2008 Post on Bridging the Communications Gap Between Finance and Purchasing is Now a Generational Reality

Note: The following post will be reprinted in the Corporate United Q4, 2010 “A Word From Our Partner” newsletter column

Back in 2008 when I first started to investigate the obvious communication gap between the financing and purchasing departments within organizations, there were telltale indicators that such a breakdown existed. The most ominous of which was the fact that the vast majority of savings claimed by purchasing such as cost avoidance, was discounted as being irrelevant with surprising alacrity by the company bean counters.

Largely the product of the artificially created silos of functionality these gaps, many experts proposed, could only be bridged by a shift in focused understanding on the part of procurement professionals which included what Robert Rudzki, president of Greybeard Advisors and co-author of Straight to the bottom line, identified as the five critical finance terms every purchaser should know:

1. ROIC (Return on Invested Capital): earnings divided by the total capital invested in the business (long term debt plus stockholder equity)

2. Cost of Capital: the weighted average “cost” of debt and equity. It represents what you must earn to, minimally, cover the expectations of your debt holders and stock holders

3. EVA (Economic Value Add): if ROIC is greater than Cost of Capital, then EVA is positive (you are adding value to the organization). If ROIC is less than Cost of Capital, then value is being destroyed and – absent substantial corrective action – the demise of the enterprise is just a matter of time

4. EPS (Earnings per Share): the net income divided by the # of common shares outstanding. Typically calculated on a quarterly and annual basis.

5. P/E Ratio: The ratio of the common stock price to the annual earnings per share. Companies/industries typically “enjoy” certain P/E ratios, therefore, increasing the E (earnings) often directly equates to a higher stock price.

The two “biggees,” says Rudzki, are ROIC and EPS. Those two concepts drive C-level because they are what Wall Street and bankers are interested in. ROIC and EPS are the ultimate “report card” of senior management.

While technically sound and quite relevant at the time, based on present day realities the above guideposts for effecting better internal communication between these two departments is somewhat outdated in terms of its scope or reach of significance.

Specifically, we are no longer looking at the now myopic breakdown in the singular communication channel between finance and purchasing, but instead multiple areas within the global enterprise including IT that are influenced by as many as four different generations simultaneously employed within the same company.

While there is to a certain extent those detractors who would question the true impact of a multi-generational workforce on a company’s ability to communicate and ultimately perform, one thing is for certain . . . it is a variable which complicates rather than clarifies the indigenous breakdowns to which Rudzki had originally referenced.

In fact, as newer generations of purchasing professionals who have actually chosen (versus falling into) their field of work, graduate from schools in which finance is now as much a part of the curriculum as are the all too familiar purchasing basics, the range of expertise becomes less of a question. This shift towards a more holistic enterprise awareness and knowledge means that the very nature or make-up of the aforementioned gaps have also changed to one of dissemination and practical application on a generational versus departmental basis.

The existence of generational divides is a subject about which I recently had the opportunity to talk with expert author Bill McAneny, whose first book “Frankenstein’s Manager: Leadership’s Missing Links” provided a look at some of the root causes of the communication gaps of old. During the October 26th, 2010 PI Window on Business segment “Generational Learning: What is the Impact on the Purchasing Profession?,” Bill shared numerous results from his latest research which directly impact our approach to procurement including contract negotiations.

Of particular interest in the area of contract negotiations was an adjunct Journal of Business and Economics research paper titled “Negotiating Styles Amongst American Purchasing Managers In The 21st Century: Revisited,” (a copy of which you can view through the PI SlideShare Viewer below).

Collectively, these additional elements dramatically change how we do business, especially as we enter into the complicated realms of the governance of global supply chains.

In the end, the core value associated with Rudzki’s determination that it is imperative for purchasing professionals to expand both their view and understanding of the role they play in their organization’s success, including how said contributions are quantified by other stakeholders, while still noteworthy as it pointed us in the right direction, no longer goes far enough. Today’s purchasing professional must comfortably embody many different attributes to establish and maintain meaningful relevance in a world that is no longer one dimensional.

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2 thoughts on “2008 Post on Bridging the Communications Gap Between Finance and Purchasing is Now a Generational Reality

  1. Jon, another stimulating blog … but I must take issue with the findings regarding contract negotiation. I perceive the problem you highlight regarding Procurement’s relationship with Finance permeating many of its other relationships, including those with suppliers. This can sometimes lead to delusional perceptions …. For example, we asked Procurement professionals whether one consequence of the recession had been closer cooperation with their suppliers. Well over 70% said yes. When we asked suppliers whether they perceived greater cooperation from their customers, less than 10% agreed.

    The article on Purchasing negotiation appears to reflect this self-image, rather than being accompanied by any objective view of actual behavior. It falls into the trap of seeing ‘collaboration’ as a unilateral process. Most bullies se their behavior as reasonable; their victims would generally see things differently.

    Also, the debate fails to consider the fact that the vast majority of negotiations today are virtual, often driven by electronic tools and systems. Once more, the article betrays its detachment from the real world when it talks about negotiating parties meeting ‘at the table’ etc. Remote negotiation creates real divides and stresses, irrespective of the generation conducting the negotiation. The evidence suggests that such remoteness (driven by cost cutting and travel restrictions) enables far more aggressive behavior and of course undermines the principles of trust and openness that are fundamental to ‘collaborative’ relationships.

    I wrote about these issues following a meeting last week with around 120 sales executives, where several Procurement leaders presented. One or two of those Procurement heads were brutally honest – for example, the head of procurement at Aer Lingus told them ‘you are all commodity suppliers’ and warned them that ‘collaboration’ is not part of the Procurement agenda. Those words certainly reflected the day-to-day experiences of those in the room.

    I think we do a disservice to our colleagues in Procurement if we perpetuate the myth that currrent negotiating behaviors (internal and external) are seen by others as ‘collaborative’. One key reason for this is the continued focus on PPV as the basis for measuring ‘success’. And who is it that most commonly prevents Procurement from escaping this narrow trap? Why, it is of course the CFO ….!

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    • Once again Tim, you bring an enlightened perspective to the table that in many instances is still beyond the conceptual grasp of those in our profession.

      Sadly, and as reflected in the disconnected results where 70% of those asked on the buying side of the equation believe that they have fostered closer relationships with their suppliers, while a paltry 10% of suppliers actually agreed, means that the true lessons for collaborating still have to be learned within the buying enterprise itself.

      What I believe is that Rudzki laid the foundations for stimulating buyers to look beyond their own area of practice to realize that they are part of a bigger internal picture. This requires commitment and in its own unique way a change management mindset that can be more challenging for established buying professionals versus those who are emerging from the present day school ranks.

      Unfortunately, many organizations have and still do attempt to bridge (and bypass) this gap through technological implementation versus skill development. While we are in the midst of what one could call a new era in terms of intuitive technologies based on the non-consultancy SaaS model that can on a more cost efficient basis assist with the collaborative exercise, these absent skills sets still need to be acquired and incorporated into the procurement process first internally, and then extended to include external relationships with suppliers.

      Until this is acted upon, I fear that this disconnect between buyer and supplier (re the 70/10 perception split) will continue to persist.

      In short, you are right on the money with what you are saying, it is the existing mindsets that need to catch-up . . . hence the article hopefully serves as a needed starting point.

      Like

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