Procurement and capex business units need to work hard to make the relationship between them effective and successful by understanding how both can bring the potential for huge business benefits.

Procurement is often seen as being in an ivory tower in the world of business. It often finds itself adrift in an organisation, which means that the business is missing out on a great opportunity to save money and streamline operations.

Procurement departments should be working more closely with finance departments, but time and again, this isn’t the case. Why not? Recent research¹ commissioned by 4C Associates points towards the nub of the problem being the procurement department’s ability to influence capital expenditure (capex). Procurement has less of an influence on capex decision makers than direct and indirect goods and services (22% compared with 28-35%).

Given the increasing importance of capex in most businesses, and its strategic nature, this presents an opportunity for procurement to get involved in more strategic areas. How can procurement work more closely with capex and what are the barriers to a successful partnership?

Changing Perspectives

Procurement can often be viewed by capex teams as having a one-dimensional approach: the department is perceived as being good at buying stationery or IT consumables, but not complex capex project requirements. Often radically different approaches are required, and procurement must be ready to adapt and demonstrate agility and resource flexibility - capex projects won’t wait for procurement’s timescales. It is also essential to be able to understand complex requirements and adapt sourcing processes to meet specific project need, without compromising critical commercial processes.

The procurement department has a lot to offer in the management of capex programmes. Strong project and process management skills are vital in managing capex programmes, which are strong points for procurement. Also, procurement can bring lucidity to programmes by clarifying key decision-making criteria and ensuring key buy-in from all stakeholders by encouraging a move from an emotional decision-making process to a more logical one, taking into account the importance of both cost and quality.

This clarity becomes a thread running through all decision-making - from an input-specific focus, including supplier conditioning, to an output-specific focus, with the emphasis on departments asking ‘what do I need the solution to deliver?’ as opposed to the more traditional ‘how will the solution deliver?’ question. Procurement is able to contribute its market intelligence to a project, identifying new suppliers and creating new markets. This includes challenging the rare idea that businesses are ‘special’ and have truly unique requirements. This is essential, as it means that supplier choices are kept open and not narrowed down to one or two.

Capex teams can also be aided by procurement teams as they are able to identify and recognise key specification requirements and translate these into clearly defined requirements of the supply contract. This means that capex teams will get the specifications right the first time and avoid headaches that can be caused by capex suppliers generating additional revenue through ‘scope creep’ during the supply and commissioning stages of projects. Procurement taking a hand in the management of the commercial process means that scarce technical resources can be freed up so capex teams can focus on project delivery.

Significant benefits can also be gained for capex teams by the relationships that procurement has across the business. These can be leveraged, ensuring that capex teams have a 360 degree viewpoint and focus more towards total cost of ownership, instead of only initial capital cost, which often drives capex decision-making. This is done without delaying the project, and is important because capex decision-making often has a huge impact on operations and revenue further down the business.

Strategic Engagement is Key

Although procurement has important skills that capex teams can benefit from, it is not as simple as just putting the two teams together. Procurement needs to get closer to the function as early on in the decision-making process as possible - attending key steering meetings and liaising with decision-makers and important stakeholders to gain visibility of future capex processes. This means that procurement can influence thinking earlier in the process and escalate important issues before they become larger and more difficult to resolve.

The key for procurement teams is to succeed through effective engagement. This means building a strong working relationship based on trust. With this, capex teams will engage procurement earlier in the process, at the stages where the greatest influence can be made: the specification development and supplier engagement phase. However, other business functions need to be aware that, although procurement has a lot to offer from its arsenal, the procurement process needs to be respected. Time needs to be built into the capex project plan to accommodate critical procurement process stages, so that capex teams will reap the full benefits of working with procurement.

Both procurement and capex teams need to work hard to make the relationship between them effective and successful, with the potential for huge business benefits. Both teams need to keep in mind the objectives and needs of the other, while ensuring that strengths from each are utilised in projects.

Article by David McKilligan is a senior manager in the consulting division of 4C Associates who specialises in procurement diagnostics and benchmarking. Prior to joining 4C in 2007, McKilligan was an engineering category manager with BPO specialist, Xchanging Procurement Services. Preceding this he started his career in purchasing with AstraZeneca where he gained his CIPS qualification having initially joined the company's Engineering Graduate scheme in 1999.