P2P Special Focus - Optimizing P2P on a Budget (Part 1)

SSON News and Analysis
Posted: 07/09/2012

 

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Optimizing your P2P process is, of course, an important activity regardless of the prevailing economic conditions. However, in today’s parlous times finding the money for large-scale transformation programs can be tough – if not downright impossible – and for some organizations even smaller discretionary projects have been shelved in a desperate fight against the fires of the credit crunch. But there’s an obvious catch-22 here: sometimes firms have to spend a little to save a lot, and in some areas – including, obviously, the procure-to-pay process – investment even during all but the most terminal of cash crises can result in savings that can make the difference between success and a very final failure.

As part of the Shared Services & Outsourcing Network’s P2P Special Focus series, we asked a range of players from the world of procure-to-pay for their tips on what steps practitioners can take to optimize their P2P processes. In this first part of a two-part feature we investigate their views on available quick wins in critical times; what steps can be taken to improve communication and interactivity between the P2P function and the rest of the business; and how practitioners can leverage automation without investing heavily in new technology.

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In the light of the financial crisis and the increased focus on cash-flows and optimizing working capital, what are the quick wins which P2P practitioners can carry out to increase the value of the P2P function to the organization?

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Antonella Schiavone
Regional Process Leader P2P, Eli Lilly

The current environment is such that credit is rare and negotiating longer payment terms with suppliers is not anymore an available tool to optimise working capital.  In fact, in the current context the P2P function is relied upon to defend the existing credit terms, prevent suppliers tightening them and avoid unpaid suppliers putting at risk the company’s future by disrupting deliveries. So, it is back to the basics: running the P2P process in such a way that payments are made correctly and on time. In the current environment any efforts aimed at meeting credit terms is the first and foremost thing to do.
 
In practice, this means striving for speedy invoice management within P2P and for faster invoice approval process in the business units. The use of web invoicing certainly enables the achievement of the first objective – although building a critical mass of suppliers using web invoicing may not be particularly quick. In the meantime, suppliers can be informed and educated on how to issue paper invoices in such a way that they are ready to be processed. Training and keeping trained budget holders on the invoice approval process is the other effort to undertake.

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Robert Bendl
Director, Lockheed Martin

Several opportunities are available including active management of planned delivery dates to ensure material is delivered in a Just-in-Time manner. In addition, there are opportunities to work vendor-managed inventory programs in which supplier maintains inventory within your facilities only to be consumed (and paid for) when the inventory is consumed during product build from a point of use perspective.  Finally, there are opportunities to increase cash flow from a Purchase Card perspective given the monthly billing and payments for items that have been purchased over the previous month.

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Bertrand Maltaverne
Global Purchasing Application Manager, Schneider Electric

Focusing on the P2P pillars that are demand management, spend management, and cash management is now more than ever critical in terms of dealing with the uncertainty of the current financial crisis.

Technology obviously plays a critical role in these three areas; however, beyond technology the challenge is to maximize value by allocating resources where it pays the most. Another way to put it is to say that "the key to successful financial management during a recession is to manage wisely" as highlighted by FSN in its article titled "Purchase to Pay automation is booming in recession".

At first, it’s more a matter of process and discipline than a matter of technology and automation. For example, standardizing processes and procedures enables organizations to share resources and achieve economies of scale by centralizing some or all global processes. This also enables organizations to go a step further by, for example, automating some of their processes, since standardization is a pre-requisite to any implementation of technology. Processes first, then technology; but not the other way around!

Improving contract management (relying on technology or not) will bring savings by reducing or eliminating maverick spend, increasing volumes channelled to preferred suppliers, allowing purchasing to negotiate better conditions…

Spend management—or, even better—differentiated spend management (treating spending in strategic areas differently than areas of lesser value), is also something companies should look into to better identify opportunities and to make sure they implement all negotiated savings. It all starts by making spend "visible" because, as the famous adage says, "you can’t manage what you can’t measure". Spend analytics enable organizations to identify new opportunities, build contracts with consistent terms and conditions, and to ultimately close the loop by making sure that you are buying from the suppliers you’re supposed to be buying from at the right times, quantities and prices.

Spend/contract management is the cornerstone of compliance management, as highlighted by Aberdeen in its "Practical Approaches to Contract Management Deployment" report that says that compliance management is improved by 55% with a contract management system.

Better demand management and better spend management allow companies to better manage their cash. Better visibility means better forecasts on financial liabilities and assets. Better management means more time and resources to focus on more strategic financial issues like payment conditions and cash generation / management.

Because the P2P process relies heavily on documents (POs, invoices…) that are often managed by multiple departments in multiple locations, it usually represents a huge area for savings. In addition to the well known administrative savings, centralizing invoice management reduces risks like:

  • double payment of invoices
  • late payment penalties
  • discovery of unrecorded liabilities forcing companies to restate earnings or assets

One key enabler of P2P efficiency is the use of global processes, i.e. processes standardized across the whole company. These processes rely on "information":

  • contract management: making sure that all are aware of the contracts in application
  • spend management: making sure that Purchasing has a complete and accurate view of spend
  • invoice management: making sure that AP is aware of all the invoices and POs sent or received by the whole company

The larger the company the more difficult it becomes to capture and share information globally. Technology is, in this respect, a key enabler that allows companies to leverage their common processes and their size by giving access to information to internal departments.

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Carlos Di Brico
President & CAO, Emerson Argentina

a) Negotiate extended payment terms with key vendors. We know it is not easy because for our vendors cash is king too. But when you have a good reputation as a customer they will want to keep doing business with you, because crises are not for ever.

b) Reduce stocks. The Supply Chain people need to take the lead working very closely with the Business Units optimizing inventories. Finance people are the ideal partner for Supply Chain to bring this initiative to a good end.

c) Negotiate price reductions based on bulk orders placed for an extended term (more volume).

d) Speed the P2P process up. What it basically means to reduce the cycle end to end.

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During your career, what improvements have you put into place – or seen put into place by others – which have improved communication and interactivity between the P2P function and other business units?

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Carlos Di Brico
President & CAO, Emerson Argentina

These are the most useful initiatives according to my experience in different organizations:

  • Teamwork activities
  • Process vision of the organization instead of traditional silos vision.
  • Development and implementation of a formal communication plan lead by HR but with active participation of business units and shared services
  • Climate Surveys and the related action plans

It is important to point out that communication and interactivity are never ending targets. We need to exercise them recurrently at any level. But definitively it is necessary to walk the message. The top executive level has to take the ownership in this.

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Antonella Schiavone
Regional Process Leader P2P, Eli Lilly

The P2P function interacts with virtually all other business units in any given company: all employees are eligible to submit a request for expense reimbursement or to make a purchase on behalf of the company triggering an invoice to be processed.

The most successful improvements that I have seen are those which simplified a particular sub-process by reducing the process cycle and the number of process steps (more specifically the number of handovers between different departments). This type of improvements tend to be generated by projects where both P2P and business units representatives are part of the same team. These projects allow for mutual comprehension of each other’s processes and requirements and lead to more robust and lasting solutions since these latter are built on a solid knowledge of the process end to end.

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Robert Bendl
Director, Lockheed Martin

Joint goals and objectives between organizations are key drivers to ensure/help communication/interactivity between P2P and the balance of the business organizations.  In addition, actively establishing rotational assigns within procure-to-pay functions for organizations such as Engineering to provide dedicated resources has increased the awareness/driven opportunities across the business.

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Can the P2P function successfully leverage automation without investing heavily in new technology, and if so, how? And how can organizations determine which systems are most appropriate for them?

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Robert Bendl
Director, Lockheed Martin

Increased automation can partially be achieved without investing heavily in new technology through a detailed P2P process optimization effort to determine quick-hits/opportunities (requiring limited investment). The organization should identify system requirements through a detailed understanding of the overall business system strategy as well as an understanding of the COTS applications opportunities.

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Bertrand Maltaverne
Global Purchasing Application Manager, Schneider Electric

There are many parameters to take into account when investing in technology. Some of the questions are related to:

  • Level of maturity of the organization: are processes standardized or do they vary from one business unit to the other? Are people who will run the processes centralized or spread out across the organization?
  • Level of maturity of the information system: What is the status of the ERPs? Are they the same across the company or are there several systems? Is interconnectivity required or not? How will integration be done? Is the company ERP centric or not? Select a Best-in-Class provider or a software suite consistent across all P2P?

Then, when looking at costs, it goes from set-up costs to running costs.

Set-up costs usually include:

  • Infrastructure & solution: off-the-shelf software, customization to local specificities, integration with other systems…
  • Change management: consulting, training of users…

Some running costs:

  • Infrastructure, licence, rental fees, maintenance…
  • Fees and resources to support and administration…

Obviously, how a solution is selected and the costs associated with the chosen solution (and ways of reducing these costs) vary widely from one company to another. But, there are ways to reduce the impact of such investments by looking at "new players" and/or new business models relying on:

  • Open-source / free software
  • ASP / SaaS (on-demand)
  • Technological breakthroughs

Open-source / free software and solutions start to make their way to the P2P area.  In 2007, Coupa launched its open-source eProcurement offer called Coupa Express. Coupa Express can be downloaded for free on Sourceforge.net. In the eSourcing world (eRFQ and contract management), we also start to see "free" players like ThomasNet and SourcingParts acquired a few years a go by MFG.com that both offer free services to buyers and suppliers.

Obviously, small & medium-sized businesses are the primary target for open-source software because it’s a good way to minimize investments and running costs, Coupa defines Coupa Express as "simple to acquire, install and maintain and simple to use". Larger companies, needing more feature-rich and customizable products may go for other offers and most of the open-source/free providers (like Coupa, MFG.com…) also offer more extensive tools that have a minimal cost.

ASP / SaaS solutions based on an on-demand approach are also good ways to minimize costs since some of the costs (software, maintenance, infrastructure…) are spread across all users. In addition, since all customers use the same software, it’s also a good way to implement standardized processes since ASP/SaaS software usually doesn’t allow a lot of customization. In the eProcurement world, Perfect Commerce moved from hosted software (acquisition of Commerce One in 2006) to an on-demand offer. In the eSourcing world we see players offering a mix of hosted- or on-demand services like Ariba or full on-demand offer like MFG.com that leverages the power of on-demand by building around a service-oriented architecture (SOA) to facilitate interoperability between their product and other software.

Technological breakthroughs are also a good opportunity to improve a ROI by minimizing costs or maximizing value.

For example, community-driven innovations cut implementation costs by reducing change management costs. Such tools rely on a user community; so, if you target the same community you won’t have to spend too much time and effort training users since they already use the technology. Tools like MFG.com use the community effect to their advantage.

Another area of potential breakthroughs is linked to focusing more on users. This approach consists in reducing the usability gap between tools we use in our personal life (Amazon, Expedia, Google…) and tools we use in our professional life. This approach drives implementation costs down by reducing the amount of training required by users to become proficient with these new tools. For example, Perfect Commerce developed a set of new modules including a new search manager by looking at how Google works. Search is an area that is critical to P2P since it relies a lot on documents that people need to have access to or retrieve to do their tasks in an optimized matter. Perfect Commerce looked at Google as their primary competitor (and not another eProcurement provider) since most people have been enjoying Google’s ease of use and power. This brings value to the user who finds the catalogue item he was looking for much faster but also to Purchasing by making sure that contract formalized in catalogues are available and used.

Content-driven innovation is also a driver to maximizing ROI by enabling users to have access to more and better information. The more complete the information, the better the decisions or the more efficient the processes. Again, as an example, Perfect Commerce looked at how to increase the spend under management in catalogues of the eProcurement application. They built their ASP catalogue manager to enable companies to catalogue more to put more spend under control.

Other breakthroughs are in the field of supplier enablement, usually an area characterized by difficulties and costs. A company like Amalto decided to tackle this issue by providing companies (mainly SMEs not having the required resources for implement ebusiness solutions) with a physical box (the "b2box") enabling them to plug-and-play with their clients and/or customers.

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Carlos Di Brico
President & CAO, Emerson Argentina

Yes, they can.

As an example, EDI implementation with vendors and Invoice Digitalization are low-cost automation initiatives that can easily contribute to improve the process productivity. But any decision in that area needs to be aligned with the global IT strategy. Otherwise we run the risk of spending money in solutions that will never work.

In many cases the decision on which system is the most appropriate is made by the headquarters on a worldwide basis.

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Antonella Schiavone
Regional Process Leader P2P, Eli Lilly

Certainly in P2P there is a lot to benefit from higher automation and operational efficiency offered by new technologies. Automation and technology are the building blocks of a paperless/ touchless P2P function, which is the "Holy Grail" everyone is after at the moment. Given for granted that the company uses an integrated ERP system for purchasing goods and services and processing invoices, the next steps – such as maximising the use of web invoicing or the use of optical characters recognition (OCR) – are both a legitimate and right ambition for any P2P practitioner.

However, one should not disregard that in a region like Europe there are still enough local regulations which could lead to unavoidable customizations, making automation expensive if the solution is meant for different affiliates. This may make the project unattractive, depending on the company’s circumstances. Also, it is important to maintain a balance between recourse of automation and retention of process knowledge. The quest for automation should not be pursued in such a way that the P2P team loses the knowledge of the underlying financial process, exposing the company at risk in case of staff turnover or IT outage.

When it comes to decision making, there are two aspects to keep in mind. First, prior to designing an automated solution, the P2P function should conduct a voice of the customer: for whom is this solution meant? Does it address this particular customer’s needs (current and future)? Without a good appreciation of what the final user will experience with the new solution, the risk of wasting time and money is very high.

Second, in deciding which systems are the best fit, organizations should be aware of the environment they face and of their future growth plans: market share, new regulations, and growth projections (organic or via acquisition), dismissals or spin offs etc. A small player may find it difficult to persuade the majority of its suppliers to migrate to web invoicing; conversely a company experiencing growth may want to invest in advance in a more complex system.

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(Go here to read the second part of this feature)

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SSON News and Analysis
Posted: 07/09/2012

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