Purchase to Pay Pitfalls – The Business Case

Purchase to Pay Pitfalls – The Business Case

Posted by Pete Loughlin in Purchase to Pay, Purchase to Pay Process 02 May 2010

Purchase to Pay, P2P and Dynamic DiscountingGetting the P2P message right through an effective business case can be difficult. Despite it being proved, CFOs remain cautious. Use competitors success to pursuade, recognize the challenges in turning change into cash and stress that P2P isn’t the destination – it’s the bus.

The successful implementation of a Purchase to Pay Process in a global environment has many challenges. In a short series of items, Purchasing Insight discusses some of the pitfalls. In the first, we discuss the 1st implementation stage, the business case.

Purchase to Pay Pitfalls – The Business Case

The Approach

The Purchase to Pay process covers a wide range of business activities and spans a number of business functions from sourcing to procurement, accounts payable, finance and treasury management.  Working from first principles, examining and mapping existing state processes and identifying the benefits of a new ways of working in a global business environment can be a Six Sigma consultant’s wet dream. A detailed analysis of the processes involved can be extremely complex and time consuming. And by the time the exercise is complete, the world may have changed – a new business acquired or a fundamental change in the business environment or economic conditions can in validate the business case, particularly if it has taken a long time to develop.

Saving Fingers and Toes Instead of Heads

Simplistic business cases based on identified saving such as a reduction in the cost of processing an invoice through 5 minutes saved here and 2 minutes saved there are unconvincing. The main problem is that they identify actual benefits that are difficult to turn into cash. Unless labor cost savings can be transalted into headcount reduction they are meaningless. Happier staff leaving on time instead of having to stay late at month end, while desirable, is not a business benefit. It can’t be quantified in cash and will not excite a CFO.

Unimpressive ROI

The return on investment of a P2P business case is actually quite low. It will give a break even timescale within 18 months and a decent return on capital over a 3 year period but even in the most dysfunctional environment implementing a best in class solution it is easy for the CFO to find an alternative investment with a bigger and quicker impact.

Overcoming the Challenges

Approach

Don’t build the business case from the ground up. Instead, borrow from others’ experience using benchmark data (Aberdeen is a good source). Purchase to Pay is proved and there are mature examples in most industries showing where it works. Build a high level business case based on peer organizations. Apart from delivering the business case more quickly, it is more convincing. Instead of describing an aspiration, it describes a competitors achievements.

Losing Fingers and Toes

To overcome this issue, take a commercially savvy approach and recognize that some of the money will be left on the table. Factor a benefits realization or crystalization factor to allow for the fact that some of the process benefits of purchase to pay will not be measurable in cash. Anticipatethe objection and present up front that the benefits are actually far greater but in terms of investmet request, only the benefit that are delivered in cash are used in the business case.

Small ROI

This is never an easy one to win. However, you should not be presenting the P2P business case in isolation. In reality, Purchase to Pay is not the goal – it is the foundation. The fact that it pays for itself (as illustrated in your business case) is a big plus, but the real win is what P2P allows you to do.

A good example is Dynamic Discounting. Dynamic Discounting can deliver a return on capital of over 30%. Dynamic Discounting isn’t possible without a P2P foundation.

Summary

Getting the P2P message right through an effective business case can be difficult. Despite it being proved, CFOs remain cautious. Use competitors success to pursuade, recognize the challenges in turning change into cash and stress that P2P isn’t the destination – it’s the bus.

Post a comment