I will start my contributions to Procurement Insights by laying the truth right out in the open: I am terrible at math. But that confession is just the beginning. In college I took advanced music theory to avoid calculus, and I got my MBA by learning just enough about finance and accounting to get through my exams. If you don’t apply academic themes, they have a way of being replaced with more useful information like how to deliver a presentation, how to keep an internal stakeholder from saying too much, or how to stay calm during a reverse auction. But, like financial topics or not, we need them.
Over the years I have gotten comfortable with savings calculations, cost-modeling, and the 80/20 rule. For a while, it was enough, especially when you layer on category knowledge (fuel, services) and process experience (opportunity assessment, supplier discovery). But in this brave new world of procurement, the stakeholder with ever increasing clout and expectations is the CFO.
According to a 2011 report by Ardent Partners, “the CPO is more likely to report to the CFO than any other executive” (CFO CPO: One World, Two Worldviews). There is no problem with that in and of itself, but according Jon Hansen’s keynote speech at eWorld last September, 80% of CFOs do not believe that procurement makes a contribution to their company’s competitiveness.
Procurement contributes to the competitiveness of the organization by keeping costs down, managing suppliers, and introducing opportunities for innovation through market and category research. In my opinion, the key issue is one of perception. Procurement offers benefits that are not perceived because we are not using the right language to describe them. The trick is to keep adding the value we’ve always added but to market ourselves better.
While most procurement groups report into finance, many procurement/purchasing professionals do not have a background in finance or an MBA. If we are to effectively communicate our value to finance, we need to speak their language. Additionally, we need to understand corporate financial priorities so that we can align procurement’s goals with them.
What are the topics procurement professionals need to learn more about in order to make the above possible?” I asked this question of a number of people and have gotten some interesting answers. Here is a list of topics we should all be more comfortable with. If you are interested in learning more, I encourage you to start with Wikipedia, making full use of their additional information sections.
Overhead: The ongoing costs of operating a business that aren’t directly associated with the product or service the company sells to make money. This is a great example of a communication disconnect. Procurement talks about overhead all the time – but we call it indirect spend.
Depreciation: The accounting recognition of the fact that an asset (like a piece of equipment) can be “used up” over time by reaching or surpassing its expected lifespan. You may still have the same lift/computer/vehicle after 5 years, but it is not worth as much as it was when you bought it and therefore you should not have to pay taxes on its “new” value. Typically, a sourcing project for fixed assets will depreciate the negotiated savings on the same schedule as the asset’s recognized value.
Cost Accounting: A system of accounting used by a company to enable their managers to make decisions. Because cost accounting is not used to put together official financial statements, the methods and calculations used do not need to follow GAAP (generally accepted accounting principles). Learning more about your company’s use of cost accounting will give you great insight into the focus and priorities of finance and operations.
Accrual Accounting: A system of accounting that counts funds as taxable once they are earned rather than when the funds are received. This concept goes hand in hand with revenue recognition the principle that determines which period the revenue from a sale is recognized separate from when the earned cash for that sale is received. Software purchases are a good example of this principle in practice: unlike other categories when you can clearly delineate if a good has been delivered or a service performed, there is some flexibility in recognition because the transfer of ownership is less clear.
One of the most interesting responses I received came from Dr. Jim Anderson, sales coach and the author of “The Accidental Negotiator” blog, “Keep in mind that a CFO may be next in line to lead the company. Procurement professionals have an opportunity to educate the CFO on how procurement works. The CFO already knows more about finance than any of us ever will, they may be eager to know about our side of the business as they prepare for the future. Not all will, but it’s well worth an exploratory conversation…”
Be sure to join Kelly every Monday evening at 9:30 PM EST on the PI Window on Business on Blog Talk Radio as she provides Buyers Meeting Point’s up to the moment information on industry happenings and events.