Ups and Downs of Procurement and Finance

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 discussed his 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’s 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 of costs, 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.

As a vendor my concern is whether these initiatives will harm our relationship with customers. We know the key responsibility of any CFO is 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 desire for Service Providers to improve cash flow means pushing longer payment terms upon the vendor, and cost savings mean price reductions and discounts by the vendor. The need for larger discounts with larger vendors means smaller vendors like ourselves may be pushed aside.

Neural Technologies employs just over 160 people globally, spread predominantly in four offices 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? And how do you look to reduce your revenue by 10% year on year, absorb negative currency exchange fluctuations, and agree that license fees should be free of charge, and then satisfy their list of product changes?

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 is 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 also tomorrow? What is the quality of the product in regards stability? What are the commitments from the vendor? What references can the vendor provide? These factors matter as much as cost.

When we sell our products and services we seek to start of a long term 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 every successful company focuses on cost cutting exercises every year. Successful companies 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, because short term financial gains need not translate into long term financial or commercial success.

I hope the strategic change and evolution in Finance and Procurement continues to mature. Business owners and vendors can also be part of this initiative, contributing to an open, constructive, interactive relationship. By working together we can all deliver a robust, strong partnership that nurtures and benefits everybody.

This article was originally published on the corporate blog of Neural Technologies. It has been reproduced with their permission.

Luke Taylor
Luke Taylor
Luke is the founder of Risk Reward Awards, an association whose goal is to encourage recognition of the best work done by risk professionals. Previously he was the Group Chief Commercial Officer and Deputy Chief Executive Officer of a risk management software developer. Luke now divides his time between Risk Reward Awards, RAG and Lateral Alliances, his consultancy business where he works with the likes of Symmetry Solutions, XINTEC, GBSDTech, Yates Fraud Consulting and Focus Data, to name a few.