Procurement
February 18, 2021

How to bridge the gap between procurement and finance using spend analytics

We all have at least once in our lives working with someone we didn’t see eye to eye. The outcome of such collaborations is always either of the two:

  1. We end up finding common ground and having fun in the said collaboration
  2. We still have contradicting opinions and end up impacting the project.

The first outcome indicates a common ground, and if not, a bridge can fill the gap, whereas the second one shows how different mindsets can affect the collaboration and the project as a whole.

This is also what happens in organisations, among departments, especially with procurement and finance departments.

Procurement has a different outlook on what and how the costs can be saved, while the finance department believes in the art of numbers where costs are reduced. There is a possibility that finance leaders believe that procurement is saving costs, but they are not entirely sure or clear about the measurement of the value-driven. On the other hand, the procurement leaders might agree that the direct and indirect costs are being managed, but do not have a clear understanding of its effectiveness.

These two departments and their heads do not share a common point of view because of the difference in data results or its lack thereof.

What does this mean?

To understand that, let us first understand the processes and functionalities of procurement and finance separately.

Procurement

Procurement is all about identifying and acquiring goods and services of the right quality, at the right price, and at the right time. So, the functionalities of procurement look something like this 

  • Need Analysis
  • Market Research
  • Competitor Analysis
  • Quoting and Selection
  • Negotiation
  • Order Placement
  • Documentation
  • Payment
  • Receive order
  • QC
  • Relationship Management

Procurement is focused on driving value out of all these processes with costs coming secondary into the picture.

Finance

Finance itself is defined as money or liquid assets being invested, managed, acquired, lent, or borrowed to keep a business, person, group, or institution afloat. And, the functionalities of finance look something like –

  • Planning
  • Controlling
  • Allocating
  • Investing
  • Tax Administration
  • Asset Protection
  • Banking
  • Evaluating KPIs, Cost-benefit Analysis
  • Redirecting Funds
  • Capital and Investment Decision making

Costs and Expenditures are a core part of the financial functionalities where the focus is targeted towards reducing costs and expenditures and higher ROIs.

An evident gap between the two processes is how they look at costs, where data and its analysis changes everything.

Let’s take an example

The procurement manager, Alex, is asked to procure machinery that deducts the manufacturing cycle from an 8-step process to a 5-step one. The finance manager, Justin, is asked to collaborate with Alex and develop a joint solution that keeps the costs minimum and the value maximum.

Alex collects the market data and evaluates all different types of machinery in the market with its attributes, whereas Justin collects the data on vendors of the machinery.

Alex chooses product A offered by vendor one at a price - $5000

Justin chooses vendor two that offers product B at a price - $4500

Alex’s decision to choose vendor 1 is because of the offering (product A) that is supposed to sustain longer and will have a lower cost of maintenance.

Justin’s decision to choose vendor 2 is because of the cost of the product with similar attributes ($4500), reducing the overall cost of procurement.

How does one solve this problem?

The answer is Spend Analytics.

Technology has always been a major contributor to bridging gaps and disparities within and among organisations and industries. And, procurement and finance are no different.

Spend Analytics is the discipline of gathering, organising, cleaning, and analysing the procurement data. We call it the game-changer of the decision-making processes in the field of procurement and its associated costs.

Spend analytics evaluates the data input and identify the areas where costs can be saved and highlight investment opportunities.

With spend analytics, Alex and Justin will have a consolidated and category-wide breakdown of data and insights that consider the facets of risks, benchmarks, savings, and spending visibility. They might even come to choose vendor C that offers product 1 without additional costs of integration and delivery, resulting in the opportunity to save costs and reduce them.

Both teams collaborate and utilise intelligent solutions such as spend analytics to map the gaps and identify improvement areas.  

With spend analytics, there is a common baseline of set functionalities that will help the teams develop operation-specific strategies optimised by complete visibility. This means that neither of the two departments will collect and interpret data differently and have contrasting insights on how to go about things. With spend analytics, procurement and finance will be able to see eye to eye and manage and plan costs while driving value due to the comprehensive view that they will share.