Michael Eckstut, Principal and Len Prokopets, Principal Archstone
Consulting, A Hackett Group Company Print This Page
A commonly held view by most top managers today is that simplifying processes
and taking a "lean" approach to all business operations is the golden path to
business success. We have seen over and over again companies successfully
re-engineering their business processes to take out complexity and become more
effective and efficient, better able to compete in the marketplace by meeting
customer service and quality goals while driving down costs.
believe there are times when simplifying processes can go too far and little
"messiness" to the business is the right decision for the business. We see this
increasingly in what clients are trying to do in the Procure to Pay (P2P)
process - an existing complex and "messy" process - lack of standardization and
many sourcing approaches, multiple approaches to PO usage and approval
mechanisms and many payment approaches. And now, aiming to have a single,
standard and consistent P2P process, often driven by a specific goal of having "all payment being electronic", with an objective of reducing P2P transaction
Historically the P2P process has been viewed very tactically and
addressed via a series of initiatives aimed at reducing costs but rarely being
integrated into a broader Procurement strategy or an overall P2P "channel"
strategy. Initiatives in the past often took the form of consolidating the
Account Payables function (which in most companies is typically part of the
Finance organization, not Procurement), in a shared service environment which
may be outsourced and often placed in a low cost geographic location staffed
with low skill personnel. The result is often a disjointed and ad hoc AP
process, which may appear to be low cost and even "standardized" but it often
creates service and quality problems for Procurement (time to resolve
exceptions, inability to meet internal payment guidelines and standards, manual
interventions, etc.), procurement users (low procurement process, use of "high
cost" approaches and maverick spend) and vendors (slow payments, complex
process, etc.) and parallel "shadow" processes crop up.
In our work, we
have found that only focusing on simplifying P2P payment channels across all
elements (categories, geographies, type of buy, etc.) of the spend by reducing
the number and types of payment channels and driving all transactions to a
single "standard" global process flow does not always result in happy
stakeholders (internal to procurement and external to the user community) or the
most cost efficient results and healthy bottom line companies seek. A strategic
and balanced approach, including adding just the right amount of "messiness" can
lead to many financial benefits while also improving P2P effectiveness
(delivering higher quality results) and supplier and financial risk.
the last few years, a growing focus on procurement visibility and compliance has
led most large companies to tame the P2P problem. Best Practice Companies are
using a combination of policies and technology to reduce the number of ways that
any good or service could be bought, ordered, approved, and paid. They
rationalize the channels that the purchase to pay process could follow without
being draconian. Rather, they balance this against a range of options for
transacting a purchase, to optimize overall process costs, compliance, and
management attention while maintaining the right level of control over all
purchases. These practices often lead to an optimized channel strategy that
ensures that the right levels of protection and visibility can be applied with
the right cost for each purchase.
The Hackett Group views the P2P
process with a "Buy" and "Pay" framework and defines a payment channel as the
particular path a purchase takes from requisition to the last step in the
payment. (Refer to the figure below).
Each combination does imply a slightly different process (making up another
line in a spaghetti diagram), however, many of these can be automated making the
complexity manageable and in many cases reducing the amount of physical work of
An effective P2P channel strategy involves understanding the
advantages and disadvantages of each option under each of the process steps.
Each varies in cost, automation and risk management which should be tailored for
individual types of transactions. Companies should be asking the questions below
for each process phase.
Identify needs for goods and services?
Structure invoice requirements
Structure approval requirements?
Identify 3-way match candidates?
Structure PO requirements?
Transmit the order?
Receive the goods or services?
Allow banks to pay?
By selecting the option in each process that best matches the automation and
risk management requirement for each category of transactions, a company can
balance their P2P costs and risk management needs. Furthermore, establishing a
defined strategy allows the P2P group to fully understand the rationale of how
to transact, reducing the amount of maverick activity and relying on the habits
or creativity of the individual buyers.
Companies can begin to realize
a range of financial benefits through an effective channel strategy. Savings
leakage will be reduced as contract and policy non-compliance falls as
established channels are used allowing for ease of audit visibility and
enforcement. Process complexity will decrease as well with clearly defined
standards leading to efficiency and overall cost reduction.
addition, overall effectiveness can improve as well as transaction visibility
and master data management is simplified. This visibility expands beyond simple
audit controls but can be used in category management and strategic sourcing
efforts to make the sourcing group more effective as a whole. The usability of
the requisitioning system and process also becomes easier for all users. This
can lead to faster turnaround times and more effective management of suppliers
leading to a company gaining preferred customer status with their suppliers.
Overall, an effective P2P channel strategy also improves a company's risk
management. The aforementioned improvement in audit visibility and reduction of
non-compliance mitigates the risk of financial transactions. Additionally,
ensuring that the selected channel falls within all contractual requirements
during strategy will ensure a company will not face legal risks should issues
So, while process diagrams often show complex processes and tend
to imply process reductions as a positive for companies, in the P2P space, some
"messiness" in the right amount can make a company more efficient and effective.
Although not typically an area of strategic focus, a thoughtful channel strategy
not only reduces cost and improves risk management for the P2P space, but can
also enable improvements in supplier relationship management, category
management and strategic sourcing.