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September 5, 2017

Ensuring Budget Alignment with Enterprise Objectives

Ensuring Budget Alignment with Enterprise Objectives

As we enter Q3, many companies are beginning next year’s  budget setting process. Establishing a new budget creates opportunities for big thinking, goal setting, forecasting and growth planning. In order to secure approval, however, each budget owner must demonstrate budget alignment between their funding requests and overall enterprise objectives.

Achieving budget alignment throughout the organization requires strategic evaluation on the part of the executive team. They will have to make judgement calls about where the majority of the value will be created and which “highest” priority offers the greatest ROI for the company as a whole. At the department level, this means stiff competition for additional budget – or in some cases for the same budget – year over year.

As long as budgets are in flux, there is the possibility that additional funds will be allocated to new efforts. Once they are finalized, the budget occupies a fixed point as circumstances around it change. After that, alignment can only be maintained by making adjustments to demand, requirements and purchase timing.

Fortunately for budget owners, procurement specializes in seeking and achieving alignment. Are our efforts aligned with corporate strategy (ideally)? Is our understanding of requirements aligned with the business’ needs (hopefully)? Is our view of performance aligned with finance’s perspective (well…). Alignment requires mutual understanding and flexibility – skills that procurement can bring to bear during the annual budgetary process which also help the company as a whole and the individual departments that roll up into it.

Procurement has three opportunities to facilitate alignment between departmental budgets and enterprise objectives: during the planning stage, ongoing delivery and in instances of lost alignment.

Spend Alignment with Corporate Objectives

Spending is never just spending – at least not if it is done right. It is not easy to secure approval for a budget that includes increased spend or investment in resources. The best way to achieve this is by tying each request for funds to departmental capabilities that will then advance enterprise objectives.

When the budget approval process involves meetings between each department and the leadership team, it is critical for procurement to be involved, even if in a passive role. Procurement should be party to discussions about how the investment of resources can advance corporate goals. They can then, in turn, help individual budget owners understand where they fit into the big picture and what parallel requests for additional budget they are likely up against.

Procurement can objectively evaluate how budget requests will be received against the backdrop of market pressures and competition before making the actual request. That will provide invaluable support for the department leads as they consider their customers and internal stakeholders.

Fostering Alignment with the Procurement Toolkit

Procurement’s whole existence is based on helping maintain each department’s alignment with their budget. In fact, we bring more than one of our tech tools to bear on alignment during routine procurement processes:

  • Strategic Sourcing: In most cases, having more qualified options to choose between increases the total value created. This has meaning to the enterprise precisely because the available budget is not unlimited. Downward pressure on budgets requires departments to make calculated trade-offs and explore creative options. While not easy, this is a healthy process that forces each budget to efficiently manage category-level spend so that it rolls up in the correct proportion to the department budget, just as the departments roll up to the enterprise budget.
  • Contract Lifecycle Management (CLM): Sourcing creates conditions under which the company gets what it needs in exchange for reasonable terms, but only in theory. It is through CLM that theory becomes reality. By monitoring actual purchase volume against projected volume, charged prices against negotiated prices, and achieved service levels, procurement can oversee the performance and value contribution of each supply partner and hold them accountable for their role in meeting the budget.
  • eProcurement: Just as sourcing only has impact via the benefits of contracts, eProcurement is the key to making the right products and services available to distributed buyers. If it is easy to stay compliant, buyers will have little reason to mis-use purchasing cards or return to former incumbent suppliers, off contract and without agreements in place. Having all purchases flow through a centrally designated channel also allow departments to accurately track their monthly and quarterly purchases against the approved budget.

Budget Alignment: Making Course Corrections

Good intentions aside, sometimes departments find themselves out of alignment with their own budget. Demand might unexpectedly increase or a supply chain disruption might force a switch to a more expensive alternate source of supply. Regardless of the cause, the business’ first outreach should be to procurement. By returning to strategic sourcing or leading a direct negotiation with one supplier, procurement can bring alternate sources back into line with the budget or study spikes in demand to understand their cause. If nothing can be done to mitigate the unanticipated increases in one category, procurement may be able to help close the gap in another category of spend covered by the same budget.

While we usually think of the budget cycle as an annual process, it is wise to plan ahead. Projects often cross fiscal years, and having procurement involved – at the enterprise and departmental levels – can only bring the final result closer to the plan. Even a draft budget, one that is focused on known continuations of spend from one year to another, will speed up subsequent budget proposals and increase clarity on the current year.

 


Wherever you are in your current budgeting process, you can pick up some ideas at Determine’s live product demo webinars at 4PM ET / 1PM PT today, or on Thursday, September 7th at 11AM ET / 8AM PT on Budget Management Aligned with Procure to Pay.

If you want a closer look at solving specific challenges,  you can schedule a personalized demonstration on how the Determine Cloud Platform enables you to get all your people, processes and data (and budgets) in alignment.

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