Key themes from the Basware's Cost of Control research report

"No matter what size a business is, keeping control of finances has never been more important for just about any company you'd care to name right now. Though the wider European economy may now be in a slow upturn (and at the very least moving away from further recession), financial prudence, clarity and accountability are still the primary drivers for most businesses wanting to weather the longer storm. But just how good are we at doing that? How smart are European businesses when it comes to spend visibility? What exactly is the cost of control?

That was just the question that we recently posed to 550 Financial Directors and CFOs from across Europe and the United States. The results were, across the board, enlightening, alarming, surprising and promising all at once. Our respondents were quizzed on a range of subjects that included themes as diverse as their targets for cost-cutting over the next financial year, through to automation, supplier risk and regulatory change. From the findings, it seemed that our audience was telling us three distinct things:

1. Finance continues to underestimate the strategic value that purchasing and the supply chain can have on business performance
2. The CFO mindset is currently dominated by immediate cost cutting opposed to other, arguably more strategic options
3. Businesses across the globe are experiencing efficiency gaps in data capture, automation and integration across their purchasing and finance functions, leading to lost time and money

Each of these issues alone would be serious enough for most businesses to want to stop and think about where and why they are failing, but the combination of all three together points to some serious flaws across the business landscape. Whether that's missing the strategic value of one of their most important financial tools in procurement, or simply failing to capitalise on the benefits of automation, the majority of companies surveyed by The Cost of Control demonstrated that very few were running at a level of efficiency that they would aspire to in tough economic times.

Of course, there's little point in doing research of this kind if you can't then take away some lessons that tackle those very issues that you've just identified. With that in mind, let's look at each of these issues in turn, where the gaps exist, and what can be done to help counter the cost of control.

Procurement: blunt tool or financial scalpel?

If the above conclusion that CFOs are failing to recognise the importance of procurement when it comes to managing supply chains and making an active contribution sounds harsh on both parties, it's because it is. Having said that, the statement is created from data that points very clearly to just that finding, and makes it very difficult to conclude otherwise. A few key stats tell the story loud and clear:

• 52% of those surveyed said that they thought purchasing was becoming a more strategic function, but 36% believed that it is still largely administrative
• Only 29% of respondents described procurement as a function that has a positive impact on enterprise growth
• Only 28% of respondents believe that procurement has a significant impact on financial risk exposure

While CFOs generally acknowledge that the job of the Chief Procurement Officer (CPO) is getting more difficult (61%), that less than a third of respondents see procurement as being able to mitigate financial risk or help contribute towards financial growth is particularly damning. It is however, also reflected in procurement's role in the average organisation, which differs – at times wildly – across businesses. Procurement's role and reporting structure within an organisation varies widely from reporting directly to finance (27%), having limited interaction with finance (17%), to both finance and procurement being represented in cross functional teams (22%). It is little wonder that the value that procurement offers struggles to be seen by those who it could benefit most.

No matter which way you look at the data however, what becomes instantly clear is that finance is still not seeing the true value of procurement. Although satisfaction with procurement's contribution to strategic objectives remains consistent at around 50% across most areas, CFOs consider the procurement objectives of "identifying cost savings opportunities", "curbing non essential spending", "delivering on cost savings targets and negotiating better prices from supplier's" to be more important than others, and it is in these areas where satisfaction gaps appear.

Only 54% of CFOs, for instance, said that they were satisfied with procurement's ability to seek out cost saving opportunities, despite an overwhelming 88% stating that they saw this as procurement's major priority. An identical 54% said the same of delivering on cost savings targets. And a similarly low 50% said that they were satisfied with procurement helping them to curb non-essential spending. The general air from the financial decision makers surveyed seems to be one of dissatisfaction.

This may, in part at least, be reflected in the way that procurement is set-up within the organisation. The last of the setups detailed above [the cross-functional variety] represents the most dynamic and sophisticated arrangement, but interestingly in these cross-functional set ups, 75% of CFOs consider that the job of CPO is getting more difficult – higher than the average of 59%. However, where procurement reports directly to finance, a more traditional model, the percentage reduces to 54% – lower than the sample average.

This suggests that current cross functional set-ups are less than efficient at removing purchasing challenges. Of course, it may be that cross-functional models are simply a product of complex organisational structures, meaning that purchasing pressures are greater by default. But the overriding suggestion is that the organisation structure itself is an influence on the way procurement functions, a major point for anyone looking at best practice into how to make their procurement process more effective.

Is cost cutting king?

The economic downturn has seen companies uniformly throw the spotlight on cost cutting in order to survive, let alone thrive. Cost reduction looks set to continue dominating strategic priorities for businesses into 2010 – with 64% of respondents focused on reducing direct costs and 60% looking at reducing indirect costs. Further results also suggest that CFOs are putting growth and profit issues firmly down the list of importance, as priorities such as risk analysis (39%), maintaining / improving margins (39%) and increasing profits (37%) are significantly diminished alongside cost reduction imperatives.

When CFOs were asked to specify the most significant challenges affecting finance now compared with 12 months ago, The Cost of Control showed that whilst strategic priorities were very much skewed in the direction of cost cutting, when it comes to challenges, perceptions vary and a far more evenly distributed "worry list" emerges. Exploring the top five concerns amongst CFOs reveals a situation where finance is tasked with identifying and realising cost savings whilst grappling with increased supplier risk, a lack of spend visibility and a realisation that maybe technology could help.

Missing links in the supply chain

On the very subject of technological gain, there is a vast array of technology now available to automate various elements of the supply chain and to integrate these processes into the wider finance function, bringing some level of co-ordination and certainty to the table. Data from our research shows that, across all companies, on average only 50% of purchasing processes are automated and just 42% of indirect spend is captured by PO systems. This means that more than half of spend is "in the wild", not measured or managed in any real sense.

When dealing with automation in more detailed areas of invoicing and purchasing, there is further evidence of room for improvement. Contract life-cycle management (34%), contract matching (33%) and travel and expenses (35%) are notable areas that experience a lack of automation.

Invoice processing and supplier transactions show higher levels of automation and also represent more straightforward areas of process infrastructure, whilst contract matching and life-cycle management fall below 35%. The absence of automated systems illuminates the challenges of data visibility and supplier risk stated by respondents. In short, purchasing systems leave many aspects of financial operations beyond the reach of meaningful access.

One thing that The Cost of Control survey showed us quite distinctly was a notable relationship between levels of automation and improved performance by procurement departments through the eyes of FDs. Quite simply, the higher the automation level of a business, the more satisfied the CFO is with the procurement function; 68% of CFOs in high automation businesses said that they believed procurement and finance together to have done a good job with cost saving in the past 12 months, compared to 58% of low automation businesses. 55% of high automation businesses said the same of effective integration between procurement and finance, compared to just 37% in low automation business.

The research further expands on the impact of automation across a range of different areas within the procurement function, showing across the board that automation is bringing about better performance. This is particularly notable in areas of high strategic importance where procurement shortcomings have otherwise been exposed such as delivering on cost savings targets (47% low automation; 62% high automation), developing closer relationships with suppliers (48% low automation; 60% high automation) and improving spend visibility (46% low automation; 55% high automation).

While automation is clearly not the answer to everything, from an FD perspective, the higher the degree of automation, the better procurement is seen to perform. Investing in technology at this time may not be an attractive option, but the ability to achieve greater cost savings, through improved visibility and control, and to better mitigate supply risk should prove a motivating factor in addressing automation challenges amongst large enterprises.

Five final points

While we were crunching this data, we wanted to come away with a few recommendations that would help businesses of all sizes look at how they could use their procurement and finance functions for the greatest good. So, here goes:

Functioning integration

Evaluate to what degree the interdependence of purchasing and finance is best served by the existing integration within the business. An assessment of the operational framework created between 'buyers' and 'billers' provides the basis for understanding where improvement can be made.

Capture and automate

Data capture and automation should be seen as highly synergistic improvement measures. Exploring the benefits of one in exclusion of the other is a flawed approach to resolving process efficiencies, yet often systems are streamlined and automated without sufficient consideration to how this impacts data capture and visibility. Conversely, efforts to improve data capture can create significant disruption to workflow and processes when executed in isolation.

Complete the risk picture

All businesses have the capacity to assess problems and their potential outcomes. This can be via sophisticated analysis tools or more mundane methods. However, purchasing and supply side operations must form an integral part of any risk decision if an accurate picture of opportunities and threats is to be created in order to achieve cost saving goals.

Continual cost measures

The complexity of supply chain infrastructure means that short term benefits and savings are hard to realise. This means that tactical process and cost efficiencies must be combined with the longer-term cycle of infrastructure change. It is important to implement technology changes that can support and realise continual cost measures across distinct cost saving activity.

Satisfying strategic needs

Whilst automation of, for example, contract negotiation and spend processes can have a positive effect on the ability of businesses to meet financial goals, the vast majority of businesses still have significant opportunities to automate further. All efforts to address this should ensure that links between infrastructure change and the realisation of strategic cost cutting goals are defined from the outset of any future projects.

Contact: info.uk@basware.com.