Treasury and Procurement – Closer Than Ever?

Interactions between treasury and procurement spiked during the Covid-19 pandemic, as both departments dealt with the emergency that global lockdowns triggered for corporate supply chains. As we move into the next stage of managing the crisis, strengthening engagement between the two departments offers efficiency opportunities for team members and the wider organisation.

While they tend to operate as two separate functions, there are areas of shared interest in the treasury and procurement Venn diagram. Much of this ‘connective tissue’ comes from the different external relationships that each department specialises in – for treasurers, this is their core banking relationships. At the same time, procurement focuses on supplier relationships.

David Voss
Head of Commercial Cards, Global Transaction Services, EMEA, Bank of America

David Voss, Head of Commercial Cards, Global Transaction Services, EMEA, Bank of America (BofA), comments: “There are themes that these two functions have in common, even though, on the face of it, they may look quite different. Both parts of the organisation are focused on creating efficiencies and value, and both need to raise the visibility of their activities at the board level. Where appropriate, it makes sense for them to partner because what one area does can heavily influence the other in terms of cash flow optimisation, payment terms and reducing risk. There’s definitely more that unites treasury and procurement than meets the eye.”

Frank Reinhardt, Senior Vice President, Corporate Finance, Wacker Chemie, agrees: “There are some clear areas of common interest that exist today between treasury and finance teams and procurement. For example, anything that involves longer payment terms, paying suppliers on time or managing the increasingly complex sanctions environment, can benefit from shared input by both functions.”

Frank Reinhardt
Senior Vice President, Corporate Finance, Wacker Chemie

For Alberto Panariello, Head of Cards Sales & Partnerships, Nexi, procure-to-pay is the main sub-process where the interests of procurement and treasury converge. “Today, this space is impacted by several hot topics: digitalisation, inflation, cost of funding, disruption of supply chains, and working capital dynamics, for example. There could also be the opportunity to examine company spending and better understand and enforce compliance with procurement policies and needs.”

Co-operation is key

The onset of the pandemic gave any natural synergy between treasury and procurement a boost. Covid thrust the corporate supply chain into the spotlight, as those in the roles of CEO and CFO clearly witnessed the business challenges that arise when goods are not delivered. More specifically, the crisis underlined the importance of supply chain finance (SCF) to drive and sustain the whole supply chain.

Markus Rupprecht, Founder and CEO, Traxpay, explains: “We have a client that used an SCF programme to support their suppliers that were running low on cash. While it is not uncommon for a supplier in that situation to go onto such a platform as a solution, in this case, the buyer was in a position to offer them cash at an even lower rate. The suppliers could get paid immediately, rather than waiting 60 to 90 days, for almost no cost. This has been a shift in strategy as a result of the pandemic – corporates used to squeeze their suppliers as much as they could by lengthening payment terms, but now they ensure they’re getting paid as quickly as possible so they continue to deliver.”

Markus Rupprecht
Founder and CEO, Traxpay

Covid has also clearly had a logistical and operational impact as well as a financial one, with supply chain bottlenecks hitting the headlines around the world. As a result, procurement and treasury teams had to discuss sourcing and payments strategies from different sides of the same problem.

Panariello comments: “Quite often over the past two years, we have seen procurement looking for additional suppliers, sometimes in new markets, and needing to manage these relationships with faster, safer, and more digital payment processes. This is a clear challenge that can be addressed only if open and strong co-operation is established between procurement and treasury.”

Breaking down silos

With the various external and internal pressures encouraging greater co-operation between the two functions, some of the walls between them are starting to crumble – and examples of best practice collaboration are emerging.

Baris Kalay, Head of Corporate Sales, Global Transaction Services, EMEA, BofA, notes: “When establishing or running an SCF programme where treasury and procurement are equal stakeholders, the value of common goals is immediately recognisable. A more unified approach between departments enables a banking partner to implement and grow an SCF programme in a way that helps the corporate achieve its targets in a much easier manner.”

In some cases, the blurring of boundaries between the two functions has led to responsibilities traditionally managed by one department being picked up by the other.

Rupprecht reveals: “Something we have observed at many corporates is that the procurement function is often initiating and driving SCF today. Two or three years ago, we never saw anything like this coming out of the procurement department. While most programmes are still initiated by treasury, the fact that some of them now evolve out of procurement shows how these organisational silos are starting to be broken. This is to everybody’s benefit.”

Some of the most exciting cases of treasury and procurement partnerships are where payment activities are part of the commercial relationship with the suppliers. This becomes a key negotiation lever because the means of payment gives the supplier a tangible benefit thanks to the customer’s asset, something to which third-party vendors are already reacting.

Panariello explains: “Digital B2B payment cards are one example of how to provide suppliers with liquidity by leveraging the customer’s creditworthiness. In this regard, we recently signed a partnership with Piteco, an Italian software house, enabling large domestic corporations and SMEs to have a new digital payment solution at their disposal to shorten payment times in the supply chain. The integration between Piteco’s software and Nexi’s virtual credit cards gives companies tools capable of scheduling payments, optimising cash flows, and sustainably reducing liquidity impacts.”

The benefit of the two departments working together on payables issues not only helps the supplier relationships on the procurement side but also aids in strengthening bank relationships through the business presenting a united front.

 “Card and payables implementations are generally at their quickest, and adoption has accelerated, when we’ve had procurement and treasury together in the room,” adds Voss. “We’ve seen several tangible examples that demonstrate a common objective, most likely agreed at board level. To me, those are the signals that there’s a joined-up strategy and that the company is set up for success.”

Integrating ESG elements

While treasurers and procurement managers can identify areas of potential collaboration between the two functions, senior management and board-level organisational goals also push the two functions together. Compliance with the hot topic of ESG requirements is a particular issue in supply chain management.

Analysis from McKinsey^[1] found that the typical consumer company’s supply chain creates far greater social and environmental costs than its own operations, accounting for more than 80% of greenhouse gas (GHG) emissions. With companies now signing up to Scope 3 of the Paris Agreement’s Greenhouse Gas Protocol – to reduce emissions generated in the upstream and downstream value chain – there is an organisational emphasis on procurement and treasury to work together to achieve the protocol’s goals.

“The concept of ESG in SCF has penetrated the procurement world quite efficiently and is becoming popular,” reveals Kalay. “This is an excellent example of how treasury goals are also incredibly valid for procurement. For example, there are several ways to identify the more ESG-friendly suppliers. As a treasurer, it is critical to have procurement’s buy-in, feedback and co-operation when establishing an SCF programme with an ESG focus.”

Voss agrees: “There are certainly some key corporate objectives under the ESG umbrella that indicate there’s room for more synergies between the two functions. Corporate responsibility is a key point, as both treasury and procurement must continually update their way of thinking, such as relationships with their suppliers. How can you get the right trade-off between extending payment versus helping your smaller suppliers’ cash flow?”

Strategic enterprise-level programmes such as ESG help everyone within an organisation to focus on common goals, thereby facilitating the cross-functional alignment. Another such topic that can come from the top is digitalisation.

 Panariello explains: “In the specific context of ESG and digitalisation, mutually relevant topics will emerge through the joint ownership by procurement and treasury. As well as the financial sustainability of the supply chain, the full digitalisation of the order-invoice-payments cycle is a prime example.”

Alberto Panariello
Head of Cards Sales & Partnerships, Nexi

Indeed, digitalisation could help to remove one major stumbling block between a successful partnership between treasury and procurement – the fact that often the two departments will naturally have very different, yet related, goals and targets.

 “Digitalisation should solve the many competing KPIs within corporates,” says Rupprecht. “Treasurers will need to combine all this data from the various organisational departments and find a way to ensure that all these goals match, in other words, that they are not competing but rather aligning goals. The biggest problem for today’s corporates is that there are no obvious means to measure all these KPIs. When we achieve this through digitalisation, it will be a massive change for all companies, as once they can be measured, we can debate and defend the merits of different approaches.”

Aiming for a win-win situation

Of course, KPIs are not the only challenge to overcome when bringing the two departments together to work harmoniously – there are other hurdles to clear.

“One potential stumbling block to a good partnership between finance and procurement can be the different mindsets both functions bring to the table,” Wacker Chemie’s Reinhardt notes. “Due to the transactional nature of the role, procurement tends to be more focused on the ‘best last price’, whereas finance is committed to long-term, trustful relationships.”

Nexi’s Panariello agrees that good co-operation requires an alignment of all levers and tools across the organisation. “Common obstacles to watch out for are conflicting goals and targets, decoupled information systems –both management information systems and operational level information systems – and having a short-term focus without a long-term view.”

 The difference between a well-functioning partnership and an impasse between the two functions can come down to something as trivial as which team is able to claim credit for a job well done. This can especially be the case regarding company revenue. Rupprecht suggests that a wise treasurer could gain better insight of the commercial side of the business by judiciously allowing procurement to take the credit for certain developments.

“Most of the time, the treasury function is seen as a cost centre, nobody expects it to generate revenue,” continues Rupprecht. “But treasury is gaining the company money by effectively paying suppliers early through an SCF programme. This can be either through dynamic discounting or by optimising the days payable outstanding [DPO], enabling procurement to get the best price from the supplier with the promise of immediate payment. It is a clever move to put the treasury department in the centre of everything, and it is much easier to get procurement and sales on board if they see that they keep their benefits while prices get lower. It’s a win-win situation for the two departments and, ultimately, for the company.”

A final obstacle to overcome in the quest for a harmonious relationship is gaining the support of the IT department. This is vital because technology underpins so many projects that procurement and treasury are likely to work on in partnership.

“Treasury, procurement, and IT have to go down the digital path together,” continues Rupprecht. “The biggest challenge that the treasury and procurement partnership faces in SCF is that they both depend on IT. However important a treasury and procurement project might be, it will not be completed without IT. I know of many a project where either the CFO or the CPO wanted to go ahead, but it wasn’t executed because IT said they couldn’t do it at that time.”

Creating a productive partnership

There are various steps that treasurers could take along their journey towards starting a new relationship with the procurement function or if they simply want to enhance existing ties.

“Treasurers can support procurement naturally through some of their core competencies,” enthuses Reinhardt. “This includes efficient cash management, SCF, and know-how when assessing certain suppliers’ creditworthiness and financial stability. Having both functions on the same page can be a big win for the overall organisation.”

Panariello agrees that treasurers can look to provide additional internal and external negotiation levers to procurement colleagues. “There could be many useful instruments in the treasury toolbox that can help procurement have richer discussions with suppliers and also gain a better view of internal spending needs.”

Another tool is the close ties that the treasurer has with the business’s core banking group. Opening up that element to the procurement team, when appropriate, could be critical. Kalay recommends: “Leverage your relationship banks. Treasurers are very close to their core banks, interacting with them almost daily. These same relationships can be used for advice on cost efficiencies or identifying solutions for the procurement team, which could also benefit the working relationship between treasury and procurement.”

Baris Kalay
Head of Corporate Sales, Global Transaction Services, EMEA, Bank of America

If treasury and procurement KPIs clash, it is vital to have a conversation at senior-management level to determine what mutual success would look like. Rupprecht explains: “It is a joint success if there are no longer any hiccups in the supply chain. When companies are making money out of that, if they are increasing their DPOs, if their rating is getting better – all these different items need to be defined by someone above treasury. A manager can tell everybody in the company what the goals are, and what is of utmost importance to the value chain or the ESG rating. They can also be allies in ensuring that IT is working towards the same aims.”

Patience is also a virtue when it comes to working together. Voss concludes: “Treasurers should bear in mind the different conditions that procurement experiences – the longer timescales and outlook – and always be prepared for change to take longer than they might anticipate.”

“Also, focus on areas of common ground where objectives are most closely aligned. Working capital optimisation has huge potential to benefit both functions and to bring a core benefit to the treasurer. This will only happen with the involvement of procurement. Finally, don’t be hesitant to ensure that the top of the house supports any decision. That can make all the difference in executing a joint treasury and procurement vision.”