Quantifying Middle Market P2P Success: Labor Savings and More

Spend Matters welcomes a guest post from Shannon Lowe, Marketing Communications Manager at Verian.

Many of us celebrated the recent Labor Day holiday with a much needed long weekend. If you're like me, the holiday weekend always zips by too quickly, filled with barbecues, parades, shopping, and travel. And while all that fun stuff is really...well...fun, this year I found myself wondering just how much I really knew about the true meaning of Labor Day, and what celebrating it is all about.

In her recent message, Labor Day 2012: Honoring the Great American Worker, Secretary of Labor Hilda Solis writes, "This Labor Day, we lift up American workers who are doing what it takes to reinvent themselves to ensure that our future is even brighter than our past."

Her message suggests there is something vitally important about our work that we should never forget. Ensuring a brighter future may mean reinventing ourselves so we can work smarter, not harder. Many organizations have found that implementing purchase-to-pay technology is a good way to achieve this objective -- the middle market included.

I am reminded of one large heavy equipment dealership burdened with an outdated accounts payable system that was creating lots of manual work for its purchasing employees, not to mention all sorts of holes in their procurement, billing and payment processes. Five AP clerks did nothing but reconcile purchases and manually re-enter data from 50,000 POs each year. It took them over two hours to issue and receive a PO and pay an invoice, and it was costing them about $83.25 each time. The total cost for all 50,000 POs? Around $4.2 million.

Keeping up with vendors' negotiated contracts was nearly impossible for them. Out-of-contract spending was at 35 percent. Even though the dealership negotiated good deals, many of their locations were still going outside those contracts for purchases, and paying higher prices. Those higher prices cost the dealership another $500,000 each year.

There was also nothing in the old system to prevent their customers from being billed before the dealership knew the full cost of the parts and services used for the service work. This problem cost them $40,000 annually per location. At sixteen locations, that's another $640,000 in lost service billings each year. It really was a nightmare. But the story doesn't end there. They elected to work smarter, not just harder.

They replaced their outdated systems and were able to quantify the benefits of the switch. As a result, it now takes four minutes to issue a purchase order. And the average cost of issuing, receiving and paying is down to $12.60, for an annual total of $630,000 -- a savings of over $3.5 million per year. Process efficiencies delivered by the new approach have also put them well on their way to capturing the $1.14 million lost each year from off-contract buying and lost service billings. Other typical P2P benefits have accrued as well: having more time negotiate better contracts with vendors, capturing more early pay discounts, completing jobs faster, etc.

Quantifying P2P success -- including labor-based savings and beyond -- is something that all organizations should take the time to do, SMB organizations included. And when success comes, it's nearly always about working smarter, nor harder.

- Shannon Lowe, Marketing Communications Manager, Verian

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