever comes next.
Similar to the strategy for cash, success requires organisations to meet regularly, prioritise supplier risks in decision-making, and involve multiple stakeholders to understand and target vulnerabilities.
How can we improve communication between Procurement and Finance?
The relationship between the CPO and CFO under normal circumstances should be close and co-ordinated. In today’s environment, the relationship has only elevated in importance for an organisation’s financial health. Often, the lack of planning, co-ordination and fundamental alignment between their objectives causes roadblocks. To avoid this, both the CPO and CFO should be involved in the strategy and goal planning process from the get-go, so that there is a clear alignment of goals and objectives, and, frankly, a robust level of ongoing dialogue to manage the unknowns constantly introduced by COVID-19.
It is important for both parties to talk the same language and leverage information from the same systems and sources. For example, if Procurement is talking about savings secured, and the CFO is tracking savings realised, there is a gap. Both parties should collaborate on a common set of metrics and definitions that work across Procurement and Finance. Alignment is hard when each function uses its own key performance indicators (KPIs).
CPOs and CFOs should also have a regular cadence in which the CFO shares the business’ financials and discusses how Procurement’s priorities, targets and timelines specifically align with corporate and financial goals. To help with this, the CPO should illustrate procurement performance through an established performance scorecard that takes into account innovation and the larger corporate vision as well as cost-saving metrics. Spend analysis should be a core component of these discussions.
Is ‘intentional goal setting’ the right focus for Procurement?
Intentional goal setting is about seeing the big picture. For Procurement, that means looking beyond its own four walls and into a business, viewing each operating function as a separate internal ‘customer’. What are the unique needs of each functional team? What is the broader organisation trying to accomplish strategically, and how can you use the procurement team’s experience, influence and tools to support and drive those objectives?
If the end goal is innovation, for instance, where and how can you creatively work with your supply base to support product teams? Could a smaller, more agile supplier execute a new production method or incorporate a new component faster and increase competitiveness? If the goal is profitability, what levers can you pull to make the biggest impact? Would moving supply locations closer to production facilities reduce transportation costs and country-specific tax obligations? Would using a different material offer the same product functionality at a lower price?
Alignment with other executives is also essential. Conditions evolve rapidly during times of crisis and the leadership team needs to be agile. Without an aligned corporate team and shared understanding of the situation, trade-offs, priorities and more, it is impossible to make quick decisions that drive the best possible outcome for an organisation.
What one thing can Procurement do to help Finance get through the coming economic difficulties?
The number one way that Procurement can support Finance right now is spend management. CPOs and CFOs should collaborate to build cost models that capture data across a company’s entire source-to-pay process and all areas of spend. The value of Procurement’s ability to rapidly adapt (namely reduce) current spend levels to align with depressed sales volumes arising from COVID-19 impacts is critical. Relatedly, they should prioritise increasing spend under management, reducing maverick purchasing, eliminating waste and ensuring that everyone is taking advantage of pre-negotiated rates.