When multi-industry procurement and accounts payable finance teams assess their overall purchase-to-pay (P2P) processes, they can often find areas of bottlenecks and friction. In many cases, the culprit is paper-based or manual-driven exception processes. Such friction leads to added inefficiencies, strained relationships and added costs from multiple areas. They stem from classic organizational, process and technology enablement barriers.
Strained Relationships and Inefficiencies
A recent posting hosted on the blog of The Institute of Finance and Management (IOFM) observes that in most large organizations operating P2P processes, there exists two rather different silos. Procurement maintains responsibility for the qualification and selection of suppliers along with maintaining the processes for ordering goods from such suppliers. After receipt of such goods, the observation is that the purchase transaction gets “tossed over the wall” to accounts payable to pay the supplier. Depending on the proximity and interaction among these two groups, hardened silos can often develop that lead to inefficiencies and bottlenecks in overall P2P process flows and exception management needs. This friction takes on the usual people-process and technology dimensions that organizations so often struggle with.
Research from the Economist Intelligence Unit identified that the biggest pain point for businesses focused on global trade related payments are specifically issues related to currency fluctuations, process inefficiencies, limited payment visibility and ensuring invoices are compliant in meeting relevant legal requirements.
In a November blog posting hosted by Tungsten Network, author Rick Hurwitz cites Tungsten Network research revealing a myriad of reasons why businesses do not pay on-time, observing that it can be more complex than to assume intent. While businesses commonly cite slow internal processes as a dominant obstacle to timely payment, factors such as lack of automation, administrative errors and larger volumes of transactions are also cited. A noted common misconception is that late payment is often translated to working capital management strategies, but research would indicate more often that clunky inefficient processes are sometimes dominant causes.
Supply Chain Focused Friction
A 2017 global study conducted among 422 P2P professionals, The State of P2P Friction, jointly sponsored by IOFM and Tungsten Network, identified the top five points of friction across the supply chain that adds to friction in such processes. Here again, most are closely related to manual and paper-based processes. In overall survey ranking they include:
- A high proportion of paper invoices received- 49 percent
- Too many non-purchase order based invoices- 48 percent
- High numbers of supplier inquiries regarding invoice or payment status- 47 percent
- Lack of automated exceptions- 43 percent
- Lack of automated approvals- 43 percent
Further noted is that more than two-thirds of those surveyed indicated that they do not believe friction has decreased in recent months. That implies that friction is becoming a greater concern. Our Supply Chain Matters take on this finding is that as business and supply chain complexities continue to increase, the points of process inefficiencies or silos continue to magnify.
As the authors point out, the urgent need is to address the process, organizational and technology enablement levers that will streamline overall P2P processes, particularly for organizations that manage large numbers of globally based suppliers. The survey authors observed:
“Though friction in P2P process is a common problem for businesses around the world, the causes of friction do vary somewhat by region. For example, many large businesses in Europe source vendors from multiple countries, a scenario that creates additional regulatory and tax complexities”
Addressing Business and Organizational Priorities
Friction is also observed as greater for larger or growing businesses, since a reported 71 percent of those who identified friction removal as a top priority were from companies with over 1,000 employees.
In the IOFM blog posting cited earlier, Continuing Education Manager Jess Scheer cites a Bain & Company partner who focuses on organizational performance improvement as observing that, at least in-part, broken relationships among procurement and AP leave significant savings on the table:
“By better integrating procurement and AP, truly running them as parts of a single process, he says companies can cut the cost of their annual external spend by between eight to 12 percent. And for those that continue to link procurement and AP and work to change the silo culture, additional savings of two to three percent can be generated every year.”
Scheer goes on to explain that the savings that can be achieved in improving processes can fall into two buckets: 60 percent coming from traditional procurement tasks and 40 percent from traditional accounts payable tasks.
There is thus a compelling case that encourages senior business and functional leadership sponsors to focus on either solid or dotted-line alignment of joint roles and relationships among both organizations under a single sponsor for the success of a P2P end-to-end process. The size or complexity of the organization may determine the degree of management approach.
Addressing Technology Enablement
As Supply Chain Matters has observed in many prior blogs, leveraging technology in addressing and overcoming end-to-end process inefficiencies can be addressed in the utilization of a B2B technology platform that caters to the automation of transactions and decision-making processes involving a broad community of globally-based suppliers.
Supply-chain-wide B2B platforms that adhere to international data and security standards such as ISO 27001 can provide businesses that assurances that data is safe, and that invoice fraud can be managed by automated rules and security practices.
Both Tungsten Network and the IOFM have created a dedicated web site, frictionfinder.com, providing additional content and video resources addressing the means for addressing the organizational, process and technology enablement needs related to reducing P2P friction. The site has a wealth of information.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.