Purchase to Pay Perspectives

Purchase to Pay Perspectives

Posted by Pete Loughlin in AP Automation, Purchase to Pay 27 Dec 2013

In many organisations, purchase to pay is like a car crash. Like something dreadful – something that despite yourself, you can’t stop watching. Unbelievable. Horrific. Shocking even. Yet compelling. Alright, perhaps not quite that bad – but it can be pretty bad. I also mean it’s like a car crash in the sense that if you ask a few witnesses what they saw, they’ll all tell you something different. It’s like they’re describing completely different events.

It’s something I’ve written about before – the wide variety of views that people have of the same thing depending on their perspective. Finance people see P2P as an opportunity to account for things more accurately. Purchasing people see it as an opportunity to make savings through compliance and, indirectly, through better spend analysis to get better value for money. Ask a P2P operations person, they’ll tell you it’s about better process and straight through processing. They’re all valid perspectives and they are all correct but I have a question. Which perspective delivers the biggest benefit and more importantly, which is the one that will persuade a board to invest in P2P? In other words, what is the real business case for P2P? It’s not what you might think.

Purchasing Insight logoBetter accounting is good. But does it actually deliver anything tangible in terms of business benefit? The accountants will tell you that better accounting is always a good thing and that it allows you to make better financial decisions. Well they would say that wouldn’t they. There are many organisations who have an army of accountants enabling the business to make better decisions when the best decision they could make would be to save all that money they spend on the bean counters.

What about the operational point of view? Certainly, better, more efficient process means the time spent in handling pieces of paper is reduced but those benefits can only be cashed in upon if you can actually lose whole numbers of people. It’s a classic business case issue – the theoretical savings are rarely crystallized into cash. That is not to say it’s impossible of course but there are those that will point out that any efficiency savings can be delivered simply by doing the same inefficient things offshore. “Your mess for less” as Nigel Taylor calls it.

And the strategic sourcing benefits delivered through greater purchasing compliance? Theoretically, P2P delivers this but in practice, strategic sourcing benefits get claimed when the contract with the supplier is signed. Overlaying the P2P dimension only diminishes the claimed saving because there is never 100% compliance.

All of the above can deliver real benefits and there are ways to measure them to make them tangible but more often than not the business case is just not that impressive and certainly not impressive enough to motivate a CEO to spend on P2P rather than other, sexier projects.

But there is one P2P driver that despite delivering very little in terms of tangible financial return dominates them all. Control.

When P2P business cases are prepared, the focus is on identifying costs and financial savings and while this is the right thing to do the more obvious reason to implement a P2P is overlooked. Ask a CEO to sign off an investment of hundreds of thousands of dollars with a 24 month ROI the response won’t always be positive. But explain to the CEO and the rest of the board the unmitigated risks that are endemic in their business because Purchase Orders aren’t used. Tell them that there are PCards and T&E cards in the business being used without any effective controls. Tell them about the consequences of poorly controlled receipting and inventory management or the opportunities for supplier collusion that could allow employees to fleece the business. Then ask them to explain how they’d respond to a question at the AGM querying why there has been no priority given to or investment made in P2P.

Here’s the thing. Without robust P2P processes which, like it or not, requires investment in people and technology, the cash in the business is up for grabs. Employees and suppliers can simply help themselves. It’s not difficult to defraud a business that doesn’t take care of its cash and relying on good will is simply naive. A board of directors that doesn’t take this seriously is culpable in the event that P2P fraud occurs and any officer of a company that defends the status quo where poor practice is in place is, quite rightly, in the firing line if shareholders get a whiff of it. This is the most important perspective of all. The one from the senior people who are supposed to be in control. And the most compelling business case for P2P isn’t one presented in a spreadsheet – it’s the one that plays to the hearts and minds of those with the responsibility to represent the interests of shareholders.

The benefits of P2P are different depending on your perspective but the perspective that really counts is the perspective of those who know they’ll be held to account when things go wrong.

Pete Loughlin can be found on twitter @peteloughlin

  • john mardle December 28, 2013 at 1:57 pm /

    Investment houses also have a say these days in whether the cash is ‘in the bank’ and therefore is available to pay an invoice and hence the ‘traditional’ P2P is now replaced by a new paradigm that includes SCF in all its various forms, one of which, is the subjective element as to who to pay, how much and when!

  • Awfa Abdulhay December 28, 2013 at 9:07 pm /

    There are problems facing P2P :
    1- Purchase orders created more than one time for the same service which reflects two things:
    a- Poor control from project manager approving the cost of purchase orders
    b- Corruption in the organization that approving the cost more the one time
    2-Working capital affecting the performance of P2P ,because and problems in collection process from the customer some times will lead to delay payments to the vendors.

  • Robert Bruhn January 8, 2014 at 11:25 am /

    Thank you for a very good article. I agree with the entire article and would add another driver, visibility.

    I am talking about visibility into the daily activities of finance and purchasing and the business and suppliers. With visibility you can exercise due diligence of who does what and when. Linking each purchase to the durability and value brought to the business beyond the pure dollar value. Value as your purchasing department will tell you are in the goods or services performance, business goal alignment and benefits for the business.

    Harness this visibility and accountability and your board will sign off on the opportunity to run the rest of the business smother, more effective and align to the enterprise goals.

    Robert Bruhn
    Subject Matter Expert in P2P and Automation

  • john mardle January 8, 2014 at 11:37 am /

    Your strategy is critical in this area as the path you decide upon may need to be driven how complex your business might need to be in the future i.e. expansion into Europe say or even into a Business2Public sector.

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