Optimising financial processes

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Purchase to Pay Cycle: Smart Analytics Provide Opportunities for Greater Efficiency


p2p gpoIt is generally accepted that organisations lose between 3—5% of their annual cost base to error, waste and fraud (according to many sources, including ACFE). There is much evidence that the cost of inefficiency is in fact higher. The biggest spotlight is on the Purchase to Pay (P2P or PtP) process (sometimes referred to as Source to Pay (StP) or Source to Settle) as the low hanging fruit of cash recovery, whether it be in error and waste in the purchase of goods and services, misuse of those goods and services or accounting issues in the invoice to payment cycle.

In addition, there are significant demonstrable cost savings in the simplification and standardisation of the Purchase to Pay cycle in large organisations. With the latest ERP software, there are substantial opportunities to implement automated controls to try to minimise error, fraud and waste. However, due to their complexity and arcane nature, these controls are often not implemented fully or effectively and are easier to circumvent than one might expect. Consider the image below with the automated ‘preventive control’ of an electronic car park barrier ensuring access for only authorised employees. Consider too, the tyre tracks in the snow and the story they tell . . . .

Parking Control

Complementary process automation technologies are also targeted at process improvement. Purchase Cards aim to reduce the cost of administration of high volume, low cost indirect purchasing. Performance management and the monitoring of Key Performance Indicators (KPIs), whilst targeted at performance improvement, sometimes have unanticipated consequences and high KPI achievement can obscure fundamental issues in the process.

The introduction of Shared Services and end-to-end Global Process Owners (GPOs) are also strategies to drive efficiency, effectiveness, continuous improvement and strategic flexibility.

Despite all of these efficiency strategies, the prize for structural performance improvement and cash recovery remains stubbornly high. This is a business issue that is high on the management agenda, and although today’s business processes are heavily IT enabled and dependent, it is critical to focus on this as a business issue rather than an inherently technology related one. In our experience of examining P2P cycles in large organisations around the world, the root cause of many of the key issues diagnosed is behavioural and human, not fundamentally technological. Technology is a powerful ally, but business management must lead the drive for improved process efficiency and effectiveness, while satisfying the needs of all involved stakeholders.

Key stakeholders in the P2P cycle include Procurement, Line of Business Management, Finance Operations, Financial Control, Accounts Payable, Shared Services leaders and Global Process Owners. Supporting contributors include Internal Audit, IT Risk and ERP implementation leaders.

Key objectives for improving the P2P cycle can be summarised as follows;

  • Reduce cost and cycle time required across the procurement, invoicing and accounting cycle through simplification and standardisation ·
  • Increase the percentage of transactions received or sent electronically ·
  • Create paperless purchasing and accounting environment ·
  • Reduce cost of error, waste and fraud ·
  • Improve cash management and cash flow  ·
  • Increase visibility of information ·
  • Improve use of technology to displace FTEs

As the law of unintended consequences is alive and well, focussed improvement in one area can lead to increased risk in related areas, therefore effective risk management needs to be considered a parallel activity as greater efficiencies / cost reductions are made.

The key question is how to assess and identify the specific areas for improvement in the Purchase to Pay cycle for the greatest benefit in the shortest time.

For contextual understanding, key questions for GPOs and stakeholders include;

  • What is the current end to end Purchase to Pay process?
  • What improvements have been already identified?
  • How standard is our P2P process execution?
  • How do we identify unusual P2P process flow examples?

Specific questions to be considered by P2P process owners (GPOs) and stakeholders include;

  • How well controlled is the vendor management process?
  • How well managed is the vendor master data governance process?
  • What is the level of integrity over vendor master data?
  • How often do we encounter duplicate vendors and what is the reason?
  • How widely and effectively are Purchase Requests and Purchase Orders used?
  • How often do Purchase Orders undergo repeated change?
  • How widely do we employ a 3-way or 2-way match policy?
  • How often do we encounter retrospective purchase orders (POs raised after invoice receipt)
  • How efficient and effective is Invoice processing?
  • How often do we encounter duplicate invoices?
  • How efficient and effective is payment processing?
  • How often do we make duplicate payments?
  • How do we monitor for vendor bank account changes?
  • How often do we pay invoices too early or too late?
  • How standard is our P2P process execution?
  • How do we identify unusual P2P process flow examples?

If the answers to these questions are clear, reviewing them as a stakeholder group is necessary, followed by root cause analysis to identify the various causal factors and to identify specific actions to improve and measure process, control, policy, communication and staff education.

If the answers to these questions are not clear, smart analytics can provide a rapid assessment of the complete profile of P2P process and transactional history for an agreed period. This is recommended to produce an objective assessment which can be reviewed by stakeholders and addressed with root cause analysis, as above.

In this way, P2P GPOs, functional leaders and other stakeholders can get consensus on key issues, priorities and targets and drive rapid improvement in what is always a complex, cross functional environment.