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Procurement persuasion is vital to cost management success

Finance directors need to get buy-in from procurement and the board that they can, and will, lead cost management in years to come

Waxing lyrical on building an economic recovery is all very well, but there is a growing belief that 2013 will be the year a second recession kicks in. Between the belief that the UK government will need to make more swingeing spending cuts and that many of the businesses that refinanced in 2009 will see their loans mature that year, it seems all the more real. Which is why cost cutting is not about to go away, a well worn topic though it is.

That has been underlined by one of the UK’s foremost economic seers, professor Doug McWilliams, founder and chief executive of the Centre for Economic and Business Research. In a keynote speech opening the 2010 Financial Director Summit, McWilliams caused a sharp intake of breath by predicting the end of the euro and adding that the kind of annual growth Western nations enjoyed in the decade before the economic crisis was a permanent thing of the past. His thoughts cement the position of cost management at the top of the FDs’ agenda – and as something that has become a real leadership issue for the next few years.

Procurement is an ever more troublesome jewel in the cost-management crown. In a session on the topic at the Summit, FDs concurred that their procurement functions still have a long way to go in proving their value and in earning their chief performance officers a seat in the boardroom. To be really accountable and effective, FDs in attendance believed procurement needs far better metrics around its own performance. And there is concern over procurement ‘mission creep’ – expansion of the procurement role into functions that were better tackled as ‘sourcing’ (in manufacturing businesses), ‘buying’ (in distribution businesses), or ‘supply chain’ in both. Procurement, it was felt, has clearer legitimacy in tackling costs that have not been attributed an owner, such as office supplies, maintenance spend or temporary staffing.

And the ownership question is where the issue of cost leadership comes into force. FDs need to push themselves out of their bread-and-butter comfort zones into higher value-added areas, such as seeking out new cost models for the business and having views on how to win from future changes in industry cost structures. The key factor in successful long-run cost management is senior team leadership, which can be broken down into a dozen components – things such as persistence, improving feedback, and winning hearts and minds.

These are skills FDs have been much more involved in since the recession landed in their lap.

For example, Narin Ganesh, chief financial officer for the UK and Scandinavia for removals company Crown Worldwide, told delegates at the Summit how he had an opportunity to discover the importance of winning hearts and minds when asking staff to accept pay freezes and overtime cuts to deal with lower demand.

Garry Price, CFO of Heinz UK, recalls the persistent pressure placed on him to find new efficiencies that he has now embedded in the Heinz culture, creating earnings growth despite the scant topline growth that characterises the big food industry.

FDs can expect more of the same as government beds into a period of austerity and companies scramble to find ways to pay back their renegotiated loans. Taking a leadership role in cost cutting without damaging the delivery of the business and becoming broad strategic contributors is the new FD profile. Cost management will remain on everyone’s lips for years to come.

Andrew Wileman, author of Driving Down Cost: How to Manage and Cut Costs – Intelligently spoke at this year’s Financial Director Summit

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