Spend Matters welcomes a guest post from Michael Eckstut and Len Prokopets of Archstone Consulting.
A commonly held view by most top managers today is that simplifying processes and taking a “lean” approach to all business operations is the golden path to business success. We have seen over and over again companies successfully re-engineering their business processes to take out complexity and become more effective and efficient, better able to compete in the marketplace by meeting customer service and quality goals while driving down costs.
However, there are times when simplifying processes can go too far and little “messiness” is the right decision for the business. We see this increasingly in what clients are trying to do in the Procure-to-Pay (P2P) process – an existing complex and “messy” process – lack of standardization and many sourcing approaches, multiple approaches to PO usage and approval mechanisms and many payment approaches. And now, aiming to have a single, standard, and consistent P2P process, often driven by a specific goal of having “all payment being electronic,” with an objective of reducing P2P transaction costs.
Historically the P2P process has been viewed very tactically and addressed via a series of initiatives aimed at reducing costs but rarely being integrated into a broader procurement or overall P2P “channel” strategy. Initiatives in the past often took the form of consolidating the Account Payables function (typically part of finance, not procurement), in a shared service environment which may have been outsourced and often placed in a low-cost geographic location staffed with low-skill personnel. The result is often a disjointed and ad hoc A/P process, which may appear to be low-cost and even “standardized” but often creates service and quality problems for procurement (time to resolve exceptions, inability to meet internal payment guidelines and standards, manual interventions, etc.), procurement users (low procurement process, use of “high cost” approaches and maverick spend) and vendors (slow payments, complex process, etc.) and parallel “shadow” processes crop up.
In our work, we have found that only focusing on simplifying P2P payment channels across all elements (categories, geographies, type of buy, etc.) of the spend by reducing the number and types of payment channels and driving all transactions to a single “standard” global process flow does not always result in happy stakeholders (internal to procurement and external to the user community) or the most cost efficient results and healthy bottom line companies seek. A strategic and balanced approach, including adding just the right amount of “messiness” can lead to many financial benefits while also improving P2P effectiveness (delivering higher quality results) and supplier and financial risk.
In the last few years, a growing focus on procurement visibility and compliance has led most large companies to aim to tame the P2P problem. Best Practice companies are using a combination of policies and technology to reduce the number of ways that any good or service could be bought, ordered, approved, and paid. They rationalize the channels the purchase-to-pay process could follow without being draconian but balancing this against a range of options for transacting a purchase to optimize overall process costs, compliance, and management attention while maintaining the right level of control over all purchases. These practices often lead to an optimized channel strategy, ensuring that the right levels of protection and visibility can be applied with the right cost for each purchase.
The Hackett Group views the P2P process with a "Buy" and "Pay" framework and defines a payment channel as the particular path a purchase takes from requisition to the last step in the payment. (Refer to the figure below).
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Each combination does imply a slightly different process (making up another line in a spaghetti diagram), however, many of these can be automated, making the complexity manageable and in many cases reducing the amount of physical work of FTEs.
An effective P2P channel strategy involves understanding the advantages and disadvantages of each option under each of the process steps. Each varies in cost, automation, and risk management, which should be tailored for individual types of transactions. Companies should be asking the questions below for each process phase:
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By selecting the option in each process that best matches the automation and risk management requirement for each category of transactions, a company can balance their P2P costs and risk management needs. Furthermore, establishing a defined strategy allows the P2P group to fully understand the rationale of how to transact, reducing the amount of maverick activity and relying on the habits or creativity of the individual buyers.
Companies can begin to realize a range of financial benefits through an effective channel strategy. Savings leakage will be reduced as contract and policy non-compliance falls and established channels are used, allowing for ease of audit visibility and enforcement. Process complexity will decrease as well, with clearly defined standards - leading to efficiency and overall cost reduction.
In addition, overall effectiveness can improve as transaction visibility and master data management is simplified. This visibility expands beyond simple audit controls but can be used in category management and strategic sourcing efforts to make the sourcing group more effective as a whole. The usability of the requisitioning system and process also become easier for all users. This can lead to faster turnaround times and more effective management of suppliers leading to a company gaining preferred customer status with their suppliers.
Overall, an effective P2P channel strategy also improves a company's risk management. The aforementioned improvement in audit visibility and reduction of non-compliance mitigates the risk of financial transactions. Additionally, ensuring that the selected channel falls within all contractual requirements during strategy will make sure a company will not face legal risks should issues arise.
So, while process diagrams often show complex processes and tend to imply process reductions as a positive for companies, in the P2P space, the right amount of “messiness” can make a company more efficient and effective. Although not typically an area of strategic focus, a thoughtful channel strategy not only reduces cost and improves risk management for the P2P space, but can also enable improvements in supplier relationship management, category management, and strategic sourcing.
Michael Eckstut is a Principal in the Sourcing and Procurement Practice and the head of the Global Life Science Practice at Archstone Consulting, a Hackett Group Company and the head of the firms West Region. He has over 30 years of broad range business and operational experience in large, small and early stage companies in the life science industries as an operating executive, consultant, investor, advisor and board member.
Len Prokopets has over 19 years of experience in consulting to Fortune 1,000 clients. Len specializes in Supply Chain and Procurement Transformation including Supply Chain and Procurement Strategy, S&OP, Category Management, Supplier Relationship Management, Working Capital Optimization, and Supply Chain and Procurement Analytics. He is a frequent speaker and author on Supply Chain and Procurement topics. He holds an MBA from Carnegie Mellon University and a BS and BA from the University of Rochester.