Building a Business Case for Procure-to-Pay
Building a Business Case for Procure-to-Pay 1.0 Introduction Becoming that well-equipped procurement and supply management organization means recruiting the right talent into procurement, adopting proven best processes and using technology strategically to: overcome human limitations for processing information; remove physical obstacles to collaboration; ensure efficiency and maximize return on investment in procurement. Procurement today faces myriad of challenges in areas such as supplier management, low cost country sourcing, compliance etc. For procurement to succeed as an explicit driver of business performance, they need to ! ! ! ! ! !
Thoroughly understand the spending needs of the business Extract the greatest possible value from global supply markets Build collaborative relationships with high-performing suppliers Minimize supply risks, Obtain collaborative and corrective behaviors from the people who spend and Align every strategy and activity that procurement undertakes with such business performance measures as cost of goods sold, working capital, cash flow, profit, shareholder value, market leadership and innovation
A typical procurement organization is involved in the sourcing of a lot of materials - direct & indirect purchases. As the organization grows and spreads so does its purchases and the number of suppliers from whom the purchases are made. As the volume increases, it increasingly becomes difficult to monitor each and every purchases happening within an organization. This translates to following key imperatives for procurement,
Gaining visibility: While the past decade has seen many companies make enormous progress in establishing spend visibility, the coming decade will see companies taking more holistic approaches to procurement visibility. The most competitive procurement organizations will become capable of connecting information — generated both internally and externally — from many sources, systems, locations, languages and formats to create 360˚ visibility that supports a full range of strategic procurement activities (not just spend management and strategic sourcing).
Ensuring Compliance: Driving business performance from procurement means convincing employees to line up with and adopt preferred procurement processes, strategies, standards and decisions. A recent in-depth Zycus study covering some 600 procurement organizations worldwide finds compliance in general growing from a platform that combines alignment of objectives, communication, collaboration and consistent technology adoption. Of course, relying on solutions to promote compliance assumes people can easily adopt and use the solutions.
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Generating Savings through procurement initiatives: Procurement's core performance focus – minimizing costs - can often feel at odds with other business objectives. Procurement's imperative is to make sure the results of its work materialize either on the top or bottom lines of the business in highly quantifiable ways. Until very recently, this need had been ill met from a procurement technology perspective, but the situation is changing rapidly. Keeping in mind the key imperatives of procurement, this whitepaper will look into the impact of Procure to Pay (P2P) on 4 key areas of a procurement function.
2.0 Why P2P P2P is the transactional flow that surrounds an order that is sent to a supplier, the fulfillment of the order, and then payment for the product. It constitutes a multifunctional process, cutting across users (requisitions and desktop buying), sourcing (deal making to reduce cost or increase value), departments/functions (Finance and Accounting, money tracking and funds transfer; Accounts Payable, paying bills; setting/enforcing policies), and ultimately the suppliers. P2P automation refers to using technology to streamline part or all of the procurement process. The figure below provides the common components of the procurement process that are automated.
Requisition
Payment is issued
Approval
Receipt of Invoice & Matching
Purchase order generation Receipt of Goods/Service
Requisitioning – Requisitions are generated by operation staff that wish to purchase goods or services. Automation of the function allows the operations staff to complete the requisitions electronically, often selecting items from a limited catalog or template of items that they are permitted to order.
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Requisition Approval – Once a requisition is raised, it needs to be approved before sending it out to suppliers. Manual approval processes have long proven to be ineffective, as approvals are often not obtained or obtained after-the fact due to the time required to obtain approvals. Automation allows for these requisitions to be routed electronically, reducing approval time.
Issuance of Purchase Orders – Once a Requisition is approved a purchase order is issued to a vendor. Without automation, purchase orders are called-in to vendors or faxed. In case of automation, purchase orders are sent electronically with acknowledgements being returned electronically from the vendor.
Receiving Invoices - Invoices are mostly submitted by suppliers via mail which upon receipt, are manually entered. In automated AP departments, invoices can be received electronically and in case of invoices received manually can be scanned creating a fully electronic environment. Matching Invoices – Once received, invoices should be matched to purchase orders and receipts so that appropriate payment is made to the vendor.
Issuing Payments – In the world of business-to-business commerce, it has taken a much longer time for adoption to occur. However, a combination of ACH and procurement cards are quickly increasing the volume of payments processed electronically, steadily reducing the number of checks issued by many organizations.
3.0 Benefits of P2P P2P benefits stem from automating procurement activities and streamlining purchasing workflow, both internally and with vendors. Automation solutions contribute to processing efficiency. Buyers can order products from online catalogs; purchases can be reviewed and approved electronically using sophisticated workflow tools; and orders are delivered to suppliers in electronic format. Hackett benchmarks suggest that world class P2P efforts yield significant results for companies (compared with average performers)—World class organizations: ! ! !
Are able to lower PO process costs by nearly two-thirds Can more than double the number of POs each FTE can manage Can reduce by nearly half the number of FTEs required to manage each billion dollars of indirect spend
1. Impact on compliance Compliance entails policies that drive users to the company's channel of choice (use the tool or adoption) and those that ensure that the negotiated savings show up in the bottom line. For channel compliance, spend visibility, including assignment to the department or budget centre where the spending resides, is critical. Too often, senior executives want to insulate their organization from the need to comply because “they are different” or “Procurement doesn't understand” and thus become the root cause behind e-procurement spend channel policies that do not work.
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In the figure below it is seen that best-in-class companies (characterized by 80% + spend under management) with implemented P2P solution show 85% orders compliant with contracts and 75% of spend compliant to contracts. What this implies is reduction in maverick spending. Research from Aberdeen group suggest reduction of maverick spending to merely 15-20%.
Impact on compliance
90
88
85 81 75
80 70
74 75 59
60
53
50 % Spend under management
40 29
30
% of orders compliant with contracts
20
% of spend compliant with contracts
10 0 Industry Average
Best in Class
Laggard
Source: Aberdeen 2008
2. Impact on transaction processing Manual processes and paper work concerned with Purchase order (PO) processing are characterized by human errors, inaccuracies and reworks. Automating approvals, escalations and triggering events ensures that POs are expedited quickly. Issuing a PO is quicker when it is generated and submitted automatically. Finding products is easier when vendor catalogs and product information are available online and amenable to searches. From the results of the research conducted by Aberdeen group it can be seen that P2P implementation has a significant impact on the cycle time for requisition to order. The main reason for this impact can be related to automation and process based workflow. Also as discussed earlier it is seen that organizations with implemented P2P solutions are better able to manage the catalogs which inturn further increases compliance.
Impact on transaction processing 21.5
25
No. of days
20
18.2
Impact on compliance
15
12.4
11.6 10.1
Requisition to order cycle time
7.5
10 3.1
5 1
Average time to onboard a new supplier
2.5
Average time to process & implement a catalog Change
0 Best in Class
Industry Average
Laggard
Source: Aberdeen 2008
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3. Impact on Invoice processing cost Automating the purchasing process lowers transaction costs per PO and reduces the administrative overhead of the purchasing organization. The figure below shows the impact of P2P solution on the invoice processing cost. The study from Hackett group as shown in the figure below reveals the cost of processing a single invoice through four different methods. Let's consider the impact of these figures based on an example. Consider an organization using scanning and work flow (which involves $5.41 processing cost per invoice). If the organization moves to OCR they will save 18% on processing cost per invoice while at the same time if the organization implements eInvoicing they can look at a potential savings of 42% in the processing cost per invoice. Impact on invoice processing cost
10
8
$7.99
6
$5.41
Paper based $4.39
4
Imaging with workflow
$3.13
OCR 2 eInvoicing 0 Paper based
Imaging with workflow
OCR
eInvoicing
Source: Hackett group
Impact of P2P on early payment discount Hackett data suggests that those companies in the top quartile of performance which adopt early payment discounts (and process, on average, 80% of invoices electronically) realize discounting participation rates nearly four times as high as bottom quartile performers (which process only 2% of invoices electronically) and also at the same time show a nearly 60% reduction in processing cost per invoice. Impact on electric invoicing (median) 100
80
92%
89%
80%
$6 85% $4.65
$5.22 $5 85% $4
$3.25
60
42% 40
$3
% of electronic invoice line item
$2
Process cost per Invoice
$1
On time payment rates
$2.14
16%
20
2% $0
0 1st Q
2nd Q
3rd Q
4th Q
Source: Hackett group
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4. Impact on FTE This benchmark from the Hackett group says that a top performing organization with implemented P2P solutions can operate with an (Accounts Payable) AP headcount of 6.2 per $billion spend.
FTE per billion dollar
20
15.1 15
10
Top performers
6.2
Non top performers
5
0 Top performers
Non top performers
Let us consider the impact on FTE with the help of an example as shown in the table below
eInvoice implementation
Number of FTE (AP headcount)/ billion dollar spend
Cost/FTE ($)
Total Cost ($)
Pre implementation
15
20000
300000
Post implementation
8
20000
160000
Savings ($)
140000
. As seen from the table, consider an organization with 15 AP head count per billion dollar for an organization using manual methods for invoice processing, with cost per FTE being $20000. Going by the research report if the company were to adopt an eInvoicing solution and even it were able to reduce the AP head count to 8, it would translate into savings of close to 50%
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4.0 Creating a new savings wave – Linking P2P with spend & sourcing A good P2P (Procure-to-Pay) system may provide a few of the monitoring and compliance checking capabilities (for example, automatically enforcing approval limits, or guiding or restricting procurement to preferred vendors) without involving a spend analytics solution. Spend analytics tools integrated with contract management and P2P systems, can generally do much more sophisticated types of analysis, monitoring and compliance checking. E-procurement increases efficiency, improves cash management, reduces inventory requirements, and slashes maverick spending. This is all valuable (especially in organizations that typically only see 30% to 60% of negotiated savings realized), and often represents a process and prevented over-payment savings of 2% to 5% in many organizations, but the largest contribution of a properly implemented and heavily used eprocurement system is a centralized, clean, data store that provides a solid foundation for spend analysis and e-sourcing -- which can often deliver savings opportunities on many spend categories in the 5% to 15% range when there is an e-procurement system in place to capture and enforce the negotiated savings.
Conclusion As organizations across the globe are increasingly banking on procurement to deliver on hard dollar savings to counter the challenging macroeconomic conditions, it has become important for procurement to not only develop a strategic outlook towards its sourcing & supplier management initiatives but also to back its strategies by ensuring its savings initiatives are realized. P2P solutions by automating all or most of the components within a procurement function provides procurement with the much need visibility into its processes and most importantly increases compliance to processes to have a direct impact on the targeted savings.
Zycus offers a comprehensive and easy-to-use P2P solution including eProcurement, eInvoicing and Supplier Portal. Our patented Artificial Intelligence based Auto-classification engine offers a one-of-its-kind Guided Buying experience to help requisitioners buy preferred items, order from preferred suppliers, and route the request to appropriate buyers for sourcing. This provides maximum compliance to contracts & policies, and ensures that all spend - be it catalog, punchout or free-form - is accurately classified for granular spend visibility. Zycus is currently offering P2P Pilot Program, where you can get started with a full-feature evaluation in less than a week and experience rapid implementation, ease of use and mass adoption - first hand. Contact information@zycus.com for more information.
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Z About Zycus
At Zycus we are 100% dedicated to positioning procurement at the heart of business performance. For more than a decade we have been the world's most trusted leader in Spend Analysis. With our spirit of innovation and a passion to help procurement create even greater business advantages, we have evolved our portfolio to a full suite of Procurement Performance Solutions — Spend Analysis, e-Sourcing, Contract Management, Supplier Management, and Financial Savings Management. Behind every Zycus solution stands an organization that possesses deep, detailed procurement expertise and a sharp focus on being responsive to customers. We are a large — 600+ and growing — company with a physical presence in virtually every major region of the globe. We see each customer as a partner in innovation and no client is too small to deserve our attention. With more than 200 solution deployments among Global 1000 clients, we search the world continually for procurement practices proven to drive competitive business performance. We incorporate these practices into easy-to-use solutions that give procurement teams the power to get moving quickly — from any point of departure — and to continue innovating and pushing business and procurement performance to new heights.
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