Is Your Business in Need of a Procurement Transformation?
Corcentric’s podcast series, Corcentric Conversations, is exploring how one function within a company can make a marked difference in whether or not that company achieves its goals in its 5-part series, Mastering Procurement Transformation, which explores different steps in Finance-led transformation. The first episode explores how to recognize you even need to transform your procurement function and then create a roadmap to follow.
Although business conversations over the last two years have been heavily focused on the pandemic (and rightly so), business leaders are facing challenges on so many additional levels: mergers and acquisitions, management reorganization, constantly evolving technology, global expansion (which involves regulatory compliance issues), and more.
In today’s environment, businesses are looking for more than just the next quarter’s revenues. Cost reduction is still top of mind, but businesses realize that to ensure continuity, a business must strive for sustainability. When it comes to source-to-pay (S2P), sustainability requires alignment within all facets of that continuum (Sourcing, Procurement, Finance) in order to deliver maximum results.
4 ways to recognize that you need Procurement Transformation
One of the areas most heavily impacted by today’s challenges is Procurement. The days of viewing the procurement function as simply purchasing (being singularly focused on price) are gone. The reality is that there is no other area of a company that can affect top-line and bottom-line results in the way that Procurement can. That’s why Procurement should be playing a strategic role in every organization.
From a top-line perspective, Procurement, done right, focuses attention to supplier relationship management. Doing so can make your business a supplier’s customer of choice. That will be significantly advantageous when it comes to the kinds of supply chain issues we are seeing today. Being first-in-line when needed products and materials are available is the very essence of having a competitive advantage. Another advantage of being the customer of choice is having access to new technology that suppliers may already possess. Both advantages lead to positive bottom-line results of better pricing and terms, all leading to significant savings.
If Procurement isn’t considered a strategic partner in your business, then it might be time for you to consider procurement transformation. You need to take this step if:
- You don’t consider how Procurement can give your business a competitive advantage
- You look at Procurement’s function as essentially tactical, as an order taker
- There’s a lack of compliance within the Procurement team regarding agreements and contracts
- Finance and Procurement are not in alignment when it comes a definition of what “savings” means
Before you begin transforming your procurement processes, you need to evaluate your situation. Where are you now and where do you want to be? This involves engagement with all stakeholders (internal and external), helping them with budgeting, building requirements and going to market plans. The engagement with suppliers, as noted above, can result in becoming a customer of choice, enjoying all the advantages that position provides.
The necessary alignment of Procurement and Finance
In business today, one of the major barriers to operational optimization is the existence of silos within the organization. Every business unit within a company should be in alignment with the strategic direction of the company, while staying aligned with organizational goals and priorities. This necessitates an ongoing collaboration between Procurement and Finance. Procurement leaders and CFOs understand the need to have these business units work together. When these functions exist in silos, each has its own priorities and objectives when it comes to specific goals and processes.
- Finance-led Procurement Transformation – For Finance, the starting point is technology (digital transformation and automation). When Finance is still operating under legacy manual and paper-based processes, it has no real-time visibility into existing liabilities, making accurate forecasting extremely difficult. A lack of visibility into spend can mean late payments, the inability to predict cash flow, and ultimately less ability to manage working capital. Finance is looking for ways to establish controls and greater efficiency. The primary goal may be on-time (or early) payments; but the road to get there starts with digitization.
- Procurement-led Procurement Transformation – For Procurement, transformation starts with spend visibility and resources (staffing, team structure, organizational structure). The focus is on centralizing and standardizing processes, building the team necessary to handle those processes, and quickly showing value through savings. This tack is to the detriment of Procurement because if you’re always starting with savings to show value, then Procurement will be judged only by that instead of all the additional strategic value it can bring to your company.
Instead of having the transformation process under the auspices of a single function, it is important to think holistically and have Finance and Procurement working together. You need to look at people, process, technology, and the value of Procurement as the main components of Procurement Transformation. Focus on those components rather than on savings. The fact is, if you take the right steps and successfully transform Procurement, the savings will come.
Developing the road map
First, it’s important to realize that one size does not fit all businesses.; this transformation journey will be unique to each organization. Some organizations are further along than others in how Procurement functions within the company; others haven’t even begun this evolution. Some companies are very successful, yet their Procurement is misaligned with other goals, meaning the company is not reaping all the potential benefits. Each organization needs to evaluate whether they need an overall procurement transformation or just make some spot changes or modifications of their current strategy.
Once you’ve evaluated where your procurement function needs to be, it’s important that you set priorities and objectives early on. Once set, and before moving beyond that point, you need to make sure that these objectives:
- Align with larger company goals (consider what else is happening in the organization). This is often where attempts fail. Instead of beginning with this alignment, the focus is on tools, technology, and processes. Management wants to ensure that the cost of transformation will benefit the company’s overall goals. When this can’t be shown upfront, the result can be a lack of attention and buy-in from leadership.
- Align with the major pillars of procurement: people, process, technology, metrics, and reporting, as well as Procurement’s functional roles.
Once you’ve established that your objectives are in alignment overall, it’s important to understand where the goals for Finance (compliance and controls) and Procurement (spend management) intersect. To get on the right path and ensure a successful transformation, planning is essential. Most of the time spent upfront should be on building this roadmap, which should entail:
- Understanding the resources necessary to undertake this mission
- Building an end-state vision
- Establishing a timeline to get to the end-state vision
- Aligning the effort cross functionally.
The final consideration – managing change
It would be painful to go through all the steps that need to be taken for transformation and then find that the people you need to ensure success are resistant to change. For many projects, the change management (or the lack thereof) is often a major point of failure. Even if businesses acknowledge that something is wrong or isn’t working as efficiently as it should, there is no real understanding of the scale and timeline of a project and how it would make employee’s tasks so much easier and more efficient.
What organizations need to understand is that when it comes to something as important as business transformation, people are the priority. To get support for this initiative, you need to assess who within the organization is this effort going to impact (including end users) and communicate clearly with them how long the project will last and what it will all look like at the end. It’s important to remember that competing priorities will exist within the organization and prepare to deal with those efficiently.
You should also assess the change culture within your company. Do people respond to change easily or has the resistance been a true impediment. Are there instances where a change was successfully undertaken? Determine what tactics and strategies were in effect during these efforts and leverage that success as a model.
Success comes down to collaboration
When it comes to Finance-led Procurement Transformation, Finance and Procurement need to align goals, incorporate multiple perspectives, and plan out the transformation. If they do all this at the beginning, Procurement will then be able to deliver the desired value.
Listen to our Corcentric Conversations, Mastering Procurement Transformation, Episode 1 below.