A finely tuned and strategic Indirect Procurement function generates value for Executives across the entire business. This is especially the case for Finance, and the CFO.
For the CFO, partnering with a high performing Indirect Procurement team creates significant opportunities and benefits. Procurement-as-a-service delivery models amplify these benefits for companies with $1B to $5B in annual revenue. Firms within this range will typically not have the scale necessary to invest in the subject matter expertise, market intelligence and technology across all spend categories that elevated procurement performance. Procurement-as-a-service now makes this possible.
(for a procurement-as-a-service primer, see “Procurement-As-A-Service: New Jargon for an Old Model or a Game Changer?“).
There are five key benefits for a CFO of investing in an outsourced procurement-as-a-service model that manages Indirect (or non-core) spend:
- Risk Mitigation
- Cash Management
- Financial Planning
- Spend Visibility
- Variable Cost Structure
A strategic Indirect Procurement team is the first line of defense for identifying, managing and mitigating the risks associated with a companies third party non-core spend. This is achieved by applying risk-based processes and blueprints to all of your supplier spend.
These are not the procurement processes of old, however. Value is created by building and implementing risk-based processes that adapt to the product or service that is being purchased. Addition rigor is placed on those services and suppliers that are inherently riskier, whether it be because of access to data, operational importance or the level of investment.
Once potential risks are identified, the procurement team will lead the organization is building and implementing risk management and mitigation strategies through contracting provisions, governance, performance management and disaster recovery plans. Examples of risk factors to mitigate include the impact of concentration risk, financial risk, strategic risk and geopolitical risk.
A high performing Indirect Procurement team plays a key role in cash management:
- By negotiating market leading pricing for the products and services that a company buys (achieved through niche subject matter expertise and market knowledge), and ensuring any savings achieved actually flow through to the bottom line.
(for more information on the procurement value proposition, see “How the Compound Effect Can 5X Your Procurement Returns”).
- By reducing demand for products and services. For example, enabling stakeholders to lever already purchased services, or channeling users to lower cost alternatives.
- Through building and executing supplier payment term strategies to ensure payment terms are favorable and are consistently applied.
- By leading process efficiency and continuous improvement initiatives between the business and supplier, and then ensuring that any savings generated either hit the bottom line or are reinvested.
- By implementing milestone and performance based financial terms with suppliers that are tied to specific deliverables. This both extends payment terms, and reduces the risk of paying for poor performance.
By levering procurement-as-a-service outsourcing, a company will have access to the market intelligence that facilitates long term financial planning. The Procurement team is now able to provide data driven insights that enable a CFO to more accurately forecast forward looking third party product and service costs.
Enhanced Spend Visibility.
An average company spends almost 70% of their revenue on third party spend (source). Of that, 20-40% is typically on Indirect, non-core third party spend. However, a lot of companies do not have true visibility into that spend. Spend analytics software – purchased either as a standalone or as part of a broader program – will provide the detailed insights that facilitate proactive spend management, and the prioritization of strategic actions.
Variable Cost Structures.
A hallmark of the as-a-service model is that it provides a pricing structure that is flexible and scalable based on the needs of the business. This shifts procurement labor costs from a fixed expense to a variable one.
Extending this further, the subject matter experts that procurement-as-a-service brings are able to use their market knowledge to partner with leaders to build similar variable cost model structures across other areas of the business. These specialists know where and when this makes sense – and critically, when is does not. For the CFO that is interested in shifting back office costs from a fixed to largely variable cost model, procurement can deliver significant value.
Finance and Procurement ultimately share very similar high level objectives – reducing risk while improving margins. The very biggest companies have the scale to build this procurement capability internally. Procurement-as-a-service and knowledge based outsourcing delivery models now enable smaller companies to take advantage of the strategic procurement value proposition.
Implementing a program that delivers these results is not easy. If it was, every company would be taking advantage of it. It requires a carefully crafted scope, a supplier partner with a strong cultural fit, a contract that aligns motivations and a strong launch and governance execution. Critically, it also requires a strong commitment to drive change.
The ProcureChange team has experience of building, delivering and transforming outsourced strategic procurement programs that generate multiple times return on investment. To learn if procurement-as-a-service outsourcing could be a fit for your company, contact us today.