Three ideas for improved collaboration between procurement and finance departments

November 26th, 2019
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Within companies, it is recognised that a silo organisation where each department ignores the practices and references of the other is a barrier to collective development. On the contrary, closer collaboration between departments, for example between procurement and finance, improves the overall performance of the company.

Two questions then arise concerning the collaboration between these two departments:

  • Under what conditions is a more shared practice possible? 
  • What areas should procurement departments work on to create effective and lasting connections with the finance department?

The good news is that the steps that procurement departments need to take are not so great when it comes down to it. Procurement departments must implement three conditions to be fully vested in improving collaboration with the finance department:

The procurement department must develop their financial expertise

The first condition for an effective collaboration between procurement and finance, is for the procurement department to develop its financial culture. Developing an in-depth financial expertise will result in three positive outcomes:

  • Fostering communication and understanding with the finance department.
  • Giving procurement departments more influence in the strategic decision-making of the company, adding financial expertise to its ability to offer innovative solutions
  • Optimising the department's own operation by enabling them to carry out more sophisticated economic analyses

Moreover, the digital transformation of procurement is a reality for many companies. However, for companies undergoing digitalisation, procurement departments need to develop their financial skills in order to take full advantage of the opportunities provided by this transformation. Being able to collect and process a significant amount of data are among the benefits of e-procurement. Economic expertise is essential to make the analysis of results as relevant as possible.  

Finally, greater financial expertise increases the procurement department's legitimacy in making much greater contributions during the company's budgeting process. This recognition will therefore make it easier for procurement and finance to collaborate over budgets, providing the company with greater detail and forecasting accuracy. As a result, the company will be able to take a more tailored approach to management, which will ultimately make it easier.

Procurement and finance departments must have a more fluid relationship

Simply put, procurement and finance both have to worry about costs, with questions such as:

  • How should we anticipate costs?
  • How should we control costs?
  • How should we lower costs?

Procurement and finance both work on cost management in the company's value chain. But do they actually always work together? These parallel efforts embody the whole issue of the collaboration between the two departments.

This is why the second challenge for procurement departments, when trying to work more closely with finance, is the fluidity of their relationship. In particular, hidden costs are very difficult to quantify and therefore control if no end-to-end method exists to trace them.

A digital source-to-pay solution is a good initial answer to the challenge of controlling costs, especially hidden costs. However, in order to create a truly fluid relationship with the finance department, or in other words, to have full control over the value chain, this solution should not be limited to procurement alone. The real answer to avoiding silos is to define and implement a shared and continuous information system between the two departments.

Procurement and finance departments should share a set of common indicators

The insights into procurement and finance departments as depicted in this article can also be used to dispel deeply ingrained clichés. Procurement departments are not just tasked with buying cheaper. It would be foolish to overlook the procurement department's potential to contribute to the overall performance of the company.

Over time and through the use of tools, procurement departments have developed the ability to manage their supplier ecosystems with an extraordinary finesse and a retrospective outlook. As a result, procurement departments now have an extremely detailed knowledge of their partners.

Many indicators feed into this knowledge and ability to control, such as the following:

  • Correct deliveries
  • Governance ethics
  • Product and service innovation
  • Service quality monitoring
  • Reliability of commitments

While these indicators are at the centre of the procurement department's performance, they also sustain its potential to contribute to the strategic decision-making of the company, notably by shedding light on risk management. For its part, the finance department contributes to the strategic strength of the company through its simulation capabilities, integrating revenue and know-how into budget forecasts.

There is no doubt that sharing some of the indicators currently exploited separately by the two departments is one avenue to explore in order to improve collaboration in pursuit of the strategic excellence of the company.

In conclusion, establishing shared practices between procurement and finance departments is largely based on the digital transformation of procurement. To be more specific, it is also based on integrating an element of cooperation with the finance department as part of the overall reflection on the digitalisation of procurement.

In some ways, this article provides a very concrete dimension to the reflection published on 5 November 2019: Digital transformation in procurement departments: Digitalisation "in the business" or "as a business"?. Take another look to understand the difference between digitally transforming the procurement department to optimise department processes and a procurement digitalisation strategy where the stated objective is to better integrate procurement into overall company performance. Clearly, a collaboration that creates value between the two departments falls within the scope of the second option.   

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