Geographic Difference in Purchase-to-Pay Channel Strategy: Balancing Efficiency and Effectiveness

Spend Matters welcomes a guest post from Kurt Albertson, Associate Principal, Procurement Advisory at The Hackett Group.

The Hackett Group has long emphasized the need to balance risk and control within the P2P process, leveraging the "optimal" end-to-end channel rather than simply defaulting to the often overly controlled three-way match process. By doing so, organizations balance efficiency and effectiveness within the P2P process, freeing up resources to focus on higher value activities such as sourcing and supplier management.

And while Hackett has long published performance differences between world-class and peer organizations, recent analysis highlights some interesting perspectives when the P2P control environment is compared by geography. These insights come from Hackett's 2011 Purchase-to-Pay and Procurement benchmarks, in which we segmented performance by North American and Western European operations.

When we examined the P2P transactional strategy, the findings generally showed that Western Europeans placed a much greater emphasis on controlling commitments compared with North American counterparts. Western European operations for a leveraged three-way match process nearly twice as often when compared with North American operations. The use of purchasing cards as an end-to-end strategy was also next to nothing for Western Europe when compared with 13 percent for North America, on average.

No doubt a tighter regulatory environment, inter-country complexities, and differences in purchasing card acceptance across Western Europe are partially behind the greater emphasis on controls. But too often the thinking that auto-matching of the PO, invoice, and receipt information makes a three-way match process seamless is also a major contributor to a tighter control environment. Basically, the notion of "having your cake and eating it too" when it comes to efficiency and effectiveness through an automated three-way match.

And in an electronic environment with perfect information and compliance to policy, I'd generally agree that the overused reference to cake might apply, but the other big performance gap we saw was in "first pass match rate." While the median North American rate was 82%, it plummets to 59% for Western Europeans. Experience has shown that missing receipts and delayed invoices are too often the culprit for low first pass match rates for which optimal channels such as assumed receipt and evaluated receipt settlement are normally the antidote.

Another metric that is likely a symptom of a tighter control environment is in the time it takes to process an invoice which. Western Europe takes twice as long versus North American operations. While this in itself can pose concerns around late payments and higher inquiry volume (Western Europe had 44% more inquiries) it also impacts an organizations ability to purse what Hackett calls "higher value" objectives such as early payment discounts. From the analysis, we see that North American operations are twice as likely to have a strategy of pursuing early payment discounts compared to their Western European counterparts due in part to longer invoice processing cycle times.

In comparing performance between geographies, one needs to be careful in understanding the gap contribution resulting from legitimate complexities (e.g. regulatory) versus cultural factors (e.g. the status quo) that need to be legitimately challenged in the pursuit of operational excellence. And when legitimate factors do exist even these must be viewed from the perspective that all barriers can be broken down over the long run which is a critical element of achieving and sustaining World-Class performance.

- Kurt Albertson, Associate Principal, Procurement Advisory, The Hackett Group

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