sievo.

com

© Sievo 2018
Book design by Merkitys / Safa Hovinen
Illustrations by Tuomas Kärkkäinen
 Contents
4 Foreword

9 Introduction

11 The Challenge

15 Understanding Procurement Value

to Business

21 Proving Procurement Contribution

to Finance

47 Predicting Future Profitability Together

58 Ingredients of an Everlasting Love

64 Conclusion

67 About Sievo
Foreword
The role of supply chain and procurement
organizations has changed significantly over the
past decade and we have been tasked with more
responsibility within the overall value chain.

In today’s businesses, the relationship between

operations, finance and procurement is more
complex and more important than it has ever been,
hence flawless cross functional collaboration is
the key to global organizations. While it is widely
recognized that procurement is an efficient lever to
increased profitability, we now see many examples

4
of procurement being used as an additional lever
when driving organizational transformation.

Leading global supply chains require clearly

defined strategies and dynamic leadership to
deliver tangible results while supporting the
customer value proposition. Gone are the days of
reactive procurement organization focused only on
cost savings. Now it is expected for procurement
to deliver the results of today, while contributing
actively to the company strategy of tomorrow.

When operating in a high-paced interconnected

global marketplace, there is no time for arguing.
We all need to adapt to the ever-changing needs of
our customers; ensuring continuous improvement
in their satisfaction level while creating increased
value to our shareholders.

For procurement to win over the hearts and minds

of the CEO and CFO, it needs to build trust and
create transparency. Trust is built by delivering
tangible and financially recognized results on the

5
bottom line. Transparency is enabled by data-driven
activities using the finance language and metrics to
demonstrate the factual procurement impact.

The future procurement vision has to be bold,

simple and should have ambitious goals. Obviously
procurement entails to operate more fact-based
than today, but most importantly, it needs to
deliver on the bottom line promise. This means
procurement requires more precision when
isolating the real drivers of performance and has to
be more concrete about the measurement of value.
In order to drive this change, procurement must
adapt and align with the targets set by finance and
shared by the wider organization.

In ISS, we have since 2013 gone through the global

procurement transformation journey to deliver
more transparency and proven value. To succeed in
our goal, we set out hard and tough targets based
on facts and real data.

6
Driving the transformation has required strong
senior executive governance combined with
solid engagement from stakeholders across the
business functions. Our journey since day one has
been based on measurable business results and
throughout, finance has become a close ally. By
aligning our goals with the financial goals of our
company, we have not only proved procurement
contribution on the bottom line, but we have
also built trusting relationships with our finance
community. Together, we have transformed
the country, regional and global impact of our
procurement operations, delivering proven value to
the business while supporting the value proposition
to our customers.

The concepts presented in this book provide a

meaningful guide to help both procurement and
finance succeed in their collaboration.

Share this book with your colleagues at the start of

your procurement transformation journey or when
you’re looking to build bridges to achieve new

7
levels of success. You will find here both theoretical
frameworks and practical examples to reach a new
level of partnership.

I hope you too enjoy the read. Remember to be

bold, keep it simple and deliver on your promise.

Good luck in taking your procurement organization

to the next level!

Christian Lindskov Alsø

Group Chief Procurement Officer,
Head of Supply Chain & Procurement,
ISS World Services

8
Introduction

A happy ending seems far-fetched between

procurement and finance. Any relationship facing
challenges, like lack of communication and trust, is
bound to fail. But with the right ingredients, and
the right amount of love, these two important
functions can collaborate effectively and have a
more strategic and fruitful partnership.

Long gone are the days when procurement’s focus

was only on negotiating better prices and finance
only cared about P&L impact. Leading businesses
today are built upon collaboration, data-driven
best practices and human relationships. Just like
a marriage, the key to long-lasting relationships is
trust.

This book is for the procurement leader looking to

build more trusting and collaborative relationships
with finance, and for finance professionals to untap
the full potential of procurement as a strategic
lever for improved profitability. We establish the

9
revolutionary idea of the SavingsBridge™, which
replaces all the non-standard ways to measure
procurement performance with one fair and
universally acceptable measure: the procurement
contribution.

Over the next five chapters, we go much beyond

theory and give real life practical examples
based on decades of experience helping
global businesses achieve more value through
procurement analytics. Be prepared to challenge
your preconceptions and established ways of
working.

After reading this book you will be well-equipped

to develop more collaborative, and yes, loving
relationships with your key stakeholders.

Open your heart and mind, and get ready. Take that
step towards the perfect love story.

10
 CHAPTER 1

The
Challenge
E
nter Cedric, the CPO and Leslie, the CFO. It is
like any other month-end meeting. Everyone
gathered in a boardroom, about to discuss
the company’s growth strategies and business
priorities. Cedric has just presented a case
claiming 250M€ savings for the current year but
is challenged with several questions. When Leslie
asked why this is not in the profitability report of
the divisions, Cedric started explaining that the
savings were used elsewhere. Procurement does
the sourcing work, signs the contracts and reports
approved savings, but these are just not visible in
the P&L. Leslie began throwing questions about
the savings approval process, baseline definitions
and whether savings really hit the bottom line.
On top of that, procurement was blamed on its
lack of transparency which then results to inability
of Finance to confirm contract compliance. The
meeting moves to other topics and the value that
procurement drives is not recognized. Sounds
familiar? Perhaps you’ve been in the same situation
many times already.

12
What causes this misalignment between savings
claimed by procurement and savings recognized
by finance?

THREE ROOT CAUSES

1 Lack of common language and terminology

when discussing savings

2 Measuring contracted rather than realized

savings

3 Focus only on proactive savings projects and

not taking external factors into consideration

Procurement and finance are two living banks of

the same river. While it’s true that they both impact
the flow’s shape and speed, at least from where
they stand, both have different perspectives on the
reasons behind this. There is often an obvious gap
between what procurement claims it has saved,
and what finance sees impacting the profit and
loss statement. This gap deepens further as this

13
misunderstanding is ultimately relayed to the wider
management team. For any relationship to work,
communication is the key. When the language
and terminology used are not aligned, not only is
time wasted, but communication breakdowns also
occur.

Sievo is the bridge that will allow both to see

the river from the same point, encompassing the
environment in its entirety. Sievo can also help
these two entities in changing the way this river
flows.

14
 CHAPTER 2

Understanding
Procurement
Value to
Business
B
efore we dig deeper into building a loving
relationship between procurement and
finance, let’s discuss first why procurement
is such an essential part of an organization.
Procurement is at the heart of the supply
chain management. It is no longer simply an
administrative responsibility. All organizations
should see it as a key driver for competitive
advantage. It is time to make a stand, and come
out from being the passive back-office service to
becoming a critical, strategic and value-adding
function with corporate visibility and influence. It is
time to be a procurement hero.

FIVE SUPERHERO TRAITS OF PROCUREMENT

The Deal-Maker
Procurement sources goods and
services, and negotiates contracts
aiming for the highest quality
and ensuring the best total costs.
This allows companies to realize the

16
immediate upfront cost savings and other savings
opportunities. Procurement has the ability to
capture and understand the total volume and the
full measure of external spending. It shows how
creating flexible contracts can change strategies.
At the same time, there is a lot more than the
signed contracts. The great prices achieved, and
best deals yielded can be all attributed to the
negotiation skills of those in procurement. As a
central function to working with suppliers, it plays a
key role in building deep collaborative relationships
with suppliers. An optimized purchasing process
will lead to better outcomes – quality goods and
services delivered on time.

The Defender
Procurement raises its game
beyond simple tactical activity
and negotiating contracts to a
broader and more strategic role
within the organization. A company can
be vulnerable facing external factors such as price
variance, supplier risks, currency fluctuations, and

17
a lot more. The procurement fights the battles,
taking into account the external environment
when creating procurement strategies to mitigate
reputation risks and monitor their exposure to
threats. This function is not only a matter of cost
reduction, but it is also about ensuring that the
requirements for a range of criteria – like quality,
delivery, innovation and service – are being met by
suppliers.

The Innovator
An empowered procurement with
almost seamless cooperation
with other business units allows
innovation. When there is tight
collaboration between product teams
and procurement, the latter is able to push for
innovation from the supplier base either in the form
of better quality, design or economies of scale
which results in competitive prices. The supplier
base is home to various sources of innovation that
could initiate a huge competitive advantage. The
suppliers are the experts who hold the key to the

18
invention that could transform a business. Building
strong relationships is a precursor to having access
to these opportunities and driving these new
ideas. Procurement is the primary channel of the
organization for bringing these innovative supplier
ideas and creating the winning technologies.

The Partner
From a business perspective, the
most obvious benefit of an effective
procurement strategy is a positive
impact on the organization’s bottom
line. Procurement is a value driver for
most companies, so it needs to have a voice the
same way it needs to listen to other units. It should
have an equal say in business strategies and in
what needs to be done to elevate company’s
success and profitability.

The Visionary
To make an impact on your
organization, one needs to be
able to predict future profitability.

19
To forecast the most probable future prices,
procurement should work hand in hand with
finance and offer them insights. Procurement has
enough resources and capabilities to explain all the
different drivers affecting profitability, both from
sourcing and business point of view. They provide a
collaborative platform where different stakeholders
can work on just one set of numbers. With the right
tools, procurement holds the key on uncovering
how the vast amounts of data can be transformed
into meaningful forecasts.

Organizations need to develop new fundamental

ways of how procurement can bring value.
Mastering its potential will ensure competitive
advantage in today’s dynamic global business
landscape. Procurement is no longer just an add-on
service.

Clearly, it is time for procurement to shine and be a

superhero.

20
 CHAPTER 3

Proving
Procurement
Contribution
to Finance
I
t takes two to tango. Aligning procurement
and finance is a powerful enabler to maximize
the financial value that procurement adds to an
organization. The value of the procurement function
to an organization takes multiple forms. And
while all are essential, in this chapter we will only
concentrate on its financial contribution.

ESTABLISHING A COMMON GROUND

Procurement typically looks at spend from a

category point of view - travel, IT, logistics,
marketing, etc. While this focus has its own
advantages, it also causes problems because
nobody else looks at costs this way. The category
view remains irrelevant to other functions in the
company, like finance and operations. This means
that if you want procurement’s contribution to
be recognized by finance, spend should also be
looked at from their perspective.

Let’s start with the main definitions.

22
EXTERNAL SPEND

Defining the backbone for procurement

contribution requires understanding first the
external purchases and their nature. The basis for
all measurement is External Spend, which refers
to the total external purchases from suppliers;
excluding taxes, interests and other non-sourceable
items.

External Spend Segmentation

OPEX

CAPEX

One-offs Recurring

23
The segmentation on the previous page reveals
that there are different kinds of purchases which
are very different from savings perspective.

First, we see that some purchases will not be

repeated, but are considered as one-offs. This
means that by nature there is no clear reference
point for measurement from one period to another.

Secondly, we need to divide OPEX and CAPEX.

Operating expenses are accounted directly within
company’s EBITDA, whereas capital expenditures
are excluded from EBITDA but visible through
depreciations.

Therefore, procurement contribution to one-offs,

recurring, OPEX and CAPEX ought to be measured
differently.

24
DEFINING PROCUREMENT CONTRIBUTION
WITHIN THE DIFFERENT SEGMENTS

The other angle is the measurability aspect. For

one-off purchases, you do not have meaningful
comparison price baseline from last year. Whereas
for recurring purchases, you can always compare
year-on-year basis.

Procurement Contribution to Finance

OPEX EBITDA
Savings

Cost
Avoidance

CAPEX CASH only

Savings

One-offs Recurring

25
Procurement contributions from one-off purchases
are real. However, they cannot be measured as a
performance improvement from one period to the
other. Nevertheless, it is important to recognize
that without such contributions, the cost of these
purchases could have been greater and hence have
a true impact on performance.

We define such contributions as cost avoidance,

which are often calculated in two ways:

(i.) Cost avoidance

= cost from initial quotation – cost from final quotation

or

(ii.) Cost avoidance

= budgeted expense – realized expense

Cost avoidance tracking should be done on

the actions performed by procurement with
verification from finance on the financial impact.
This will ensure that procurement continues to
support large one-off purchases that require

26
their negotiation expertise and gets rewarded
accordingly.

Furthermore, on the measurability aspect, recurring

CAPEX purchases savings are not measurable
directly from EBITDA impact point of view as they
are accounted through depreciations. Hence,
we define these as cash only savings, due to the
limitation on direct EBITDA impact.

Similarly, there are other types of savings where

procurement can clearly contribute but which
cannot be measured from the bottom line impact.
For example, working capital improvements by
negotiating better payment terms.

Cost avoidance, cash only savings and working

capital improvements are important and need to be
recognized. The methods to do so are different, but
underlying process and need for common language
still remain the same. Procurement contributions
need to be tracked and verified by finance in order
to build trust and optimize performance.

27
Finally, procurement contribution from recurring
OPEX purchases can be measured on year-on-year
basis as EBITDA savings. Recurring purchases are
fully accounted for in EBITDA development and
hence can be reconciled with the company’s P&L
statement. This reconciliation is often considered
as the bottom line impact of procurement.

From here onwards, we will focus on the EBITDA

savings and continue to journey on bridging the
gap between procurement and finance.

ISOLATION OF VALUE DRIVERS

In the context of EBITDA, procurement savings are

the result of a number of actions that the function
has taken to reduce costs. These take multiple
forms and are specific to certain situations and
categories. Actions can be taken by procurement
alone but often are the result of the collaboration
with other functions.

28
Identifying and isolating value drivers is the key
in establishing meaningful conversations and
collaboration between procurement and finance.
Unlike cost avoidance, procurement savings are
measurable from one period to the other. As much
as might have happened between/within the
periods, it is important to dissociate what was
controlled by procurement and what was not.

Though many of the drivers impacting prices

are directly or indirectly under the control of
procurement, a number of value drivers are not.
Non-controllable drivers are related to business
volumes, currency fluctuations and commodities
market swings.

Measuring procurement savings therefore must

isolate non-controllable drivers from controllable
ones. Formulas to isolate these drivers can be
applied as follows:

29
 Driver Formula

(Quantity Current Year

Volume – Quantity Previous Year)
× Price Previous Year

Price Previous Year

× ((ExRate Current Year
Currency
÷ ExRate Previous Year) – 1)
× Quantity Current Year

Price Previous Year

× ((Market Index Current Year
Market ÷ Market Index Previous Year) – 1)
× Quantity Current Year

After isolation, procurement savings are calculated

the following way to unveil financial contribution
from one period to the other:

Procurement Savings
= Spend Current Year – Spend Previous Year
– (Volume Impact + Currency Impact + Market Impact)

30
The isolation aims at providing further clarity
on the contribution of procurement and other
functions. More specifically, it aims at isolating the
procurement savings from the non-controllable
value drivers.

THE SAVINGSBRIDGE™

With years of experience as a marriage counsellor

between procurement and finance, Sievo created
the concept of the SavingsBridge™. This method
closes the gap between these two functions and
ceases the never-ending discussions of where the
savings really went. Once the terminologies are
aligned and understood on both ends, and the non-
controllable drivers have been isolated, this opens
the path to focusing on what impacts the bottom
line, and what will help improve the company’s
profitability. Connecting spend and savings brings
credibility and increases relevance. This is what the
SavingsBridge™ offers, explaining in deep context
the different components of spend development.

31
 SavingsBridge™
Procure­ment
Volume Currency Market Savings

–40M€ +200M€
–350M€
+450M€

This is what Finance

4.84B€ 5.10B€
usually sees

Spend Spend
Previous Current
Year Year

The finance department typically sees merely

the spend difference from one year to another.
Because there is an increase in spend, they
would ask where the savings are when the costs
have actually gone up. This is the traditional

32
spend analytics, wherein spend increases but
procurement claims savings. As a procurement
organization, you know you’ve done a good job,
but that’s not how finance sees it. What we can do
is break the spend development down and use just
one framework to further explain it.

The first factor is the volume impact. If you buy

more products and services, spend will increase.
But this does not affect the profitability, as the
reason is typically growing business or strategic
change.

Next there is the currency impact. Business

is increasingly global and most likely you do
purchases in many different currencies. Currency
fluctuations can have a big impact on large
organizations which have businesses in different
countries.

Another external driver is the market impact.

Commodity prices tend to follow global market
changes, which have a direct impact on purchase

33
prices on the products that consist of those
commodities. Hence, we isolate the portion of the
price change, which is due to general commodity
price development. This happens typically by
tracking indices and linking those to purchased
products and services. By doing this, you can
isolate how your procurement performed in
comparison to the market in general.

Finally, what we are left with after isolating these

external drivers, is procurement savings. Through
this process, you are able to measure how the
actions that we have done as a procurement
company really contributed to the bottom line. By
doing this on a continuous basis with jointly agreed
definitions, you are able to communicate your
performance to the rest of the organization.

Quite often savings are (and should be) driven by

joint efforts from demand management, production
and procurement to improve profitability. This
could mean changing recipes or production
processes, which can also result in measurement

34
dilemma when you don’t have the exact baseline
from previous year. This can be solved by defining
substitutions and further isolating these changes
from the year-on-year spend development.
Substitution impact helps in communicating the
true savings for these actions as well, separate from
traditional price performance.

The effect that substitution has on procurement can

be calculated by applying the following formula:

Substitution Impact
= (Price Current Year of New Product
– Price Previous Year of Original Product)
× Quantity Current Year of New Product

When savings are communicated in an integrated

way based on actual invoice data and tied to spend
development, the value of savings is much more
credible. It also gives the visibility on total net impact
on costs, which is much more business relevant for
the stakeholders than just the savings alone.

35
 FRAMEWORK FOR MEASUREMENT
STRATEGIES

Applying procurement savings measurement in

practice requires a segmentation of business areas
that will allow focusing on certain categories over
others. The following framework can be used to
select the appropriate measurement strategy for
different spend categories.

Sievo’s Framework for

Savings Measurement Strategies

Strategic Categories

SavingsBridge™ Advanced
with Proxies SavingsBridge™

Low Data High Data

Granularity Granularity

Standard
ignore
SavingsBridge™

Non-Strategic Categories
36
Categories need to be prioritized to provide
optimal trade-off between deployment costs and
business value. Isolating value drivers is a data
intensive process, especially when done at the
transaction level. This need for data is represented
on the horizontal axis of the matrix above.

Main focus should be in strategic categories.

Where high data granularity is available, category
specific value drivers enable accurate isolation of
non-controllable drivers. This is done by isolating
the easily automated drivers (volume and currency),
and advanced drivers such as market impact and
substitutions.

For strategic categories without data granularity

(typically indirect spend), a deeper assessment of
data availability will help define the appropriate
strategy. We approach this typically from two
directions:

1 Enriching the data

2 Utilising proxies

37
In some categories (e.g. travel and logistics) the
granular data can be attained from your suppliers.
By bringing in supplier data, we are able to utilize
the advanced SavingsBridge™ method in these
categories as well.

The second option is utilising proxies, by which we

mean defining a driver for spend development in a
specific category (e.g. office expenses are driven
by headcount and facility management spend by
square meters). By collecting the data on the driver
and quantifying that in relation to category spend
development, you are able to track procurement
savings even if your invoice data might not provide
the hard unit price metrics.

For non-strategic categories with high data

granularity, it is recommended to isolate the easily
automated value drivers (volume and currency) in a
systematic way. For non-strategic categories where
data granularity does not exist, our approach
is to follow-up spend without major efforts on
measurement.

38
DIRECT PURCHASE EXAMPLE

Consider an international company purchasing

chemicals worth 23.1M€ in previous year and sees
its total spend in this category go up to 26.4M€
in the current year. By reading the profit and
loss statement, finance deducts that spending
increased by 3.3M€.

From the 3.3M€ cost increase, there is a need to

isolate first all external non-controllable drivers
that hide the actual contribution of procurement.
By assessing the spend further, one observes the
following:

• Market prices of the purchased commodity went

up from a one-year average of 18.0K€ / tonne
in the previous year to 20.0K€ / tonne in the
current year.

• Purchases were made at an average price

of 21.0K€ / tonne in the previous year and
22.0K€ / tonne current year.

39
• Those purchases were actually made in USD at a
USD : EUR exchange rate that had risen from 0.7
in the previous year to 0.8 current year.

• Total quantities also increased from 1,100

tonnes in the previous year to 1,200 tonnes
current year.

After isolating value drivers, this now leads to the

following results (rounded numbers):

Volume Impact
= (Quantity Current Year – Quantity Previous Year)
× Price Previous Year
2.1M€ = (1,200 – 1,100) × 21.0K€

Market Impact
= Price Previous Year × ((Market Index Current Year
÷ Market Index Previous Year) – 1)
× Quantity Current Year
2.8M€ = 21.0K€ × ((20 ÷ 18) – 1) × 1,200

40
 Currency Impact
= Price Previous Year × ((ExRate Current Year
÷ ExRate Previous Year) – 1) × Quantity Current Year
3.6M€ = 21.oK€ × ((0.8 ÷ 0.7) – 1) × 1,200

With this, one can then deduct that procurement

savings have actually been 5.2M€ for the current
year.

Procurement Savings
= Spend Current Year – Spend Previous Year
– Isolation of Non-Controllable Drivers
–5.2M€ = 3.3M€ – (2.1M€ + 2.8M€ + 3.6M€)

Purchasing launched a substitution strategy that

consisted in a redistribution of volume from the
original purchased product to a new product that
will progressively take over the old one. In the
current year, 400 tonnes of the new product was
purchased with the price of 21.2K€ per tonne,
whereas the original product price in the previous
year was 22.4K€ per tonne.

41
By isolating the substitution impact, one can
determine a 480K€ P&L cost decrease due to the
substitution strategy.

Substitution Impact
= (Price Current Year of New Product
– Price Previous Year of Original Product)
× Quantity Current Year of New Product
–0.48M€ = (21.2K€ – 22.4K€) × 400

Accounting for isolation, one can then easily

determine the actual price impact of procurement
actions, which in our case sums up to a saving of
4.72M€. The bottom line impact can be visualized in
the chart on the next page.

42
 Chemicals Category Example

Volume Market Currency Substitution Price

0.48M€
3.60M€
4.72M€
2.80M€

2.10M€

26.40M€
23.10M€

Spend Spend
Previous Current
Year Year

43
INDIRECT PURCHASE EXAMPLE

A European company with operations in the US has

launched a savings project on telecom calls spend
for its US branches. In the previous year, it spent
0.6M€ and the spend for the current year from the
P&L statement for telecom calls totalled 0.7M€.

For the 0.1M€, we should isolate value drivers to

truly dissect whether savings have been realized or
not.

First, volumes must be isolated. This is done by

determining a practical and acceptable proxy, in
this case white collar headcount. The headcount
has increased from 500 (previous year) to 550
(current year).

Volume Impact
= (Quantity Current Year – Quantity Previous Year)
× Price Previous Year
60K€ = (550 – 500) × (0.6M€ ÷ 500)

44
Note that the price has been calculated by dividing
spend by the headcount proxy.

The next step is to isolate the currency impact as

purchases have been made in USD. The USD : EUR
exchange rate has moved up to 0.8 from 0.7 the
previous year.

Currency Impact
= Price Previous Year × ((ExRate Current Year
÷ ExRate Previous Year) – 1) × Quantity Current Year
94.3K€ = (0.6M€ ÷ 500) × ((0.8 ÷ 0.7) – 1) × 550

After isolating value drivers, one can deduce that

the additional headcount led to an increase of
60K€, currency fluctuations explain an additional
increase of 94.3K€ while procurement savings have
actually been 54.3K€.

Procurement Savings
= Spend Current Year – Spend Previous Year
– Isolation of Non-Controllable Value Drivers
–54.3K€ = 100K€ – (60K€ + 94.3K€)

45
And as SavingsBridge™ terms, the year-on-year
development looks like below.

Telecoms Category Example

Volume Currency Price

54.3K€
94.3K€

60.0K€

600K€ 700K€

Spend Spend
Previous Current
Year Year

46
 CHAPTER 4

Predicting
Future
Profitability
Together
S
o the honeymoon stage is over. What comes
next? Now that procurement has been
aligned with finance, the next step begins
when you can apply this collaboration into knowing
what lies ahead in the next 12–24 months. Together,
procurement and finance look forward and see
what impacts profitability and what hits the bottom
line. This should include enabling an effective
and efficient process with proactive risks and
opportunities management.

A FORWARD-LOOKING VIEW ON SPEND

Procurement is often focused on what happened

in the past. But the real benefit is knowing what
the future will bring. To make an impact in an
organization, one needs to be able to predict future
profitability. Since a big portion on organization’s
costs is based on spend from suppliers, a good
forecast enables the company to manage future
profitability.

48
Knowing where you are will help predict where
you might be going in the future. For an effective
collaboration, one needs a solution that can take
advantage of all the data available internally and
externally, and has built-in predictive analytics
capabilities. This should not only transform the
vast amounts of data into meaningful forecasts,
but should also be a collaborative platform, where
different stakeholders like procurement, supply
chain and finance can work on just one set of
numbers and a single point of truth. One language
that resonates to everyone gives much clarity and
leads to more definite actions and insights on how
to drive profitability in the company.

Developing the forecasting process is not only a

future trend in procurement but can also translate
savings and category spend developments into
end product forecasts and bring tangible value
to business decisions. This allows procurement,
finance and supply chain teams to compare actual
performance to forecasts so that forecasts can
improve over time. A good and reliable forecast will

49
serve as a one-stop shop for procurement with all
the information at your fingertips, providing more
value-adding analysis versus just number-crunching.

COLLABORATIVE FORECASTING

While procurement and finance operate

independently with different viewpoints, profitability
of the company is the unifying objective. Having
an effective forecasting process serves as a
communication channel between the two entities.

There is a need to isolate the savings from the

market-driven components to be able to create
a full picture relevant to stakeholders. Using
the concepts from the SavingsBridge™ in a
forward-looking manner creates constructive
dialogue, elevates procurement’s position and
drives cross-functional actions. Doing this enables
communicating to the business partners the
change on margins in their language instead of
talking about category savings.

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In most organizations, finance is responsible for
forecasting as they are generally better equipped
for this task. Because they are more familiar and
adept of revenue forecast, it makes sense for them
to also take charge of spend forecasting.

However, there is a compelling argument for

procurement to lead the spend forecasting process
and have a higher level of involvement. For one,
the results will definitely be more realistic because
they own the prices, contracts and supplier
relationships. This responsibility makes them feel
more valued which eventually results to more
commitment to the process.

In the end, both procurement and finance need

to be actively involved in producing better
spend forecasts to ensure alignment and achieve
consistency. When there is a tool that can be used
cross-functionally in a dynamic and fluent way, the
business needs of different stakeholders will be met.

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 Realized Savings
Volume Currency Market Savings Volume Currency Market Pipeline

+200M€ +92M€
–40M€ –350M€
–31M€ –286M€
+205M€
+450M€

4.84B€ Total Impact on Costs 5.1 0B€ Future Estimate 5.08B€

Actual Actual Spend Estimated

Spend Current Year Spend
Previous Year Next Year

Realized Savings Spend Forecasting

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VALUE FROM COLLABORATIVE SPEND
FORECASTING

• Credible figures and bottom up calculations

lead to trust between procurement and finance

• Proactive savings opportunity management with

constant feedback loops

• Continuous and relevant input to end product

pricing decisions

PREDICT THE IMPACT ON FUTURE

PROFITABILITY

The more you know, the better you’ll be. Having

a clear immediate visibility into data gives one a
better understanding and a heads up to respond
to potential price changes in a timely manner. This
goes a long way and allows the company to have
credibility with the information used to forecast
properly, set accurate budgets and facilitate better
decision-making. Visibility to costs by product

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purchasing plan and business enables proactive
decision-making strategies, sales pricing, savings
initiatives and marketing decisions.

Predicting the future is not easy but using what-if

scenarios and incorporating external factors and
parameters definitely help in shaping the future and
focusing on what really matters to align and drive
global teams into the company’s strategy. If one can
do this in a collaborative way, and with a process
that one can trust, then staying ahead of the game
and having a clear future is easy. This is the key to
profitability and driving bottom line impact.

PRACTICAL EXAMPLE

Consider a company in the FMCG industry buying

almonds for its muesli products, planning its
budget for the next year. The category manager
has negotiated a new contract with the almond
supplier (with considerable savings achieved) half
a year ago. The contract will last until Q3 next year,

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and the category manager expects the prices to
stay fairly constant near the negotiated price for
the whole next year. Therefore, the budgeted price
for almonds for next year is 7,000€ / tonne. Based
on the muesli production estimates, our forecasted
need for almonds is 75 tonnes per month.

Fast forward half a year when the company is

revising its forecast for the second half of the year.
The muesli sales forecast has gone down, thus the
forecasted purchase volume for almonds has been
revised down to 50 tonnes per month for the rest
of the year. At the same time, weather forecasts
estimate that California (a major source region of
almonds) will be hit by a severe drought during the
summer, affecting the market outlook for almonds.
The current almond contract lasts until Q3, but for
Q4, as he has no new contract in place yet, the
category manager will have to forecast a sharp
increase in almond prices, to 9,000€ / tonne.

Comparing the new forecast for Q4 to the budget,

our estimated spend per month has dropped

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from 7,000€ / tonne × 75 tonnes = 0.52M€ to
9,000€ / tonne × 50 tonnes = 0.45M€. If we isolate
the impacts:

Volume Impact
= (Quantity New Forecast – Quantity Budget)
× Price Budget
–0.175M€ = (50 – 75) × 7,000

Price Impact
= (Price New Forecast – Price Budget)
× Quantity New Forecast
0.1M€ = (9,000 – 7,000) × 50

Additionally, we can factor in a currency impact.

If our purchases were actually in GBP, and the
exchange rate has changed from 1.05 to 1.15
between the budget and the new forecast, we can
calculate the effect of currency from the total price
impact:

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 Currency Impact
= Price Budget × ((ExRate New Forecast
÷ ExRate Budget) – 1) × Quantity New Forecast
0.033M€ = 7,000€ × ((1.15 ÷ 1.05) – 1) × 50

While the almond spending is estimated to go

down, we can see a sharp price increase estimated
for Q4, which directly impacts the bottom line on
the end product profitability.

Through the continuous and repeated forecasting

process, with credible data backing up the
trustworthiness of the estimates, procurement and
finance can together find the biggest drivers for
profitability as early as they can, and act on them
before it’s too late.

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 CHAPTER 5

Ingredients of
an Everlasting
Love
W
e previously discussed how
procurement and finance stand on
opposite sides of the same river.
Bridging the gap is not always straightforward,
but with proper and continuous implementation
of the SavingsBridge™, a happy and successful
relationship is now within reach. Let’s talk about
the key ingredients for procurement and finance to
achieve everlasting love.

TRUST

You should believe that your partner has your

best interests. A common savings language
for procurement and finance is the initial and
crucial step to building trust and accountability
internally. When the terminologies are aligned,
procurement raises its profile and demonstrates
the value it can bring to the business. But building
trust requires mutual commitment and does not
happen overnight. In a healthy relationship, both
parties need to trust and be open to each other.

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There should be constant communication and
consistency in actions. There should be a coherent
and extensive process in place in measuring
spend and savings to identify opportunities for
improvement.

COMMON PURPOSE

The exciting journey in relationships is the chapter

when ‘yours and mine’ becomes ‘ours’. When
this has been achieved, a meaningful relationship
is held together by a common purpose, and
a common vision of what it can potentially be.
Having one goal encourages dynamic collaboration
and partnership. Finance and procurement should
be on board with the same objective of adding
strategic value and driving competitive advantage.
When both parties are aligned towards the
same target, each becomes the better version of
themselves, creating a relationship that inspires
both to reach for greater heights. Organizations
which have achieved this alignment set on

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common targets have much greater control of
their spend and better ways of driving continuous
improvement initiatives.

FOCUS ON WHAT MATTERS MOST

When you focus on what’s important, a lot of other

things just fall into place. Becoming attached to
things that are not necessarily essential leaves you
off track, disoriented and distracted from pursuing
the real goal. Finance and procurement should
concentrate on how much of the contracted
savings are actually captured and hit the bottom
line. Focusing on realized savings mobilizes
actionable behaviour. If both will consolidate their
efforts and energies towards realizing savings, then
the organization has a better chance of achieving
higher levels of success. When procurement
reaches out beyond savings, it will become the
center of value creation in the whole organization.

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RECOGNITION

Procurement no longer finds itself low in the

pecking order but will become a key partner
of Finance. It stretches beyond cost and has
elevated its understanding of how it can impact
the organization through better cost management,
and identification and realization of opportunities.
This is a far cry from being a mere support unit
tasked to spend money. Procurement has made its
way into providing the business greater flexibility,
increased market certainty and a significant
competitive advantage over its competitors. As
more focus is placed on leveraging systems
and technology, the company is now on its way
to drive greater value, innovation and market
differentiation. With the right tools, procurement
serves as the cutting-edge function that will
increase efficiency and solidify the organization’s
bottom line.

Trust, recognition, having a common purpose

and focus are the keys to everlasting love for

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procurement and finance. A great relationship
brings out the best in each other, dreams big and
looks forward to creating a better future together.

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Conclusion
Procurement and finance work closely together in
more ways than one. Global supply chains require
clearly defined strategies and dynamic leadership.
In a high-paced interconnected global marketplace,
there is no time for arguing. Leading businesses
stay ahead by keeping business units and functions
fully aligned on a common goal and executing
faster and smarter than competition.

At the same time, the key to success is developing

effective working relationships between people.
For procurement to win over the hearts of people

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in finance, it needs to create transparency and
build trust. Transparency starts with using the
same language and metrics. There is no point
having different goals for procurement and
finance. Procurement can and should align with
the targets set by finance and shared by the wider
organization. The clearest way for procurement to
build trust is to deliver real value to the bottom line.
This means procurement needs to be more precise
in isolating the real drivers of performance and
more concrete about the measurement of value.

While other core strategies advance procurement’s

overall value, it is within the realm of collaboration
between finance and procurement that will bring
the greatest organizational impact and influence.
Effective and efficient collaboration should be
part of a holistic approach to company’s strategic
performance. These two critical business functions
must work hand in hand to pave way to realizing
the company's goals and objectives. Both should
have an equal say in what needs to be done to
elevate the company's success and profitability. It

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could be a bumpy ride, and can take considerable
time and effort, but a union between these two
can maximize the value of procurement in your
organization.

As pioneer in Procurement Analytics, Sievo

combines deep procurement expertise with
advanced data analytics capabilities to automate
collaboration across organizations. Designed
for that purpose, Sievo’s solutions analyze past
purchases, predict future spend and measure
performance based on the foundation of the
SavingsBridge™ across organizational, time
and category dimensions. With decades
of procurement and software development
experience, Sievo can help you kick-start your
procurement transformation process and turn even
the messiest enterprise data into rich insights and
action.

Start your journey now. Visit sievo.com

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About Sievo

Sievo is a leading procurement analytics SaaS-

based solution company that provides spend
visibility, but also goes way beyond that. We
help our clients identify opportunities, translate
these opportunities into projects, embed created
value into budgets and ensure that savings truly
hit the bottom line. We speak the language of
procurement and translate numbers into the
financial view.

Our solution is used by thousands of users in

best-in-class procurement organizations, such
as Deutsche Telekom, ISS and Kellogg’s. With
our clients, we don’t stop at backward-looking
reporting but deliver more by creating forward-
looking forecasts and comprehensive analytics.

We combine internal information with external data

sources. With Sievo, human input and machine
learning technologies are integrated together. In
short, we translate procurement data into dollars.

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Since our founding in 2003, we have experienced
rapid, profitable and self-financed growth.
Currently we employ more than 100 professionals
and have offices in Europe and US.

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