Why Finance and Procurement Need to Collaborate For Success

by FEI Weekly Podcast

With the economy heading into uncertain times and profits getting squeezed, how companies approach expense management will become a top priority.

PeopleImages via iStock / Getty Images Plus
For financial executives, that means getting into the weeds of how money is going out and if procurement operations is getting the most value and efficiency out of their work.
In this sponsored episode of the FEI Weekly podcast we speak with Matthew Smith, CFO and cofounder of Fine Tune,  an expense management firm focused on getting the most value out of a company’s procurement operations and indirect services.

To contact Fine Tune click here.
Or via email here.

A trascript of the podcast is below.

Christopher Westfall: Great. Matt, thanks for joining us today. Obviously, a lot of these questions around how procurement works and how finance interacts with procurement is at top of mind for a lot of our listeners, but I wanted to start off always with a little bit about yourself and a little about the company you work for.

Matthew Smith: Well, thanks Chris. Happy to be here and discuss stuff that we're involved in at a granular level on a daily basis. My name is Matt Smith. I am CFO. Fine Tune. I've been a CFO for about 25 years now. Going all the way back, I've had a few different fairly long runs through the whole private equity process, if you will, where from startup to growth to sales. So, I started my career in medical imaging, the medical imaging space and helped grow that, and ultimately did a private equity deal, sold that company, and then moved on and spent 10 years in the luxury automotive space as a CFO, which was quite a departure from medical and more in a retail environment, lots of transactions, people everywhere. Big facilities and real estate operations. And then, here more recently I have joined Fine Tune full time.
I'm a co-founder of Fine Tune, and so I've been tangentially involved for our entire history. Fine Tune was founded in 2002 by a gentleman named Rich Ham, and Rich and I knew each other all the way back to our days at Indiana University. I was getting my MBA there, he was in undergrad. And when I moved on and became CFO in the medical imaging business, Rich called me up one day and said, "Hey, I'm working for a uniform rental company, and I have this idea about a consulting business, how we could help companies procure these services, and potentially save them some money." And I had recently done a shared savings deal, so I was very familiar with the space and helped him get the business started. That was over 20 years ago now.

Like I said, I've had these day jobs over the years, but after we sold the car business in late 2017, I stayed on for about 18 months there to help the buyer through that transition. And Fine Tune was just an awesome place for me to land, and start applying everything I'd learned over these last 25 years. So, it's been a fun transition for me to, from working for large companies to now helping large companies solve some really significant challenges.

Westfall: And that's great, and I think we can have a totally separate discussion at some point about moving from industry to industry, large company to bigger company, because I think that's a lot of experience that our members are dealing with. So for a future discussion, but I wanted to maybe you could define a little bit what Fine Tune does and what your role and how you think about that.

Smith: Fine Tune is, I think broadly considered a category solution. More specifically, we are a full service expense management business. So, we essentially manage a handful of really complex and troublesome categories for increasingly large clients. Everything from middle market on up to a Fortune 50. And we really do everything for them from data gathering, baseline assessment, to sourcing and implementation of agreements, and then ongoing management and auditing after the fact, which as we head further into this discussion, that third piece, that ongoing vigilant management and auditing piece is absolutely crucial to really achieving true expense management. And so, we really are a nose to tail solution in just a handful of categories.

Westfall: And I want to dive a little bit deeper into that. And if I understand it correctly, it works in the space of finance and procurement, so maybe can level set perhaps a little bit. Could you describe a typical procurement department and what that looks like, and how it differs between industries and the size of the organization?

Smith: Yeah, I think there's less in terms of an industry variance, and maybe more so in terms of just size. So a procurement department can range anywhere from a single person being an entire department to all the way to having hundreds, if not thousands of people separated by... Typically we see it bifurcated from the direct expense and raw materials expense on one side of the ledger, and then indirect services and expenses on the other side.

As you move up the food chain, there's typically a chief procurement officer with then directors on either side of that equation, then with handfuls or teams of individual buyers that are responsible for a handful of categories or a basket of categories. And their job is to simply contract those services for their organization. And so, that's typically what we see. And over time though, I will say that we've seen a change over time, here basically since the great recession, this area has been getting increasingly difficult as these positions, and there's been just fewer resources dedicated to procurement.

So, we're seeing a leaning out, if you will, of these departments. And the upshot you have fewer folks with more responsibility and less ability to engage in expense management after deals go live. They're simply just order takers, and pushing paper, and this contract's done. I'm moving on to the next one and where the rubber meets the road in an expense management is what happens after the contract is signed, in many instances. And so, we're seeing less and less focus on that and just more on trying to just get the mountain of paperwork done, if you will, to get contracts completed and signed, and move on to the next.

Westfall: I want to follow up to that. That's pretty interesting point. What do you see, we're certainly going into a period... Well, we've coming out of a period of pandemic and scarcity and supply change issues and we're going into certainly an uncertain period and financial period. I would think that procurement would need even more focus going forward in expense management. Is that the way you think about it?

Smith: I do. I mean, I think one of the things that's happened here more recently is the pandemic and the disruption that occurred in supply chains. And so, I think from that standpoint, at least procurement and supply chain management has gotten a renewed focus because of the challenges coming out of the pandemic. But I think we're also facing resource allocation issues as well.

And so, procurement has not been typically an area that has received huge amount of allocation of resources. So hopefully there's a bit of a balancing element there though, just given what's in the recent rear view mirror of all these supply chain issues, in addition to pandemic related new challenges, all of a sudden companies were having to procure all sorts of different items for their organizations that they probably never even thought of between hand sanitizers and masks and things. And so it did bring it much more into focus in recent years, but I fear that even though we might be heading into who knows what the period of uncertainty looks like, it doesn't seem like maybe we're headed into more uncertain times ahead. I would be shocked if we're going to see a massive investment in procurement resources in today's environment moving forward.

Westfall: Right. Yeah, I know that's always the push and pull of not being a revenue generating line of business. But maybe we could talk a little bit about what do you see as the collaboration and the communication between procurement, and finance and the other departments and how does that play a role in your thoughts about expense management?

Smith: Well, I mean it's absolutely crucial. What we're finding is there is not one party that's really in charge of expense management. It usually touches many departments between procurement contracting, you have finance involved in resource allocation, you have accounting, paying the bills. Operations is using the services and potentially approving and or signing off on them. And then as you move out... Excuse me, across the spectrum into more complex expenses, you have lots of other departments weighing in. I mean, you may have quality involved, you may have security and legal involved, and now you have sustainability weighing in and HR.

So, it can get really complicated as you move into more and more complex expenses, especially. And those coordination issues don't just happen at scale. It's at the middle market too. We see these same problems happening over and over again across industries, and it doesn't really matter the size of the business, although it gets increasingly harder at scale to coordinate all of these different departments. But everybody has their own silo. Everybody has their own pay plans and incentives and KPIs, and it's really hard to coordinate all of those things with an eye towards expenses and controlling cost. When you get quality or security involved as an example, all they care about is quality and security. Cost be damned most of the times.

And a lot of times you see everybody's hair's on fire, and we have to have something in place immediately when it is one of those more sensitive concerns. And we always say, well, is it security at any cost? At some point there has to be a sensible conversation there that involves procurement, that with an eye towards really managing these expenses, it really is crucial. And we just see so often that different departments with different priorities are making decisions, and then procurement's just playing catch up. They're trying to just get a contract in place, the vendor's already there or the decision's already been made, and you're just in a terrible position to negotiate something that's competitive from a marketplace standpoint.

So it's crucial, and I do think this is a major problem that we see over and over again is just really hard to coordinate. And so, the way we think about it is, expense management does need to have it's own... It needs to be its own thing, and there has to be a coordinating element there. And Fine Tune does provide that connectivity a lot of times. Our business is built around managing expenses like this, so we can help provide some of that connective tissue that organizations are lacking. But speaking to this audience, I would be mindful of how the lack of coordination and the siloing of these different areas directly impacts the expense line and the profit margins of your business.

Westfall: I want to get a little bit specific about some of what you just said. And one of the things you talked about was the way contracts are put together, and I was reviewing some of the material fine tune and one of the things that came up was the theory of a good contract, bad deal. Could you explain what that means and why finance or CFOs should care about that?

Smith: Yeah, this has been something here. We've developed this term in the last few years as we've continued to move up the food chain. And once we got to the Fortune 100 level, I just assumed when we founded this business that eventually we'd reach a point where just margins were super thin and companies that were a $100 billion companies would have these amazing agreements, and we're spending tens of millions in this particular area, and we would just have the best deal out there. We would be able to leverage our buying power to have just an awesome deal. And we've been frankly shocked that we typically deal in savings percentages of 20 to 50%, but those percentages have held all the way up to the Fortune 100 level.
And the thing that we noticed was this phenomenon you mentioned, good contract, bad deal. They all have good contracts. Once you get to Fortune 500, 100, almost every deal is on a master services agreement. Some of these are a hundred page long. A contract with all sorts of rights, and it's just amazing that when we sift through some of these documents, how strong the contracts are, and even a lot of the pricing is really good too. But what we find is there's gaps, and especially when you get out into the complex services end of the spectrum, you need some expertise. You just don't know what you don't know, and there are gaps there. And as I indicated, procurement, their job ends a lot of times at the moment that contract is signed, and then it's just, okay, left to the field. Hey, I'm going to lob that contract over a wall. It's going to go into a file folder somewhere, and then business goes on. And you have vendors that have really dramatically adjusted and evolved their strategies to grow margins of the business.

And so, the moment the job ends for procurement, these vendors are all immediately working to regain anything they gave up in those negotiations and then to grow it from there. And so, we've seen this phenomenon of, this awesome contract was just signed, that goes in a file somewhere, and then business starts happening and things are changing. Folks in the field are buying new products. You have off contract items, you have... We see if the unhealthy focus on price only as opposed to important terms. We say to our clients a lot of times, well, yeah, the price is important of course, but what about the number you're multiplying the price by. Managing quantities and inventories, and so forth.

So, there's so much more to it. And our clients a lot of times are ill-equipped to deal with the vendor strategies that are simply getting more and more sophisticated every day to grow their business. And so, that's what we mean by good contract, bad deal essentially. Invariably there are good agreements in place, but when the rubber beats the road and checks are flying out the door, it's like what's actually on that invoice? And we're shocked most of the time when we marry those two up that many of our clients do have a bad deal effect in practice. And so, that's what we mean by that. And it's something that we see over and over again, doesn't really matter the industry at all. It's a recurring phenomenon.

Westfall: What's driving that though? Is it just because companies are running so lean staffing wise, do they not have the people or the resources to follow it? What's driving that?

Smith: I think it's a few different things. It's this organizational disconnect for one, that we talked about. Different areas of businesses have different priorities. You have procurement that is intimately familiar with the ins and outs of the actual agreement that should be governing the relationship. They're typically out, like I said, the moment that contract is signed.

So, you have the people that have the most knowledge about what that contract says and what the relationship should look like, moving forward. They're typically being removed at that point, just moving onto the next one. And then, the folks in the field are just doing their job. They're ordering stuff, they're worrying about quality or security or safety, and this is where that coordination element becomes a problem. There is no focus on true expense management. It's really typically nobody's job, if you will. Everybody has a siloed job, and that coordination that it takes to really achieve true expense management just falls through the cracks a lot of times. Especially when you get into complex services and the more complex end of the spectrum widgets and so forth, and you're buying just items.

Companies can do well with just negotiating a price and moving on, if you will. But as you move out that spectrum, it gets increasingly hard to coordinate all of those elements, to really make sure you're getting what you signed up for.

Westfall: Maybe you could talk a little bit about the role and the importance of software data analytics, and driving the decision-making and optimizing the process around procurement.

Smith: Yeah, this is absolutely crucial. Look, everybody has software, data and analytics currently. Almost any business. The smallest businesses have AP Solutions and other software that's helping their business. But we've been just struck by how bad the data typically is, or the fact that organizations have grown by acquisition and they have multiple systems and multiple sources of data. And it makes it a situation where in many, if not most cases, you have a garbage in garbage out situation. And this is really hard stuff when you're talking about a dynamic and changing organization to stay on top of your baseline. We hear this a lot. The company might double in size and maybe a particular expense category grows 30 or 40%. Well, that's up 30, 40% year over year, but the business doubled, yet people don't have the ability to say, well, yeah, it's only 30 40% growth, but we had a 100% growth on the revenue side. That's actually a good job.

The data is so bad that focuses really on just like year over year increases, and simple variance analysis, and that's just woefully inadequate. You have to know and normalize for each one of these expenses, especially in the complex end of the spectrum, what does that number mean? In a vacuum you could, in the example I just gave, that procurement or that company could be doing an amazing job with only 30% growth in that particular expense, but in many cases they're getting penalized in that situation or the converse is true. Oh, hey, yeah, we divested to business lines, and so our expenses are down. And then, folks in procurement are getting credit for reducing expenses that they had nothing to do with.

And so, the data and the analytics piece of it is absolutely crucial. The first thing we do with any client is get all this data and then spend a ton of time making sense of it, and figuring out what is the actual baseline here? What is truly happening with this company? And that is, it's not easy, it is hard work.

And so, I see why companies default to the basic of just variance year over year, month over month, basic analysis. But if you're really looking to drive real meaningful change, you have to get in the weeds in these calculations, and this is where this audience can really help. This just can't be left to procurement professionals to do complex calculations and math, if you will. And we hear it all the time, that it's hard. It is typically left to procurement. Oh yeah, well, here's my math and here's what the savings is, and then they have to go sell these calculations to operators and other folks in the organization. And those conversations don't typically go well. And so, I do think that the finance and accounting areas of these businesses has to help and really do need to be involved in the math. The math is incredibly important and it's hard.

But until you get to the point where you can really track and understand what you're actually spending on a site basis or a line item basis, and you can normalize for the ever-changing elements of your business, you're not even in the starting game. You're playing Checkers, and your vendors are playing chess. And you just have no hope in that instance. It's just reactionary at that point. Oh my gosh, what happened here? Oh yeah, we spent double at this one site for this thing and the money's already gone.

And so, I think that this is absolutely crucial. We spend a ton of time on the data and organizing it, cleaning it, and then not to mention the future here with AI. AI's just being dumped on the marketplace, which is great. Oh, awesome. We have all these new tools, but we've seen all these hilarious examples of ChatGPT where it's hallucinating and getting all these bad answers and so forth, and producing false information. Well, if you have bad data, it's really going to stand in the way of companies leveraging it moving forward.
So, it's absolutely crucial to do, and to focus on and improve the intake of data and then the cleaning and organization of that data once it's in the building, because it absolutely leads directly to being able to properly manage expenses.

Westfall: One of the things you mentioned, it certainly and really caught my ear was the role of finance and accounting, and how they can help, and the role of data. Is there any... Always like to think about what our members are thinking about. What are the blind spots that they need to focus on? So, is it just broadly data, or is there something specific? Is there a specific blind spot on the finances accounting side or even on the pure side that both need to focus on when it comes to the process? And are there technologies that can help with that?

Smith: Yeah. So, we've identified one of the issues here, but to me, incentives matter with all of this. People need to have a motivation to improve things in the right way to direct behavior. This audience understands that incentives do direct behavior. And because there's so many challenges with data and these calculations are so difficult, we have just... At least the business world has, in many respects, just defaulted to really flawed incentive plans in the area of procurement. We see it time and again where all they care about is year one or year over year is... Or when they're signing multi-year service agreements with vendors. Well, okay, years two and three don't matter in those things.

And as I indicated, you have the situation where many times the work is just beginning from an expense management standpoint at the point that contract is signed. Well, no one... Or not no one, but most organizations like cost avoidance, which is one of the main things that we do as a company is to help companies avoid those, the escalation of cost, and making sure they get what they sign up for. Cost avoidance isn't even a thing in many organizations in terms of anybody getting compensated for it. So, you're not even incentivizing the right behaviors. You're incentivizing short-term gains only. You're not incentivizing the most important behaviors there.

And then you have, even how they're being paid is typically off of projections because the calculations are hard. A lot of folks who just compensate, oh, here's my projection of what I'm going to save over the next 12 months, somebody signs off on it up the chain, and that person gets paid, so we're not even properly assessing what actually happened.

And then, you have other incentives where there are goals or targets for a particular year. Goals are great and all, but they can be counterproductive at times too. We see it time and again, where departments are just like, oh, I've already met my 10% this year. I want to defer that opportunity to next year. Or I'll stagger savings over time. I don't want 15% now I want 5% now, 5% next year, 5% the year after. It's just incredibly counterproductive. And so, there are just a host of bad incentives here that are really causing problems in the system. And so, when you talk about a potential blind spot, I would start there.

And then, in terms of the technology, we touched on it. We have to be able to do these difficult calculations. And again, that starts with really getting better data, cleaning it, understanding it, and then assisting and having finance involved in a more dynamic and difficult baseline, and normalization calculations that you absolutely have to do. If the ground is shifting underneath you, you can't just do a year over year analysis. You really do need to normalize to properly evaluate these people.

And I think all of this has led to the flawed incentives. That work is hard. You got bad data, multiple systems. People just throw up their hands, they don't have time for this. But I would argue that these fundamental flaws are costing companies massive amounts of money, and we see it every day in our business. We just see the same things time and again. And as I indicated, we deal with these percentages of 20 to 50%, and this is a major part of it. There's very little ownership of expense management. The incentives are not there for any of these parties. They're all incented in their own little silos. And then, you layer in the problems with the technology.

But I would start with the incentives. I do think that that is the biggest blind spot here, trying to better incentivize behavior. And then, some of these other things will hopefully correct themselves over time. We'll get better at the calculations, and people are being paid off of those calculations, and so forth. And I do think that finance has to be the arbiter here. Ultimately, those calculations should not be left to procure, because I think somebody else needs to keep score, if you will, because we do see frustration on the side of procurement when they try to make these arguments. Well, hey, my expense is up 30%, but that's actually a good thing. It should've been up 50. But they don't get credit in those situations typically. In fact, they're sometimes penalized.

And so again, I think incentives are a major factor here. And working to improve the incentives and rethink these plans that most of these departments are paid from, is a great starting point.

Westfall: Perceptive are people, when you tell them, when you talk to them about this way. Because I got to assume you're blowing a lot of people's minds about you have to rethink your incentives, your compensation, your entire approach. I assume it's an easy sell to top management, because they'll do the math and they'll see more savings. But for the actual finance department that has to work through it, how do you discuss those moving in that direction? It seems like a heavy lift.

Smith: It's a very interesting question, because we typically don't get to sell at the finance level. Look, that's one of the reasons why we're talking to this group today because this particular audience should be the most receptive to these messages. But typically, we're talking to procurement. This is, we're talking about expenses that that department handles. And we're a third party that is looking to engage with an organization, and they are typically the gatekeeper. So a lot of times, one of the biggest barriers to us getting a deal with a company, is a procurement professional that's worried about looking back. We've had people just come straight out and tell us, "Hey, yeah, you're right."

We have this thing Chris called the rollercoaster where... And I can't show you the picture of it. But every three to five years, somebody does something, the costs shift down a little bit. And then, over the ensuing three years it goes up. And then three to five years later, we do it all over again. And somebody gets paid for a cost savings initiative three to five years from now, it goes down a little bit again, and then it just goes right back up for the next three and they do it again. And we've had people directly tell us, "Oh yeah, that's actually good." It's probably good if the costs go back up, because we have some low hanging fruit to attack three to five years from now.

And so, we have to tiptoe around it when we're dealing with procurement. But with this audience, we can be very direct. It'll great now because it's the reality. We see it over and over and over again. I I would just ask finance, how can these departments save 20% every time they negotiate a uniform or a waste management contract? Well, they're not actually 20%. The cost escalated so much that waste management's willing to throw 20% for 10% savings your way, because they were so far afield from where you started.
Anyways, I do think that's an issue, but procurement, it's not their job to go and change their incentive. That is at the finance level. They're just playing by the rules they've been handed in most cases. And so, that's the challenge that we typically face.

Westfall: So, my final question is going to put your future thinking hat on, and really think about the future of the pyramid process. Especially what we started with, with the discussion about supply chain processes, completely upending in some areas, what's going on in China and changes there, inflation. So from your perspective, what do you see as the future of the procurement process, and how do you stay on top of this field going forward?

Smith: Well, we've touched on a few of them. Just starting with better software and systems and better data. Again, we have to have a solid foundation from which to work, and that has to happen. And look, I'm confident that companies will get there. We're talking about AI now. Software generally's improving over time.

Now, working against that are the vendors themselves, who are incentivized to make it more difficult. And we see this all the time, where it's just the invoicing process and the information they're providing you is inadequate to properly evaluate. So, it's this game that's going on. Well, company's got to get in the game. They need better data, they need to do these calculations, is a foundational element.
And then separately, I do think somebody has to take more of an ownership over expense management. After these deals go live, it needs to be more of a focus on the ongoing management of these contracts that then get put into place. And so software, I do think is crucial to help perform those functions and perform them at scale. And so, solving some of these historical challenges, I think, would be a huge amount of improvement.
And I do think, once you have some of these more foundational elements in place, you can start making an impact before the money leaves the building. We say this all the time, it's extremely hard. Possession is nine tenths of the law. Once that dollar is gone, it's really hard to get it back. Even if you find true black and white non-compliance with an agreement, it is extremely hard. So, the game ultimately becomes, how do you prevent the money from leaving the building in the first place, and being able to eventually anticipate things creeping up.

We've spent a ton of time in this area, and with our systems and software development. And the most insidious stuff that we've seen, and we describe as more of a gray area of expense management. There's black and white non-compliance. You have a price, they charged you something else. Look, most companies should be able to deal with that. And most basic systems should be able to handle that sort of a variance. But it gets really hard when you're talking about gray areas, stuff that is technically compliant where with margin... Excuse me, volumes of an item are growing or inventories are just gradually creeping up over time. And vendors are just injecting little bits of new product into the system. That is extremely hard to track and manage.

And I do think there is a future state where software can detect those sorts of things and say, "Well hey, we've seen this before." Machine learning can kick in and say, "Let's keep an eye on this." There's a site that ticked up a little bit two months in a row. It's not enough to flag any variance calculations, but we're seeing a trend, and is that something we should be delving into at a detailed level? So, I think there's so much low hanging fruit though, that just improving and getting in the game from a data standpoint, and understanding the data, and doing the hard work of monitoring the data, I think, is an enormous step. I think companies will realize a huge amount of gains almost immediately from all this low hanging fruit I'm describing.
And then, there are opportunities to improve it from there. As you get more and more sophisticated, the software's learning. You have AI involved. You can detect anomalies and changes in more real time to then affect change, again, before those changes become ingrained and before too much money has left the building, so. My message here, the future is really now. We've got to just improve what we have before you can... I mentioned the AI part of this. You really have no hope of applying AI if your data is that bad. And so, I do think getting back to the basics here a little bit is a great starting point. But then from there, using software and AI and these emerging tools will allow for more sophisticated management moving forward.