Procurement and Finance tend to pretty much ignore each other so far, with a minimum level of communication between both. It needs to change to respond to challenges created by the financial and economic crisis.

This is now the second of the three articles on this rich subject. The first article discussed how Procurement can take a pro-active approach to address Financial objectives whilst securing the vulnerable portion of its supply base. This second part will deal with the middle-ground issue of how to bridge the gap between savings determination and reporting on one hand, and budget setting and monitoring on the other hand.

In our experience, there is a degree of misunderstanding and frustration between Procurement and Finance on this not-so-simple issue. Unless a specific management of savings is put in place to capture and manage them, there is invariably a discrepancy between savings declared by Procurement and the actual overall spend reduction in the Departments supposed to benefit from the declared savings. Finance asks: where have these savings gone, implying were they real?

This is of course linked to 4 main factors:

• Time gap between declared applicability and actual accrual of savings, e.g. due to implementation ramp-up period not to mention the infamous misunderstanding between ITY (In This Year) and annualised savings;
• Volume variation: buying more or buying less than the hypothesis on which projected savings had been calculated and declared
• The uncontrolled recycling of the savings into an increase in quality or quantity of purchases, or into the fulfilment of requirements which would otherwise have been left unsatisfied
• Leakage / non-compliance: actual implementation of new contractual terms not as per the initial projection.

The matter can be further complicated by questions such as is a volume reduction a saving?; the answer of course depends on the balance between the variation of the volume of solutions bought and the variation of the volume of functional requirements, a reduction of the latter being not eligible to a statement of savings.

Working jointly, Procurement and Finance will address this issue by devising and implementing the appropriate mechanisms; this will often highlight the need to beef up the Contract Management function often but not necessarily a Procurement responsibility as such, but at least somebody must be in charge and accountable, so that any variance can be monitored and addressed.

Likewise, working together will result in the budget setting exercise to be more aligned with the Procurement Plans. Our experience of creating this much improved working relationship between Finance and Procurement has showed a secondary positive effect: sitting down together to figure out the impact of the Procurement activity on budgets resulted in a higher level of pressure put on Procurement (partly self-applied), taking them out of their comfort zone, but also gave Procurement a much stronger mandate and Executive Board support to go and challenge existing situations.

The mechanisms needed to gain a proper control over the impact of savings on the accounts and budgets, and to link budget settings and Procurement plans each part feeding the other are neither complicated nor time consuming: what it takes is essentially the motivation to make it happen!