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The CFO's View of Procurement

Same Page, Different Language November 2007

The CFO's View of Procurement Page 2

Executive Summary
The Chief Financial Officer (CFO) and the Chief Procurement Officer (CPO) share a common goal - improving the bottom line, but the approach that each take to achieve it, and as importantly, the language that each use differ greatly. While the average CFO is keenly aware of the strides the procurement department has taken in recent years to make itself more strategic to the enterprise, less than 20% view procurement's impact on overall competitiveness as very positive. The broad procurement transformation, that began a decade ago and has been chronicled by Aberdeen, still has a long way to go.

Best-in-Class Performance
This Aberdeen research effort captured over 500 survey responses of which slightly more than 170 came from the CFO or finance department. The set of responses from finance professionals was captured in October and November of 2007 and are the focus of this report. Aberdeen distinguished Best-in-Class enterprises by the percentage of enterprise spend under management. Best-in-Class enterprises in this study are notable for the level of engagement between procurement and finance and their rigorous approach to savings measurement and capture. They also book 24% more of the procurement department’s projected savings rates.

Three Tiers of Savings Identified: Beyond simple identification of a savings opportunity, this tier of savings is characterized by sourcing activity and negotiated pricing, where savings potential is attainable. Implemented (or realized): After the contract has been executed, enterprises begin to realize the potential of previously identified savings opportunities. This tier is characterized by purchasing, receiving, invoicing, and settlement activity and ensured by contract compliance and strong end-user adoption. Booked: Once savings have been realized, they can be recognized or booked in operating budgets and other enterprise-level financial statements. This tier is characterized by close involvement with finance, procurement, and the budget holder.

Competitive Maturity Assessment
Survey results show that the firms enjoying Best-in-Class performance shared several common characteristics including their approach to calculating and implementing procurement savings. The Best-in-Class claim an advantage in the area of core procurement skill-sets and knowledge as viewed by the CFO including negotiation and contracting skills, supply base knowledge, and overall process innovation.

Required Actions
In addition to the specific recommendations in Chapter Three of this report, Best-in-Class performance starts with alignment and dialogue between procurement and finance. These “brothers in arms” should develop a platform that promotes open communication, visibility, and precise alignment on goals and objectives. Additionally, Aberdeen recommends that CPOs: 1. Move away from soft measures like cost avoidance that cannot be quantified in an absolutely unambiguous way 2. Hold itself accountable to a savings benefit that measures total cost over total cost 3. Above all else, procurement executives reading this report should challenge the current view that it is procurement’s responsibility to negotiate budget reductions with the line of business Once savings have been achieved, it should not fall to procurement to establish how this real benefit should be allocated across the enterprise, but rather to the line of business and / or finance.
© 2007 Aberdeen Group. www.aberdeen.com

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................................ 9 Tables Table 1: The CFO's View of Procurement Performance ................................................................................................10 Table 3: The Competitive Framework through the CFO's Eyes..................................................................................................................................................................................................14 Organization ...........................................................15 Chapter Three: Required Actions ........................17 Appendix A: Research Methodology........................................................................................................................................................................... 5 Competitive Impact ........16 CPO Steps to Success...............................16 CPO and CFO Joint Steps to Success.........................................................................................................11 Chapter Two: Benchmarking Requirements for Success ............................................................................................. 2 Chapter One: Benchmarking the Best-in-Class ..................................................................... 6 Figure 3: Finance Department Involvement with Procurement..................10 The Best-in-Class PACE Model ............................................................................................................................................................................................................................aberdeen.........................................................................com Telephone: 617 723 7890 Fax: 617 723 7897 ................................................................20 Figures Figure 1: What is Procurement's Impact on Competitiveness? ................................................... 2 Competitive Maturity Assessment...................................................................13 © 2007 Aberdeen Group.......................................... 2 Required Actions....10 Table 2: The Best-in-Class PACE Framework .................................................................. 8 Figure 4: The CFO's Top Pressures .................................. 7 Lingua Procurement ....................................................................................................13 Process..............................................................12 Capabilities and Enablers..............................................................................................................................14 Knowledge Management...........................................................................The CFO's View of Procurement Page 3 Table of Contents Executive Summary.................................................................... 8 The Maturity Class Framework.................................................................................... 9 Figure 5: Procurement Actions to Assist the CFO.......... 6 How to Make Friends and Influence Finance.................................................................................................. 7 Credibility Gap............................................................10 Best-in-Class Strategies....................14 Performance Management..............................................................12 Competitive Assessment... 5 Figure 2: Savings Performance...................................................16 CFO Steps to Success.......................... 2 Best-in-Class Performance...........................18 Appendix B: Related Aberdeen Research........................................14 Technology............................................................................................. www.......... 5 Meander to the Bottom Line ............................................................................................................... 5 Not Your Father's CFO .................

.................................................com Telephone: 617 723 7890 Fax: 617 723 7897 ..................19 Table 7: The Relationship Between PACE and the Competitive Framework ..................................19 © 2007 Aberdeen Group..............................................The CFO's View of Procurement Page 4 Table 4: Top 10 Procurement KPIs ....... www...........................................18 Table 6: The Competitive Framework Key ...aberdeen....................................15 Table 5: The PACE Framework Key .........................................................................................................

We tell the business ‘here’s the savings. more than twice the view procurement has of itself √ Competitive Impact Since less than 20% of CFOs view procurement as having a very positive impact on competitiveness (Figure 1). On the operations side. Figure 1: What is Procurement's Impact on Competitiveness? 17% 3% 9% Very negative Slightly negative 25% None Slightly positive Very positive 46% Source: Aberdeen Group. a negative impact on competition. CFOs must choose their battles and guard their time wisely leaving CPOs to vie with their functional peers for the time and mindshare of the CFO. Fast Facts √ 73% of CFOs view procurement as more strategic over the past three years 37% of CFOs feel procurement has no impact or worse. We focus on price over price savings. the person responsible for the finance and accounting operations of the enterprise. www. no matter the reporting relationship. Yet.” ~ CPO Fortune 50 Company © 2007 Aberdeen Group. it is not surprising that the financeprocurement dialogue is not frequent.The CFO's View of Procurement Page 5 Chapter One: Benchmarking the Best-in-Class Not Your Father's CFO At the financial and operational hub of the enterprise sits its Chief Financial Officer (CFO).’ If the business wants to take their savings and use it to grow the business. to acknowledge the likelihood of this view and set a deliberate course to change it. strategic planning as well as people. it is incumbent upon every CPO.com Telephone: 617 723 7890 Fax: 617 723 7897 . Conversely. November 2007 "Our job is just to deliver the savings.aberdeen. with 37% of CFO's judging procurement's impact on competitiveness to be neutral or negative. we let finance decide how to track it down and measure it. CFOs now regularly manage HR and 30% now have the Chief Procurement Officer (CPO) as a direct report. the role of CFO has moved well beyond traditional controller and treasury duties. and operational management are some of the now common responsibilities for a "renaissance" CFO. But for many enterprises. client. despite what one presumes would be easy access via a direct reporting relationship coupled with a widely shared view by 73% of CFOs that procurement has become more strategic over the last three years. With an everexpanding role. getting on the CFO's agenda remains a significant challenge for most CPOs.

2% Identified Implemented Booked Source: Aberdeen Group. International Forest Products Co." ~ Director Strategic Sourcing and Supply.4% is implemented. Finance Multimedia Technology Conglomerate 3." ~ Managing Director.4 million.com "The impact to the bottom line of each business operation? How do you measure it without an army of financial analysts? In our industry. the inability to claw-back savings from an operating budget and impact. The causes of this dramatic leakage are numerous and challenging . Of the 11. has nevertheless had a dire effect on the view that CFOs have of procurement and their overall impact.The CFO's View of Procurement Page 6 Meander to the Bottom Line Fueled in large part by the claims of many e-sourcing solution providers and strategic sourcing consultancies during the internet boom. Figure 2: Savings Performance 2.aberdeen. using a chemical that costs 20% more but yields a 40% net benefit in operations) (3) adjustments in sales which could increase or decrease the benefit.9% in average identified savings.2% or only 27% of what procurement and sourcing teams initially identified. at times political.7% 11. at times operational.000 of potential savings is lost during the average sourcing project. November 2007 As reported in the January 2007 Advanced Sourcing and Negotiation Benchmark Report. that they had "saved" their clients billions upon billions of dollars. we forecast benefit which may or may not be fully realized because of (1) compliance / leakage (2) changing the product mix (e.4% Leakage Lost or Reclaimed "What traditionally happens is procurement reduces costs and the business spends the benefit elsewhere. not solely the fault of procurement. Telephone: 617 723 7890 Fax: 617 723 7897 . By the time finance enters the equation to account for the booked savings. Based on an average sourcing event value of over $4. The traditional view places blame for the gap between implemented and booked savings squarely on the shoulders of procurement. procurement believes that only 9. If a line of business chooses to deploy the savings to drive other goals that does not © 2007 Aberdeen Group. procurement by its own admission fails to implement 21% of the savings identified from its sourcing efforts. But this is a significant and fundamental issue that must be revisited and challenged. www. it is too often taken for granted that the bids "identified" and / or "awarded" at the end of an esourcing event or strategic sourcing project are quickly implemented and that 100% of these savings estimates hit an enterprise's net income or "straight to the bottom line.9% 9. this number plummets to 3. Procurement’s role should be to deliver savings to the enterprise. this means that more than $100.g.5% Savings 8.at times financial." The reality is far from that (Figure 2).

the language becomes intricate. Yet. this would appear to be a reasonable and straightforward objective.CPOs need to work to with their CFO to redefine the measure of success. As seen in Figure 3 (where respondents could select more than one option and those © 2007 Aberdeen Group. one challenge is to translate the department's operating performance into meaningful and usable information for the CFO. and in many ways has a much greater ability to do so." ~ CFO. this misses the larger point of having a collaborative relationship and only partially addresses the primary issue facing procurement in its relationship with finance today: trust and credibility. volume discounts. One of the fundamental challenges to bridging the gap is the level of engagement that currently exists between the two functions. specialized. of profits and losses is generally understood by the average professional in an operating enterprise. More specifically." ~ Efficiency Program Manager Mid-market Enterprise Telephone: 617 723 7890 Fax: 617 723 7897 . European-based Software Provider Credibility Gap Certainly the CPO must place the department's performance in context for the CFO. How to Make Friends and Influence Finance "Ways to make people like you . as you drill down into specific functional areas.4% savings per sourcing initiative is a real and significant number . Where we have not been able to complete the cycle yet is to actually see the benefit by removing the excess funds from the individual budgets. Since 52% of CPOs have a background in finance. And while some have suggested that a CPO should translate everything the group measures into strict enterprise-level financial terms. besides being extremely time consuming.Rule 5: Talk in terms of the other man's business.The CFO's View of Procurement Page 7 make implemented savings any less real.D in organizational behavior. www. according to findings from the November 2006 CPO’s Strategic Agenda: Managing People. Purchasing people don't tend to understand financials and finance people sometimes are too far away from the purchasing dynamics. our controller forms the budgets for different planning cycles and we know that procurement is able to achieve better than budgeted prices through negotiations. For procurement executives who are deeply focused on their own department's main operating metrics. measures like the "percentage of spend under management" or "purchase price variance" and different levels of "cost reductions" or compliance in the "source-to-settle" process." of revenues and expenses. it makes little sense to involve the CPO in a protracted discussion around how to reallocate savings.aberdeen. In reality.Dale Carnegie." . The fundamental issue for the CPO today is that what should be defined as an enterprise-level performance gap (Figure 2) is viewed by the CFO as primarily a procurement credibility gap. 1936 The language of "Business 101. the CFO should be more vested than the CPO in resolving this issue. The CFO must be able to translate functional performance into enterprise operating performance and financial statements. Just as it would be absurd to expect the head of a business unit or general manager to defer to procurement’s judgment above all else on the management of its business and key initiatives in the next 12 months. An average of 9. Managing Spend benchmark report. and nuanced. etc. "We have been working towards the development of clearer goals and joined (bonus) objectives to ensure that finance and procurement have the same incentives. but the dialogue with finance should not require a CFA designation and a team of analysts anymore than a dialogue with HR should require a Ph. foreign to the occasional visitor.com "We are working to improve cooperation between finance and procurement.

the CPO reports to the CFO. November 2007 The degree of interaction between procurement and finance is an issue for both functions to address. yet only 6% of enterprises have a dedicated finance resource assigned to procurement. Lingua Procurement CPOs should certainly be able to communicate their department's performance details in terms that the larger enterprise can understand and use. Global Procurement.The CFO's View of Procurement Page 8 options registering below 6% are not shown). www. our Controller forms the budgets for different planning cycles and we know that procurement is able to achieve better than budgeted prices through negotiations. etc. volume discounts. Fortune 50 Enterprise Dedicated resources assigned to procurement 6% Source: Aberdeen Group.aberdeen. Finance has a fiduciary responsibility to support procurement and procurement needs a strong partner in finance if it is going to achieve its objectives. I have usually found this to be sub-optimal. "We are working to improve cooperation between finance and procurement. the net effect is muted without solid financial stewardship. but they should not have to get there alone. finance's level of involvement with procurement is generally tepid and ad hoc by nature with just 30% of finance departments offering dedicated support to procurement operations. For some strange reason. Where we have not been able to complete the cycle yet is to actually see the benefit by removing the excess funds from the individual budgets. More specifically. with little regard on how best to achieve this as a reliable. sustainable engine of growth and innovation. Perhaps it's because both are support functions. CPOs track a series of KPIs (Table 1) that focus on savings and departmental operating efficiency. While Aberdeen has chronicled numerous Best-in-Class case studies where procurement has had an extraordinary impact on the enterprise." ~ Efficiency Program Manager Mid-market Enterprise © 2007 Aberdeen Group. Some can be placed into strict enterprise financial terms.” ~ Executive Director. This exercise will both rationalize and validate procurement's performance metrics and move the opportunity for collaboration significantly forward. while others like spend under management serve as leading indicators of procurement performance and can not. The CFO and the finance department should be engaged in a series of review sessions to explain and refine procurement's performance metrics. Today's business environment makes these two groups natural allies.com Telephone: 617 723 7890 Fax: 617 723 7897 . The focus of the discussion tends only to be about money and savings. and the alignment does not enhance integration of procurement activities into the business. Figure 3: Finance Department Involvement with Procurement Budgeting/Ad Hoc 57% Limited or no support 8% Core member of cross-functional team 24% "In some companies.

The CFO's View of Procurement Page 9 Figure 4: The CFO's Top Pressures Enterprise growth 56% Increase profits Reduce operating expenses Maintain or improve margins Expand into new markets 31% 50% 37% 37% Source: Aberdeen Group. November 2007 CFOs. © 2007 Aberdeen Group. and develop a spend analysis program that includes distribution of the key output to all key stakeholders (Figure 5). November 2007 CFOs feel that the things procurement should do to help it achieve the broader goals are to build better relationships with the lines of business that it supports. improve the level of procurement automation. However. while 57% (not shown) feel that procurement contributes to enterprise profitability. desire growth (56%) and profitability (50%) above all else (Figure 4). and distribute spend data 22% Improve visibility into processes 20% Improve collaboration between finance and procurement 20% Source: Aberdeen Group. www. Procurement ranks higher when it comes to impacting the management of expenses (65%) and the maintenance of margins (67%). Figure 5: Procurement Actions to Assist the CFO Improve collaboration of procurement with business stakeholders 30% Increase procurement automation 26% Gather. only 46% (not shown) of CFOs feel that the procurement team has contributed to enterprise growth. analyze.com Telephone: 617 723 7890 Fax: 617 723 7897 . like the enterprises that employ them.aberdeen.

aberdeen. Aberdeen research has shown that enterprises have been able to achieve a 5% to 20% cost savings for each new dollar of spend brought under management. Less than 30% of enterprise spend is under management Source: Aberdeen Group. Table 1: The CFO's View of Procurement Performance Definition of Maturity Class Best-in-Class: Top 20% of aggregate performers Industry Average: Middle 50% of aggregate performers Laggard: Bottom 30% of aggregate performers Mean Class Performance More than 70% of enterprise spend is under management 30% to 70% of enterprise spend is under management Spend Under Management The classic measure of procurement’s impact upon an enterprise is the percentage of non-payroll-related spend that falls under management of this group. All participants should examine their prioritized Pressures. November 2007 The Best-in-Class PACE Model Aberdeen has shown that there is a clear relationship between the pressures companies identify and the actions they take. Table 1 summarizes the average performance of enterprises within the different maturity classes for this study. November 2007 © 2007 Aberdeen Group. and Enablers (PACE) selections and determine whether there are valuable perspectives to be gleaned by comparison with the PACE priorities of Best-in-Class companies (Table 2). what is commonly referred to as spend under management. Table 2: The Best-in-Class PACE Framework CFO Pressures Enterprise growth Procurement Actions Increase procurement automation Benchmark procurement performance Procurement Capabilities Supplier negotiation and contract management Spend management Process efficiency and standardization Managing contract compliance to supplier agreements Procurement Enablers Spend Analysis E-Procurement Corporate Performance Management (CPM) for procurement Single or integrated budgeting and general ledger application Supplier performance measurement Source: Aberdeen Group.The CFO's View of Procurement Page 10 The Maturity Class Framework Aberdeen distinguished Best-in-Class enterprises by a common key procurement measure: percentage of spend under the management (see side panel for definition). Capabilities. and their subsequent competitive performance. Actions.com Telephone: 617 723 7890 Fax: 617 723 7897 . www.

This tier is characterized by purchasing. Booked.to paraphrase Vince Lombardi “Savings isn’t everything.aberdeen. www. invoicing and settlement activity. this tier of savings is characterized by sourcing activity and negotiated pricing. the CFO feels that spend analysis is a real key to the underlying ability of procurement to achieve its objectives that then ultimately roll into the enterprise's main objectives. where savings potential is attainable. Implemented (or realized). The CFO and CPO should work together to develop an enterprise-wide set of savings definitions. it remains the yardstick by which most are measured . Astutely. enterprises begin to realize the potential of previously identified savings opportunities. and the budget holder • • © 2007 Aberdeen Group.com Telephone: 617 723 7890 Fax: 617 723 7897 . But Best-in-Class enterprises demonstrate that spend analysis can be leveraged to greatly improve business performance when the right technologies are matched with efficient processes. less than 10% of procurement departments do a great job managing (projecting. After the contract has been executed. and ensured by contract compliance and strong end-user adoption.Measure Twice. Once savings have been realized. Aberdeen recommends applying these standards to the three tiers of savings: • Identified. Save More While procurement departments can deliver much more than savings. Beyond simple identification of a savings opportunity. and tracking) its savings measurements The current gap between the high importance of savings measures and their accuracy must be closed.The CFO's View of Procurement Page 11 Best-in-Class Strategies The degree of technology utilization and automation play significant roles in the advantages that Best-in-Class organizations enjoy. procedures to calculate savings. it’s the only thing. implementing. This tier is characterized by close involvement with finance. and standard timelines for savings reporting. they can be recognized or booked in operating budgets and other enterprise-level financial statements.” Despite this importance: • • • 34% of enterprises have no formal process to measure the savings generated by procurement Another 36% calculate these measures on a case-by-case instance In the CFO’s eyes. receiving. Aberdeen Insight . procurement.

leading finance departments cannot reasonably stake a claim to their own operational excellence if they leave an important function like procurement to its own devices in the achievement of its main objectives. The real benefit to the report however. www. (3) knowledge management (the CFO's view of procurement's knowledge management)." ~ CFO.5 billion. "We are a metricsdriven company. so I track sourcing volume against budgeted spend. Assuming a conservative 15 price-to-earnings (P/E) ratio would mean that this team has improved the market capitalization of the company by more than $1. (2) organization (the level of collaboration between procurement and finance). Industry Average. I believe that if all of our major contracts are being negotiated by our best people. (4) technology (the level of procurement automation and the usage of corporate performance management solutions).com Telephone: 617 723 7890 Fax: 617 723 7897 . Case Study . provides great detail. In addition to having common performance levels." The level of trust between the two was not an accident as this was the third company where the CPO and CFO worked together in similar roles. Likewise. "I also get a quarterly savings report that tracks the status of the implementation and final results. and correlate directly with Best-in-Class performance across the key metrics. The company would not share annual sourcing activity or final results other than to say the aggregate impact on the net income of the company is over $100 million. Fast Facts √ Best-in-Class enterprises book 24% more of procurement's projected savings Best-in-Class enterprises are 25% more likely to have a formal methodology to measure procurement savings Best-in-Class enterprises are five-times more likely to remove procurement savings from budgets √ √ Competitive Assessment The aggregated performance of surveyed companies determined whether they ranked as Best-in-Class. and (5) performance management (the percent of procurement savings that are booked and impact the bottom line)." the CFO told us.The CFO's View of Procurement Page 12 Chapter Two: Benchmarking Requirements for Success Benefits from operational excellence within the procurement function are constrained without a strong partner in finance to validate and help bring the fruits of their labor to bear. or Laggard. "My weekly sourcing report is a single page yet. Dow Jones Industrial Component © 2007 Aberdeen Group.aberdeen. is the fact that the entire company knows I am tracking this activity and fully supporting my CPO. each class also shared characteristics in five key categories: (1) process (the ability to track procurement savings rates in a standardized way across the enterprise). good things will happen.The Value of Activity Reports The CFO of a Dow Component receives a weekly report that tracks all esourcing activity from the procurement department. These characteristics (identified in Table 3) serve as a guideline for best practices.

November 2007 Capabilities and Enablers Enterprises that place more spend under management typically experience a host of other advantages as it relates to cost savings. and Best-in-Class Performer Excellent / good process efficiency and standardization Process Superior process innovation aptitude Superior negotiation and contracting skills Organization Dedicated finance resource assigned to procurement Superior general business acumen Superior supply market knowledge 63% Strong technology acumen 34% 61% spend analysis 57% eprocurement 57% CPM for procurement 54% supplier performance measurement 76% 17% Procurement related solutions currently in use: Knowledge Technology Use formal methodology to calculate procurement savings Performance High accuracy of savings projections. Financial Services Industry.com Telephone: 617 723 7890 Fax: 617 723 7897 . and the ability of procurement departments to deliver greater strategic value across the enterprise. This has been a great lever to engage more stakeholders.The CFO's View of Procurement Page 13 Table 3: The Competitive Framework through the CFO's Eyes Best-in-Class 60% 30% 70% 7% 53% Average 38% 15% 45% 6% 33% 34% 19% 52% spend analysis 38% eprocurement 20% CPM for procurement 36% supplier performance measurement 71% 13% Laggards 36% 15% 29% 6% 38% 29% 14% 43% spend analysis 38% eprocurement 29% CPM for procurement 35% supplier performance measurement 48% 0% "I bring two reports to our quarterly executive meetings. Some of those advantages include: © 2007 Aberdeen Group. process efficiency. budgeting. www. The second is a spend report (again sorted by business unit and by function) that shows what my group is currently managing and what my group is not managing." ~ CPO and VP of Print Services.aberdeen. and tracking Source: Aberdeen Group. The first is a year-to-date report of implemented savings sorted by business unit and by function.

Until more recently. Organization While the Best-in-Class fare no better in garnering dedicated finance department support. While changes in demand factor into the equation. These solutions enable procurement to drive the identification of critical savings opportunities and empower them to deliver on these cost savings targets through key sourcing decisions and the enhanced ability to monitor compliance based on increased visibility into enterprise spend. Their effectiveness on baseline processes also serves as the foundation to build upon and innovate. Certainly procurement solutions capture key elements of performance and efficiency but these often don't travel the last leg of the journey and avoid looking at the budgetary impact of savings.aberdeen. www. Many CPOs prefer to recruit their staff from other. yet this type of application has significant traction with the Best-in-Class who have adopted them on more than two-times the basis.com Telephone: 617 723 7890 Fax: 617 723 7897 . the controllable part of this leakage is caused by a failure to: • • • Capture the negotiated bid terms into the final contract Fully implement the category with the stakeholders Actively manage contract compliance Knowledge Management According to the November 2006 CPO’s Strategic Agenda. © 2007 Aberdeen Group. These leaders understand the benefits of process rigor and how it can serve to optimize overall performance. CPM solutions for procurement were non-existent. they absolutely shine when it comes to their core skill sets in supplier negotiation and contract management as 70% are noted for their superiority in these areas. It stands to reason that the leading organizations have skilled procurement professionals who have a deep understanding of the supply markets (63%) they manage. and retaining their best people above other objectives. Technology Best-in-Class enterprises have armed their procurement departments with spend analysis solutions at a higher rate than their peers (61%). These professionals also bring superior business (53%) and technical skills (34%) to the table. These skills are crucial. non-procurement or supply chain-related posts. Additionally e-procurement applications are one of the most effective ways to engage the enterprise end-user and place more spend under management as a majority of the Best-in-Class understand (57%). training. Best-in-Class CPOs focus their efforts on hiring. Best-in-Class are twice as likely to possess an aptitude for process innovation.The CFO's View of Procurement Page 14 Process The Best-in-Class are focused on developing efficient processes that are standardized across the enterprise.

and avoidance. both leaders have much to gain in achieving this and by also developing a standard set of goals and objectives. the CFO and CPO should work to develop a compensation plan that focuses each department or group on the set of agreed upon goals and objectives.Pay for the Right Performance CFOs and CPOs have a great opportunity to transform their working relationship from infrequent and tactical to proactive and strategic.com Telephone: 617 723 7890 Fax: 617 723 7897 . the alignment of their processes with their technology and their general prioritization of this measure allow them to excel. delivery. reductions.) Contract compliance Requisition. service. Table 4: Top 10 Procurement KPIs KPI Negotiated cost reduction savings Implemented / realized cost reduction savings Percentage of total spend under management Cost avoidance Procurement ROI (savings / operating costs) Percentage of suppliers = 80% of spend Supplier performance (price.aberdeen.The CFO's View of Procurement Page 15 Performance Management What gets measured gets done and in the often confusing world of cost savings. November 2007 Aberdeen Insight . and the focus that each member of the group takes. etc. But how their staff members engage. a new level of focus and accountability should translate into performance against the right metrics. survey-based) Source: Aberdeen Group. having clearly defined metrics (that are standardized across the larger enterprise) is critical to procurement execution. For the procurement team. Procurement savings only impact the bottom line of the enterprise when they are booked and budgets are changed. www. © 2007 Aberdeen Group. PO. Fortunately. quality. While the superior negotiating skills possessed by the Best-in-Class may play some role in their ability to book a significantly higher percentage of identified savings. A list of the top ten KPIs used by procurement is included in Table 4. or invoice transaction volume Subjective feedback (structured. To ensure proper alignment between the two departments. will continue to reflect their individual compensation plans.

This is not the intended consequence. Help your CPO make an impact and show your support by assigning resources to support their operations. Keynote Address 2007 CPO Summit © 2007 Aberdeen Group. Procurement does not need to provide everything it does in strict enterprise-level financial terms. Whether a company is trying to move its performance from Laggard to Industry Average. or Industry Average to Best-in-Class. Credit and reward procurement for cost reductions that are retained by the business. The clearest driver of employee behavior is compensation. Aligning the two groups performance goals will go a long way towards driving engagement and dialogue and develop a clear mechanism to assign accountability. They share many similar goals and face many similar challenges. which must still prove the savings through the clearly defined “language. Align departmental performance objectives and bonus plans.’ If the business wants to take their savings and use it to grow the business. Enterprise budgets are the responsibility of the business and of finance. to do so would be an exercise in futility. This does not provide a blank check to procurement. √ • CFO Steps to Success • Assign dedicated resources to support the procurement department. A CPO’s involvement in budgetary impact discussions can place them in potential conflict with their internal customer. Procurement’s job is to deliver the highest value supplier for a specific requirement. Together the two groups should work together to develop common “language” with a set of metrics with standard definitions (and methodologies for calculation) and promote them across the enterprise. www.” ~ CPO. Procurement does need to help the CFO and the larger finance department understand how its goals and objectives map to the broader enterprise objectives. be aligned and coordinated. Change the view that the only value that procurement can deliver is through an impact to budgets. We focus on price over price savings.The CFO's View of Procurement Page 16 Chapter Three: Required Actions Finance and procurement are natural allies in the battle for bottom-line growth. the following actions will help spur the necessary performance improvements: Recommendations √ Challenge the enterprise view that procurement should be measured on booked savings The CPO and CFO should develop a common language that is part finance and part procurement that includes clear and quantifiable metrics Align finance and procurement performance objectives and metrics √ CPO and CFO Joint Steps to Success • Develop a common “language” with clearly defined metrics.com Telephone: 617 723 7890 Fax: 617 723 7897 .aberdeen. We tell the business ‘here’s the savings.” • "Our job is just to deliver the savings. Best-in-Class procurement departments are more than three-times as likely to significantly impact the overall competitiveness of the enterprise than their peers. We let finance decide how to track it down and measure it. that’s their call. not set or reallocate budgets. The line of business should view procurement as a vital resource to help them achieve its objectives. their efforts should therefore.

CPO Steps to Success • Trust starts with visibility and dialogue and ends with accountability. but rather. as an example. Engage Your Partners The Procurement IT group of a global chemical manufacturer spent 15 months building a savings tracking tool for its procurement organization to track the benefits of their sourcing efforts. Focus on the total cost of ownership. This will be increasingly important as the impact of global sourcing can drive lower part. Case Study . set regular meetings while ensuring that the dialogue is valuable to both parties. the system and process was determined to be 'seriously flawed' . Challenge the current view that it is procurement’s responsibility to negotiate budget reductions with the line of business.the system was turned off the next quarter. or material costs but can be associated with greater shipping and holding costs. if booked savings are the main goal of the enterprise. but after a four week audit by finance. the organization changed each commodity manager's comp plans to include their performance as tracked in the tool. component. Bonuses skyrocketed initially. it should not fall to procurement to establish how this very real benefit should be allocated across the enterprise. The global rollout included a formal training plan and over the first 12 months. Engage your CFO directly and often. Year-over-year cost reductions lose some of their glimmer and significance if the total cost of a new contract is not incorporated in the overall analysis. www. The implementation was led by a cross-functional team that included two finance members and a senior sponsor from each major line of business.aberdeen. Demand accountability from your CFO and require it from your staff. Procurement failed to engage finance in the development of the system or in the validation of the savings numbers (which were input directly by the commodity managers).com Telephone: 617 723 7890 Fax: 617 723 7897 . to the line of business and / or finance. Validate cost reductions that the procurement department delivers but remove procurement from budgetary discussions with the business. • • © 2007 Aberdeen Group. establish the dialogue with the business stakeholders. Epilogue: A budget for a spend analysis tool that enabled robust reporting across the source-to-settle process was approved the following year.If You Build It. Procurement should not be responsible for booked savings. Once savings have been achieved.The CFO's View of Procurement Page 17 • Engage the line of business directly for budgetary reductions.

target markets.. partner interfaces. go-to-market. Their sponsorship has made it possible for Aberdeen Group to make these findings available to readers at no charge. and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e. brand. Study Focus Responding finance executives completed an online survey that included questions designed to determine how the CFO (and other finance executives) view their procurement organization including its: √ √ √ √ √ √ √ People Process Technology Performance Strengths Weaknesses Opportunities to improve • Solution providers recognized as sponsors of this report were solicited after the fact and had no substantive influence on the direction of this report. and Asia-Pacific (14%). and a broad distribution across 31other industries.g.g. changing customer preferences. These terms are defined as follows: Pressures — external forces that impact an organization’s market position. political and regulatory.g. competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e. training and support. user interface. Aberdeen applies a methodology to benchmark research that evaluates the business pressures.The CFO's View of Procurement Page 18 Appendix A: Research Methodology Between October and November 2007. development platform. network connectivity. Remaining respondents were from the EMEA (20%). Responding enterprises included the following: • • • Job title / function: All of the survey respondents work in the finance organization of their enterprise. skilled people. and the intentions of more than 170 finance executives across a wide range of industries. www. and enablers (PACE) that indicate corporate behavior in specific business processes. data cleansing. economic. viable products / services.g. Aberdeen supplemented this online survey effort with telephone and online interviews with select survey respondents. 42% were from midsize enterprises (annual revenues between $50 million and $1 billion). or business operations (e. such as product / service strategy.. market positioning. Aberdeen examined the use. Industry: High technology (17%). competitiveness.. capabilities. and 34% of respondents were from small businesses (annual revenues of $50 million or less). applications.com Telephone: 617 723 7890 Fax: 617 723 7897 . financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e. ecosystem partners. November 2007 © 2007 Aberdeen Group. gathering additional information on the view that the CFO and finance have of procurement.. technology.aberdeen. align the corporate business model to leverage industry opportunities. Company size: Twenty-four percent (24%) of respondents were from large enterprises (annual revenues above US $1 billion). actions. and management) Source: Aberdeen Group. financial strategy. Table 5: The PACE Framework Key Overview The study aims to identify best practices for the working relationship between the CFO and CPO and provide a framework by which readers may assess their own management capabilities. the experiences. Geography: The majority of respondents (66%) were from North America. financial services (14%).

and result in average industry performance. and result in the top industry performance. Industry Average (50%) — Practices that represent the average or norm. In the following categories: Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization — How is your company currently organized to manage and optimize this particular process? Knowledge — What visibility do you have into key data and intelligence required to manage this process? Technology — What level of automation have you used to support this process? How is this automation integrated and aligned? Performance — What do you measure? How frequently? What’s your actual performance? Source: Aberdeen Group.The CFO's View of Procurement Page 19 Table 6: The Competitive Framework Key Overview The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) — Practices that are the best currently being employed and are significantly superior to the Industry Average. November 2007 Table 7: The Relationship Between PACE and the Competitive Framework PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most impactful pressures and take the most transformational and effective actions are most likely to achieve superior performance. and result in below average performance. www. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions. November 2007 © 2007 Aberdeen Group.com Telephone: 617 723 7890 Fax: 617 723 7897 . Source: Aberdeen Group. Laggards (30%) — Practices that are significantly behind the average of the industry.aberdeen.

and may not be reproduced. August 2006 Source to Settle: Compliance Clues for the CFO. Unless otherwise noted. Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. September 2005 Information on these and any other Aberdeen publications can be found at http://www. Inc. Inc. the entire contents of this publication are copyrighted by Aberdeen Group.aberdeen.The CFO's View of Procurement Page 20 Appendix B: Related Aberdeen Research Related Aberdeen research that forms a companion or reference to this report include: • • • • • • • • Spend Analysis Benchmark. www. Through its continued fact-based research. tools. September 2007 Direct Materials Sourcing: Living in a Material World. For additional information.bartolini@aberdeen. November 2006 The E-Procurement Benchmark Report. Aberdeen Group has 400.asp. Global Supply Management Research (andrew.com/channel/procs.xml Author: Andrew Bartolini.com) Founded in 1988. or transmitted in any form or by any means without prior written consent by Aberdeen Group. Aberdeen Group's methodologies provides for objective fact based research and represent the best analysis available at the time of publication. Aberdeen Group is the technology. Managing Spend.driven research destination of choice for the global business executive. and services. or to learn more about Harte-Hanks. As a Harte-Hanks Company. distributed. and actionable analysis.aberdeen. Aberdeen’s 2008 Global Supply Management Research Agenda is also available.000 research members in over 36 countries around the world that both participate in and direct the most comprehensive technology-driven value chain research in the market. Subscribe to the Global Supply Management RSS FEED at: http://www.com/2-0/rss/procurement. October 2006 CFO's View: Getting More to the Bottom Line. KPIs. May 2007 The CPO’s Strategic Agenda: Managing People. benchmarking. Aberdeen's analytical and independent view of the "customer optimization" process of HarteHanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. call (800) 456-9748 or go to http://www. Vice President. Aberdeen Group offers global business and technology executives a unique mix of actionable research. January 2007 E-Payables Solution Selection Report. visit Aberdeen http://www.aberdeen. August 2007 The Advanced Sourcing and Negotiation Benchmark Report: The Art and Science of the Deal.harte-hanks. archived.com or call (617) 723-7890.com Telephone: 617 723 7890 Fax: 617 723 7897 . This document is the result of primary research performed by Aberdeen Group.com © 2007 Aberdeen Group.aberdeen.