When Will Finance Take Procurement Seriously?

A couple of weeks back, Basware released the results of a study analyzing finance's view of the procurement function. It's already been well covered by many media outlets so I'll spare you much of the detail that you can read for yourself. But in short, the news is not good regarding finance's view of procurement, at least in most cases. In the press release announcing the study, Basware suggests that "only 46 percent of financial chiefs see real integration between purchasing and finance processes, representing a major break between two departments that should be working closer than ever to combat the downturn". In addition, the results revealed that less "than half of the respondents see any level of integration between procurement and finance teams". I had the chance to speak to one of the study's authors, Prof. Mark Frohlich, who serves as an associate professor of operations management at the Kelley School of Business, about the results last week. His own observations on the data are quite telling indeed (but are perhaps a bit more optimistic than my own interpretation of the results).

In the analysis of the 550 companies surveyed, Prof. Frohlich sees respondents typically falling into three categories based on his own cluster analysis of the data. One group is primarily "interested in reducing direct and indirect costs. They are not interested in cash flow or risk analysis or regulatory compliance." This group is best described as the "cost cutters". Another group "is interested less in cost and more in purely managing and optimizing cash flow". I'd best describe this group as Lord Byron worshipers in the spirit of the author's famous quip, "cash is virtue". The third group comprises "companies that want to reduce cost and maintain cash flow and are also interested in risk management". This group is aggressively looking at payables and receivables together versus separately. Prof. Frolich refers to this segment as the "holistic" ones.

How does the survey data breakout? In our discussion, Prof. Frohlich suggested to me that the absolute percentages indicate that only a minority of companies have close finance and procurement integration. But while these numbers nothing to write home about, we need to look at the study for what it is today in comparison to what it would have been a decade ago. Still, "The fact that only 27 percent of CFOs consider that procurement has a positive effect on enterprise profitability suggests that the procurement role itself and the wider supply chain is not seen as a significant contributor to bottom line performance," Frolich suggests.

Here, Prof. Frolich hypothesizes that the low 27% figure would have been a single digit number if the study was done years ago. Hence, "In the big picture, slowly but surely more CFOs are getting in tune with the supply chain" and if you "look inside the data, finance is happy with procurement's transactional metrics including process automation". But "where the frustration is, is in the intersection of cutting costs and cash flow". Perhaps this is the reason why spend visibility tops the list of strategies as a "main priority" for finance when it comes to procurement in the coming 12 months on a global basis. After all, if you don't know what you're buying and how much you're spending, it's hard to implement the right cost reduction and working capital management approaches. Interestingly enough, however, if we separate out the US data (which represents a sample size of 100), spend visibility is a much lower level priority behind supply risk which was the number one focus in the US. Other priorities that outrank spend visibility in the US include: the need to automate/implement new technology more quickly, overcoming difficulties in realizing cost savings across the business, and enhancing relationships between procurement and other business functions.

But what is finance's top challenge with how procurement is managing itself today? Specifically, Prof. Frolich suggests, "finance does not believe that procurement knows where and how to effectively reduce costs at the level they need to be reduced" and that when it comes to efficiency and supply risk, "procurement is not doing the job it needs to be". How much of this negativity is related to the timing of the research versus a persistent view that procurement is not doing the job it needs to be? "I believe this survey is a snapshot of a major recession," Frolich told me. "Had this study been done a couple of years ago when it was about growth and opportunity, perhaps the CFOs might not have been quite as critical. Now about a quarter of the CFOs are in tune to the relationship between procurement and the supply chain -- but the rest are wondering what the heck is procurement doing."

Stay tuned for further insights from my conversation with Prof. Frolich including his observations about a number of impending signs of supplier financial distress to be on the look out for when managing supply risk. Throughout our conversation last week, I found nearly all of his thinking to be both inventive and original. I think you'll find his additional insights both observant and highly pragmatic as well. No wonder this guy is not a career academic!

- Jason Busch