The constantly shifting landscape of supply chain and procurement requires organizations to stay on top of trends and react to swiftly changing conditions. However, getting a handle on spending is virtually impossible without alignment between your top financial stakeholders.
What are the best ways to get your finance and operations on the same page? And what does the financial future of your company look like if you can’t?
This article outlines the benefits and best practices for achieving financial and operational alignment through a robust financial operations (FinOps) practice. The need for alignment goes beyond technology spending, and many of the practices outlined here can benefit every spend category.
Using FinOps best practices, companies will achieve total visibility and reduce the impact of indirect spend on their profit and growth.
How to align finance and operations
FinOps, short for financial operations, is the processes and techniques used to control indirect spending. The principles of FinOps combine cost-saving and cost-avoidance techniques to systematize approval and spending.
Because waste spending can consume up to 30% of an organization's budget, spend optimization is becoming a priority for most businesses. Engaging in FinOps techniques ensures companies get the best business value for the goods and services they buy.
Why is FinOps important?
The main goal of FinOps is to lower costs and curtail unnecessary spending. Achieving this goal requires a systematic and thorough approach to managing your indirect procurement costs.
These practices are essential because reducing indirect costs is at the heart of many organizational objectives. Using a FinOps approach to indirect spending, companies can make improvements in several areas:
- Optimizing budgets and refining their allocation
- Streamlining vendor vetting and relationships
- Reducing the busywork of managing excess accounts
- Mitigating risk from unproven third-party vendors
- Building a reliable and resilient supply chain
Good budgetary controls begin with knowledgeable negotiation and remain in place throughout the vendor life cycle. FinOps is a holistic practice that involves many internal and external stakeholders to guide and approve spending decisions.
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Benefits of adopting a FinOps process
While there are many obstacles to implementing an optimized process, the benefits of successful implementation make it a vital component of organizational planning.
Improved cost savings and profitability: The top motivation for aligning finance and operations practices is to save money, eliminating maverick spending that leads to budget overruns and cash leaks. This leads to better financial performance and can have a positive impact on top-line metrics.
Better contract performance: Thoughtful evaluation and careful negotiation with suppliers result in better contract terms throughout the supplier relationship. By committing to a thorough evaluation, companies end up rightsizing their purchases and establishing better relationships with providers.
Lower risk: Improved due diligence lowers third-party supplier risk. This weeds out questionable suppliers, prevents undesirable outcomes due to weak service-level agreements (SLAs), and reduces the potential for data-security incidents.
Streamlined tech stack: FinOps focuses on optimizing every aspect of purchasing. With a better understanding of company needs, there comes an opportunity to consolidate suppliers. This, in turn, streamlines the accounts payable process, reducing account and invoice volume.
Increased visibility: Getting a handle on your contract management and software purchasing practices creates better visibility into spending. This provides increased access to real-time data insights to drive informed decision-making.
Easier budgeting and forecasting: With better budgetary controls and higher visibility, finance and procurement can work together to fine-tune budgets, perform capacity planning for future technology needs, create and track performance metrics, and implement accurate forecasting.
Top challenges to FinOps cloud spend optimization
The nature of software purchasing can make optimizing software spend a challenge. Some of the top obstacles to streamlining software budgets include:
Changing pricing: Software pricing and features are highly variable, and often your service level and pricing will change throughout a contract. This variability makes it more difficult to perform benchmarking, estimate future costs, and control spending. Good finance practices can help mitigate the effects of a changing software pricing landscape.
Disorganized supplier management: In the absence of cross-functional teams, departments tend to self-serve when sourcing supplies and software. This may result in multiple departments engaging in separate contracts for the same or similar tools. This disorganization can lead to duplicate contracts and orphaned apps and licenses that cost thousands in the long run.
Poor contract visibility: Often some of the uncontrolled spending within an organization’s budget comes from poor contract management for auto-renewing items like SaaS subscriptions. These subscriptions are frequently initiated outside a controlled purchasing process (e.g. on a corporate card or expense report) and become “orphaned” when the billing owner leaves or software needs change. These invisible contracts quietly auto-renew, leaking cash and reducing cost optimization.
Incomplete spend data: The same data silos that tend to create duplicate tooling and redundant contracts create an incomplete picture of spending. When data is decentralized, it can’t drive value creation or better decision-making, sapping budget potential.
Manual processes: Spreadsheet-based tracking and reconciliation are error prone and costly. This approach may work in the beginning stages of a startup, but it creates more problems and increases wasteful spending over time.
5 FinOps best practices
Taking a best practices approach to aligning finance and operations can yield better results and improve savings. Start with these 5 areas:
Standardize the approval process: Optimizing spending requires good budgetary controls—from needs identification all the way to vendor offboarding. With a well-constructed purchase requisition or intake form, finance has all relevant information together in one place before a deal gets off the ground. Creating a standardized and well-documented process for purchases puts controls in place early. It also centralizes the information required to complete the purchase process.
Agree on contract prerequisites: Your CFO and your legal, IT, security, and finance teams all have a vested interest in purchasing outcomes. They often have lists of requirements for supplier relationships. Therefore, these departments need to align on the prerequisites for any supplier contract. When these non-negotiable items are communicated through the purchasing workflow, they give stakeholders guidelines for selecting and evaluating potential suppliers.
Use competitive analysis: Financial accountability doesn’t happen automatically. When buying software, there’s the temptation to go with a recognizable name or a supplier recommended by your network. However, best practices dictate that companies conduct a bid process for any new purchase. Collect quotes from two or three potential suppliers and perform due diligence to source goods with the best total cost outcomes for your organization while evaluating the trade-offs.
Practice strategic sourcing: Strategic sourcing is the process of vetting and working with a small number of preferred suppliers to meet organizational goals. Strategic sourcing consolidates your purchasing practices in order to leverage volume pricing and control costs. Developing a strong strategic sourcing practice within your procurement process can enhance FinOps cost-saving measures.
Centralize contract data: Once you have successfully negotiated a deal with a preferred supplier, ongoing contract management becomes the next priority. The easiest way to accomplish this is to centralize data into a dynamic platform. While spreadsheets may work for lightweight tracking, they cannot offer the automation necessary to build a scalable contract management practice.
How Order improves FinOps practices
Even in small businesses, the number of supplies, services, and software licenses needed to keep business moving forward can be overwhelming. Moreover, there’s a constant flow of renewal dates and cancellation windows, changes to supply prices, volume discounts, service tiers, and features packages. This changeability makes the task of organizing and managing indirect procurement spending overwhelming.
Order brings all sourcing, ordering, fulfillment, and pricing data together in a cohesive platform that offers total control and visibility into spending. Additionally, Order’s invoice consolidation features allow you to pay your suppliers on time, without manual processes or missed payments.
Using Order to align your finance and operations teams offers you better cost savings while freeing your staff from the burden of administering thousands of purchases and invoices. To see this process in action, request a demo of Order, the first and only Spend Efficiency Platform, today.