Until 2009, boardroom discussions would often be restricted to revenue growth. The sustained recessionary conditions of recent times have forced CXOs to focus on several other priorities, not least of which are cost reduction strategies.
Across all corporations, spending as per budgets, achieving savings targets, ensuring spend compliance, etc. have become key points of discussion! While all these “changes” are positively impacting Direct Procurement’s COGS (Cost of Goods Sold) effectiveness, Indirect Procurement’s expense line continues to be plagued with multiple challenges. One of these can be attributed to its poor relationships with internal customers (read: peer functions).
We see three distinct issues that make up this relationship obstacle for Indirect Procurement. How can they be tackled and resolved?
#1: PACKAGING & MARKETING SERVICE OFFERINGS TO INTERNAL CUSTOMERS
The Procurement Department is essentially an internal vendor to other functions within an organization. But sadly, most Procurement Departments don’t understand the need to market their services internally, expecting peer functions to leverage their services by default.
In an ideal scenario this may make sense, but in practice it fails miserably. Peer functions (Marketing, R&D, IT, Facility Management, HR, etc.) understand their needs better than Procurement’s buyers and often involve them only at the last stage for “completing the paperwork”. Procurement, for its part, does not usually proactively build relationships to demonstrate the value it can add on behalf of its internal customers.
Tip 1: For Procurement teams to be successful, it is essential for them to speak the language of the business (i.e., internal customers) and understand their strategic drivers and business goals. Procurement leadership needs to align its functional goals accordingly. It is less and less about purchasing techniques and more about its ability to see the bigger picture.
#2: MANAGING THE PERCEPTION & EXPECTATION GAP
Communication gaps are major factors contributing to the failure of Indirect Procurement finding its place under the mainstream sun.
We have seen this two-way communication failure taking place simply because peer functions do not communicate their annual Master Assignment Schedules (MAS) to the Chief Procurement Officer. And, by the same token, Procurement does not communicate its savings plan for spends under management to peer functions. Having a plan to drive savings is great. But without communication, a perception versus expectation gap opens up—and that plan fails even before taking off!
The Perception & Expectation Gap!
Limited communication between internal customers and Indirect Procurement leads to your peers doubting your objectives and your sourcing support. In any case, if your colleagues in the business feel that the savings you achieve will show aspects of their function to be ineffective, they may even push back and veto an otherwise sound strategy. “Procurement does not understand the technical nuances”—now how many times have you heard that before?
Tip 2: Perception and expectation management is an important lever to ensure success of any strategy. Procurement leaders need to design inclusive strategies to achieve their savings and risk targets without threatening peer functions or making them look unnecessarily bad.
#3: COLLABORATING EFFECTIVELY WITH ACCOUNTS PAYABLE!
Across many companies, Procurement is from Mars and the AP (Accounts Payable) team is from Venus resulting in interdepartmental paralysis that fails to translate procurement outcomes to key performance indicators.
It is imperative to understand that while purchase orders and contracts are executed by Procurement, payment processing will always be done by the AP organization. The lack of a “meaningful” relationship with AP often leads to issues such as vendors not being paid on time, missing early payment discounts and incurring late payment penalties (mostly in the case of utilities).
This in turn adversely impacts Procurement’s ability to manage vendors effectively. An end-to-end integrated Procure to Pay organization is intrinsic to Procurement’s success in managing vendor relationships and meeting internal customer expectations.
Tip 3: Managing your relationships with the CFO and the AP team is absolutely crucial to your Procurement teams’ success at all levels.
Ultimately, the effectiveness of Procurement
will not come about from only excellent supplier relationships, knowledge of procurement techniques
, best in class e-procurement tools or smart vendor management. It requires highly skilled and passionate people (and teams) who can clearly chart out their strategic agenda and win cross-functional buy-in by choosing to be key “business partners” within the intra-organizational structure.