Identifying benefits as a result of sourcing cost improvement projects can be very challenging for most organizations.  There are several theories as to why this effort presents itself as difficult.  For example, some organizations are satisfied with the general improvement in their financial statements after implementing some kind of Business Improvement methodology, such as a Project Management Office or Lean Six Sigma.  In this case, they have not deemed it necessary to reconcile the benefits to the company financials because the company is holistically performing better.  Another theory is that many companies do not realize the benefits of implementing a financial validation process during their initial efforts of driving cost saving projects because they are so focused on training and project execution. 

As Business Improvement  methodologies have matured over the last few decades, many companies have developed the perception that simply learning the tools and driving the project to completion will deliver the desired benefits.  Unfortunately, they have missed an opportunity to bring true credibility to the effort by implementing a process that directly and auditably reconciles any project and its savings to the company’s bottom line.  What companies need are accounting and reporting processes so there is no debate and argument as to the financial impact and effectiveness of the process improvement effort, whether the projects reside within the sourcing function or not.

The Key to Success – Strong Project Governance

It is widely understood that a strong project governance process is key to the successful execution of projects.  A high level governance process is demonstrated below, where we illustrate the critical elements of the project selection process:

1.     Idea Generation

2.     Benefits Estimation

3.     Project Prioritization

4.     Project Approval

5.     Project Launch

Most organizations recognize the value in this process, but many fail to follow each step for every

project.  In fact, research has shown that many companies are so anxious to launch projects that they do not

perform a proper benefits estimation process for each project, thus resulting in an ineffective project selection and prioritization process.  As a result, too many projects are chartered, and few are completed to the company’s expectations.

The Relevance of Financial Validation

 A necessary element to add to an organization’s project governance process is financial validation.  By ensuring that this element is fully integrated into your project selection process, an organization can
drive improvements in several critical areas:

1.     Project benefit reporting;

2.     Definition of project benefits, defined specifically as tangible and intangible; and

3.     Credibility of the project’s deliverables by the company financial representatives.

The implementation of such a financial validation process can be achieved by applying the following basic principles:

1.     Customize the project financial rules, in accordance with specific company financial policies and guidelines;

2.     Integrate with the company’s general ledger and financial reporting system;

3.     Reconcile calculated savings with actual financial movements and transactions within the general ledger and reporting system;

4.     Integrate and compare with the company’s financials, as included in the project governance process, with the real financial transactions going through the accounting system;

5.     Report output provided for key schedules for the Management Accounts relating to the improvement program; and,

6.     Direct control and governance of the cost savings’ program in a way that directly and auditably reconciles to the company’s accounting and reporting systems.  

 

Thus, through the implementation of these principles, you eliminate the debate as to the financial impact and effectiveness of the process improvement program within the organization, thus driving credibility and building sustainability.  The linkage to the project benefits is direct and not ‘fuzzy’, because the validation and reporting is performed by your company’s financial representatives – not the sourcing organization.

Results

The implementation this model drives significant improvement in project reporting and financial internal controls for sourcing, or another organizational, projects.  The model is effective regardless of whether your company uses a project management portfolio database, or simply tracks them on Excel spreadsheets.  In either case, introducing this financial infrastructure elevates an organization to another level by validating and locating benefits that are often overlooked by a company’s financial community.  The end result is more precise measurement of benefits, and credibility that a sourcing organization’s efforts are indeed yielding the desired results.