How does Procurement ensure all savings are recognized by Finance? This is an on-going question of procurement organizations who are trying to validate the worth of their activity to the broader organization.
Procurement leaders and organizations need to consider a few aspects when trying to answer this question. The first one being: what are YOU trying to achieve?
In most organizations, Finance does not generally expect Procurement to calculate what has actually hit the P&L but they want to know what to expect.
So are you trying to do someone else’s job to prove your worth, or do you want to do your job and deliver actual value?
This leads to the second aspect : what do THEY/Finance expect?
The only way to know is to ask and work together on a savings policy.
It should lay the foundation of your mutual understanding with Finance of Procurement’s contribution.
This may include:
- Various types of benefits (P&L impact, cost avoidance, inflation mitigation..).
- Rules for calculation.
- The most important one being: how do we define the baseline (when we have a comparable reference or not, when the volumes change…)
Keep it simple. Your savings policy should cover 80% of the cases. And for the remaining 20% you will adjust the calculation on a case by case basis with Finance (but you’re not starting from scratch).
An important point: YES, this should include cost avoidance.
If Finance tells you it has no value, tell them that it’s true, they will not find that value in their P&L… but if you don’t look after cost avoidance and stop delivering them, Finance will be able to trace it back to the P&L, just on the wrong side!
The key here is to be reasonable and use you common sense when you report cost avoidance. Your litmus test can be: can I look my CFO in the eye and defend my cost avoidance? If I’m not sure, I don’t report it. Otherwise it is worth fighting for.
Once you have defined and shared the rules, you must adopt a structured approach: establish targets that are validated with Finance (type of savings, baseline and ambition), do the job, measure what has been achieved, have it validated by the business and Finance. As you mature the process, Finance can flag a contribution as being reusable by the business or taken out of their budget. If done in collaboration with the Business Unit and Finance, this creates the right incentives for the business to engage with Procurement.
The finance controller will then take your numbers and see if what you have secured actually happened. if there is a deviation they will spot it. And if you can help, they will come to you.
In a nutshell:
- Work hand in hand with Finance to define the rules
- Don’t be shy and report on ALL of your contribution. You’re doing some work, it has value
- Help Finance distinguish between what they can trace back to the P&L and what they cannot
- Cost Avoidance vs. Cost Reduction