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Procurement: what it is and why it matters


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Procurement: what it is and why it matters

Kurtis Hanni headshot
Kurtis Hanni headshot

Kurtis Hanni

Kurtis Hanni is a CFO, consultant, and podcast host who writes about business finance for his newsletter “Frameworks & Finance,” which helps more than 25,000 people understand their financial statements and make strategic decisions that drive business forward.

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Kurtis Hanni headshot
Kurtis Hanni headshot

Kurtis Hanni

CFO

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Kurtis Hanni is a CFO, consultant, and podcast host who writes about business finance for his newsletter “Frameworks & Finance,” which helps more than 25,000 people understand their financial statements and make strategic decisions that drive business forward.

Smart, scalable procurement processes

I started my career in a very big private company. When I walked in, I was told:

The process to get things approved
Who could approve them

So, when I started at a smaller business that had none of these processes, I was lost. You tell me I’m supposed to ask the CEO about everything? I knew this had to change.

So here I was, 3 years out of college, in a small business with no other accountants. How do I set up an approval process? What is procurement? Why are these words so big?

I learned quickly and figured it out. I built the processes from the ground up, got approval from the CEO, and then implemented them among (what was eventually) 1,000+ employees.

When CEOs and leaders tell me they hate their approval processes, I get it. But the alternative? Confusion, bottlenecks, and inconsistent application of rules. So, while “procurement” may seem like a bad word, there is power in this bad word. Today, we’re going to define it and address 4 main problems with procurement in new and old businesses alike.

Let’s dig in.

Performance

Performance criteria are the high-level business operations things we look at. We’re not looking at the cool things the software does, but instead we’re looking to make sure it meets our minimum criteria.

If the software isn’t usable, scalable, priced right, easy to implement, or integrate, it can be pretty much useless.

Software companies like to sell on features, but without the right performance, the features don’t matter.

For each of these criteria, you can rank the tools on a scale, for instance from 1-5, with 5 being the best. The rankings can then be added up to give a total score for each tool.

This can help you see at a glance which tool might be the best fit for their needs.

However, you might want to weight some of the performance criteria higher. You can adjust your scoring scale so that each criteria has different “best” numbers.

It might be that you value automation, care a little about scalability, and don’t care at all about implementation. So, you could make automation on a scale 1-8, scalability 1-5, and implementation 1-3.

The great thing is it’s your preference, so there is no wrong way to do it other than not doing it at all.

Now let’s talk about the performance criteria.

What is procurement?

You may hear the term procurement and think, what does this have to do with me? Well, please stay locked in and I’ll explain.

As a business leader, you start by making all the purchases. Then one day you give the power to buy things to someone else, then someone else, then someone else. As your company grows, everyone either goes to these appointed people to buy their stuff or buys it themselves and requests reimbursement.

Without you knowing it, by authorizing more people to buy things, you’ve set up “procurement” in your business. Procurement is the process of sourcing and/or acquiring goods or services for your business. By appointing someone else to do something (or even only allowing yourself to have that power), you’ve already created a process.

But process does not mean it’s good. Employees can go to multiple employees for the same things, meaning you spend double what you need or have confusion on what’s “right.” Confusion reigns!

By setting up a procurement process, you add formality and clarity for your employees. An effective procurement process can significantly impact cost, quality, and operational effectiveness.

While the web has made this process easier, it has also expanded options, which makes it more daunting. This means more and more businesses are paying for procurement software, as Brex reports 43% of their mid-market customers are.

Before we dive into the problems you’ll run into, I want to address 2 types of procurement: direct vs. indirect. Direct procurement is the acquisition of materials or goods to be incorporated into your product. This is not what we’re addressing. Indirect procurement is the acquisition of goods or services necessary for non-product/service-related needs. This could be office supplies, service agreements, and software, just to name a few.

It’s assumed that direct procurement is core and already solved for, though it’s possible that’s not a good assumption for some. But since indirect is more widely applicable and problematic, we’re going to address the major problems people have with it and how to solve those problems.

Listen: A strategic procurement function actually enables smarter spend, says Redis CAO Angelina Hendraka

Biggest problems

Too many involved/unclear parties

Ever been in an organization where Joe was doing one thing and Aaron another? Or one where EVERYONE gets invited to all the meetings? I think everyone has.

This creates a lack of clarity on who’s responsible for what and where the actual approval lies. What happens is people run their own fiefdoms, then the front-line workers have to deal with the mess. Lack of clarity not only causes stress, but it causes inconsistent decisions.

Solution: Clear processes

By creating clear processes, you reduce the lack of clarity and frustration people feel with that. A clear process will:

1. Provide a clear approval route
2. Utilize software to automate processes
3. Ensure backup is always attached

With software, this has become easier than it has ever been. Software like Brex allows for automated, multi-level approval flows that make it clear exactly who is in the loop, flag duplicate subscriptions (to make sure two people aren’t paying for the same thing), and ensures the right approvers see the right purchases. They also use AI-enabled tools to automate invoice entry and make the collection of receipts and backup easier, so that you never have to dig through papers and emails for a contract again.

Slow approvals

In some ways, clear processes help speed up approvals, but this issue is slightly different. A clear paper process will absolutely provide a clear route, but people will still lose paper and slow it down. When you add formality to the process, it can also unintentionally slow it down.

You also have the problem of people being out. When someone is on vacation, the request has to wait until they’re back.

Solution: Platforms to the rescue

This is where technology is like magic. But even the best tools poorly implemented don’t solve solo approvals. So, you have to assure you:

1. Create a culture of quick approvals

A culture of quick approvals is made up of two things: ease of use and an expectation of quick response. I’m not a huge fan of requiring immediate responses to inquiries, but with expenses, it’s essential to get full compliance.

Write into your policies an expectation of less than 24-hour response to expense requests, then create a culture that responds significantly quicker.

This cannot be achieved with paper, in most cases, so utilize software that helps make responses easy. Many will now send push notifications or emails that have one-click approval.

Brex, for example, has bill pay and purchase cards for both invoiced and non-invoiced spend, which means by setting the right parameters, you can control spending while avoiding the PO process (which can take time and slow down innovation).

2. Utilize backup approvers when employees gone

With paper, it’s rare that people assign a backup approver. But, technology makes this extremely easy. Most platforms I’ve seen now allow the assignment of other users in the flow. Set up this function before leaving and work can go on, even when you’re out of office.

The bonus? You can truly unplug and come back to a slightly emptier inbox.

3. Combine expense management, travel, and procurement when possible

A key to compliance? Making sure users don’t have to log-in 10 different places to get different parts of their job done.

This is where platforms like Brex come in handy. They combine expense, travel, and procurement on one platform, giving your employees one place to go — and giving you one source of truth over all spending, which improves management and staff confidence in using the platform.

Combined platforms likely save you money and are way easier to implement, which means compliance and full adoption are more likely.

Overpaying

Procuring any new software or solution can be frustrating, as it takes a lot of time and coordination. The result of this frustration? You settle for the wrong solution, don’t give it the attention it deserves, or settle for unfavorable terms.

Procurement processes help remove some uncertainty, but they still leave a lot to be desired. In the end, cost is one of the things most often ignored and “accepted” without negotiation.

Solution: Establish cost guidelines, negotiation & review the contract

1. Limit spend with platform controls. New, integrated platforms like Brex allow managers to create pre-approved spending budgets with exact per-transaction or per-vendor limits. This helps avoid overspending or overpayment and significantly decreases the compliance overhead cost. I’ve used this in my organizations to create single-use cards based on the approved budget. It has completely changed our workflow and lightened the load in Accounting!

2. Require a select number of bids. It has become pretty typical to implement this sort of requirement, but I wanted to mention it for those that don’t. It’s not until you really analyze solutions that you can truly know what you want or don’t want.

3. Establish a scoring system to identify the best value. We talked about this in June when talking about spend software, so I’ll point you to that article for a deep dive.

4. Have someone help negotiate the contract. Let’s be real: most of you stink at negotiations. I’ve seen too many blindly accept the quoted price without asking a single question. The reality is, in software, the scale of clients matter almost more than the price. An expert negotiator will negotiate the best terms and save you the most money.

Bringing in a skilled outside party helps you:

  • Save time

  • Preserve relationships

  • Get an expert to review the contract

Never looking back

We’ve already established the process is exhausting, so most just want to put it behind them. But by doing that, you miss out on the lessons you learned.

Solution: Spend analysis & after action reviews

By implementing a bidding and scoring system as mentioned above, you make the ideal decision at the time. But it’s still easy to not have the right information and it turns out the decision cost more than expected or was less than ideal.

To combat this, implement 2 procedures:

1. Do an annual spend analysis
2. Establish an After Action Review process

Too often the contract is signed, implementation is done, and people move on. But expectations versus reality should be looked at during implementation. This assures you don’t make the same mistakes twice. Establish milestones during the implementation and reflect back on your scoring and cost and ask:

1. What is the same as expected?
2. What is different than expected?
3. What would I do differently next time?

These simple questions will take minutes, but provide lessons you can implement the next time around. Then each year, during your annual budgeting process, do a spend analysis. You do this by looking at what you spent versus what you expected to spend.

Everyone should have a budget, of some sort, and this assures you compare budget to actuals. By doing this, you uncover the expenses you didn’t expect related to the contract.

This article originally appeared on Frameworks & Finance.

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