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Why CFOs should not put cost targets at procurement
Arjen van Berkum |
November 9, 2023 |

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Why CFOs should not put cost targets at procurement or contract management

The role of a Chief Financial Officer (CFO) is crucial in managing the financial aspects of a company. When setting cost targets, it is important for CFOs to consider the overall impact on the company’s performance and not limited to procurement or contract management alone. More often then not I meet procurement or contractmanagement departments that have been given an objective… cut cost.

Here are a few reasons why CFOs should not put cost targets at procurement or contract management:

1. Holistic Approach

Cost targets should be aligned with the overall business goals and objectives. It is essential to take a holistic approach and consider the entire value chain of the business. By setting cost targets at the real accountability holders, such as the different business departments or business units, the CFO ensures that cost reduction efforts are well-distributed throughout the organization.

2. Process Efficiency

While procurement and contract management play a significant role in managing costs, focusing solely on these areas may limit the potential for cost savings in other parts of the business. By involving the real accountability holders, who have a deeper understanding of their respective areas, the CFO can identify inefficiencies in various business processes and uncover hidden cost-saving opportunities.

3. Performance Accountability

Holding the real accountability holders responsible for meeting cost targets instills a sense of ownership and accountability. It encourages departments or business units to align their decisions and actions with the overall financial objectives of the organization. This approach fosters a culture of cost-consciousness throughout the company.

4. Broader Perspective

Cost targets at the accountability holders allow for a broader perspective on cost management. Different departments may have unique cost structures and requirements. By involving them directly, the CFO can gain insights into specific cost drivers and tailor cost management strategies accordingly. This approach promotes a deeper understanding of the business’s financial dynamics.

5. Collaboration and Innovation

Involving the real accountability holders in cost target-setting encourages collaboration and innovation. It enables cross-functional teams to brainstorm and develop creative cost-saving initiatives. By engaging various stakeholders, the CFO can tap into diverse perspectives and expertise, leading to more effective cost management strategies.

In summary, while procurement and contract management are important components of cost management, placing cost targets solely on these areas may limit the overall effectiveness. By involving the real accountability holders within the business, CFOs can take a holistic approach, promote accountability, gain a broader perspective, and foster collaboration and innovation.

Author: Arjen van Berkum

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