CPO Challenge #4: Closing the procure to pay loop

As we all know, invoice matching, be it two-way (purchase order to invoice) or three-way (purchase order to invoice and goods receipt) has been a tedious, labor intensive and error prone activity which beckons to be automated. And this is not only a problem on the buyer side, payment routines are as cumbersome for suppliers as they are to buyers; low visibility means little traceability, lack of traceability means higher risk of unauthorized orders slipping through. The pitfalls are many and with today’s strict view on corporate governance this is a major problem for many companies.

So what’s the solution? Why do so many still lag behind when this is such a wide spread problem? Closing the loop between procurement and payment is rewarding in a number of ways; so getting the mandate to do something about it should be easy enough.

The procurement and the payment processes both carry huge cost saving potentials regarding process cost savings and in an even higher portion as lever for getting spend visibility and streamlining the contract compliance. And you can gain even higher results and synergies if these two processes are connected to each other.

But there are of course a number of hurdles that need to be overcome in order to succeed.

Problem number one: Compliance to contracts and compliance to process

Many procurement functions struggle with contract compliance and have a hard time promoting their agreements internally (to the end users). What many are missing is that you need to have compliance to the procurement process before you can start to reap the rewards of contract compliance. And this is where closing the procure to pay loop really can help.

A blunt; yet very effective; weapon in this struggle can be the no purchase order, no payment policy. We have seen numerous examples where this approach has shaken up both the buying organization and provided suppliers with tools that minimize invoice disputes and other costly legal proceedings.

Simply put, this approach means that no invoices will be paid unless they are marked with an approved purchase order number. In a fully automated process; faulty invoices are rejected before reaching accounts payable while correct invoices are routed through the solution landscape and settlement is almost fully automated; thus eliminating many error prone activities for both parties.

The no purchase order, no payment policy also means that end users cannot circumvent the purchase process and that suppliers force the end users into the e-procurement solution by demanding a purchase order.

Problem number two: Unclear organization and process ownership

Unfortunatly; many procurement functions are split from accounting in the organizational structure. Along with a heterogeneous solution landscape this often means cross functional teams that need to be able to access a multitude of solutions in order to get a clear picture of the total spend.

It’s hard to point out exactly how to ensure a smooth integration of e-procurement and accounts payable if the organization is unclear over who owns the entire process. Is it the CPO or the CFO; are both on the management team; do they compete for internal status/recognition.

One thing is clear; if you want to reap the rewards of two- or three-way matching and purchase order/invoice automation, you need to be on the same team.

Problem number three: Heterogeneous supply base

Getting suppliers to buy into the e-procurement process can be hard at times but as we described in the book Purchasing Transformation your suppliers can be used to increase compliance whilst closing the procure to pay loop. In Purchasing Transformation Abdülkadir Tekin introduced the hunter-herd-prey approach and discussed how to deal with the suppliers to get them onboard and enthused about the e-procurement project.

For suppliers; e-procurement means that you as a buyer can deliver on your promises (the agreement/contract) – you ensure that you purchase the agreed volume through an authorized channel.

And with the order management tools available today, even the smallest suppliers can share the value of e-invoices and invoice matching; getting paid quicker with less risk of invoice disputes. For the already integrated and automated suppliers e-procurement means even more automation; which in turn streamlines business even more.

Aligning the procurement and payment processes provide great opportunities for process cost savings and in addition you get greater spend visibility and an additional lever for achieving contract compliance; if you are not already on the procure to pay bandwagon, chances are that you are missing a great cost saving opportunity.

Mark Masterson, Country Manager, IBX UK