For those of you old enough to remember grade school dodgeball, you might recall the very uncomfortable process of selecting teams. There had to be someone who was picked last. I felt sorry for the poor classmate who was left in that last slot, and more often than not felt sorry for myself. I feel the same way about the procure to pay (P2P) business process.
Procure to pay is a staple of most businesses. Businesses need to buy things. Other businesses that sell things want to get paid for the things their customers buy. The buying company wants to pay as little as possible to the selling company. Multiply this dance by millions of buyers and millions of sellers 24×365 and all of a sudden you have a fair amount of transaction volume.
World-class procurement organizations operate at 22% lower cost than the peer group. In a company with $10 billion in revenue, this represents an opportunity to save $6 million annually in procurement process costs. Digital transformation allows procurement teams to accelerate and close the gap to world-class performance. The Hackett Group
Unfortunately, procure to pay (or P2P) has not received the same benefit as the more “cool kids” like order-to-cash. After all, this is a back-end process and not something that touches customers or revenue generation.
That type of bias has left many companies with suboptimal P2P processes which limit their operational effectiveness. P2P simply hasn’t gotten the love.
The sources of this benign neglect are multiple.
As businesses grow, acquire, expand, divest, shift, and move, it’s common that processes become fractured and complex. These fractures are resolved with people. Some of these fractures are caused by using applications that overlap. Some of the problems are based on new lines of business that come into fruition that are jammed into the process.
And given that P2P has been the “last guy picked”, it is usually not on the top of the list for business process reconciliation. If internal six sigma teams are on the warpath to drive out waste and inefficiency, their target is usually on those functions which offer low hanging fruit for material hard-dollar returns (like revenue generation activities).
As I ask business leaders how they measure the P2P process and what metrics are most useful, I usually don’t get succinct answers. Days Purchasing Outstanding (or DPO) is one metric that is oft cited as important, and it is measurable. But the elusive value of P2P — maximizing supplier discounts and measuring the degree to which you’ve optimized your use of capital to take advantage of supplier payment strategies — there isn’t a lot of evidence that there is a good measure for how well we do here.
Other gaps in P2P are in the bridge between the online and offline world. While significant consumer purchasing happens on online platforms, those platforms may not be tightly connected to your backend ERP systems. I can go on Amazon, make several purchases, but the individual items I purchased, how much I spent on them, and whether this was the best price for the item—these aspects of the transaction are often lost. And no one wants to go through the drudgery of capturing that detail and re-entering into a manual corporate system. It’s simply easier to submit an expense for the aggregate total.
The opportunity by putting the focus on your P2P hygiene can be substantial.
You can drive higher profitability by maximizing vendor discounting offers. In order to maximize savings from programs like this, your organization needs to tightly manage how those discounts take effect, given the various forms these discounts often take. Visibility to discounts and automated payments in real-time reduces costs while improving people efficiency, and gives your internal buyers a sense of agency. Similarly, understanding your cost of capital will be an important counterpart to the discounting discussion. The higher your capital cost the more valuable your discount.
You can also achieve higher process efficiency. One of the biggest slams in dodgeball is the spinning curveball thrown by the class quarterback. In P2P that’s equivalent to the Accounts Payable (AP) reconciliation. Even with the myriad software tools that exist, the number of manual steps to handle exceptions can derail the effectiveness of the finance team.
The Procure to Pay Process
Maverick spend—especially with online purchases—is another opportunity. In a world where most of us are making online purchases, it is common that the details of those transactions aren’t captured in the ERP of choice—the punch out capability to capture the detailed order doesn’t make its way into the system—which is a hole that can lead to lack of visibility to what types of items were procured and whether the cost reflects the best-negotiated terms for the company.
The good news in this conversation is that renovating your P2P approach doesn’t require a wholesale overhaul of your back-office systems in order to make improvements. In fact, there are several steps you can take to identify and resolve process gaps:
- Centralize your procurement process. Many organizations struggle with distributed responsibilities that prevent coordinated decision-making. While there may be an argument for a decentralized approach in many organizations, in most cases the lack of centralization (especially on the indirect materials side of the ledger) is an artifact of a company acquisition, rapid growth, or simply de-prioritization. Taking on a centralization initiative can frequently demonstrate rapid gains in efficiency with little or no systems investment.
- Evaluate the effectiveness of homegrown procurement systems. In many cases, the systems infrastructure for managing P2P is spread across multiple applications. Homegrown systems may have been implemented when your company was smaller and your processes not as sophisticated as what may exist today. Similar to organization centralization, system consolidation can often bring benefits to making the implementation of your desired process easier and more robust.
- Assess the usability of your current ERP system. Many ERP systems were designed and implemented in the early days of cloud computing. While they may serve as an effective system of record, the modern workforce may struggle to use them effectively. There are solutions today in a category called Intelligent Process Automation (IPA) that can supercharge dated ERP products with streamlined interfaces and automated process interaction that eliminates tedious human interaction.
Don’t let P2P dodge the wave of process innovation in your company. There’s a great deal of opportunity for your business when you examine this critical process and make it a priority for operational efficiency and compliance.