Procurement – the benefits of a closer engagement with the CFO office
Author: Luke Taylor CCO & Deputy CEO
Date: 6th June 2016
I attended a very interesting event a few weeks ago, where a number of chief financial officers from leading CSP’s around the world presented and discussed their experiences, strategies and predictions for the coming year. One topic that resonated with me in particular was a presentation by a CFO of a large European telecom service provider. He presented and discussed his own company’s strategy and initiatives for Finance and Procurement departments working more closely together to ensure competitive advantage in the marketplace. Finance and procurement working together – seems a common-sense approach and already exists, right? Well yes, but historically more in the case of budgets being set, individual departments spending their respective budgets through a Procurement process and Finance at the end of the day paying the vendors invoices.
But it seems there is a new more proactive approach maturing in the marketplace that ensures there is visibility, interaction and communication throughout the financial lifecycle and procurement chain, where both the CFO office and Procurement contribute to the procurement process with the objective of competitiveness. And the benefits of such a strategy are tangible for the Service Provider – Reduction on cost base, shorter lead time and approval process, better terms and conditions, better cash flow and working capital as well as simplifying the process, promoting transparency and better working processes and more effective vendor management. As well as all these positives, incorporating larger purchasing power though consortium type initiatives where either telecom companies in larger parent groups or joint ownership procure larger volumes and hence demand larger discounts.
My concern as vendor are do these initiatives harm the vendor relationship or strengthen it when some of these financial directives and initiatives are incorporated in the Procurement chain? As we know the key responsibility of any CFO is the managing the financial risks of the business as well as financial planning and reporting – combining this with Procurement means putting financial pressure on external vendors such as myself. The need by the Service Provider for improved cash flow means pushing longer payment terms for the vendor, the need for year on year costs savings means price reductions and discounts by the vendor. The need for larger discounts with larger vendors means the smaller vendors like ourselves being pushed aside. Neural Technologies is just over 160 people globally, spread predominantly in four office in North America, UK, Singapore and Malaysia, but I class ourselves as a small medium sized enterprise (SME). We are of course proud to be selling to esteemed world leading companies but like these larger corporations, we need security and cash flow to ensure that we can maintain the workforce and stay in business. So how do you do this when your customers look to change payment terms from 30 days to 90 days? Look to reduce your revenue by 10% year on year, Ask you to absorb the negative currency exchange fluctuations, State that license fees should be free of charge, have a huge list of things we want to do with your product – but have no money…
I hope larger corporations can understand that we are in the very same boat as them, we want to increase revenues and reduce costs – we are paddling the same stream, in the same direction, with the same current against us, it’s just our boat maybe much smaller..
Finance and Procurement working more hand in glove is a good thing, but pure cost reduction is not everything when purchasing products, services and goods. Procurement and Finance need to understand what they are purchasing, which means the relevant business departments and possible budget holders need to be involved and influential in the purchasing decision. Is initial cost (Cost of Ownership) always the best metric to use? Does the product fit your needs today and importantly tomorrow? What is the quality of the product in regards stability? What are the commitments from the vendor? What references can the vendor provide? etc. We always believe when we initially sell our products and services, that this is a start of a very long partnership between the two companies. With every partnership there must be some give or take but at the end of the day every successful partnership is a mutual respect of each other’s businesses and the value they bring to the respective party. Not all of the most successful companies in the world are determined on the cost cutting exercises implemented year on year. Successful companies are ones which work well with their strategic partners, understand their customers and provide quality services. Procurement departments and CFO offices need to always think of the bigger longer term aspirations of the company, where short term financial gains do not mean long term financial or commercial success. I hope as this strategic change and evolution in Finance and Procurement continues to mature and the business owners and of course the potential new or existing vendors can be part of this initiative and have an open, constructive, interactive relationship. Which I believe at the end of the day will ensure a robust, strong partnership that all parties involved can nurture and ultimately benefit from.