Building Business Case for Procure-to-Pay

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Building a Business Case for Procure-to-Pay
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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
88
90
85
81
80
75
74
70
75
59
60
53
50
Spend under management
40
29
30
of orders compliant with contracts
20
of spend compliant with contracts
10
0
Best in Class
Industry Average
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
20
18.2
Impact on compliance
15
No. of days
12.4
11.6
10.1
Requisition to order cycle time
7.5
10
Average time to onboard a new supplier
3.1
5
2.5
1
Average time to process implement a catalog
Change
0
Industry Average
Laggard
Best in Class
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
Paper based
5.41
4.39
Imaging with workflow
4
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
6
92
89
5.22
85
80
5
4.65
80
85
4
3.25
60
of electronic invoice line item
3
42
2.14
40
Process cost per Invoice
2
16
20
1
On time payment rates
2
0
0
1st Q
Source Hackett group
2nd Q
3rd Q
4th Q
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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 () Savings ()
Pre implementation 15 20000 300000
Post implementation 8 20000 160000 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 e-
procurement 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_at_zycus.com for more
information.
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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.
Z
About Zycus
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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