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- April 06, 2017
- David Hearn
I’d be willing to bet that most senior executives today believe they know all they need to about procure-to-pay systems. For the past few decades, the purpose of these systems has been to automate the transactional workflow of business buying, from purchase order to invoice approval. When we spoke of P2P transformations, they were all about achieving process efficiency through technology. The main question for executives to ask was, "How are we doing on our cost of processing purchase orders and invoices?” How can we cut costs even further?” And that was pretty much all there was to it.
Every procurement person's dream, though perhaps not shared with executives and business leaders, is to contribute to the company’s success by finding better suppliers, conducting shrewder negotiations, and securing more favorable contract terms—terms that create a competitive advantage beyond just cost savings. That is the core of our profession.
Unfortunately, for many decades we were trapped chasing purchase orders and invoices that didn't match up, because we did not have good P2P tools. We had tools to crank out POs, and to suck in invoices and digitize them. But we didn’t have anything that could capture all of the spending that took place outside of the PO process. Bringing together all the data needed to see the big picture was a huge manual effort, so we did not have visibility into the whole, interconnected process. Managing transactional processing took precedence over the strategic work to drive better supplier sourcing.
And they have analytics and reporting to help procurement professionals determine what areas to target. You get notifications in your inbox that say things like, “hey, look at this trend of people buying from the wrong supplier.” That’s the kind of thing a procurement person would probably take weeks or even months to figure out on their own.
Livin' the dream
It would be a mistake to think of these platforms as simply a better breed of automation though. You do have to have an efficient automated process, but once you have that, there’s only so much incremental savings you can wring out. It’s hard to get 10% cost savings from process automation year after year
What automation really does is let procurement do their dream job: continuous strategic sourcing. There is more value there than you could ever gain from just trying to drive costs out of purchase orders and invoices. This is a goldmine for the company
This is something manufacturing organizations discovered back in the '90s, when sophisticated software tools for managing the supply chain first became available. Over the last 20 years or so, companies were able to unlock incredible value by developing a disciplined approach to using systems and benchmarks and analytics to optimize the supply chain for cost savings and value.
Now it's time to do the same with what we call indirect spend—spending with suppliers of goods and services that you use inside your company. I believe fewer than 10% of companies are mature in their indirect goods and services procurement today. The tools to do this literally have only reached a similar level of sophistication in the last few years. Now that they’re here, it’s time for executives to think about this in a new way, and ask new questions.
More than savings on pens
I don’t mean questions like, “can we save more on pens and toner cartridges” either, because there’s a limit to what you can save there as well. Most companies have already sourced the easy, obvious categories. The first generation of P2P tools adopted the catalog model of the ERP world, meaning you could only work with items that could be reduced to a stock number. Today’s spend management platforms allow practitioners to source and save on almost anything, so we can go beyond shaving the last penny of cost out of commodity items.
For example, almost every sizable company uses outsourced providers to help them in customer service. That could be a call center, or a team of technicians in remote areas where it makes more sense to use a third party.
Those have a direct impact on your cost structure, and since they're representing you and your company, they also impact your brand. You want these people to be unfailingly cheery, and to not only do a great job on fixing whatever needs fixing, but go the extra mile to win loyal fans for the company.
How do you accomplish that? By setting expectations up front when the supplier is chosen. That's what professional sourcing and procurement people do. When they’re freed from tactical processing, they can be out working with marketing or customer service or engineering or IT people to understand what they want. They can go out and find multiple service providers and set them up in competitive bidding situations where you can see everyone putting their best foot forward.
They can use their expertise at comparing bids and negotiating, and writing contract clauses to guarantee that wonderful level of customer service that you want. If the supplier doesn't deliver it, you can turn to them to rectify the situation, or terminate the contract and look for somebody else.
A new gold mine
Procurement can be doing this for many, many categories company wide. Most companies do very little with strategic sourcing, compared to all they could do.
Sourcing is needed all throughout the year. And just because you sourced something last year, doesn’t mean you shouldn’t source it again this year. Suppliers change. The market changes. New things are invented. Your company changes. It doesn't stop. You want your people out there all the time looking at what's being offered.
This is an endless stream of large cost savings and value improvement that most companies haven’t been tapping into because they can’t get past the pressing problems of managing process efficiency and transactional minutia. Your people in the trenches will know all about this when you ask them about it. Every single one of them probably has at least half a dozen ideas for things they could source for better value.
Making the process efficient with a spend management platform adds value on its own, especially in the first year or two, but the greater value is delivered over the long run.
Now you can ask questions like, "What percent of all the money we spend with suppliers is going through a disciplined, high-quality, sourcing and contracting process?"
That's a different kind of question. Don't feel bad if the answer now is, 25 percent. You wouldn't be behind most companies, because most haven't even gotten there yet. So you can see what kind of opportunity we have before us.
Not your father’s P2P
You don’t need to add carloads of people to do this. Because these tools make existing people more efficient, they can do more sourcing events than they ever could have done in the past. This can scale without lots of headcount, though you may need to retrain some people, and hire different kinds of people, because sourcing and working with suppliers on negotiations and contracting is a more advanced skillset.
This is no longer your father's tactical, transactional, P2P process. Whereas for a long time, sophisticated sourcing and procurement tools only existed for the manufacturing space, now the tools for obtaining indirect goods and services have caught up.
They're called spend management platforms now. They go all the way from sourcing and contracting to the POs and invoices and even on to reporting and analytics, and they also capture all of the spending in your company, not just the small slice of it that you probably thought about before.
Think of it more broadly. Ask your team the right questions about how well you're doing on spend management, and how well you're doing on getting past just the transactional efficiencies to the higher-value-added sourcing. I bet they’re dying to tell you.
David Hearn is a procurement consultant and a member of the Coupa Executive Advisory Board. He was the Indirect CPO at Juniper Networks, Sun Microsystems and Kaiser Permanente.