- How much time and effort does the current process take?
- How much manpower is really involved in a typical purchase transaction?
- How much time does it take an employee to buy something in order to do their job?
- How much time do managers spend reviewing and authorising requests while trying to make sure they stay on budget?
- How much time do professional buyers spend on purchases that don’t really need their expertise?
- How much time do Accounts Payable (AP) clerks spend every day tracking down information to verify the accuracy of invoices?
The purchase-to-pay cycle is the ultimate case of a business process with a delicate balance between the need for controls and the time required to follow them. When the effort to comply becomes too great, it is amazing how inventive people can become in finding ways to work around the process. Once that starts happening, an organisation has the worst of all worlds.
Why it’s Important
What to Look For – Key Indicators
- Organisation-wide productivity: No matter what business you’re in, high productivity throughout your organisation is key to success. If employees take a lot of time to get the goods and services they need to do their jobs – e.g. find the right source, create a request, chase their manager for approval, respond to Accounts Payable to authorise invoice payment – that takes time away from their real job. If line employees spend even a small percentage of their time in such non-value-adding activities, that can be a lot of lost productivity. No organisation can afford that.
- Cost of compliance: Another way to look at the same issue is the cost of each purchase transaction. The more time it takes away from employees and managers, the higher the transaction cost that is really being added to the direct cost of each purchase.
- Cost of Accounts Payable: Payment controls are essential, but the cost of the Accounts Payable function deducts directly from your organisation’s bottom line. A people-intensive, paper-intensive Accounts Payable process is almost certainly costing your organisation more than it needs to.
- Cost of inconsistent compliance: If the “proper” buying process is cumbersome and time-consuming, some employees will skip it entirely and go around the controls you’ve worked so hard to put in place. That, of course, leads to all the problems discussed in the previous questions.
- Paper: Is there a lot of paper (or even a lot of standalone electronic forms that don’t populate a database) involved in your current procedure? Are forms often being lost, causing people to spend a lot of time chasing them or re-creating them?
- People: Are there people in your organisation for whom a noticeable portion of their time is spent “buying things for people”? (i.e. administrative assistants or buyers placing orders for things that are really not that specialised).
- Frustration: Do employees express frustration with how hard it is to get what they need to do their jobs? Or how long it takes? Do managers express frustration with the effort required to keep up with purchase approvals, or do they really know what it is they are being asked to approve, or to figure out where they really stand with their budgets? Are a lot of purchases still taking place outside the proper process even though it’s well defined? Does that indicate the process may be onerous and the frustration with it has just become too great?
- Lead time for invoice posting: What is the average elapsed time between when an invoice is received and when it is authorised for payment? For many invoices, more than a couple days probably indicates inefficiencies. You also may want to track the percentage posted in “x” days of receipt.
- Invoices processed per AP employee: On average how many invoices are processed per month per Account Payable FTE (Full Time Equivalent)? Less than 50 probably indicates an opportunity for improvement, though this can vary by organisation. You can also do a quick calculation of average AP cost per invoice this way.
- Number of supplier enquiries per month: A high number of supplier calls probably indicates a high number of late or incorrect payments. This, too, is adding to the actual cost per invoice, and therefore per purchase.
How to Improve
Obviously, the only way to improve is to streamline the process without giving up the necessary controls. That leads us to the value of a good purchase-to-pay (P2P) system
The Value of an Effective Purchase-to-Pay System
- Lower cost per transaction: A good P2P system reduces the time spent by employees, managers and Accounts Payable personnel on just about every purchase. That reduces both the productivity loss and direct cost of each transaction. It provides an easy, intuitive way for employees to request or buy the things they need to do their jobs. The system guides them through the process without the need to spend time looking up the policies, forms, etc. It enables more direct ordering by employees, reducing the overhead of administrative help for many types of items.
- Accelerated buying process: With a good P2P system, everything happens more quickly because it uses electronic records and communications instead of paper. There is no time required for physical movement of paper. Managers have immediate access to all the information they need about budgets and commitments in order to make an authorisation decision. AP has PO information at hand as soon as invoices arrive. The speed and visibility of the entire process eliminates frustration and makes it easy for everyone to comply with the organisation’s policies and procedures.
- Dramatically streamlined AP: With a good purchase-to-pay (P2P) system, much of the invoice review process is automated. Many invoices flow through to posting “untouched by human hands” while their correctness is thoroughly verified using automated matching. Far fewer invoices arrive without purchase order (PO) numbers since most purchases are the result of a PO produced by the system. When discrepancies are identified, it provides email-based workflow so the originator can resolve issues quickly. The invoice registration process can be dramatically accelerated with tools such as OCR (Optical Character Recognition) and electronic invoices. A P2P system can even provide a supplier portal for self-service supplier status enquiries, and more. The cost savings opportunity is clear.