In the aftermath of the Global Recession, many Chief Financial Officers (“CFOs”) have made the realization that a business environment that values cash, profit margins, and risk mitigation is one that plays to the primary skills and capabilities of a procurement organization. In fact, Ardent Partners research has shown that a Best-in-Class procurement operation in 2019 delivers an extra 3.1% in cost savings for every dollar of enterprise spend. This shows that the impact and advantage of a top-performing procurement operation can be extraordinary and that optimizing enterprise spend is a business imperative. But the transformation of a procurement operation does not happen organically – it takes time, investment, resources, and above all, executive leadership, to achieve Best-in-Class procurement performance. In the CFO’s drive to maximize shareholder value, the procurement department’s success should be a top priority.

The Importance of Spend Management

If the CFO’s role in many enterprises has become increasingly strategic, the pressure to focus on compliance, controls, and costs remains as intense as it has ever been. A strong procurement operation can be a powerful force in achieving these objectives via its ability to manage enterprise spend. The term “spend under management” refers to the percentage of total enterprise spend (which is comprised of all direct, indirect – including capital expenditures, and services spend) that a procurement organization manages or influences. Spend under management represents the opportunity that procurement has to influence and impact the enterprise. And, while there is no guarantee that managing more spend will result in superior performance, Ardent Partners’ research has consistently shown that the procurement groups that manage more spend report superior cost savings and compliance rates.

Ardent Partners’ research has also shown that for every new dollar that is placed under management of the procurement department, the average enterprise sees a savings benefit of between 6% and 12% during the first contract cycle. Consider that if procurement is not managing certain categories of enterprise spend, its ability to identify savings opportunities within those categories, track and ensure compliance to specific supplier contracts, and reduce maverick spend is severely, if not completely, limited. The benefits that procurement can deliver by placing spend under its management and then managing it well can impact cash positions and the bottom line. The tools in the Chief Procurement Officers‘ (“CPOs”) spend management drawer include:

• Identified and Implemented Savings – Working to ensure that after a contract is executed, the savings that were identified during the negotiation are realized and implemented by the enterprise. Based upon the unique business stakeholders involved, these very real savings benefits may or may not impact the budget.
• Demand Management – The best way to save money is not to spend it. Procurement can influence category usage by the sourcing decisions it makes and the training and coaching it provides during implementations/roll-outs. CPOs can also educate the employees on the value of frugality.
• Contract Compliance Audits – Conducting these audits to ensure that the enterprise buys against its preferred contracts and pays exactly what was negotiated.
• Total Cost of Ownership (of Supply) – Awarding contracts based upon the entire cost of managing a supplier contract, including all of the direct and indirect costs associated with the purchase and maintenance of the item or service over its lifecycle of usage.
• Payment Terms and Strategies – Negotiating how and when suppliers will be paid.
• Process Efficiencies – Managing the procurement department below its targeted budget.

Final Thoughts

The fact that many of the above strategies deliver benefits that do not impact the general ledger can make it very difficult for a CFO and the finance department to recognize them without assistance. For example, the results from demand management strategies are practically invisible in the company financials. This is not solely a CFO’s problem. It is incumbent upon finance to support procurement in the pursuit of these strategies and then collaborate with them on the definition and measurement of the results.

There are just two weeks until Ardent’s fourth-annual procurement executive summit, CPO Rising 2019. Tickets are still available, but they won’t be forever. Register now to be among your fellow spend optimizers!

Tagged in: Ardent Partners Research, Chief Procurement Officer, CPO, Finance, Lists, Process, Spend Under Management, Strategy