Upfront: Procurement Promotes Competitiveness

Benchmarking procurement processes and embracing best practices can give you an edge over the competition.

As companies face the likelihood of slow revenue growth and lower profit margins next year, demands on finance executives to control costs are escalating. Procurement is one critical area where businesses can strengthen their competitive position by benchmarking their processes and embracing best practices.

A benchmarking procurement study conducted by The Aberdeen Group and Business Finance that assesses the challenges, priorities, capabilities and technologies of procurement programs shows that procurement's strengths lie in negotiation and contracting. But weaknesses in costing, project management and process innovation are indicators of procurement limitations and fertile ground for improvement.

CFO respondents estimate that only 34 percent of projected procurement savings on average get to the bottom line, sharply less than the 75 percent to 80 percent savings reported by sourcing managers. This gap is likely due to different interpretations of the term "savings"; lack of companywide guidelines to calculate, track and budget for the savings; passive involvement of finance in procurement activities; and limited use of formal procurement plans that link to business plans.

Companies that reported the most confidence in booking procurement savings and had the highest levels of expenditure under management consistently demonstrated three best practices:

• The finance department dedicates resources to procurement or participates as a core member of sourcing teams.
• The organization uses formal, preferably multi-year procurement plans that allow it to project, audit and validate procurement savings.
• The company positions financial systems to complement purchasing applications with the goal of improving visibility and compliance.

The Aberdeen Group also finds that top performance is linked to the use of certain technologies, such as ERP, financial analysis/business intelligence and expense automation.

How can finance executives improve the rate of procurement savings? They must demonstrate the impact of procurement activities on key financial metrics and establish corporate savings guidelines and reporting methodology, the study says. Jointly, finance and purchasing need to integrate procurement plans into corporate performance planning activities, and they should validate the impact of savings on key financial metrics.