Poor visibility of key financial information is undermining confidence among supply chain decision makers in their company performance, and that’s ultimately leaving doubts about profitability, according to a new study from Basware Inc. Constrained by this limited visibility, businesses are struggling to make informed decisions and effectively forecast and manage costs.
The study is based on insights gained from 550 CFOs and finance executives, and was prepared in collaboration with professors Steve Jones and Mark Frohlich from the Indiana University Kelley School of Business, and Markus Maedler and Adrian Done of Barcelona’s IESE Business School.
“Last year’s survey uncovered a lack of collaboration between finance and procurement departments, each working separately toward shared business goals,” says Ari Salonen, general manager, North America, Basware. “In this year’s research, even though respondents acknowledge that their degree of collaboration is low, they realize the importance of collaboration; there is a clear correlation between successful collaboration and confidence in company performance. Financial executives also recognize the challenge of collaboration, which explains the trend toward an increase in integration and automation of purchase-to-pay systems and processes – a trend that looks set to continue amid a search for greater profits in uncertain market conditions.”
According to the new study, just 50% of respondents have a high level of confidence in the performance of their departments and only 44% maintain this level of confidence when considering the company’s performance overall. Confidence in the regional economy drops to just 19%, and to 9% for the world economy.
Successful collaboration between finance and procurement is most strongly linked to confidence in company performance, although 40% believe the relationship between finance and procurement could be improved. By working together, these often isolated departments can share responsibility for both cost and risk reduction when it comes to reducing expenditures, cutting transaction costs, mitigating potential liabilities and identifying ways to improve the bottom line.
According to Steve Jones, associate professor of finance at Indiana University Kelley School of Business, there is a growing realization that “once the low-hanging fruit is gone, further efficiencies and risk mitigation require collaboration between finance and procurement so they work toward common objectives utilizing more integrated and automated systems. Levels of automation are still relatively low with fully automated/tightly integrated systems still only in place in fewer than one in six departments, and the majority are still reliant on manual processes.”
In April 2009, 64% of CFOs claimed that raw cost-cutting was top of their list of priorities over the next 12 months, but this year that focus seems to have fallen (to 59%). In its place, CFOs cite more strategic goals of improved profit margins and increased top-line performance (58% and 51%, up from 39% and 37%, respectively in 2009).
Possibly reassured by the sharp cost-cutting efforts over the last 12 months, finance professionals are more likely to consider that procurement has a positive effect on profitability (48%) than in 2009 (29%). Finance also is becoming more aware of procurement’s impact on risk. A more vigilant 39% of respondents cite procurement as a financial risk exposure, up from a more insulated 28% last year. These findings indicate that lessons have been learned in the last 12 months, probably as finance departments were rocked by unpredicted turbulence within supply chains.
Automating purchase-to-pay processes from requisitioning to invoice handling and approval is gaining traction globally, with 72% of companies either implementing or planning more invoicing automation in the next 12 months, and with 65% having or planning for more purchasing automation.
“In the U.S., CFOs indicate a relatively high degree of confidence in company performance and the finance function, with progress having been made in terms of collaboration between the finance and procurement functions,” says Jones. “More so than in most other countries, these U.S. CFOs view systems integration as a significant challenge and a priority for improvement.”
To help tackle the challenges identified in the study, Basware recommends a four-step plan:
1. Visibility: It is vital that all organizations have 100% visibility of spend – both direct (such as raw materials) and indirect (such as services) – across the business. Only once it has a single, unified view can a business make strategic financial decisions.
2. Cost Management: Managing cost was the most cited driver of confidence in company profitability. The research identified a small increase in the amount of indirect spending captured in procurement systems; however, it is still less than 50%. Businesses should ensure that the right controls are established regarding who spends money and what they can buy, to improve business processes and capital management.
3. Efficiency: Efficiencies are already being found through integration and automation of systems, both of which were up over last year. However, companies enjoying the benefits of full finance and procurement automation are still in the minority. The clear correlations of efficiency with confidence in performance indicate that automation brings reassuring rewards.
4. Collaboration: Collaboration is the key driver of confidence in company performance. Only by working truly strategically and driving common objectives aligned to business goals, can finance and procurement make the decisions that will benefit the business as a whole.