By Simon Geale, SVP Client Solutions, Proxima

ONS figures released this week confirm what business have known for a long time – that the pandemic has plunged us into the worst recession on record. Pain will be felt and hard decisions are already having to be made by businesses across the UK.

As business look to restructure their costs to weather the downturn, many of these hard decisions will involve suppliers. Whilst the CFO’s first move to reduce cost is often to shrink headcount, external suppliers make up over 80% of the cost base of most large corporates, and so offer far greater savings, although not without consequence.

Money spent with suppliers is spent because it enables a business to do things which it could not do as well if it tried to do it internally, reckless or sweeping cuts may do more harm than good.

Successfully navigating the recession, will depend heavily on how well the CFO manages investment with external partners. Why the CFO? Well, 60% of UK procurement functions report into finance giving CFO’s end to end accountability of the finance and procurement process.

So what steps will CFOs really be thinking about to begin tackling this issue? At its heart, the key question is what sort of business you are going to be during this very different recession, and how can suppliers (or the 80% of your budget) best contribute?

Step one – See the opportunity as well as the risk

Typically, the temptation is to centralise and hunker down, but this carries serious risk in a world increasingly inhabited by agile, growth-oriented competitors and increasingly volatile customer and supply markets. For many the competitive landscape has changed and businesses will need to be act fast and smart to come out the other side in good health.

Research from McKinsey discovered that “nearly 40% of leading US industrial companies toppled from the first quartile in their sectors during the 2000–01 recession, and a third of leading US banks met the same fate. At the same time, 15% of companies that had not been industry leaders prior to the last recession vaulted into those positions during it”.

There may be a recession, but there is also an opportunity to drive competitive advantage. This might be an important mind set shift.

Step two – Decide what sort of business you are going to be

Not all businesses are going to face the same pressures, and not all businesses need to behave in the same way. A small number of businesses will be “recession proof” and able to carry on more or less as normal, but a majority will seek to lower operating costs but also achieve “something else” be that more sustainable, faster, less risky or more agile. A mark of “Coronatimes” is that some will seek the ultimate flexibility to fundamentally change their purpose and, or customer proposition.

Understanding what sort of business you are going to be is as much about looking externally at customers, competitors and supply chains as it is about looking internally. This rounded view will inform the initial strategy and course corrections taken along the way.

Step three – Understand the real supplier contribution

Whilst strategic direction will be set internally, supplier expenditure is still going to be the primary outgoing, and enabler of the desired outcomes. The challenge for CFO’s is that the tandem goals of reducing costs and achieving flexibility (for example) do not conventionally work together. This is where cutting smart comes in.

With some suppliers there will be opportunities to cut hard and fast with little consequence. There will also be instances where cutting hard is counterproductive, short and long term. CFO’s need to work closely with procurement and business stakeholders to understand the “real contribution of suppliers” and the “real state of supply markets” to make informed decisions.

Arguably this process is going to involve a new way of looking at spend and one which is common neither in finance nor procurement today. Rather than thinking in terms of long-term strategy and tactical operational benefits, businesses must think in terms of what spend is ripe for cuts and what investments will enable immediate productivity and growth.

Step four – Make sure procurement is recession ready

Most organisations now have a procurement function, most of which have been built and calibrated to service the business as was “pre-covid”, not the business now navigating the recession. CFO’s need to ensure that they have the right blend of capacity and capability for today’s challenge; the acceleration of the finding and delivery of “value”.

The term value is important here, because it can mean different things, reflecting the different needs from the supply chain be that savings, growth, ROI, flexibility, etc.

This recalibration of the role of procurement is going to mean a shift in mind-set for many finance functions in relation to both a different understanding of the supplier contribution and procurements role in enabling it. But procurement has also to step up and lead, and demonstrate its worth.

A good Chief Procurement Officer or Advisor will be seeking to stand out here, not hunker down. They will be seeking to invest in the short term to drive fast outcomes and CFO’s should welcome structured argumentation as for the need to invest in a few key areas such as cost saving programmes, supplier management/ collaboration initiatives, data visibility tools, supply chain risk management platforms, and other digital solutions.

Finance can also help by putting in the right the governance models, policies, approvals, and decision making to make procurement effective.

Step five – Get your friends and enemies closer

Such is the nature of the modern business that suppliers can be both the reason a business might fail and the reason it might succeed. Supplier relationships are more important now than ever, and so it’s critical to know each other well and work towards common goals. In addition to this, if the pandemic has taught us anything, it is that we may have new definitions of what defines a critical supplier and a healthy supplier.

Closer working relationships bring many benefits, they reduce waste, save time, bring innovation and unite businesses in pursuit of common objectives. In a recession they also allow close monitoring of each other’s health and needs. For example, a recent Bank of America Merrill Lynch study showed that 13% of public companies over 10 years old are making less profit than the interest costs on their debts.

Closer relationships with suppliers will enable CFO’s to get early warning and to make smart and fast decisions where they need to be made.

Now go

The challenge for CFOs through this crisis is to ensure that they cut smart and allocate investment funds to growth areas. Fast and effective action in the supplier base will determine which businesses emerge from the Covid-19 recession firing on all pistons.