Much has been written over the last few years about Channel Strategy and its role as part of a best in class Procurement operating model. Channel Strategy, if implemented correctly, can significantly reduce complexity and operating costs and improve control over the transactions that flow through the 'Source-to-Settle end to end process.' There is debate among consultants and pundits on where the focus of channel discussions should be, either the entire Source-to-Settle end to end process or a subset of it. Some argue that companies should focus on payment channels such as, PCards as settlement tools, automated payments (EFT) and manual checks. Others believe the channel discussion should include how we source, requisition and purchase. The short answer is both are correct.
Depending on the need and the focus of the procurement organization, one may find that a narrow concentration on one part of the Source-to-Settle lifecycle is enough. In other cases, a procurement department needs to think more holistically, move upstream and gain visibility to what its business partners are considering and start to influence the path the transaction takes. This begins from how it is sourced, the type of contracting method to be used, and how the good or service will be requisitioned, bought, invoiced and paid for.
Using a Channel Strategy to tame processing complexity and increase control
The way by which a company manages the Source-to-Settle transaction lifecycle impacts cost, complexity and user experience. The transaction lifecycle is the sum of the steps comprising the Source-to-Settle process, from supplier selection through payment. Each step in the lifecycle has alternatives and each alternative has people, process, systems, compliance, risk and data management components that drive cost and complexity. A "channel" is the path a transactions takes through the steps. Diagram A below demonstrates the overall channel map that may be used by a company, including many of the alternatives for each of the process steps and one channel, highlighted in yellow.
Diagram A: Sample Company Channel Map
One of the values of a channel strategy is optimizing the combination of channels for improved results, including: process cost savings, process simplification, system optimization, control, risk management or any combination of these processes. The alternatives chosen at each step define the overall cost to process a transaction. The sum of the cost of the alternatives (i.e., people costs, process costs, system license fees, overhead charges) equals the overall transaction processing cost. Channels heavily reliant on manual processing can cost more, potentially hundreds of dollars per transaction, than those that are automated. Conventional wisdom suggests there is a direct tradeoff between cost and control, with reduced processing cost leading to less control. However, a well-designed processing strategy, enabled with the right systems can decrease costs and reduce complexity while also increasing control. Some lower cost channels, when implemented correctly, like PCards can provide greater control than more traditional channels (three way match PO).
Companies that do not think about processing in terms of unique channels to be managed, typically have significantly more channels, which often translates to more complexity, higher operating costs and poorer user experience. To tame channels, it is critical to understand the real number of channels and their attributes (e.g., cost, time, risk, control) in the way(s) most important to the company's objective for procurement.
The first step in optimizing channels is in mapping the alternatives of each step in the Source-to-Settle process, estimating how often they are used and then calculating the cost, and other relevant attributes. After developing this granular view of the number of process steps, the alternatives for each and its relative cost, it is then possible to apply the categories of spend, the amount of spend and the number of transactions attributable to each alternative and each channel. The channels can then be analyzed and optimized.
The company should be creative in identifying the options for moving spend between and among channels based on the outcome of its analysis. In general, fewer channels are better. Nevertheless, some channels have to exist based on the type of spend or some other external factor that cannot be controlled. Source-to-Settle processing channels touch virtually every part of the company and almost all employees. Expect each to have reasons as to why they should not be expected to change. Expect the same reaction from suppliers. Again, optimized channels are driven by the company's priority for the procurement function. Expect there will be trade-offs in the analysis and optimization exercise.
On-going channel management
An effective channel strategy requires:
A definition of the future state
A short list of appropriate channels for the majority of transactions
An infrequently utilized exception process for the small number of transactions that cannot use the priority channels
Lots of on-going analysis and support, and
The people element of channel management is often overlooked. Most successful companies have an owner for the process. The owner is usually someone in an analytics or compliance role that monitors the usage of the channels and who makes recommendations about how to keep them optimized. This owner also has responsibility for reaching out to requestors/users that stray from the preferred channels to provide coaching, training and support. This is a role that is ideally suited to Shared Services if that function exists within the company, but the owner can really report anywhere in the Source-to-Settle organization that makes the most sense.
The other element of successful channel management is proactively mandating the use of optimal channels during the initial contact and negotiations with suppliers. Category managers should (1) enter initial discussions and negotiations with suppliers, (2) be armed with the optimal processing channel for the type of spend being discussed with the supplier, and (3) drive the supplier to accept that channel, where practical.
The greatest challenge to the successful implementation and on-going management of an effective channel strategy is internal stakeholders and constantly competing priorities. Having documented strategies, a proactive program to manage channels, and constant communication of the benefits of the approach are all crucial to its long term success.
Learn how a well-designed Source to Settle Channel Strategy can reduce overall processing costs while improving control. This session is designed for CPOs and Sourcing leaders who want to drive down source-to-settle processing costs without sacrificing their control environment or introducing unacceptable risks. The presenters will define processing channels, including evaluation strategies, as well as outline the components of an effective strategy and describe techniques to drive more transactions to the optimal channels.
YOU WILL LEARN:
The definition of processing channels and a channel strategy
How the mix of channels impacts complexity and control
How to optimize channels and encourage the "right" behavior
The role of continuous improvement and streamlining