Procurement and Finance – A Loving Relationship? Sometimes…

Contributed article by Peter Smith, Author former CIPS President and Managing Editor of Spend Matters Europe

In my own 20 year career as a procurement practitioner, before I took refuge in consulting, writing and commentating, I ”enjoyed” a range of different reporting lines. Early in my career, I reported to a more senior procurement director. In Mars Confectionery, that reporting line went right to the top; procurement and supply chain was vital to the business and we had the “seat at the top table” that is often discussed. In another case, my global procurement director boss reported into Finance, then later into a regional “shared services” leader. In my government role, my boss looked after
finance and a whole range of other “back office” activities for the Department. At NatWest, I reported firstly to the Group CFO, then to the Group COO.

So, I’ve looked at this from both sides now, as they say, and can comment reasonably objectively in terms of whether finance is a good home for procurement. And more broadly, what makes the relationship between procurement and finance often so “interesting”?

Well, it is clear that the two functions and the people who work within them are in many ways linked closely and even inextricably. The procurement process fundamentally flows into the organisation’s finances, after all. Yet there has often been considerable tension between the parties, even when procurement reports into finance, which it does in perhaps a third of all organisations. Where it doesn’t, the tension can run over into outright conflict. The procurement role is all about helping to spend the organisation’s money well, so that should align perfectly with finance goals around managing the balance sheet and profit-and-loss successfully.

Yet the areas of potential conflict also seem to be extensive. They can include the focus of finance on savings, budgets and unit cost reduction, which can at times drive procurement into behaviour that does not align with other budget holders and stakeholders around the organisation. The need for financial control is clear, but that can also lead to procurement playing a role it does not feel comfortable with, as it looks to gain stakeholder credibility. Showing that we understand the strategic drivers of the other operational business or functional leaders, so we can work with them collaboratively, is tough if they see procurement as an agent of a penny-pinching, cost-cutting or audit-focused finance group!

Even purchase-to-pay processes and systems (“P2P” ) can be a source of conflict. That covers the activities supporting the acquisition of goods and services from the perspective of data, administration and payment - so “onboarding” suppliers, the requisitioning and ordering process, delivery, receipt, invoicing and payment. On the positive side, procurement and finance should agree on the need for efficient processes, good, accurate and timely data, and strong anti-fraud and corruption measures. Effective P2P contributes towards these shared goals. But I have seen tension arising in three particular areas:

• End-user convenience versus control – as I have actually heard a finance director say, ““Make it easy for budget holders to spend money? Why would we want to do that”? But where colleagues have a genuine need, a policy right to spend money according to organisational policy and follow the procurement “rules”, executing the actual transactions should be as simple as possible.
• Procurement doesn’t understand exceptions - If the P2P process is deficient, that can end up with an inefficient and difficult invoice process. So for example, Finance gets left to handle the exceptions, non-standard and the sheer nightmare cases, whilst procurement says, “nothing to do with us, guv!” But of course the invoice process is driven by the upstream elements of the P2P process.
• “Transformation in isolation" – procurement and finance not joined up - when an improvement programme is undertaken, procurement and finance sometimes try to optimise their ‘P’ (purchase or pay) in isolation, causing personal tensions and inefficiencies in the wider process.

Benefits flow when the two parties work together and the whole end-to-end process is optimised. I plan to come back and look at those three areas in more detail in future articles, but those observations don’t of course answer the initial question about reporting lines. Well, I will hedge my bets and say “it depends” – on the nature of the organisation, above all. But whatever the reporting situation, it is always important for the organisation that procurement and finance work together positively.