What we talk about when we talk about savings: Why procurement needs to learn to speak Finance
Trying to convince your finance department to invest in a new procurement platform? When putting together a business case for their team, procurement professionals might need to relearn the language of finance.
Irish playwright George Bernard Shaw famously referred to England and the United States as two countries separated by a common language. And his depiction could easily describe the relationship between the procurement department and the finance department of most big organizations. CPOs and CFOs both seem to speak the same language, but often the results are a miscommunication. It’s almost like the same words mean vastly different things. And guess what… they often do!
While the differences between British English and American English can lead to some amusing confusion in restaurants—what Americans call cookies are biscuits in England, and American biscuits to Brits are basically scones—the differences between CPO and CFO English can make it hard for procurement departments to show their value or make a business case for a new platform.
Take a simple term like “savings.” It’s a common word that procurement and finance use daily to describe benefits and value to the organization. But 90% of the friction that I see between procurement and finance has to do with this little word.
From a finance perspective, savings are all about the budget—the bottom line. If a department spends less than their budget, then that’s a saving. But from a procurement perspective, if the department saves money on a particular item and then spends that money on a different item, then that’s a saving—even if the total cost is over budget. If procurement helps find an item at a better price, then that’s a saving too. Perhaps IT was about to overspend their budget, and the procurement team helps them make the purchase on budget. Procurement would consider that a saving—even if the IT department then re-spends that money on another item. But for the finance department’s perspective, none of what procurement defines as a saving has hit the Profit and Loss (P&L). So it doesn’t count as a saving.
These misunderstandings can lead to real pain between the two departments. If procurement promises savings and (from finance’s perspective) doesn’t deliver. It can harm procurement’s credibility.
Procurement may justifiably point out that without their hard work, the organization would not have been able to afford extra items, but as far as the finance department is concerned, it doesn’t count as a saving.
Cost reduction is an important goal for procurement. It’s practically their reason for existence. So, it can be difficult not to put this high up as a benefit that the procurement department brings. But again, finance will not see cost reduction with the same lens as procurement, unless it hits the P&L.
There is obviously still value in procurement saving money through cost reduction, which the organization can then spend on something else. But finance will consider it a value add rather than pure savings.
Why is this important? Unless procurement can speak Financial Jargon—the language of their finance colleagues—they will be hard-pressed to explain their value. And when it comes time to presenting a business plan for a new procurement platform, more procurement staff or transforming the organization’s procurement processes, it will be difficult to prove the business case to the people who hold the purse strings.
When building a business case for a procurement project, the key is to understand how the finance team will consider the proposal. And that means communicating it in a way that they can comprehend—highlighting the benefits that will impress them the most.
It also means communicating with the correct person within finance. And that person might not immediately be obvious.
For instance, CPOs often make the mistake of dealing with the finance person who is directly responsible for the procurement department. On the surface this makes sense; who else to ask for the funding to roll out a new procurement platform than the person in finance who manages procurement’s budgets? But actually, the finance person who manages procurement is only interested in procurement’s budget, so they’re unlikely to be interested in the savings that a new procurement platform will make for other departments (like IT, sales or manufacturing).
Instead, CPOs would be better served going directly to the organization’s CFO. Better still, enlist the help of other department heads—the CIO, chief engineers, head of logistics, etc.—and explain to them the value and savings that a new procurement initiative can provide to their departments. Then communicate those savings and benefits to the CFO—in language they understand.
Talking the language of finance requires a subtle shift in perspective and constant translation of what you mean when you use certain terms. By using the right language and talking with the right people, CPOs can better communicate with their colleagues in the finance department and put together a business case for projects that will add value to the organization.
