Spend Matters welcomes this guest post from Rich Ham, the CEO of Fine Tune, which helps businesses manage of expenses.
Procurement, operations and accounting are three disparate parts of organizations that are simply not equipped to efficiently share information and work together so that individual expenses are optimally managed. This fundamental disconnect between them is costing millions and impacting the growth of companies everywhere.
Procurement: Not Even Half the Battle
As we know, procurement departments are responsible for negotiation and contracting for goods and services. This process, while valuable at a high level (e.g., better contracts, rates, terms, etc.), does not ensure optimal expense levels by any means. If your focus is truly on the size of the payments you’re making to your vendors, you know there’s vastly more involved in true expense management than the numbers and words in an agreement.
While any good procurement professional is injecting a host of protections into their business’ contractual relationships, the reality is that once a contract is implemented, the procurement professional who just negotiated that deal is typically moving on to their next project.
Procurement likely has minimal involvement with the implementation of the new contract — if any — and almost none whatsoever with respect to managing the ongoing interactions with the vendor, and/or approving and paying the invoices as they arrive. Even if procurement goes above and beyond and puts the organization in the best possible position from a contractual standpoint, implementation errors, toxic vendor practices, billing/invoicing errors and general mismanagement of the expense on an ongoing basis all conspire to erode procurement’s best efforts.
Operations: A Mile Wide and An Inch Deep
Operations departments are typically responsible for people, processes, facilities, equipment, inventory, warehousing and information systems — everything that is required to operate a business. Management of budgets and expenses is certainly part of the equation. When you distill expense management a step further to management of specific expense categories, that is the point at which things start to break down.
Most organizations are ill-equipped to optimally manage the vast majority of expenses, and as a result, vendors enjoying out-sized margins is commonplace. When it comes to more complex services, most companies are completely defenseless. Here are a few of the challenges: lack of specific expertise, mismanagement of expenses from the general workforce, billing errors, and fraudulent or unethical activity by vendors motivated to grow their revenues while not necessarily having the best interests of the customer in mind.
Most operators are stretched thin, have a wide variety of concerns, and just don’t have the time, specific knowledge or expertise to optimally manage most expenses. Further, even the best expense management efforts are eroded by organizational disconnect — operations have inherited a contract from procurement and don’t pay the invoices when they arrive. In other words, operators live the deal, but they didn’t negotiate it and they don’t review and approve the payments for it.
Accounting: Speeding Along but Flying Blind
Most organizations are dealing with mountains of invoices to parse and process.
These processes are typically marshalled by employees far removed from the services for which they are making payment and have almost no visibility into the contractual terms and nuances governing vendor relationships.
Best-in-class organizations have systems and/or technology in place for review and processing of invoices — but these well-intended processes are fraught with issues. These solutions are primarily technology overlaying the same disconnected organizational pieces. This may produce faster processing of invoices and lower accounts payable processing costs — but, critically — almost no gains in expense analysis or management.
When the time comes to pay an invoice, the person who negotiated and signed the agreement isn’t in the conversation, and operations professionals with oversight over the expense are busy, aren’t reviewing the contract, and typically don’t know all the details.
Invoice “analysis” devolves into something to the effect of: “Yeah, I have no idea what any of these numbers mean but I recognize Vendor X as one of our vendors and it’s within my Purchase Order parameters — approved.”
How to Solve Organizational Disconnect & Save Money
To recap: We have procurement professionals positioned at the “front end” of negotiation and execution of a contract for a business service. We have operations inheriting the expense while being spread thin and responsible for a multitude of critical functions. Finally, we have accounting in a race to process and pay invoices just to keep pace — with little visibility into the accuracy of the invoice.
But today’s businesses can better align these three key functions to improve the bottom line and pave the way for incremental corporate growth. Here’s how:
- Based on your resources, make a realistic assessment of which expenses your business can and cannot truly, effectively manage. In these areas, make certain that your procurement, operations and accounting mechanisms are prepared to communicate, on an ongoing basis, to whatever extent is required by these high-priority expenses. Ideally, the expenses on this list are high dollar, mission-critical and well understood by your people.
- Get strategies in place for all other expenses, and make sure those strategies don’t detract from the mission-critical areas you identified in (1) above. Doing nothing for certain expenses because you’re “focusing on bigger priorities” is not a strategy. It’s a guarantee that you’ll overspend, and when inevitable distractions arise in these areas, your precious resources will be pulled away from their main priorities, compounding the issue.
- Engage experts to the greatest extent possible. The B2B consulting world has evolved to offer businesses niche firms staffed by experts in a host of secondary and tertiary expense categories. These firms and their experts can be driving value in secondary and tertiary categories while your resources are focused on more impactful projects. Find good firms to partner with, and you’ll find that you’ve implemented great solutions where your alternative was no strategy whatsoever.
- Make sure there is a healthy alignment of interests between you and your expense management partner(s). As you evaluate a relationship in this arena, ask yourself: “If I have a bad month, will they have a bad month too?” The answer must be yes. Full transparency of the compensation model and comfort that your expense management partners truly have the same goals as your organization are critical elements to allow you to check out and focus on your mission-critical priorities.