WHITE PAPER ADP Procure-to-Pay Solutions Optimizing P2P for Non-PO Spend
Optimizing P2P for Non-PO Spend p. 1 Executive Summary While purchase orders are a proven tool, they are not practical or even particularly useful when organizations do not know in advance the volume of the goods or services they ll need. Orders for services are a common example of this non-predictive spend. For non-predictive spend, the key document to drive the procurement process is the invoice, rather than the PO. This is best accomplished with an electronic invoicing system. These automated systems will enable your organization to verify pricing, automate approvals and estimate committed spend. Such a system can also deliver savings of up to 80% 1 compared to manual, paper-based processes. Why PO-based Systems Often Don t Make Sense POs had their genesis in manufacturing companies. For these organizations, purchase orders were and are a great vehicle for managing the ordering process. The PO system works for these businesses because they operate in predictable ways: Buyers know exactly how many items of a particular type they want to order. If you re manufacturing cars, you are able to project how many cars you plan to produce in a certain time period and exactly what parts you ll need, and when. It makes sense to use POs in operations like this because it s easy to identify scope, quantity, price and delivery date of all parts and materials. However, POs were never a great fit for companies where a significant portion of the spend is non-predictive. In many cases these organizations cannot know in advance the volume of the goods or services they will need, or the ultimate price. Orders for services are a common example. When a piece of machinery breaks down in the plant, you need to have a mechanic come fix it. However, you do not know how much time the work will take or what the ultimate price will be because the problem hasn t been diagnosed. Yes, you know the general nature of the services the mechanic will deliver and the price per hour of the service, but you can t quantify the volume or cost until after the fact. This, of course, is a fairly simple example. However, in some industries, large parts of the capital budget are outsourced to contractors or service providers who provide combinations of goods and services for large capital projects. While it can be estimated, this complex services work can rarely be detailed in advance. In fact, for complex services, the engineering and design work is often performed by the supplier/contractor and then is simply reviewed or approved by the buyer. So the supplier designs, delivers and bills for the work, with quantities and detailed components not quantified until the work is completed. In this case and others, a PO without detailed line items (often called blanket or limit POs) can achieve only some of a corporation s best-practice objectives, including ensuring people placing the orders have the necessary approvals; ensuring the supplier is approved; and identifying any pre-negotiated pricing and terms and conditions. But because the PO does not have detailed line item information about scope, price and quantity, electronic verification of invoice line items against the PO isn t possible. Common Wisdom Can Be Wrong (and It Might Cost You Money) Many procurement process consultants and procurement/erp system vendors have touted the benefits of POs for so many years that it has become sacrilegious to say a strictly PO-based system is not always a good fit for every organization. PO proponents, for example, will state that if you complain about these systems not fulfilling your needs, it s because you lack corporate discipline and the will to drive change. Do not accept these myths. As we ve already shown, certain expenditures make it impossible to generate detailed line item POs in advance of the order. To get around this, some organizations have abandoned POs altogether. Others have modified their POs to deliver what value they can by using blanket or limit POs. These makeshift approaches, although well-intentioned, can be inefficient and lead to wasted time and money as well as inadequate planning and limited visibility into spend. How to Become More Efficient How then can an organization effectively and efficiently verify pricing, automate approvals and estimate committed spend without POs? For non-predictive spend, the key document that should drive the process is the invoice. If you re using an electronic invoicing system, either in conjunction with your procurement system or on its own, you can verify pricing, achieve automated approvals and estimate committed spend. 1 Aberdeen Group, E-Payables: Invoice Receipt and Workflow, May 2009
Optimizing P2P for Non-PO Spend p. 2 Price Verification That Drives Value and Savings For non-predictive spend, two scenarios usually need to be considered: 1. 2. The work to be performed by the supplier is significant enough to warrant the pre-negotiation of pricing. In this case, you will have a contract or price book to identify that pricing. Some e-invoicing systems provide price reconciliation functionality; all they require is that you load the negotiated prices into their system. When the e-invoice arrives, the line items on the invoice are automatically checked against the line items in the contract / price book. So rather than checking an invoice against a PO, the system checks the invoice against a contract and still achieves price verification. The work to be performed by the supplier is not significant and doesn t warrant pre-negotiated pricing. In this case the spend is what might be called ad hoc work, and will have to be presented to the requisitioner or invoice approver to determine if the volumes and pricing are reasonable. Full featured e-invoicing systems will have an approval workflow to streamline this process, and will flag these line items as being off contract, so the approver can easily spot which invoices or even line items require review. This further automates the process, saving considerable time for your approvers. Automated Approvals the Long-Sought 3-way Match One of the key requirements to achieve automated approvals is the three-way match. This entails a match of all line items occurring among PO, invoice and goods/services receipt. For non-predictive spend, exactly the same process can take place, but instead of matching against a PO, the match is performed against a contract or price book. Thus, with an electronic invoicing system that also provides contract matching, automated approvals are absolutely possible for nonpredictive spend and so are the savings and efficiency they deliver. Tracking Committed Spend Keep Thinking Invoice, Not PO To efficiently track committed spend, the document that best drives the process is, again, the invoice rather than the PO. With electronic invoicing, as soon as the invoice arrives, you have visibility into your committed spend. This is a vast improvement over paperbased systems, where the visibility to committed spend may not occur until the invoice is manually entered into the ERP system. In the paper world, the lag time from delivery of goods/services to ERP entry is often 60 to 90 days. Moreover, the invoice is in fact more accurate than the PO with respect to committed spend because it reflects what was actually delivered rather than what was ordered. Though less common in manufacturing environments, when it comes to services einvoicing with ereceipts einvoicing Paper Invoicing Cost Visibility Timeline on day 15 30 days Day Goods/Services Delivered at days procurement, the delivery of services can be significantly different from what was ordered for many reasons. This includes unexpected circumstances or requirements that are often not known during the planning phases, particularly when you are dealing with large or complex projects. Since POs can t be used for these types of transactions, most companies with significant services expenditures have poor visibility into committed spend. Electronic invoicing systems provide visibility much sooner to non-po transactions than paper-based systems because electronic delivery of an invoice is instantaneous and you will be able to electronically review all of your invoices online. This is high value at accrual time. at days 60 90 days
Optimizing P2P for Non-PO Spend p. 3 Although much better than paper-based processes, electronic invoicing can still result in a lag between the point when the goods/services are delivered and the e-invoice is generated by the supplier. The way to solve this is to use electronic receipts in addition to electronic invoices. Electronic receipts make the spend visible electronically the same day the goods/services are delivered, providing real-time spend visibility. Committed spend tracked through electronic receipts is both timely and accurate, since it reflects actual deliveries on the same day as delivery. It s Time to Focus More on Electronic Receipts Though electronic receipts are an important part of any P2P improvement project, they are often overlooked or ignored. Very few companies integrate electronic receipts as part of their P2P process. If they are in fact doing three-way matching (either PO-invoice-receipt or contract-invoice-receipt), they are most likely entering the receipt information themselves directly into their ERP/procurement system. This is an incredibly time-consuming process, one that wastes precious resources so much so that it s rarely done. Which leads to other problems. Without a receipt, you can t do a three-way match, and without a three-way match, you can t get to automated approvals. This, of course, is a huge missed opportunity. The solution to this problem is to use an electronic invoicing system that also provides supplier-generated electronic receipts. After all, the supplier generates the receipt in the paper world, so why not have him generate an electronic receipt instead? This will give you the electronic document you need for a three-way match. Note: even with only a 2-way match (PO-invoice or contract-invoice), approvers still save significant time, since they don t need to do any price verification. But if they don t have an electronic receipt, they typically revert to a manual process to verify whether what is specified on the invoice is actually what was delivered. Electronic receipts represent one of the last remaining gaps (and opportunities) in electronifying the P2P process. Spend Analysis It s Still the Invoice, Not the PO For PO-based spend, the PO often remains the foundational document for doing spend analysis. We believe that the invoice should be the key foundational document for providing line item data for spend analysis for two reasons: 1. 2. The invoice represents what was actually delivered, so it s more accurate. The invoice covers ALL types of spend PO-based and non-po-based spend. Once you are capturing line item data for your spend, the opportunities for savings through spend analysis are well documented by a number of independent research firms. But the key is to capture the line items data for ALL of your spend, not just your PO-based spend. The Opportunities The opportunity for process improvement and cost savings is enormous, whether or not the majority of your spend is PO-based. But if, like many companies, a significant portion of your spend is for services, then you have a tremendous opportunity to improve your own business process, save money and free up resources for higher value work. Because of the steady stream of PO rhetoric promoted so vigorously over the past ten years, many companies with significant amounts of non-predictive spend have simply not focused on P2P improvement. It doesn t have to be this way. Take a closer look at your P2P process. With the invoice as the foundational document, you will discover opportunities for huge cost savings. (Next: Real Life Examples)
Optimizing P2P for Non-PO Spend p. 4 Real-Life Examples Companies save money in four key ways by automating their procure-to-pay processes: Process automation This includes an array of improvements, from eliminating data entry through to completely automated approvals. Capturing early payment discounts Which have been missed due to long invoice processing and approval times these savings go straight to the bottom line. Capturing and analyzing spend data For strategic sourcing, improved contract negotiation and better procurement practices. Automated price checking Against either the PO, or against a contract for non-po based spend. Based on these 4 value drivers, our customers have told us they save 4% of their total spend. That means that for every $100 million in expenditures, they are saving $4 million year after year. A Best-Practices Guide to Getting Started e-invoicing system requirements for non-po based spend: Electronically receive line items on invoices (as opposed to scanned invoices, where the line items are not electronic) Able to load price books / contracts with detailed line items Able to match price book / contract pricing with line items on all invoices Able to manage supplier-entered electronic receipts for 3-way matching Able to handle limit or blanket order POs, if that s what you use for your non-po based spend Able to handle PO-based spend as well you don t want your users to have to master 2 different systems! The ADP logo is a registered trademark of ADP, Inc. ADP Invoice is a trademark of ADP, Inc. and/or ADP P2P Canada, Inc. All other trademarks and service marks are the property of their respective owners. All rights reserved. 2010 ADP, Inc. 04-3425