CFOeBook

Strategies for Spend Optimization

Find out how to reengineer procurement to add more

value to your organization.

Strategies for Spend Optimization is published by CFO Publishing LLC, 51 Sleeper Street, Boston, MA 02210. Mary Beth Findlay and Russ Banham edited this collection, with assistance from Jenna Howarth, Caitlin Hegarty, and Stephanie Scott.

Copyright © 2013 CFO Publishing, LLC. All rights reserved. No part of this book may be reproduced, copied, transmitted, or stored in any form, by any means, without the prior written permission of CFO Publishing, LLC.

ISBN 978-1-938742-39-2

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TABLE OF CONTENTSFOREWORD: SPENDING WISELY 5

VALUE ADDED: PROCUREMENT AS A PROFIT CENTER 6 Big-Business Attitude: Reduce Cost, Increase Profits 7 The Long Game: Six Ways to Stretch Your Payment Terms 9

PARTNERING WITH PROCUREMENT: BUILDING A STRATEGIC RELATIONSHIP 12 Spending Smart: Stop Paying Too Much for Stuff You Don’t Need 13 Get It Together: A Cure for the Supply Chain Blues 16

THE POWER OF PEOPLE: RECRUITING TOP PROCUREMENT TALENT 18 Investing in People: The ROI of Procurement Talent 19

CONNECTING COSTS: HOW TO BETTER ORGANIZE PROCUREMENT FOR SUCCESS 22 Network Power: Working Better with Suppliers 23

DOLLARS AND DATA: PROCUREMENT TECHNOLOGY 26 Spend Management Software: Where Does the Money Go? 27

CONCLUSION: PROCURING VALUE 30

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FOREWORD: SPENDING WISELYD espite stellar earnings performance by

US corporations and a stock market in record territory, most companies are spending more than they have in several

years. The belt-tightening expense controls in the aftermath of the financial crisis apparently have eased, and the cash hoard that built up during the recession is being released.

This is good news, of course. But, it also focuses the spotlight on how this money is being spent, and how much of it. According to the Global CFO Council, a group of chief financial officers controlling roughly $1 trillion in assets, they are looking to increase capital expenditures by 7 percent this year over last year. Most of the money is earmarked for information technology and new equipment, although the group said their employees’ total compensation, including salaries, would also receive a higher share.

Just like when mom and dad forked over a nice check at graduation and advised, “Spend it wisely,” CFOs are looking across the enterprise and hoping for the same. The goal is not spend minimization per se, but spend optimization. It entails creating a culture of spending and inculcating it throughout the business.

In this regard, procurement plays a central role. The goal is to elevate procurement to a strategic position tasked with systematically managing expenses across the business, with a keen eye on cost efficiency and accountability. Through a process of enhanced spending controls, the thinking goes, every division, department and

function would be empowered to spend more responsibly. This, in turn, would compel significant bottom line savings that can be directed toward profitable business growth ventures.

It all sounds too good to be true, but the promise is unquestionable. When spend is systematically managed, dramatic reductions in cost are achievable. Given the enormous wealth represented by corporate expenses—equipment, machinery, raw materials, technology systems, travel and entertainment and even ordinary office supplies, remarkable savings can be realized.

The problem in many companies is procurement and whether or not it has the right skill sets to take on the job of strategic spend management. In a perfect business world, the CEO would state a new strategic initiative and the Chief Procurement Officer would weigh in on how best to keep the costs in line. This perfect world still resides in the future.

Nevertheless, spend optimization makes such good financial sense that waiting is simply leaving money on the table. The articles in this eBook lay out how some organizations are reengineering procurement to add greater value, recruiting wider-ranging talent on procurement teams and leveraging technology to achieve spend optimization. CFOs can make a difference by speeding up the clock—championing, launching and overseeing spend optimization efforts. After all, money (in finance) is everything.

--Russ Banham

FOREWORD: SPENDING WISELY

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VALUE ADDED: PROCUREMENT AS A PROFIT CENTER

“While they don’t have the time to take the day-to-day lead, executives who directly report to chief executive

officers should take responsibility and ‘own the business case’ for the project. In particular, the finance or

procurement chief should be committed—and drive the company’s commitment—to a particular

return on investment.”

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BIG-BUSINESS ATTITUDE: REDUCE COSTS, INCREASE PROFITSY ou may have heard the saying that “small

business is big business,” and with more than half of the U.S. economy populated by small enterprises, this statement has

substance. For executives of small businesses, it’s important to develop this big-business attitude when it comes to your supply chain, and even in such basic purchasing categories as office supplies. By doing so, you can reduce cost, reduce risk, and increase profitability.

To develop a big-business attitude, here are the most-crucial steps:

1. Be creative about bundling spend categories.

Even though a small business doesn’t have the volume of a large conglomerate, it is possible to consolidate some small-business purchasing creatively. Consolidation can come in many forms, cutting across categories or geographies. For example, you may think that spending $5,000 per year on office supplies is not significant, but when combined with other commodities such as janitorial supplies and custom printing services, your potential spend with one supplier may rise by as much as 100%, increasing your leverage.

A client had two small manufacturing facilities, each with its own supplier of janitorial products. By combining the volume of both facilities, a single source of supply was identified that provided not only reduced pricing but also the opportunity to obtain discounted payment terms, further reducing the financial impact.

Even within the same spending category, you may be able to find leverage. One client spent more than

$30,000 per year on various forms of packaging supplies with three different suppliers. When the volume was consolidated, the attractiveness of $30,000 of business per year versus $10,000 was incentive enough for these same suppliers to reduce prices and include several value-added services at no additional cost, in return for the opportunity to increase their piece of the business.

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ensure a successful outcome during negotiations. Several years ago, I was involved in negotiating an agreement with suppliers on behalf of several smaller organizations. The largest stumbling block we reached was the belief that each supplier should accept a reduced price on all items within the bid. Not only was this expectation unrealistic, it also shifted focus from the purpose of the exercise, which was to ensure that the overall spending for each customer was reduced. If I have to increase my cost of paper, but my overall spending for office supplies (which includes paper) decreases by 10%, why would I care?

Consider for a moment that reducing costs for overhead, materials, and services will yield immediate increases in working capital and profits. Also consider that the level of time and effort required to obtain these financial improvements is considerably less than producing similar profit improvements through increased sales. Seems like the right place to invest some time, don’t you think?

2. The procurement department is not the place for monogamy.

Human nature has demonstrated that the longer we remain in a stable relationship, the less effort we place into maintaining or improving the relationship. In a supplier-to-customer relationship, this tendency is often substantiated through escalating prices and diminishing customer service over time. That’s why maintaining a secondary source of supply can mitigate risks and increase competition.

Several years ago, I worked with an organization that used a sole transportation source for all of its inbound and outbound freight needs - remnants of its early days when it was a small business. The prices offered by the carrier had been steadily climbing, and freight damage was quite prevalent. Despite those problems, the company president was hesitant to change. After we moved the business away from the incumbent and divided it between two alternative carriers, service levels improved and the firm reduced overall transportation costs by nearly 10% per year.

3. Forecast the future, forget the past.If volume discounts are an opportunity for

reducing cost, reviewing historic volume or spending may not provide a picture that creates incentive for suppliers to increase discount levels. One avenue of savings, however, may come through communicating projected future business volumes with existing or potential suppliers.

While arranging courier service for a client, we developed an aggressive but realistic forecast for future growth. This information was then shared with courier providers to determine the most-advantageous discount levels. The results were discounts that rivaled those of much larger companies, in not only reduced courier costs but also more-competitive pricing for customer shipping. All told, the moves supported improved profit margins and a competitive advantage.

4. Negotiate, don’t haggle.It is common knowledge that negotiating is a give-

and-take transaction. Customers who continually (and often ruthlessly) take without providing any concession in return will often find suppliers applying surcharges, premiums, and unexpected price increases as a means to recoup costs.

Clearly identifying “wants” versus “needs” and having the willingness to provide concessions will

CFO Summary

• No spend is too small to ignore. If you are able to reduce it in some way then you should reduce it.

• Consolidating sources to necessity across divisions will help reduce spend.

• Knowing how to conduct and when to sever relationships with vendors can also help reduce spend.

STRATEGIES FOR SPEND OPTIMIZATION

Looking to improve your forecasting? Check out Three Tips for Creating a Reliable Demand Forecast.

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THE LONG GAME: SIX WAYS TO STRETCH YOUR PAYMENT TERMSF aced with cash calls from their banks

and creditors in the wake of the financial meltdown, many companies sought to squeeze funds out of their working capital.

They did so by going after customers who owed them money, cutting down on the costs associated with inventory, and increasing their days payable outstanding.

The result is that many corporate coffers are filled to bursting with cash. To some experts, that abundance has led to a certain complacency about making improvements in working capital. In 2010, following the worst year in recent memory in terms of working capital performance, nonfinancial companies merely treaded water. The three components of days working capital showed similarly sluggish levels of improvement. Days sales outstanding (DSO) declined 0.1%, while days inventory outstanding (DIO) and days payable outstanding (DPO) each improved just 1.1%, according to the 2011 CFO/REL Working Capital Scorecard.

Still, there are indications that many companies are looking to better those results. With much of the low-hanging fruit of working capital improvements already picked in the wake of the financial meltdown, a good area to look for betterment is on the payment side, says Steve Riordan, global managing director of advisory services at PRGX, a working capital consultancy.

Often overlooked because of the relatively low status of accounts payable in finance departments, A/P thus provides an opportunity for process and structural improvements that can enable companies to hold on to their cash longer. For companies

looking to improve their DPO scores, Riordan recommends the following:

1. Let A/P chiefs drive A/P improvements. Companies composed of many divisions often

put finance and accounting shared-services groups together to support all those units. When it comes to working capital improvements, a subgroup consisting of executives from purchasing, treasury, and payables often will run the show.

The problem at many companies, however, is that while people from all three functions are responsible for the project, “it’s not clear who’s ultimately accountable for improving working capital,” says Riordan.

When it comes to projects aimed at improving payment terms, though, it’s clear who should be in charge: the A/P director, who often reports to the controller. Sitting on mountains of data about externals (how fast vendors are being paid by the entire market and on what terms) and internals (the kind of job purchasing managers are doing in managing payables), the A/P chief is in the best spot to see where improvements need to be made.

2. CFOs or chief procurement officers should sponsor the effort.

While they don’t have the time to take the day-to-day lead, executives who directly report to chief executive officers should take responsibility and “own the business case” for the project. In particular, the finance or procurement chief should be committed—and drive the company’s commitment—to a particular return on investment.

Besides the truism that corporate initiatives

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rarely succeed without top-management buy-in, an important reason for high-level sponsorship is that some decisions regarding payables can affect the company’s value and reputation. One of Riordan’s clients, a large supermarket chain, ran into a big problem with a vendor when the chain tried to stretch its payment terms from 21 days to 30 days. The vendor “actually went to the press and tried to insinuate that my client was having cash-flow problems and bigger issues,” he says.

Even though the company was a stable and successful retailer, “the vendor was able to cast some doubt on the company’s finances,” the consultant adds. As a result, it took the involvement of senior management on both sides to resolve the situation.

3. Build a strong alliance between finance and purchasing.

While they’re not exactly rivals, finance and procurement executives have sharply different perspectives when it comes to payables. Purchasers decide what they’re going to buy and buy it. Finance

and accounting folks focus on the effects of those purchases on company cash flows.

For their part, buyers don’t tend to be rewarded for getting the best payment terms and hence don’t often negotiate for them. Sensing that, crafty vendors sometimes try “to drive a wedge between finance and purchasing” by trying to convince purchasers that payables terms aren’t all that significant, Riordan observes. To get the best arrangement, the two functions need to close ranks.

4. Approach vendors differently. Setting a broad corporate payables goal and then

expecting managers to achieve uniform results from vendors is “never successful,” maintains Riordan. Rather than blanketing all sellers with the same request for improved terms, A/P execs should divide vendors into different categories and then tailor the companies’ approach accordingly.

Riordan likes to divide vendors into four groups. First are the “untouchables.” Because such sellers have significantly more power than the buyer in their relationship, buyers shouldn’t even attempt to get them to change payment terms. While the

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Improve your working capital. Read Four Ways to Become a Better Borrower.

second group, the “squeaky wheels,” may complain vociferously about such requests, they will in the end come to a settlement. The best way to eke out an improvement is thus to engage them in live meetings.

The third category—the “good soldiers”—will “scream and yell and make lots of noise, but in the end they’re going to do what you ask them to do,” says Riordan. Last are the “wallflowers,” who need the buyers’ business so much that they’re in no position to refuse to come to terms.

Not much thinking has to go into getting wallflowers to accept later payments. All a CFO has to do in such cases, says Riordan, is to send them a letter that begins: “Congratulations! To keep doing business with us, your new terms are....”

5. Start the bargaining from a rigorous baseline.

Companies can lose money if they try to negotiate purchasing terms strictly on the basis of price, forgetting to factor in delivery costs, vendor discounts, and allowances. In negotiating longer payment terms, buyers should have a firm grasp of the effect of the purchase on their company’s adjusted gross margin—which includes such costs—rather than simply on its gross margin.

If a buyer lacks such an understanding, the seller can manipulate the deal by agreeing to stretch the payment terms but charging too much for doing so. “You’re going to lose sight of [vendors] sneaking in and sort of taking money out of one pocket and putting it in the other,” says Riordan. “If you don’t understand their total profitability, you’ll have the illusion that you’ve gotten a total improvement, but you haven’t in fact gotten [one].”

6. Pay for performance. As is the case with all efforts to improve working

capital performance, payables projects suffer from a tendency on the part of companies to gauge success—and executive compensation—solely on the basis of the bottom line of the income statement. But since they tend to boost cash rather than revenues, working capital improvements tend to show up as cash assets on the balance sheet or as upticks on the cash-flow statement, rather than as profits.

CFO Summary

• Creative consolidation can lead to big saving. Combining purchasing for different facilities or examining your office supply spend can reduce costs.

• A long-standing relationship with one supplier should not deter you for searching for new sources.

• Historic data is not everything. Communicate your projected future volumes with suppliers to lock in discounts.

• Fighting too aggressively for discounts can backfire. Pick your battles wisely to avoid unexpected fees from disgruntled suppliers.

• Improving working capital can allow for process and structural improvements. Take charge. Make sure the effort is conducted with strong support from both finance and purchasing.

Sources for Value Added: Procurement As A Profit Center: “Mend Your Spend,” Shawn Casemore, CFO Magazine, September 30, 2011. Copyright 2011 © Shawn Casemore.“Six Ways to Stretch Your Payment Terms,” David M. Katz, CFO Magazine, July 14, 2011. Copyright 2011 © CFO Publishing LLC.

VALUE ADDED: PROCUREMENT AS A PROFIT CENTER

The solution is to build budgets and create incentives that are based on cash. Specifically, a company can supply senior executives with “protected budgets” in which targets aren’t based on sales increases. It can also embed cash-flow-improvement targets into their bonus structures. The idea, says Riordan, is to motivate “the people who live and die every day by the income statement to help the company out and improve the cash balance.”

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PARTNERING WITH PROCUREMENT: BUILDING A STRATEGIC RELATIONSHIP

“Certainly most companies are doing some percentage of their purchasing online, such as for office supplies, but there has to be a cultural shift to get to the point where virtually all purchasing is online, which could

happen within five years. Like it or not, e-commerce is only going to grow. The improved efficiencies of online

buying are too great to ignore. What areas can you shift to online procurement now? How might you deal with

your preferred terms and conditions not being part of the transaction?”

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PARTNERING WITH PROCUREMENT: BUILDING A STRATEGIC RELATIONSHIP

SPENDING SMART: STOP PAYING TOO MUCH FOR STUFF YOU DON’T NEEDM ark Verbeck, like many CFOs, was

starting to feel like the bad guy, the guy who always said no.

When he started working at Blade Network Technologies as CFO in 2008, the company, which makes networking software that lives inside blade servers, was a 50-person operation. Like many smaller businesses, it relied on tribal knowledge to manage its spending: everyone knew (or believed they knew) what everyone else was doing, and when anyone bought anything, everyone knew (or thought they knew) whether it made business sense.

Every requisition went to Verbeck for approval. Because the company was small, it had little leverage with vendors and limited ability to negotiate for lower prices or early-payer discounts. Therefore, focusing attention on processes and spend—for supplies, services, and the like—didn’t seem worth the bother; it wouldn’t much affect the bottom line. So no one focused.

But by 2009, when Blade had tripled to about 150 full-time employees, its paper-based process—people throwing requisitions over Verbeck’s wall for approval—forced him to start asking questions and saying no more frequently. It was, he says, “not a very fun part of my job and I felt ill-equipped to make these decisions. We manufactured networking technology,” and Verbeck was not a technologist. (Blade was acquired by IBM in 2010.)

The growing problem at Blade, Verbeck says, was not so much that money was being misspent as that the work was burning up his and the finance department’s time. Requests and invoices piled up on his desk, distracting him from more valuable

tasks, while employees were either waiting to purchase the stuff they needed to do their jobs or buying and expensing it.

Verbeck looked for a better way to do things, and in 2009 found the Coupa Software purchasing and expense-management platform. In January of 2012 he became Coupa’s CFO.

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Sweating the Small StuffWhen times are good, when credit easy to come

by and everyone is fat, no one sweats the small stuff. But times haven’t been good for a while and today the small stuff looms large, especially in small businesses trying to grow at a time when investors and customers are wary.

The savings that can be retrieved by automating and rationalizing approval and purchasing processes are palpable (a 2009 Aberdeen Group study estimated that “improving the percentage of all non-payroll, tax, tariff, and fee-related spend”—that is, indirect, nonstrategic expenses—brought under the management of a dedicated group can help enterprises “achieve a 5% to 20% cost savings for each dollar brought under spend management”). But the real value, says Kristen Lampert, corporate-services manager at specialty-investment bank Ziegler, is de-risking organizational spending by making sure the approval chain has the right people weighing in on the right things.

When Lampert took over the corporate-services department at Ziegler in 2010—a team responsible for managing logistics, purchasing, and events—she couldn’t afford to waste time and effort on inefficient processes: the unit had been downsized to three full-time employees. In addition, Ziegler’s approval and bill-paying processes were all paper-based. “We’re over 100 years old,” says Lampert, “and we had 100-year-old processes.” There was no visibility across the firm, she says. Expenditures were authorized by the wrong people, and the company didn’t have a risk-management component in place.

She describes an invoice for a software service “that should have had oversight by the IT director,”

but instead was approved by multiple, siloed business units. The lack of communication led to the bank paying for some services that were supposed to have been cancelled.

Lampert established a work group to design a request-for-proposal for a software service to rationalize the company’s processes. Her argument was that if the company could save 1% of the $16.5 million she managed annually, getting all spending in one bucket, the return on investment would be positive.

The group began by defining the organization’s must-haves: something easy to use (“That increases adoption rate,” says Lampert); the ability to manage contracts; an easy-to-configure approval chain; supplier network capability, and electronic links from Ziegler’s system to its suppliers’ e-commerce sites for electronic catalog purchasing (known as punch-out support). After researching 18 solutions, Ziegler chose Coupa, a software-as-a-service tool Lampert expects will be easy to integrate with the new general ledger the bank is in the process of picking.

Ziegler implemented Coupa last March, and Lampert says the bank has already recognized $42,000 in second-quarter savings because managers now reach out to multiple vendors to get multiple bids on goods and services. Besides saving money, the managers get recognition for renegotiation successes that previously “were lost in a million e-mails.” And the visibility the platform provides, says Lampert, helps the company manage risk. For audit purposes, she says, “We can now track every contract, point to who approved what, and better understand our contractual obligations.”

Navigating the Vendor LandscapeAccording to a 2011 Gartner report, the

e-procurement vendor landscape is “fragmented and rapidly evolving,” so finance executives need to perform due diligence when choosing a vendor and service that fits their organization’s budget and needs.

Aside from aggressively pursuing the retail market, Amazon and other e-commerce giants like eBay are shifting their thinking toward wholesale distribution in industrial markets. Historically prominent “bricks and mortar” distributors are beginning to see that it is truly only a matter of time until e-commerce companies gobble up their market share.

For companies that buy from distributors, it is

The future of online retailers: taxes. Read E-commerce: Click and Pay.

When times are good, when credit easy to come by and everyone is fat, no one sweats the small stuff. But times haven’t been good for a while and today the small stuff looms large, especially in small businesses trying to grow at a time when investors and customers are wary.

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online distributor? Will you trust the transporter if you don’t have a direct relationship with it?

Think about the lost leverage that may arise. If you have ever negotiated for the purchase of goods or services with a supplier that’s larger than your organization, you probably know what I am talking about. Let’s say you’re currently buying office supplies (an industry that saw the e-commerce trend coming before all the others) from one of that market’s big three players. What would happen if Amazon or eBay bought it up? Surely you know Amazon could afford it. How would you negotiate price? How would you ensure that terms and conditions were fair and equitable? What would be the impact to your bottom line? The same applies to janitorial supplies and industrial fasteners. How might you leverage if competition diminishes?

3. Data ManipulationDespite the popularity of enterprise resource

planning software among industrial and other businesses, they are still challenged to capture the right data and present it in a meaningful fashion. Fortunately (or not?), that very capability has been a main building block of many e-commerce giants. Just look at the number of personalized e-mails you get and how websites are providing personalized purchase recommendations for you. If companies can’t capture and utilize their own spending data, they will be hard-pressed to keep these distribution giants from influencing customers to buy someone else’s products.

If your organization does have a problem with rogue purchasing, it’s going to become a bigger one. The e-distribution giants capture purchasing habits and use them to present solutions companies didn’t even know they needed. How will that affect the budget? Get on top of your spending information today to be well equipped to deal with the new world of impulse buying.

CFO Summary

• Don’t lose sight of smaller expenses.

• Using automated processes can help reduce oversights and provide more accuracy.

• In addition, having more accountability within the chain of command can help identify problems or concerns that may arise.

important to recognize this shift and determine how to prepare for it. There are all kinds of potential problems. For instance, consider how Amazon today tracks buying habits and makes “recommendations” via e-mail and web displays. If you are struggling to manage costs because of “rogue buyers” in your organization (i.e., those operating outside the normal bounds of procurement), how much harder will they be to control with the Amazons of the world in their face all the time?

The good news is that the industrial market can learn from the lessons of the retail market. Here are some key points companies should be considering as they prepare for the inevitable increase in e-procurement.

1. Cultural ShiftThe number of companies still faxing or e-mailing

purchase orders is astonishing. Many supply-chain professionals, not to mention corporate attorneys, believe it’s the only way to purchase goods while ensuring that the company’s own terms and conditions, rather than those of the distributor, apply to the transaction. If you buy from Amazon, you’ll be signing off on its terms and conditions.

But when was the last time anyone signed and returned, let alone read, the terms and conditions of faxed or e-mailed purchase orders anyway? They don’t even hold up in court, and if you do end up there, in a dispute over whose terms and conditions should apply, only the charge-by-the-hour lawyers will win.

Certainly most companies are doing some percentage of their purchasing online, such as for office supplies, but there has to be a cultural shift to get to the point where virtually all purchasing is online, which could happen within five years. Like it or not, e-commerce is only going to grow. The improved efficiencies of online buying (never mind the savings in paper) are too great to ignore. What areas can you shift to online procurement now? How might you deal with your preferred terms and conditions not being part of the transaction? Such questions need to be considered.

2. Loss of LeverageWhat threats might exist from more electronic

buying? The main ones are product quality and consistency, after-sales service, and transportation costs. Is what you get going to be as good as it looked on the computer screen? What kind of service relationship are you going to have with the

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STRATEGIES FOR SPEND OPTIMIZATION

GET IT TOGETHER: A CURE FOR THE SUPPLY CHAIN BLUES

C ollaboration” and “supply chain” go hand in hand, or you might think they should. But there are two kinds of collaboration with respect to supply chains. While many

companies are focused on working with suppliers to arrive at more efficient and effective solutions, our studies have repeatedly shown that far fewer work cross-functionally inside the organization to achieve the same result.

At manufacturing companies, procurement and inventory management most often report to finance, while planning and logistics report to manufacturing. With rare exceptions, though, the work groups operate independently of one another. It’s not a collaborative environment.

Why that’s the case is a question that has stumped me in the past. Why would a process that is responsible for investing, handling, and managing company capital not be designed and built to function collaboratively? The answer I’ve now found, thanks to some recent experiences with clients, is simpler than you might think.

Organizations continue to segregate roles and responsibilities based on their internal impact on the organization, rather than their external (or end-customer) impact. Consider the typical supply-chain structure described above. The responsibilities of sourcing and procurement departments, to invest and manage capital, are overseen by finance. Planning and logistics departments have a direct impact on the efficiency and effectiveness of production. All these roles are built and managed based on internal impact.

You might be thinking, so what? Here is the problem: lack of collaboration across the supply chain drives tactical actions, not strategically focused decisions. And tactical actions often increase costs and reduce efficiency, with poorer customer service the result.

Diverse Decision-MakingOne of the single most effective solutions we have

brought to organizations is improved collaboration between supply-chain functions and such key stakeholders as engineering, design and project management. Building cross-functional teams promotes increased awareness of decision impacts.

At one of my client companies, the CFO had decided that a key objective was to reduce its cost structure. Sourcing and procurement interpreted

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that and said “OK, we’re going to go out and buy in bulk, we’ll get a reduced price.” Well, this was a technology company, for which certain supplies quickly become obsolete. The company was taking in 100 units, say, when it really needed only 50 in the short term. The other 50 were sitting on the shelf going obsolete, and the inventory manager had to write the stuff off and send it to scrap.

The ultimate reason for that poor outcome was that sourcing wasn’t looking at the end customer’s needs. It made an interpretation of the CFO’s objective and took tactical actions on its own. They should have gotten together with the inventory department and said, we’re looking to bulk-buy in these areas, what do you think? That conversation should have involved engineering, too.

At some point in your corporate training you may have experienced the Beer Game, a logistics exercise in which teams manage four areas of a beer-distribution chain, developed in the 1960s at MIT’s Sloan School of Business Management. Instructions given to participants, and their resulting decisions, lead to stockpiles of work-in-process inventory and, ultimately, the dreaded “bullwhip effect.” But after communications channels are opened up across the supply chain, decisions become collaborative, they reduce inventory, and they improve work flow and lead time.

Despite actually knowing that decision-making must be collaborative across the supply chain, many organizations do little to facilitate it. Collaborative decision-making requires that business leaders and staff work closely to support the organization’s strategy. Building cross-functional working groups and holding frequent (yet brief) cross-functional meetings serve to improve communications and build a foundation for strategic decision-making.

PARTNERING WITH PROCUREMENT: BUILDING A STRATEGIC RELATIONSHIP

CFO Summary

• As your company grows make sure your approval chain adapts. Having the wrong people approve spends can lead to unnecessary purchases or neglected opportunities.

• E-commerce companies like Amazon are steadily taking over the retail market and companies should be prepared as they extend their influence within the industrial market as well.

• Some risks that CFOs must address are the reduced control over terms and conditions, the potential loss of leverage, and the flood of data that influences everyone from customers to employees.

• Lack of internal collaboration can lead to uninformed decision-making and high inefficiency costs.

Having trouble getting credit? You’re not the only one. Read Collateral Damage.

Sources for Partnering With Procurement: Building A Strategic Relationship: “A Cure for Supply-Chain Blues,” Shawn Casemore, CFO Magazine, April 10, 2013. Copyright 2013 © Shawn Casemore. “Amazon’s Coming After Your Customers,” Shawn Casemore, CFO.com, January 7, 2013. Copyright 2013 © Shawn Casemore.“How to Spend Too Much for Stuff You Don’t Need,” David Rosenbaum, CFO Magazine, August 09, 2012. Copyright 2012 © CFO Publishing LLC.

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THE POWER OF PEOPLE: RECRUITING TOP PROCUREMENT TALENT

“Why has procurement begun to take—to borrow the phrase of one of the seven senior finance executives we

interviewed—‘a more globalized perspective’? The reason isn’t much different from why other corporate functions,

like the CFO, have earned a higher corporate profile in an increasingly complex economic environment. ‘As business

gets more complicated and more global, it has added another facet to the whole issue of procurement.’”

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THE POWER OF PEOPLE: RECRUITING TOP PROCUREMENT TALENT

INVESTING IN PEOPLE: THE ROI OF PROCUREMENT OUTLAYSL ook how much you’ve grown!

Finance executives don’t actually say that, of course, but when they talk about their colleagues in procurement

they sometimes sound as if they are surprised at themselves for taking the function so seriously. It wasn’t long ago, after all, that finance executives tended to think of procurement’s role as strictly transactional: acquire goods and services at the cheapest possible price (locking it in, where possible) and on the most favorable terms. The department’s progress would be measured solely by its ability to cut costs.

But a study conducted by CFO Research Services, in collaboration with Ariba, a maker of collaborative business software, found that finance executives are well aware that the procurement function has matured into making an increasingly higher-value contribution. In the survey of 263 senior finance executives in North America, Europe, and Asia, nearly 75% of respondents said that the procurement function at their company had become more “strategic minded,” rather than purely tactical or transaction-focused, as compared with three years ago.

Why has procurement begun to take—to borrow the phrase of one of the seven senior finance executives we interviewed—“a more globalized perspective”? The reason isn’t much different from why other corporate functions, like the CFO, have earned a higher corporate profile in an increasingly complex economic environment. “As business gets more complicated and more global, it has added another facet to the whole issue of procurement,” says Paul Janicki, CFO of Roquette America, a producer of carbohydrate-based products used in food ingredients, pharmaceuticals, and other industrial applications. “That’s why procurement has become more strategic; it’s now no longer

just the means to do business, but also an area of optimization.”

Finance chiefs should view corporate procurement outlays as investments rather than costs, suggests a report by The Hackett Group—investments in the people who run procurement.

Indeed, at the best purchasing departments, staffing leans much more toward the strategic, according to the research and consulting firm. In what Hackett calls “world-class” procurement departments, 76 percent of employees are professionals and just 9 percent are clerical workers; in more-typical procurement departments, the mix averages 58 percent professional, 24 percent clerical.

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Top procurement outfits also pay top dollar, according to the report. Including salary, bonus, and benefits, they spend an average of $98,557 per employee, 41 percent more than their more typical peers. Hackett also found that top departments provide more internal and external training: an annual average of 61 hours per employee, compared with 35 at typical companies.

As for results, the best departments have operations costs that are 20 percent lower than typical companies, and they operate with little more than half the staff, Hackett found. And for every $1 million spent on purchasing operations, these top-notch outfits generate $6.3 million in savings; average companies realized savings totaling only $2.7 million.

To conduct its research, Hackett searched its database of several hundred companies and identified the top quartile in efficiency (including cost and staffing levels) and effectiveness (quality and performance). The consultancy then examined those “world class” procurement departments to ascertain what they did differently, explains Hackett’s procurement practice leader, Chris Sawchuk. He declined to give the exact number of companies that were studied.

The report found that top purchasing departments are more involved in such strategic activities as enterprise-level planning, budgeting, new-product development, and the use of cross-functional teams for purchasing activities. Rather than focusing only on purchase price, says Sawchuk, top departments take a big-picture view and devote time enough to grasp the meaning of their policies for suppliers, customers, and shareholders.

In addition to hiring and retaining highly skilled

employees, the best purchasing departments drive value by aligning their goals with those of the company as a whole—financial goals, especially. “CFOs manage the business based on performance metrics such as cost, profitability, and cash flow,” says Sawchuk. “Procurement is very strategic and essential in terms of helping improve the performance of these metrics. If a CFO wants to use procurement to drive the business, there is a need to make sure the objectives of the business and procurement are well aligned.”

As much as procurement’s effectiveness—especially in a slow-growing economy—depends on understanding and focusing on shared companywide goals, the function isn’t abandoning its duties as a fierce cost-cutting function that has a direct impact on the bottom line. About three-quarters of the finance executives surveyed by CFO Research Services and Ariba say that procurement is “very involved” in finding opportunities for cost savings.

When asked where they saw opportunity for procurement, about the same proportion of respondents saw cost-cutting as the function’s continuing focus.

In a postdownturn economy, reining in costs becomes more complex; the chopping block has already been rolled out one too many times. Procurement executives need to figure out how to leverage limited resources and restructure activities to add capabilities without adding cost. “Procurement works more with suppliers understanding when we need them, where we need them, and which are the economies of scale that we can take advantage of, either by volume or by other synergies with the suppliers,” says Bill Velasco, division controller at Flowserve, a $4 billion supplier of industrial equipment.

Beyond working more closely with suppliers, the new model of procurement lifts the function above executing purchase orders and into the lofty realm of strategic planning, getting closer to operations, sales, and technology. By becoming better aligned with the business, procurement executives gain a fuller understanding of the company’s future sourcing needs: What are the core technologies? Who are the key competitors? Which geographies best serve the company’s long-term goals?

Rather than staying rigidly focused on writing contracts, procurement executives can grow more attuned to helping generate competitive advantage for the company. Answering an open-ended survey question, one finance executive wrote that he

The report found that top purchasing departments are more involved in such strategic activities as enterprise-level planning, budgeting, new-product development, and the use of cross-functional teams for purchasing activities.

STRATEGIES FOR SPEND OPTIMIZATION

Manage your talent wisely. Learn how to give them the tools to succeed in the CFO eBook, Valuable Lessons.

CFO PUBLISHING 21

envisions “working closely with procurement to set shared objectives, track mutually beneficial metrics, and align overall management styles.”

Nobody expects the transformation to happen overnight. But there are signs of progress. In 2007, when CFO Research conducted a similar survey, 15% of respondents rated their procurement function’s ability to perform its core functions as “excellent.” In the 2012 survey, that figure rose to 25%. Larger forces—ranging from the global credit squeeze in 2008 to 2011’s devastating floods in Thailand—have prodded procurement executives to spend more time weighing risks and trying to ensure continuity of supply.

In the survey, finance executives identified some knowledge gaps that procurement will have to fill to cross over into upper management. Fewer than half of respondents agree to any extent that their company’s procurement group has “excellent analytical and business problem-solving skills,” while another 25% were neutral in assessing those skills. In terms of specific abilities that need improvement, more than one-third of respondents chose each of these areas: detect and mitigate supply risk, strengthen procurement’s working relationship with finance, and strengthen its working relationship with operations.

Developing capabilities in so many areas (while gaining increased mastery over its traditional domain) may sound daunting, but procurement as a function has already come a fair distance. A decade ago, recalls one bottling-company CFO, procurement “consisted of people who were not high up in the hierarchy.” Back then, he adds, a procurement worker’s job was “to look for three estimates . . . and the one that won was the one that always won, so as not to cause any problems.”

And now? “Today, if you are doing it right, procurement is much more of a strategic tool,” says Paul Lehmann, CFO of manufacturer Overhead Door Corp. And, he might have added, the sharper that tool gets, the more effective it can be.

CFO Summary

• Procurement has increasingly begun to shift from a purely transactional group to a strategic function that is vital to the company’s bottom line.

• Transforming procurement into an area of optimization requires hiring the right people. The best procurement departments are composed of more professionals than clericals.

• Spending more on salaries and training can be costly but companies with strong procurement departments experience drastically lower operations costs and fewer employees.

Is your supply chain secure? Read more in Avoid Three Key Supply-Chain Land Mines.

Sources for The Power of People: Recruiting Top Procurement Talent: “Power to the Procurement People,” Helen Shaw, CFO.com, February 24, 2006. Copyright 2006 © Helen Shaw“The Rise and Rise of Procurement,” Josh Hyatt, CFO Magazine, May 15, 2012. Copyright 2012 © CFO Publishing LLC.

THE POWER OF PEOPLE: RECRUITING TOP PROCUREMENT TALENT

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CONNECTING COSTS: HOW TO BETTER ORGANIZE PROCUREMENT FOR SUCCESS

“Matchmaking is only one function that supplier networks perform, and for some companies it may not

be the most important one. For example, companies can use networks to rein in ad-hoc buying by employees from unapproved vendors and improve their so-called spend-under-management. ‘Our studies find the percentage of spend captured by companies using supplier networks is 75% as opposed to 63% by companies not using them.

That means there’s less maverick spending at firms using supplier networks for procurement.’”

STRATEGIES FOR SPEND OPTIMIZATION

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NETWORK POWER: WORKING BETTER WITH SUPPLIERSF ounded in 1933 to make rubber stamps,

MarkMaster is today the world’s largest “custom marking” company, according to its website. How much demand remains for its

original product? Plenty. “We make between 10,000 and 12,000 rubber stamps every day,” says MarkMaster CEO Kevin Govin.

Still, selling ink pads and stamps with messages like PAID or DENIED hasn’t been easy in the digital era. “It used to be when a bank opened, it would order $2,500 worth of rubber stamps. Now, due to fewer paper checks and envelopes, it’s $250,” says Govin. “I even pay my own bills online. I’m shooting myself in the foot, I guess.”

MarkMaster has adapted to modern times in two principal ways: by diversifying its product line and by enlarging its pool of buyers. It did the latter by joining Ariba Discovery, a service delivered on the Ariba network that matches business buyers and sellers (and charges a fee for the service).

“We’ve grown 10% to 20%, compounded, for the last 10 to 11 years since getting on the Ariba system,” Govin notes. “Someone says, ‘We need to order 10,000 name badges,’ and they see us on the Ariba network. Our banner business is booming. The purchaser that used to go to Thomas Register [once a paper catalog, today an online discovery platform] now goes online.”

CONNECTING COSTS: HOW TO BETTER ORGANIZE PROCUREMENT FOR SUCCESS

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As does just about everybody these days. Like many suppliers, MarkMaster joined a supplier network to get itself in front of as many buyers as possible. Buyers, meanwhile, typically use such networks “to improve communications with suppliers,” says Constantine Limberakis, senior research analyst at Aberdeen Group.

Metrics Beyond MatchmakingMatchmaking is only one function that supplier

networks perform, and for some companies it may not be the most important one.

For example, companies can use networks to rein in ad-hoc buying by employees from unapproved vendors and improve their so-called spend-under-management. “Our studies find the percentage of spend captured by companies using supplier networks is 75% as opposed to 63% by companies not using them,” says Limberakis. “That means there’s less maverick spending at firms using supplier networks for procurement.” (Ariba CMO Tim Minahan points out that nothing can be approved for purchase on the Ariba network without being run against built-in business rules.)

Limberakis says supplier networks can also lower a company’s “cost of poor quality,” the expense associated with purchasing subpar stuff. That cost is 7% for companies using networks, says Aberdeen, versus 10% for other companies. Still another metric improved by networks is on-time delivery: 77% for companies that use them, 69% for companies that don’t.

Minahan believes his network’s greatest value lies in its ability to create a web of business partnerships. On the network, he says, “you can see a supplier’s capabilities and its reputation. We’ve partnered with Dun & Bradstreet to make financial-

risk scores available on Ariba Discovery. Now you can say ‘a supplier is financially sound, let’s do business.’”

One Network or Several?According to Metcalfe’s Law, the value of a

network is proportional to the square of the number of connected users of the system: more users, greater value. That’s why Ariba, which a Forrester Research study identified as the network with “the most complete range of functionality and the best user experience,” boasts of the many nodes on its network: close to 700,000 companies doing $200 billion in transactions for the 12 months ending Nov. 1, 2011.

But no one supplier network can cover the whole business world, cautions Forrester analyst Duncan Jones, the author of the study. “I ask my kids why they use Facebook,” he says. “They say, ‘You have to or you won’t know about all the parties going on.’ If you’re a supplier, you want to know about all the parties. But in the business world, there’s never going to be one dominant player like Facebook. It’s no good just to be on Ariba and miss out on all the other parties. If you’re simply looking for suppliers, why pay a fee to Ariba? Why not just use Google?”

Ariba’s main competitors are the big ERP providers—Oracle E-Business Suite and Hubwoo, based on SAP’s platform—and Basware, a supplier network that Forrester scored highly for “its broad category support and its supplier enablement and integration capability.” Unlike Ariba, Basware is an open network. “We partner with over 120 different networks,” says Robert Cohen, Basware vice president for North America. “We think that’s the only sustainable model. We’re not trying to connect organizations to our network; we connect them if they’re connected to any network.”

The payoff for Basware’s 320,000 companies and one million users, says Cohen, is the visibility companies get into working capital. Without that visibility, “when a commitment is made to buy something, finance doesn’t find out until the invoice is received,” he points out. And if the invoice is triggered without a purchase order, “you have very little choice on how or when to pay it, so you’re losing the chance at early-payment-discount terms. Maybe you’re even subject to late fees by the time the invoice gets to you.” By automating these processes and improving collaboration between buyers and suppliers, “both sides can better manage cash flow,” says Cohen.

Basware’s advantage as an open-network provider

Minahan believes his network’s greatest value lies in its ability to create a web of business partnerships. On the network, he says, “you can see a supplier’s capabilities and its reputation... Now you can say ‘a supplier is financially sound, let’s do business.’”

STRATEGIES FOR SPEND OPTIMIZATION

Supplier networks aren’t the only ones to consider. Make sure to build up your social networks too. Learn more in the CFO eBook, The CFO’s Guide to Social Media.

CFO PUBLISHING 25

won’t last forever, as Ariba and other networks increasingly move to the cloud, thereby facilitating greater interoperability between networks. (Indeed, Ariba is strongly pitching its Commerce Cloud to SAP users.)

The Network AheadIf the variety of supplier networks makes it

difficult to choose one, it also makes it expensive to go to “all the parties.” Ultimately, Aberdeen’s Limberakis sees an “oligarchy of networks” emerging, where a small number of providers dominate.

Minahan of Ariba says “productivity improvement through community” is the future of supplier networks. “Tomorrow, Ariba’s competition will be Facebook, Groupon, eBay, and Amazon,” he predicts.

Until supplier networks become a commodity, it’s up to individual CFOs to figure out where a network’s ROI lies for their organization, says Limberakis. But they’d better not take too long. In the summer of 2011, the U.S. Department of Treasury announced that by 2013, any vendor submitting an invoice to Treasury will have to use the Internet Payment Platform. One can foresee a time when being on a network will be a requisite for conducting business anytime, anywhere, with anyone.

In other words, if an organization doesn’t belong to a supplier network, it will be increasingly difficult for it to go to the party, let alone find a date.

CONNECTING COSTS: HOW TO BETTER ORGANIZE PROCUREMENT FOR SUCCESS

CFO Summary

• Networks can be used by suppliers to find new business and by buyers to improve communications with existing providers.

• Financial-risk scores made available through supplier networks can help buyers identify trustworthy suppliers.

• Selecting a supplier network can be difficult due to the vast variety, and sometimes connecting to only one is not enough. CFOs need to identify the network or networks that will provide the best ROI for their organizations.

Sources for Connecting Costs: How to Better Organize Procurement for Success: “Network Power,” David Rosenbaum, CFO Magazine, November 01, 2011. Copyright 2011 © CFO Publishing LLC.

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STRATEGIES FOR SPEND OPTIMIZATION

DOLLARS AND DATA: PROCUREMENT TECHNOLOGY

“In the past, such analysis meant bringing in a herd of consultants to thrash through the paperwork and produce a one-time snapshot of spending. That’s a far cry from an embedded and largely automated process. But experts say

that the ability to drill down into a company’s spending habits is essential to cost-cutting efforts because most

of the obvious targets (layoffs and elimination of or reductions in various forms of discretionary spending)

have already been hit.”

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SPEND MANAGEMENT SOFTWARE: WHERE DOES THE MONEY GO?I t’s been a bumpy ride for the software category

known variously as spend management, supply management, sourcing management, supplier-relationship management, total-cost

management, spend analysis, and, from way back (circa 2000), E-procurement. That so many labels can be applied to the same concept hints at the difficulties this category has had in fully defining itself. Those problems include a mix of dot-com hype, technological complexity, and entrenched ways of doing business—which have proved resistant to change regardless of what technology makes possible.

Despite those challenges, the basic concept of using technology to ease the many processes involved in buying goods and services, and to ultimately reduce costs in a number of ways, remains powerful enough to inspire vendors and customers to forge ahead.

Spend-management software relies on linguistic analysis algorithms to extract, cleanse, and classify, (by product, supplier, and other criteria) the messy data contained in invoices, purchase orders, contracts, and other purchasing records. The goal is to automate the way toward a closed-loop of spending analysis: determine from whom the company buys goods and services; narrow (or improve) the supplier base and negotiate better terms; manage contracts efficiently; and analyze the actual corporate spend.

In the past, such analysis meant bringing in a herd of consultants to thrash through the paperwork and produce a one-time snapshot of spending. That’s a far cry from an embedded and largely automated process. But experts say that the ability to drill down into a company’s spending habits is essential

to cost-cutting efforts because most of the obvious targets (layoffs and elimination of or reductions in various forms of discretionary spending) have already been hit.

“For people who live in the world of ERP and general ledgers, it’s very hard to get your arms around spend information,” says Jim Frankola, CFO of Ariba, a pioneering spend-management software company that in some ways can serve as a proxy for the entire industry. At his previous company, Frankola once tried to ascertain what the firm spent on shrink-wrap. Information on those purchases was scattered across multiple systems, and coming up with the total figure—which might have helped in negotiating a discount—required plenty of digging.

DOLLARS AND DATA: PROCUREMENT TECHNOLOGY

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technology platform that can accommodate virtually any purchase a company might make. Others address a distinct category of spend, be it raw materials or services such as contract labor. And some are narrower still, focusing only on a specific expenditure such as telecommunications, travel, or facilities maintenance.

While some analysts maintain that spend-management software is a big-ticket item of interest only to companies with at least $1 billion in revenue, there are new, smaller vendors that charge as little as $10,000 to start (as opposed to a tab of $1 million or more on the high end), and they usually offer their services in a hosted model, requiring virtually no changes to a customer’s infrastructure. Monthly charges may be based on a flat fee, volume of transactions that pass through, or other criteria.

Many analysts say that to take full advantage of spend management, companies may have to piece together several packages or services, although there has been plenty of M&A activity in the space as some vendors work toward more-complete offerings. Others are content to combine software and services with consulting help in specific areas in which even a savvy purchasing department might lack the requisite knowledge to craft the best contracts.

That was the case at Wachovia when, following its 2001 acquisition of First Union, which brought its total number of branches to 2,700, an idea to track electricity, gas, and water bills suddenly clicked. “We’d talked about how smart it would be to do this,” recalls Ginny Schlosser, CFO of corporate real estate at Wachovia Bank and former CFO of corporate real estate at First Union, where the idea first took root. The merger, combined with soaring electricity costs at the time, gave the project life.

The bank opted for a software/consulting service from Cadence Networks that not only gives it the clear picture of total spend it needs to negotiate better electricity rates, but also helps it trace wasteful usage, including the location of leaky water lines. The bank now plans an additional step: to reduce energy and water consumption through employee education and other initiatives.

It’s not unusual for spend-management systems to yield double-digit savings—about 15 percent, according to industry watchers. They also cull out the maddening waste that so exasperates many thrifty CFOs—for example, a $75 difference in room rates at the same event in the same hotel. Armed with solid, up-to-the-minute data, companies can

Bill Gunn can relate. Hired in 2003 by Gap Inc. to head up its nonmerchandise procurement organization, Gunn takes advantage of the daily business-intelligence feature in the company’s Oracle ERP system to “have at our fingertips the supplier spend data that used to take three or four months to gather.”

With more than 3,000 Gap, Old Navy, and Banana Republic stores nationwide, Gunn’s company has what he describes as “a real hidden asset in our nonmerchandise supply chain,” which includes the vast network of suppliers that play a role in opening and maintaining all those stores. The spend-management capabilities in the Oracle software, Gunn says, address all facets of the process, including the critical but often-overlooked back-end analysis.

“In the past, we’d contract for certain pricing and related terms,” he says, “but we had no way to know whether those agreements were adhered to. Most agreements have plenty of variables that can affect the ultimate spend, so it’s not enough to negotiate terms up front that satisfy you. You have to follow through and see how the spending actually played out.”

“There’s no clearer or more direct lever to improve financial performance than to focus on spend or procurement,” says Tim Minahan of the Aberdeen Group, a Boston-based IT consulting firm. “While every additional dollar in revenue a company earns entails significant costs in sales and overhead, every dollar saved drops straight to the bottom line.”

Once you back out the cost of the software and associated process and organizational changes, of course. But those changes often provide an impetus for spend-management software investments. Nate Lentz, CEO of Verticalnet, a provider of supply management software and consulting services, says that often as a result of acquisitions, many companies now want to centralize spend efforts rather than negotiate and source at a divisional level. “When they do spend analysis across the corporation, they discover an enormous opportunity to leverage their scale for both direct and indirect materials,” he says. Or as Faheem Ahmed, head of market strategy for supply-relationship management at ERP vendor SAP, says, “Purchasing is moving from being tactical to being strategic.”

Companies interested in spend-management software have no shortage of products from which to choose, but those products tend to fall into distinct categories. Some provide a broad

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and operations at GlaxoSmith-Kline. The company could see how much it spent with IBM, for example, but it couldn’t get a quick read on a specific contract. “Especially on certain indirect goods and services,” says Brandyberry, “we wanted to make sure we weren’t overbuying, or that the specification was for what we actually needed.”

Beginning in 2004, GlaxoSmith-Kline installed Emptoris spend-analysis software and began to get granular, making sure that spending follows the terms of carefully negotiated contracts. The software also helps the company get a sense of the performance of vendors supplying various indirect goods, so that, as Brandyberry says, “We can ask ourselves, ‘Do we need to buy Superbrand X when another brand will do?’” Glaxo is now ascertaining whether the system can be expanded to encompass spending on a broad range of services.

“CFOs are getting smarter about this,” says Aberdeen’s Minahan. “As a result, the buying organization is taking a more holistic look at their supplier relationships.” Gone are the days when buyers focused intently on reverse auctions to drive down the prices of goods. “Now,” says Minihan, “CFOs are checking the P&Ls and asking, ‘Where do those savings show up?’”

identify waste, eliminate rogue spending, negotiate better deals, and in general make better decisions.

Irritability Factor But there are problems. As the CEO of one spend-

management company says, “There’s a growing sense of irritability over what these expensive applications promise and what companies actually get from them. Indeed, another Forrester study found that 35 percent of respondents whose companies had invested in procurement and sourcing technology said the benefits were below expectations. Companies face three challenges: deciding what software (or combination of software) best meets their needs, getting suppliers to cooperate, and making the organizational and process changes within their own companies that are needed to move away from business as usual.

Also hanging over the greater adoption of spend-management software is the bad taste left in many people’s mouths by the earlier foray into E-procurement, which tended to focus less on analyzing spend data and more on reducing transaction costs.

Managing the relationships with suppliers is also tricky. As Minahan warns, “You can only negotiate a 15 percent discount from your suppliers for so long before you put them out of business—you’re sucking the fat out of the suppliers’ profit margins.” Zealous users of online auctions, trading webs and early E-procurement systems now take a more holistic view of the entire procurement cycle, versus focusing solely on negotiating costs.

GlaxoSmithKline knows this learning curve: in 1997, before it had become part of GlaxoSmithKline, pharmaceutical company SmithKline Beecham developed an internal procurement system dubbed SpendTrak that it believed put the company ahead of its competitors. “But SpendTrak only allowed us to do coding at a supplier level, not the granularity required to perform compliance reporting on preferred suppliers,” explains R. Gregg Brandyberry, vice president of procurement for global systems

CFO Summary

• It can be difficult and time-consuming to isolate costs when data is scattered among distinct systems across departments. Procurement software can help streamline the information to identify areas for improvement.

• CFOs looking to implement procurement technology face the challenges of selecting the best-fit product for their companies, getting suppliers on board, and directing the transition within the companies’ organizational structures.

DOLLARS AND DATA: PROCUREMENT TECHNOLOGY

Sources for Dollars and Data: Procurement Technology “Where Does the Money Go?,” Connie Winkler, CFO Magazine, March 22, 2005. Copyright 2005 © CFO Publishing LLC.

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CONCLUSION: PROCURING VALUE

T here’s an old Japanese proverb, “When you have money, think of the time when you had none.” The point, of course, is that money is precious and should not

be frittered away on wasteful expenditures. The upside is that organizations that heed this maxim should have more capital left over at the end of the day than competitors that fail in this regard, dollars that can be invested in more fruitful ventures.

Obviously, to garner such benefits, stricter expense management directives, a shift in organizational behavior, and a culture of spend management should be embedded enterprise-

wide—that’s what the articles in this eBook strongly suggest. This transformation requires elevating procurement strategically (in some companies), recruiting more business-oriented procurement personnel, enhancing operational procedures to provide spending accountability, and leveraging technology to manage the entire process.

As always, organizations that appreciate the possibilities inherent in spend optimization have early mover status, and thus should enjoy competitive advantage. As Confucius wrote, “He who does not economize will agonize.”

STRATEGIES FOR SPEND OPTIMIZATION