In the recent webinar, Assessing the CFO's View of Procurement, Andrew Bartolini, VP and group director of Global Supply Management Research at Aberdeen Group, discussed how the CFO’s view of the procurement function has changed and what organizations can do to strategically align the two functions to produce a best-in-class organization.

 

We received so many great questions from our audience that we wanted to share those questions and responses from Andrew and Jim Frankola, event moderator and EVP of strategy at Ariba.

And if you missed the event, be sure to view the replay.

 

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Q: Does spend under management only pertain to internal spending of a company or can it also include external sourcing/procurement done on behalf of a customer, which flows through the company's books?


A: Spend under management looks at all enterprise spend - internal spend across indirect, direct, and services categories. Depending on your industry, spend on capital items or a subset of them may make sense to include.

 

If you are a provider of outsourced services which includes sourcing/procurement of categories for your customer(s) that would not be included in enterprise spend.

 

I think is worth investigating if an enterprise can add value to its supply chain partners via process, category, and supply market expertise or through superior buying leverage.
Answered by Andrew Bartolini, Aberdeen Group

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Q: How can you review and measure contract compliance?

 

A: There are two considerations with contracts and spend.

(1)   How much of your spend is under contract versus maverick

(2)   Of the spend that is under contract, how much of the spend is compliant to the contracts in place

Both issues are important and in both cases, spend visibility and contracts visibility are the keys to tracking and improving these measures. Maverick spend and spend that is not compliant to contract have considerable costs.

 

To start, review the line item detail from your invoices and compare them to the pricing and associated terms and conditions of the appropriate contract. If the spend detail matches contract, it is compliant. If overpayments and other errors are identified, they can be corrected with the help of A/P. Make sure to communicate findings to stakeholders so that errors are not repeated. Seek to understand why some spend occurs without a formal contract and take the appropriate action.

 

While you can do this type of review manually, leveraging a spend analysis tool is a much more efficient and effective way to accomplish this process. In a fully manual world, a third-party that provides post-payment audit services could be considered.

Answered by Andrew Bartolini, Aberdeen Group

 

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Q: What is the best way to measure savings when using multi-year contracts? We use multi-year contracts to drive the savings % down overall however don't know how to claim savings in year 2 and year 3.

 

A: This is a great question and a great example of the complexity involved in tracking and reporting savings. Aberdeen does not have specific research on how the majority of enterprises handle this scenario, but anecdotally, many groups will only count the year one savings, of that group, some will ensure that there is some “credit” for benefits in year 2 and beyond. How this question is answered by your team can potentially lead to sourcing and contracting behaviors that may not be perfectly aligned with the larger enterprise goals (shorter contract durations to have more first year contracts would be one example).

 

The important thing here is to make sure the CPO and CFO are aligned in how savings in this example and others are treated and that the teams have a clear understanding of the agreed upon definitions/process.

Answered by Andrew Bartolini, Aberdeen Group


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Q: To whom does Procurement report for the majority of Best-in-Class organizations?  Is it the CFO or another individual/department?


A: According to Aberdeen research,

35% of Best-in-Class (top 20% of enterprises) enterprises report into the COO or Operations team

22% of Best-in-Class enterprises report to the CFO

 

For “All Other” organizations (other 80%):

36% report to CFO

16% report into COO/Operations

 

Whether or not there is a direct reporting relationship between the CPO and CFO, how these two leaders and their departments interact is important and can have a very significant on operations.

Answered by Andrew Bartolini, Aberdeen Group

 

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Q: Any advice on getting the CFO to pay attention to the procurement organization? The procurement group is ignored even when savings solutions are being suggested.


A: The best way to communicate or persuade anyone is to speak their language.  Try to understand what your CFO's priorities are and then pitch  your solutions in those terms.  A typical CFO is focused on improving earnings, improving efficiencies, increasing controls and so forth.  A proposal can try to address one or several of these priorities.  By the way, a proposal does not have to be a book.  I personally have never seen an idea that could not be communicated on 1 or 2 pages.

 

If the idea revolves around savings, don't just throw a number out there like "this will save you 15%".   Quantify it.  By purchasing this technology (or engaging this service or hiring 2 people) we will be able to save $10M this year and $20M per year after.  In the first quarter, we will have a net cash/expense outflow of $100K, in the second quarter we will be breakeven, and begining in the third quarter we will save approx $5M per quarter.  The savings will come in the form of hard dollar savings (75% of the total) and cost avoidance (25% of the total).  The savings will show in the following departments (xxx, yyy, zzz).  You get the idea.  This is how a CFO thinks. 

 

If you find that controls are an issue, then you can often pitch a savings ideas that will also improve processes, automate controls, etc.  You may even be able to work with your accountants to see if the process improvements are great enough that the auditors can reduce their auditing hours/cost.

Answered by Jim Frankola, Ariba

 

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Q: Situations exist where purchasing needs additional funds to generate savings but can't get their internal customers to "pay-up" (i.e. pay $1 to generate $2 in savings). What if the internal customer gets the savings but won't increase costs to generate them?

A: Oh, this is a great question.  There is no perfect answer to this.  It all depends on the organization (how centralized is it, how much control does the CFO or procurement have), on the commodity (are prices dynamic or stable, are there good external benchmarks), is the internal demand well understood (both in terms of quantity and specification).

 

In a reasonable world, the purchasing department would put a proposal in front of the internal customer.  If they both agree, then there is no issue.  If they do not agree, then there should be an escalation procedure.  In many cases, these types of issues go to a corporate finance or operations department.  The third party listens to purchasing and the internal customer, weighs the costs, risks, etc. and then recommends (or edicts) a course of action.  That course of action may be a budget transfer to purchasing.  Sometime it comes in the form of a challenge to the internal customer that will force them to come back to purchasing to achieve a target ("Purchasing thinks that they can save you $10M.  You do not want to do it because of xxxx.  That is fine, but I will reduce your budget by $5M because you are leaving money on the table.")

 

Another approach would be to sign a statement of work between the purchasing department and the internal customer.  This statement of work would mimic a contract that an outsourcing procurement company would use.  I do not recommend this approach because you spend more time negotiating the statement of work and arguing about whether savings were achieved than you spend on creating real value.

Answered by Jim Frankola, Ariba

 

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Q: What would you consider a good working tool between Procurement and Finance?


A:  In my opinion, process is more important that tools. By process I mean the following:

  -  Create a common understanding of how to define savings (hard dollar, cost avoidance, measurement against what baseline (last year, external benchmark, etc.), how to measure them, how often to measure, etc.

  -  Finance and procurement working as assigned teams with shared goals.

  -  Regularly scheduled meetings (more than once a year and once a quarter).

  -  A process map of the procure-to-pay process with an clear understanding of roles - both from a control perspective and from an optimization perspective.

  -  Determination of approach on how procurement and finance will work together as staff functions to influence the line functions.  Each function really needs each other to be effective.

 

From a tools perspective, you need analytical and workflow tools.  For these, you can you generic tools (Excel, Lotus Notes, internal wiki's and so forth).  You can also find vendors that have tools that are optimized for the procurement function and spending data.  Since I work for Ariba, I am familiar with our tools like Ariba Spend Analysis or Ariba Savings Pipeline and Tracking.  These optimized tools will cost you a little more than the generic tools that you may already have, but will usually have a pretty fast payback because they will allow you to capture more of the identified spend or allow you to expand the reach of the procurement function to touch more spending.

Answered by Jim Frankola, Ariba

 

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Q: We often find that the operational units will take the savings generated through procurement and spend it all on other projects...yet the company struggles every year to reduce budgets.  Is there no role for purchasing in the budget reduction effort?


A:  Please see the comments for the earlier questions on working with the CFO and with internal customers.  In addition, I would recommend that the best way to get control of the situation is to be proactive in the budget cycle.  For those of you that are not familiar with the budget process, there are usually a few functions that are "inputs".  For example, finance and HR will usually work together to determine the average pay and benefits increase costs; finance will make assumptions regarding exchange rates and inflation..  Finance will then tell all the operational units to build these assumptions into their plans (or justify differences to these assumptions). 

 

I have seen some of the better procurement departments get engaged early in the budget process.  That is, they will work with finance, look at historical spending levels, external commodity price trends, insight into existing contracts and behaviors that are sub-optimal and so forth to come up with procurement targets.  These are often built up by commodity area and summarized by department or operating unit.  These are then sent to the operating units as budget assumptions and become the starting point for subsequent conversations.  These targets have to be understandable and actionable.  By that I mean that the operating unit should able to clearly understand where the number came from.

Answered by Jim Frankola, Ariba

 

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Q: Isn't procurement function and subset of the overall sourcing function? If yes, why not have a CSO instead of CPO? Or is it just the way you call it?


A: The term “CPO” ultimately means the person in charge of the procurement organization. I think from a language standpoint, we focus on how procurement should be positioned, and it’s really to evangelize all the things that procurement can bring to the organization. There’s a legacy with the term “purchasing” that in many organizations really looks at the tactical order taking and PO generating part of the larger procurement/source-to-settle process. As I’m using CPO today, the intent is to refer to the head of the procurement organization. And sometimes, they’re called sourcing organizations, or strategic sourcing organizations, but it’s that person who has the responsibility of the source-to-settle process. For those of you in Europe, there’s actually a flip view of purchasing being the more strategic term. But in the U.S., procurement is the term we utilize. There’s no differentiation here; we’re talking about the person in charge of the procurement operations.
Answered live by Andrew Bartolini, Aberdeen

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Q: Could you define what spend under management really is?

A: It’s an area that I’ve been focused on in my time at
Aberdeen. The definition would be to look at all enterprise spend, excluding payroll, taxes, and things of that nature. Everything else that the company spends is the total enterprise spend. The percentage that Procurement manages would be the percentage of spend under management of Procurement. Now, what does managing the spend mean? And I think we’re in the early parts of this transformation, but as you look to answer that question for yourself, you should ask if you have visibility, first and foremost, into the spend. Maybe I don’t have the buy-in of the stakeholders, but can I see that there’s an opportunity for sourcing? Am I sourcing it? Do I have visibility into the contracts? Is there a system of record that I’m able to see the transactions as they occur? We don’t play so hard and fast with the def b/c some smaller organizations don’t eProcurement systems. It’s really the sense of how much of a potential impact a procurement organization can have. I always recommend to organizations that they have this as a metric, and have a deliberate plan to increase that number. If you’re not measuring it, not looking at it, if you don’t have visibility into it, you can’t make improvements on how it’s being managed. Managing spend today, and those that do manage a greater percentage than those who do not, we see high correlation in performance across other areas—higher savings, higher compliance—over time, that may shift as organizations start managing greater percentage. And at that time, we’ll need new maturity models.

Answered live by Andrew Bartolini, Aberdeen

 

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Q: What is an acceptable amount of off-contract spend?


A: So I think, there may be the one-off purchase that doesn’t require a contract, so I think you need to orient yourself there first. The suggestion is not that every purchase order is generated against the contract. There are a large number of best in class operations, though, that do require a purchase order for every invoice to be paid. “No PO, no pay” school is doable and can be effective. When you start looking at high volume-low dollar categories, utilizing P cards is an acceptable to pick up the rest of that spend that you might have used your cash drawer in the past for. Compliance as we see here, the best in class are 80% compliant to contracts. We tend to see numbers in the 70s or high 80s for best-in-class on the percent of spend that is under contract. And those are good numbers to shoot for. You’ve got to look at the size of your organization, and shoot for the 80-20 rule. And if you can improve on that once you’ve gotten there, great. 

Answered live by Andrew Bartolini, Aberdeen

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Q: What are your thoughts on Supply Chain Finance tools and/or Dynamic Discounting?


A: I think they’re extraordinarily valuable to both parties in the trading partner relationship. You can to walk them through the annualized interest of paying an invoice early and getting the discount. It’d be fair to say you wouldn’t be able to find that kind of risk-free return anywhere in the market. There’s extraordinary value in having this capability. The key is whether or not if you have that capability. That opens the discussion with your CFO/treasurer to gain an understanding of your organization’s cost of capital and when it makes sense to actually take the discount. So having that capability really sets the stage to drive very significant value. From the supplier side, and I do a fair amount of research on accounts payable automation (epayables), the suppliers who are also facing this credit crunch, having dynamic discounting abilities that are automated generally means that they’re going to have visibility into this as well. So their understanding of invoice status, when a payment is likely to be received, etc., really helps their organization out dramatically as well. I think it’s one of the most powerful tools within the source-to-settle process to help optimize working capital.

Answered live by Andrew Bartolini, Aberdeen

 

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Q: How do you define the difference between "spend under management" & "compliance"?


A: This is just my perspective (not an official definition): Spend under management is a measure of what % of total spending is touched or controlled by procurement.  For example, if $10M of printers are sourced by procurement, then that is spend under management. However, if the local IT guy buys off contact, then that is a compliance issue.  Compliance is a measure of how well employees are following procurement contracts or policies.

Answered live by Andrew Bartolini, Aberdeen

 

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Q: What is standard savings % objective for indirect spend?


A: Candidly, that’s very hard to answer without specifics of the situation. It can be widely varied based on a host of factors. What’s the specific category? If you were looking at services spend, which is down quite dramatically from 2007 to early 2008, the savings opportunity there from what you’re currently paying if you have a contract 3-4 years old would be dramatic. If you had just negotiated the contract last year, there could be some opportunity for savings, but it be reduced. I wouldn’t dare really throw out a number; it’s really almost at a category level and where you are in your sourcing journey. A data point that we tend to see, and from my own experience in strategic sourcing, you’d see numbers from strategic sourcing initiatives an overall average of identified savings would be in the 12-14% range. But you’d be sourcing those categories b/c of market opportunity and other factors, looking more broadly at the organization. But I don’t think it’d be fair to throw out a number to that question.

Answered live by Andrew Bartolini, Aberdeen

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Q: What are some best practices for managing suppliers Scorecards; i.e., how much of the information is tracked directly from the supplier vs. customer?


A: This question would be very category centric. So the right answer for your travel spend and TMC is going to be quite different from your strategic supplier of one of the main components in your manufactured good, and who the item of service touches in the organization. Internally, you want the key stakeholders weighing in, not just procurement. For strategic suppliers and suppliers that may not be strategic, but can have an impact on operations – whether that’s your reputation or your line and operations – you need to include third party sources so that you have a full view of the supplier profile and any potential red flag as it relates to viability can be drawn there. If you have a flexible scorecard platform that allows you to take the high-level approach, that’s great, but if you have the ability to integrate and pull in third party data and can a larger audience participate, that’s what you should be looking for. But it’s a category-specific answer.

Answered live by Andrew Bartolini, Aberdeen