What Does Finance Think of Procurement?

Procurement and finance are two sides of the same coin. On the one side, finance is concerned with keeping the company budget in the black. On the other side, procurement is concerned with keeping company operations running smoothly and judicially making the most of budgets.

Ultimately, both want the same goal — ensuring business outcomes are positive, timely, and on-budget. However, because procurement and finance are typically separate departments (only 17% of CPOs report directly to the CFO), too often they become siloed, resulting in inefficient operations and conflicting practices.

Without the right communication, priorities, and technology to help, managing the procurement-finance relationship can become unnecessarily complicated. In this blog we’ll break down procurement from the finance perspective, addressing common metrics, challenges, and solutions.

Which Procurement Metrics Do CFOs Look At?

The first step to understand how procurement and finance work together is by examining the procurement metrics used by CFOs and the finance department. As we discussed earlier, it’s key for procurement to understand what finance is looking for, and vice versa. That way both departments can become better aligned in making strategic decisions.

Every organization is unique, but there are a variety of common metrics at the intersection between procurement and finance worth noting. We’ll break them down into two groups: efficiency and ROI.

Efficiency

Both CFOs and CPOs prioritize efficient spending down to the last dollar. Without a clear understanding of where costs are increasing or decreasing, it’s difficult to make high-level strategic decisions.

Here are just a few of the metrics CFOs look at when examining procurement process efficiency:

• Cost of Purchase Order: What are the internal costs associated with each purchase?
• Purchases in Time and Budget: How many purchases are on budget and on time?
• Emergency Purchase Ratio: How many unplanned purchases are being made?
• Procurement Cost Reduction: How are costs being reduced over time?
• Spend Under Management: Is the spend associated with contracts, rates, and purchase orders being managed according to expectations?
• Vendor Rejection Rate and Costs: Where are there problems or bottlenecks in the procurement process?

ROI

Similarly, CFOs are tasked with maximizing the return on investment in any procurement function. For CPOs, their main concern is making sure procurement is taking a critical eye to costs.

Here are a few metrics associated with procurement ROI:

• Lead Time: How long does it take for an order to be filled, and what are the associated costs/savings?
• Purchase Order Cycle Time: How long does it take between order and payment, and how can it be reduced to improve turnaround?
• Purchase Price Variance: How efficient is the procurement team at negotiating on price?
• Procurement ROI: What is the ratio between annual cost savings and annual internal cost of procurement?

Finance’s Biggest Challenges With Procurement

Despite working toward the same goal, there are a few common areas of friction between procurement and finance. With the continuing supply chain challenges of recent years, these problems have only been thrown into sharper relief.

Three of the top challenges finance and procurement face include risk transparency, the lack of cross-functional relationships, and outdated data and technology tools.   

1. Limited Risk Transparency

When it comes to where the majority of direct spending comes from, 70% of CFOs feel they have good visibility into top tier suppliers. However, just 15% of CFOs feel like they have visibility into tier two suppliers and beyond — a major blind spot.

Without painting a clear picture of where spend is going in real-time, CPOs can run up against understandable friction from finance when it comes to financial risk. Openly discussing risks from supply, suppliers, and costs is key to mitigate this potential challenge.

2. Minimal Cross-Functional Relationships

People are often siloed in different organizations and locations in procurement. This can result in communication problems that inevitably impact outcomes the finance team cares about down the line.

This challenge comes two-for-one for procurement; CPOs need to optimize operations between their team and suppliers, in addition to optimizing operations between their team and finance. When organizations want to optimize operations from end to end, they must build bridges between the two departments.

3. Outdated Data & Technology

Last but certainly not least, outdated technology and limited data sharing between finance and procurement presents an unnecessary challenge. In order to combat volatility, inflation, and shortages, having agile technology is a must. Without good risk-operating models, supply and demand prediction, predictive procurement orchestration, and open data sharing between procurement and finance, collaboration becomes much more difficult than it should be.

How Can Finance & Procurement Collaborate?

So, are procurement and finance doomed to an endless cycle of misalignment? Not by a long shot. With the right mindset and resources, CPOs and CFOs can bridge the gap between the two departments to create a function that streamlines operations as well as costs.

First, both organizations need to understand each other more clearly. This can be achieved with a variety of strategies:

• Clarify Responsibilities & KPIs: Get clear on what spend management means to finance and procurement, and what success looks like for both.
• Create Finance Goals & Priorities Together: Manage expectations effectively by jointly determining financial priorities and outcomes over the same period of time.
• Use Technology to Collaborate: With the right tools, data sharing can become much easier, leading to greater transparency and efficiency.

How Arkestro Helps CFOs & CPFOs

Arkestro’s unique ability to ingest data from multiple internal and external sources makes it an ideal tool for CFOs and CPOs alike. With real-time recommendations for stakeholders and suppliers, savings become faster and more clear. Plus, our tool is proactive. By applying machine learning and behavioral science, performance issues or market changes that influence price fluctuations can be anticipated and mitigated.

Here’s why both finance and operations get excited about Arkestro:

• Improved pricing and terms: One in five purchase requests in Arkestro win improved pricing or terms via instant recommendations.
• Faster results: Suppliers get faster purchase orders, stakeholders get faster approvals, and procurement gets faster savings results by influencing more spend.
• Better data: Arkestro enables you to see your internal spend history and external market data side-by-side for any supplier partner.

Arkestro is a leader in procurement optimization technology. To learn more about how to optimize procurement, check out our video library.