“Best AP departments 50 times as productive as the least effective¹” – the headline finding from a study we commissioned Forrester Consulting² to conduct.  We asked Forrester to examine the performances of accounts payable departments in relation to the levels of efficiency within their invoice handling processes. 

Applying a complete purchase-to-pay process combining e-invoicing, integrated procurement and finance solutions, is found to lead to excellence in accounts payable departments, and increased productivity for organizations.

Examining the AP departments’ performance in terms of how many invoices each AP employee processed annually, the study measured the gulf between best and worst performing AP functions to determine what defines AP invoice processing excellence.  The findings revealed a significant disparity between those accounts payable departments that are still relying on paper-based processes and those organizations that have adopted automated processes and e-invoicing. 

47 percent of the organizations surveyed still receive more than half of their invoices in paper form, which leads to increased errors, delays and costs resulting from manual processes.  According to the study, “the worst-performing AP departments don’t seem to realize how far they lag behind their peers.  In contrast, 60% of those in the top quartile saw further scope for improvement. The least-efficient departments can’t move forward until they realize just how far they lag behind their peers.”

Integrated purchase-to-pay process combined with best practices such departmental collaboration between finance and procurement enable organizations to transform their AP departments to top performers, delivering cost savings and ultimately boosting the bottom line.  Combining invoice automation with e-invoicing and eProcurement within organizations was shown by the research to double the chances of achieving AP invoice processing excellence and maximize straight-through processing (STP). 

Eliminating human intervention in the invoice handling and approval process cuts manual data capture tasks such as document scanning and data entry, thus not only increasing the speed of the process but also providing cost-savings within the business.  By implementing purchase-to-pay solutions, organizations can gain control and visibility over finance and procurement processes and improve overall process performance.

¹In this study, Forrester conducted an online survey of 100 large organizations in the US, the UK and France.
²“Finance And Procurement Work Together To Achieve AP Invoice Processing Excellence. AP Departments That Combine Technology With Best Practices Are Most Likely To Get Top Results”, A commissioned study conducted by Forrester Consulting on behalf of Basware, April 2010.

Juha Hakamies market trends, procurement

The way you pay is now one of the biggest threats (and opportunities) to your brand’s reputation, says Ian Duffield, Head of Legal and Finance Operations at Equanet, DSGi’s business to business reseller arm.

“On the surface of things, it’s not really a difficult question to answer. Would you like to pay your suppliers as soon as you get their invoice through, or would you rather keep the money in the bank for a bit longer to keep your cashflow looking good? Unless your business benefits from a bank account that would make Manchester City’s new owners start to feel a little bit hard done by, the answer is probably the latter. But while cash is king for most firms in these times of tight purse-strings, payment – and particularly bad payment – can have a major onward impact for your reputation.

“It’s not something that you’ll often hear, but as we move out of recession, life is only likely to get harder for bad payers. A better economy equates for many as freer trade and better cashflow, which also means that most will once again be able to become more selective about which firms they continue to trade with. If you’ve managed to earn a reputation as someone that pays late, it’s unlikely that a supplier will choose to work with your firm in favour of a rival that gets them their cash on time.

“There is, of course, a clear distinction to be made between paying late and setting long payment terms. While most businesses will have seen payment terms becoming increasingly lengthy in recent months, there’s still a major difference between paying within terms and just throwing the rulebook out of the window. But even if a business doesn’t outright decide to stop working with you because you’re paying poorly, it’s unlikely that they’ll look favourably enough on a late payer to cut them a good deal when it comes to negotiating contracts.

“Of course, it’s all very well for me to sit here and lecture about how important it is to turn your invoices around on time, but when money’s tight, it’s not always as simple as that. Everyone’s business circumstances are different of course, but there are still a few key things that you can do to help improve your payment processes, and there’s arguably never been a better time to get your financial house in order.

“Whether it’s as simple as making sure that you have clear terms of payment specified at the outset of any deal or setting up a system to deal with disputes quickly, right through to looking at the full payment automation route as we do with our purchase to pay vendor Basware, making sure that you have as many routes to good payment as possible is essential for the business that has its eye on ongoing growth. As we move into what’s commonly becoming known as the ‘new economy’, reputation is no longer just about your brand, your product and your people – it’s also fundamentally linked to your financial etiquette.”

Juha Hakamies ebusiness, procurement

Our cost of control research has shown that there is a growing intent among CFOs for collaboration with peers from different companies.  Financial and procurement professionals are recognising that working together, sharing knowledge and processes will elevate best practice.  However, this positive news distracts from another of our findings that the very same CFOs and CPOs struggle to communicate with each other and cooperate with colleagues within their own company on a daily basis.   So why is the procurement/accounts payable relationship still so difficult within a typical organization and how can the two sides of a company’s finance team become united in their common goals?

In almost all cases the research has uncovered some tensions between the functions, whatever the structural relationship:

‘The reason I don’t report into finance is that I had it written into my contract that I would report directly to the Board. I engineered them away’ [CPO]
‘The relationship is a bit fractious; they [procurement] lack the overview of the business, the bigger picture. They sometimes are a bit slow at picking up the quality/cost relationship and how it doesn’t save us money to cut, cut, and cut’ [CFO]
‘We understand the suppliers in more detail and more intimately than finance’ [CPO]

What we found from our cost of control study is that no matter what the model, (see the diagram below for the different models currently in use) they all seem to share the same issues, although from the CPO perspective, there is a strong preference to bypass finance and report directly to the board.

(A) Procurement reports to finance with Board visibility
(B) Procurement reports to finance with no Board access / visibility
(C) Procurement bypasses finance with direct board report

A number of recurring issues erode the relationship between CPOs and CFOs, but encouragingly, these do cause regret on both sides – finance and procurement professionals see benefits in removing the tensions. The tensions primarily cluster around the areas of ownership, authority and transparency. Participants in the study often referred to lack of clarity in terms of who ultimately is in charge and similarly a distinct misunderstanding or disagreement on occasions about who should be in charge.

Both finance and procurement professionals must share some blame and undertake to remove such communication barriers that not only stand in the way of improved financial results, but have proved to be potentially fatal to many companies over recent months. Beyond perhaps an MBA qualification, CFOs and CPOs come from different worlds and have evolved differing languages. This has to change. The time has come for procurement professionals to express their requirements clearly in board-level language, to highlight what they know and how their department can leverage the supply chain for the sustained well-being of the company. Conversely, CFOs should recognise that robust businesses have been forged through blood, sweat and tears from the ground-up. Companies that are built upon solid supply chain operations and where collaboration between finance and procurement is close, have been performing consistently well during the good years, but come into their own when times get tough. They have weathered the economic storm better, and are emerging as leaders when conditions improve.

Both job functions can also be hindered and slowed in their effectiveness by the right information not being available when it is needed. The perception is that from both sides better information and systems would improve obstacles and bottlenecks. What is evident is that where data is captured in a systemic way and is available to all relevant parties in both functions the quantity of ad hoc communication goes down while the quality goes up. It is interesting to note that in some responses, finance and purchasing professionals referenced technology as a means of overcoming integration challenges, or facilitating more constructive ongoing operational relationships. However, this is subject to overall organisational frameworks and that of the relationship between the CFO controllers of the corporate purse strings and the CPO gatekeepers to the external supply chain.

So we are looking to open up debate between professionals of these two crucial areas. The opportunities to work with supply chains to transform businesses for years to come need to be set against the negative realities of supply chain risk. In the wake of recent economic events, we expect such debate to continue shaping the role of procurement and supply chain management at a corporate strategy level. With this in mind, we anticipate that there are two areas of focus for best practice discussions in the field:

1. Organizations accessing the improved costs, delivery, quality and service dimensions that improved supply chain dynamics present, and
2. Exposing organizations to increased risk of permanent or intermittent failure in the supply lines.

CPOs should make the most of this window of opportunity of ‘supply enlightenment’ to clearly communicate at board level the further strategic benefits that can be attained through improved supply chain management. Across most sectors, there is a great deal more to supply chain management than simply identifying cost savings (such as improved quality, reliability, customer service and flexibility) and it is up to CPOs to make the rest of the corporation aware of this.

Juha Hakamies procurement

As a follow up post to our Cost of Working together- it’s a question of when, not how!
Control study launch, and post on the need to combine forces between procurement and finance, we want to delve deeper into the conclusions our study present for gearing these teams up to work together more effectively.

The downturn has shown CFOs the devastating impact of what can happen when an array of strategic, financial and operational risks change and converge. In a positive economic cycle the force of upward growth and expansion can anesthetise the pain of operational shortcomings. Difficult business environments for buying organizations are seen to have a knock on effect across lengthened supply chains, often corresponding to an increase in supply risk. For many businesses the hypothesis of supply chain collapse is becoming a much closer reality that threatens commercial operations.

Figure one: As CFO, which of the following would you say are the main priorities for you in the coming 12 months?

Furthermore, as can be seen from figure one, the economic downturn has seen companies focus all efforts on cost cutting in an attempt to survive, let alone thrive. Many CFOs see the primary responsibility of the procurement department in the current climate as reducing the costs of purchased goods, materials and services, and in turn procurement professionals are feeling the pressure.

With cost cutting having been a major focus for the last 6-12 months, the question arises of how much extra cost can realistically be squeezed out of businesses if tired methods of identifying and realizing cost savings continue to be employed? Furthermore, focusing wholeheartedly on hasty cost cutting measures to the detriment of wider organizational imperatives may in fact weaken a company’s position. once a recovery begins.

Many of the challenges and priorities faced by CFOs boil down to procurement issues, yet it appears that the strategic relevance of purchasing is neglected in many scenarios. If purchasing was a window on the supply chain, it would seem that CFOs are looking elsewhere for signs of daylight among economic storm clouds. The need to combine forces and share information for the greater organizational good has never been more acute.

Juha Hakamies procurement

If you don’t heed the opening line of Dylan Thomas’ play, Under Milk Wood, you do so at your peril – beginning at the beginning and working out best processes for your shared services center mitigates the risks inherent in such a project. To put it bluntly, if things are in a mess, moving them to a shared services center will move and increase the mess you find yourself in, unless you take action at the start.

To kick start a shared services centre, the journey typically begins with the finance functions, and then moves to procurement side and maybe onto HR. But for each decision to use shared services center the most important phase to ensure success, is the starting point. So let’s begin at the beginning!

A thorough assessment of the processes, people and tools is critical for the long term success and it’s important to select the processes and tools before building the organizational structures around them. If this isn’t done, processes can get muddied very easily and the environment ends up far from ideal. In addition, choosing the right KPIs for the organization is essential so that there is room for continuous improvement and optimization of the processes once the centre is up and running. Even if you consider some key processes centralized, and so there isn’t anything more to do, think again. They may not be fit for purpose, particularly when looking at the KPIs required for a shared services solution.

For example, Metso, a global supplier of sustainable technology and services for mining, construction, energy, metal recycling and the pulp and paper industries, has worked closely with Basware to consolidate its invoice management into regional shared service centers. Alongside cost-savings and significantly reduced processing times, Metso have been able to steer the business towards more goal orientated purchasing. And the journey continues as they continue to work with their supplier base and extend out the productivity efficiencies and improve transactional relationships using the same best practice insight.

There is plenty to do when establishing a shared service center but just even focusing on a couple of key points some of the biggest time and cost consuming mistakes can be avoided:

1. Optimize processes or develop processes if there are none in place – document them!
2. Ensure the right people are in the right role, with the right processes and technology to support them and make sure people understand the roles and responsibilities
3. Provide the right tools which are easy to use, easy to roll out and useable for a multi language multi currency environment to aid customer adoption

For other tips on what NOT to do, see ssonetwork – there’s some great pointers here on preimplementation work, as well as looking at the required process throughout, and as the article states, moving towards shared services, it’s no walk in the park!

Juha Hakamies procurement