28 Jul No PO No Pay – getting the balance right
No PO No Pay is often thought of a means to “train” suppliers providing them with a somewhat negative incentive to comply with their customer’s purchase to pay processes. “No PO No Pay No Exceptions” – I’ve said it myself – but in practice not only does it not work, it’s directing effort in the wrong direction.
Let’s just go back to basics. The fundamental components of Purchase to Pay do not include ERP systems, e-procurement tools or electronic invoicing. It is much more basic than that. P2P starts with a Purchase Order – paper, electronic – it doesn’t matter. A Purchase Order provides the opportunity for a business to approve spend before it’s committed to make sure that spend is controlled and ensuring that the right suppliers are used. Matching an invoice with the PO and the confirmation of receipt of goods provides the audit train and control to manage the risk of fraud. If an organization can get these three things in place – a PO, a receipt and a matching invoice, it is well on the way to world-class from a P2P point of view.
So how do you enforce P2P compliance? What is to stop someone simply picking the phone up to any supplier and requesting goods or services? You could discipline those that do but by the time the invoice has arrived it’s too late. The goods were delivered – there’s an obligation to pay for them. What recourse do you have? This is where a No PO No Pay policy comes in. It is the last resort – the final opportunity to prevent spend through non-compliant processes. It can be effective. A supplier can be a great ally in enforcing proper P2P practice if they know it will help them get paid. Increasingly, suppliers expect this and it is recognized widely as good practice.
But should we be expecting suppliers to enforce our purchase to pay process? Why are we penalizing the supplier if it’s our people are demanding that goods and services be supplied without a PO. Shouldn’t we be punishing the perpetrator?
Let me put some perspective on this by using a real example that I came across recently – the names are omitted to protect the guilty.
There is a very large outsourcing business that operates in the UK and some other parts of Europe. They provide a wide range of services for business and government, often performing thankless tasks like refuse collection. They do not enjoy a good reputation. They are a very big, very diverse, dysfunctional operation and the press love to find fault and splash their name on their front pages. No PO No Pay was a gift to the press. A couple of years ago, a small supplier was beginning to lose patience and, when chasing payment for an invoice that was over 60 days late, was told that payment would not be made because there was no Purchase Order quoted on the invoice. “We operate a strict No PO No Payment Policy” said the standard letter. And so the newspapers had a field day. The large British business that we all love to hate – is forcing our hard-pressed small business to the wall. Big business bullies not only paying late – now not paying at all.
This kind of press coverage is not what any business would want to see but neither is it unfair. If a small business takes an instruction in good faith from a senior manager at an established customer, why on earth would they hesitate to fulfill that order? We’re not talking here of a supplier that submits a fraudulent invoice. We’re talking here of a big company that both demands the delivery of goods and services without a PO and then refuses to pay because there is no PO. That is indefensible.
Refusing to pay suppliers on the grounds that they have not quoted a PO is only reasonable if the customer’s purchase to pay house is in good order. There will always be circumstances were it is not practical to supply a PO – emergencies for example – and suppliers should feel able to respond to such situations without the threat of non-payment. POs can always be put in place retrospectively if necessary. Implementing a No PO No Pay policy should not be done lightly and certainly not at an early stage of a P2P program.
As a general rule it is good practice to send a message to suppliers explaining that because you operate a strictly controlled P2P process, this could mean that invoice payments may be delayed or indeed not be made unless there is no valid Purchase Order. It is not good practice to blame suppliers for poor compliance within your own business. Getting that balance right is crucial in developing a pragmatic and effective No PO No Pay policy.
Pete Loughlin can be found on twitter @peteloughlin