Aligning procurement and payables — The why and the how

payables Daniel Saraste is SVP Product Strategy and Innovation at Medius. (personal photo)

For decades commerce has been talking about how procurement and finance must work closer together and the benefits of doing so, like improved decision making, better demand planning, a greater understanding of the vendor landscape, and faster, more efficient workflows. That’s because they both touch all areas of the business; they both see across all regions and business units; they both focus on the ROI of every item of spend. So their mutual sharing of information and the combined visibility of the ‘where,’ the ‘who’ and the ‘when’ of spend, is beneficial to the whole organization.

While technology and digital transformation have developed over the decades to help bring the two closer together, the events of 2020 have been the real pivotal moment behind this need and have accelerated its urgency.

Recently we discussed not just the ‘why’ but the ‘how’ of procurement/finance collaboration with a solution provider that has a foot firmly planted in both camps. Medius is a leading player in cloud-based spend management field, but has a strong heritage in the payables sector.

How the pandemic has accelerated the urgency for a tighter relationship

Medius discovered, during some recent market research it was undertaking, that 30% of organizations have poor collaboration between procurement and finance, and that the Covid-19 pandemic has forced them to work closer while having to work remotely. This has therefore accelerated the pressing need for technology that can support efforts towards a people-less process.

While Spend Matters has seen an increased uptake in AP solutions since the pandemic, there are still many firms that have no electronic process, especially in the invoicing area. A recent study from The Association of Certified Accounts Payable Professionals (ACAPP) reveals that in the UK alone just 5% of businesses are using a fully automated accounts payable approach, whereas nearly one-in-five (19%) has no automation at all.

With many people still working remotely, a trend that looks set to continue for quite some time, how do you make sure that this part of the business is being administered if not through a seamless automated process?

We talked to Daniel Saraste, who is SVP Product Strategy and Innovation at Medius, who told us:

“The call for procurement and finance to increase their collaboration is based on several needs, not least of which is to have a better view of suppliers and cash flow management, both your own and that of your critical suppliers, and the need for processes to run smoothly. These are not new needs. We’ve been talking about them for 20 years, but they have been sitting around the number 3 slot on organizations’ priorities lists. All of a sudden, in terms of investment in technology, these needs are sitting right at the top, primarily because the supplier payment process has become business-critical.”

The word on the street …

“Throughout the pandemic,” he says, “we’ve witnessed more and more companies knocking on our door asking for help. We’ve had conversations about stacks of paper invoices sitting in offices; staff having to get on the underground or a bus to get into the office to scan and process them; the resultant late payments to suppliers and the consequences of that during a time when they need prompt payment more than ever.”

“The nature of our business means we are able to track how customers send and receive invoices, that means we have insight into how much is received on paper. So we took the proactive step early on in the pandemic of writing to our customer base and potential customers to take this opportunity to talk to their suppliers about how, owing to the pandemic, if they continue to use paper invoices the likelihood is they won’t get paid. It wasn’t about selling, it was about being prepared, thinking about the personal angle of what is, and isn’t, achievable. It’s the perfect time to change your internal processes, we told them, and to think about how you interact with your suppliers.”

Where procurement fits in — cash flow and supplier segmentation

Maintaining cash flow in your own business, while striving to keep your suppliers’ cash flow going, is a question of supplier segmentation. This is where procurement can really deliver value. “We are looking at two different skillsets and processes,” says Daniel. “The two are already taking place but not in the coordinated way they should. Given that most companies have been impacted in some way from the pandemic, boards are in need of, and are demanding, much more frequent updates from their CFOs. CFOs almost continuously have to show how they are holding onto cash for longer to improve their cash flow — and it’s a lot of work.”

There aren’t too many ways of doing this. They can pay suppliers late, which might improve cash flow but leaves procurement dealing with the consequences for the supplier, the supply chain and the ensuing problems for the production process. They can impose longer payment terms, but that can strain supplier relationships which procurement has to rebuild. They can capture every payment discount possible to improve their own position, but again, procurement is left to renegotiate the prices that have been raised to compensate. They can, of course, if they are one of the lucky ones, help suppliers improve their cash flow by injecting cash earlier on.

Whichever way you look at it, it requires insight that the CFO doesn’t necessarily have.

“The problem is that finance departments don’t typically engage with procurement departments,” says Daniel. “This needs to happen more, because procurement has the answer to how to segment suppliers. The CFO needs to know: Who can I pay late; who can I absolutely not pay late because they might go under; how much does each supplier do for us; what do they do for us; which ones are critical and which ones most need our help? Without combining all of that knowledge, finance can’t begin to plan to improve its cash flow strategies and tactics.”

So by having a common system and greater interaction, procurement can not only interact to solve exception cases, like an invoice not matching a PO or the unit price not matching the quantities, but can add insight that no other department has, resulting in a better cash strategy for both departments.

You need ease of use and speed of implementation

The world is moving towards digitization, from purchase to pay. We know that Europe has introduced a directive on electronic invoicing in public procurement, that the UK has legislated on the same, and we’ve seen the introduction of Peppol into the NHS. And there are many incentives for the private sector to do the same.

But right now, for private-sector firms that are starting from nothing, there is an urgent need to do something quickly. Some that have manual or part manual/part old systems in place are finding that the process breaks down from PO onwards. So speed to implementation and ease of use are critical.

Says Daniel, “If you didn’t have a system in place when the pandemic hit, then you’ve been suffering the consequences and you have been that person on the train getting into the office to sort out those invoices. The people in your organization most likely understand, now more than ever, the criticality of paying suppliers on time, the need to understand the current cash flow situation and the ability to report on it. There is no value in not being able to understand your position in terms of all the invoices you haven’t yet paid. The CFO needs that outlook, and without a proper system in place and a process that involves those with the knowledge, then that job is a very hard one. The need for payments automation is a trend that has been taking shape long before the pandemic, and is part of a bigger agenda on agility and ability to respond to change. Resilience has now come to the fore, and that can only be achieved through automation and economic efficiency.”

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