Agile Procure to Pay at the heart of Cost management

Practical measures to make your integrated P2P process efficient & effective

by Evelyne Legaux on 14-03-2024

 

Today’s article puts the spotlight on the sensitive area of cost management on the backdrop of ever-challenged business operating models & strategies, and ventures on the other side of the fence to look at the critical role of indirect Procurement & the Procure to Pay (P2P) cycle.

 

With inflationary pressures & rising interest rates gradually getting back under control and a new recession averted in most developed countries, 2024 is starting on a somewhat better footing than last year for corporates. This being said, the unknown outcomes of looming elections in large swaths of the world, ongoing military conflicts and the need to re-design business operating models & supply chains, mean that operating margins remain in the spotlight.

Corporate executive leaders & boards must therefore continue to prioritize cost management across all areas of the business - starting with operations & overheads - as a key performance driver.

The question here is: how?

Experience teaches us that one off or random cost-cutting measures don’t stick, and may even fireback several folds… So, what does a sustainable approach to cost management that doesn’t risk compromising equally strategic business growth or expansion targets, really look like?

Similarly to the area of Working Capital management, business leaders must adopt a holistic approach that encompasses three dimensions:

• a cross-functional culture of continuous improvement that also enables growth as opposed to hindering it,
• operational execution excellence & process optimization through the leveraging of new technology,
• a governance & communication strategy that fosters people to embrace the vision, commit to supporting it and feel empowered to bringing it to life.

The same way creating a Cash culture throughout the business organization is paramount to optimizing the Cash Conversion Cycle, leaders must create a Cost culture across the board.

 

The importance of Indirect Procurement & the P2P process

Irrespective of the industry sector or business size, after the purchase of direct materials - that make the cost of goods sold - and employees payroll, the biggest source of cost for any business is the area of indirect Procurement, that is the purchase by all departments of a variety of items & services that they need to simply be able to operate.

Indirect Procurement can represent a substantial amount of expenditures, and significantly impact operating margins & bottom line, let alone Working Capital & Cash Flow. It is therefore essential for any business to ensure that their end-to-end P2P process operates both efficiently & effectively.

So, what practical measures can business leaders take?

• Identify the best suppliers for your needs and negotiate key terms & conditions (T&Cs) with them.

In the day-to-day running of your business, it’s important to ensure that you are getting the best overall value at the lowest price possible each time you are prepared to spend. Having a Procurement person or team in your organization who is dedicated to thoroughly selecting those preferred suppliers & agreeing applicable T&Cs, is the foundation of healthy cost management. This is not the end of the journey though.

• Leverage your organization’s purchasing power

You also need to ensure that any purchases of goods or services by your organization in the same categories as those of your preferred suppliers, are actually made from the latter. The more purchases from them the more likely you are to obtain even more favourable T&C’s in the future, by way of volume discounts or otherwise.

For this to happen though, your indirect Procurement process must clearly guide employees towards purchasing from those preferred suppliers, be easy to use and be supported by relevant controls, analytics & KPIs. You may also want to streamline the number of active vendors in your master file for each purchase category, so as to drive spend concentration with just a few suppliers.

• Build an effective governance & spend control mechanism

Another critical dimension of healthy cost management is to ensure that all purchases & expenditures are being reviewed and pre-authorised by the right people across your organization. It is therefore essential to define an indirect Procurement policy - inclusive of an Approval Matrix - that clearly determines who should approve what, with the number of layers driven by the spend amount/purchase category mix.

Equally, all managers in your organization must have the opportunity to manage their budgets at all times. They must therefore have full visibility over both spent & outstanding committed amounts per category to-date, and indeed be permanently part of the approval flow in order to monitor any subsequent purchases versus budget, while keeping a vigilant eye on any fraudulent purchase attempts. The last thing you want is to be surprised when a substantial vendor invoice lands in your inbox for payment approval…

Implementing key financial controls throughout your P2P cycle is thus of the essence here!

• Have a robust grip on your Accounts Payable (AP) payment process

Last but not least, you must ensure that Cash outflows are only intended for those vendors that have indeed delivered the ordered items or services, and have sent an invoice that correctly reflects the agreed T&Cs. In other words, you don’t want to pay more or sooner than necessary.

Your AP team should also be able to take advantage of any early-pay discounts offered by suppliers, should this make sense from a cost vs Cash Flow perspective

Finally, your AP process & controls must be able to reliably spot any fraudulent invoices that got ill-intentionally sent to your organization.

For this to happen though, more key financial controls are needed here. Most importantly,  your end-to-end Procure to Pay process must be both effective & efficient, so your AP team acting down the chain have all the information they need to ensure that the right Cash outflows are going to the right vendors at the right time…

• Use insightful KPIs to measure your performance

Having an effective end-to-end P2P process in place is paramount to cost management. But an equally important question is: how efficient is it? How productive are your people whenever touching any of your P2P process steps? Have you ever measured the average cost of a purchasing or AP payment transaction for your organization?

It is crucial for businesses to understand that if their indirect Procurement policy & P2P process are inefficient, time-consuming & cumbersome for people to get the items or services they need to perform their day job or for managers to approve same while being able to control their spend vs budget, people will likely find quicker ways to fulfil their needs by simply bypassing or circumventing your controls & compliance rules…

The best way to avoid adding risk to inefficiency is to select a set of metrics that are truly meaningful to your business or industry, then to regularly measure your performance. Such KPIs could be: number of active suppliers per category in your master file & percentage spent per preferred supplier, percentage of AP invoices with no PO number, frequency of spend in excess of budget situations, percentage of manually matched invoices, average time to get an AP invoice approved for payment, etc…

While the list of potential KPIs is endless, the good news is that adopting the right technology to manage your end-to-end P2P process can be a real game-changer…

 

The invaluable benefits of an integrated P2P system

Similarly to the Order to Cash (O2C) cycle, the P2P process runs from the moment an employee endeavours to purchase a product or service all the way to the moment the related invoice is being paid out to the vendor, with everything in between, therefore is made up of an Operations segment (Procurement) and a Finance segment (AP).

The more effective & efficient Procurement is upstream, the more effective & efficient AP will be downstream, hence the immense value-add brought by P2P integrated systems that typically encompass both:

• an e-Procurement module enabling the creation & authorisation of Purchase Requisitions (PR), generation of Purchase Orders (PO) and the Receipting of goods or services delivered by vendors,
• and an e-Payables module enabling the processing, matching & validation of vendor invoices and ultimately the generation of outgoing AP payments.

So, let’s explore how P2P integrated systems address the many challenges faced by indirect Procurement & Accounts Payable teams, and boost your end-to-end performance. P2P systems:

• give people intuitive access to the vendors that you want them to purchase from in each category of goods & services, hence seamlessly directing them towards those preferred suppliers,
• enable you to embed the Approval Matrix & compliance rules defined in your Indirect Procurement policy,
• provide budget owners with drill-down capabilities for all spent expenditures to-date & open commitments alike,
• route all PRs & vendor invoices to the relevant authorisers/approvers as per above matrix & rules, thanks to automated workflows,
• enable automatic 2-way or 3-way matching/authorisation of vendor invoices, and the speedy resolution of discrepant invoices through embedded tolerances & resolution workflows,
• significantly increase the reliability of internal controls and reduce the risk of fraud,
• automatically capture all the data needed for your selected KPIs, dashboard & enhanced reporting requirements – inclusive of PR coding details - without the need for any manual human intervention,
• create visibility throughout the end-to-end P2P process (re individual transaction status, purchase history, …) for both those who purchase & those who authorise/approve,
• enable better & faster decision-making when it comes to cost management or operating Cash Flow management.

Ultimately, by streamlining the entire process end-to-end, P2P systems enable businesses to dramatically increase productivity, lower the cost per purchase transaction, boost cross-functional collaboration & enhance the overall supplier experience, thus giving them a definite competitive edge.

Business leaders who succeed at creating a strong Cost culture throughout their organization are most likely to build an equally strong Cash culture, thus benefiting not just cost management but the all-important Working Capital & operating Cash Flow management area alike.

No better way to remain strong & resilient in the face of uncertainty & rapid change…

 

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