While many organizations today are quite mature in procurement and accounts payable, it is very seldom that the initial business case for investing in P2P technologies can be fully justified. The main challenge for most large organizations is that the initial business case is often more or less based on assumptions in an ever-changing and therefore hard to predict business environment. So which key drivers should you base the business case you present to your CEO? There are five that are predictable and can be measured over time to achieve the desired business outcomes for your company:
1. Increased Compliance
The first and most often discussed driver is increased compliance on purchasing from contracted suppliers, measured as a percentage of additional spend under contract. But be careful not to overestimate the potential contract compliance savings in the business case. All non-PO related invoices are not maverick spend. Many categories (typically 40% of spend) are correctly ordered through other buying channels more so than with a classical purchase order. A proper spend analysis should be done for the business case to get a proven spend baseline per subcategory. This is to be able to measure spend decrease due to higher contract compliance. Based on your spend ramp up plan which refers to your buying channel strategy and depending on your supplier and contract onboarding process, you can define your additional spend under control and assess the related savings. Conservative benchmarks of 4-6% of additional spend under control can be measured as contract compliance savings.
2. Efficiency and Effectiveness
Compared to contract compliance, efficiency and effectiveness can be more easily predicted. Nevertheless, you should conduct a detailed investigation, benchmarking to ensure an aligned setup of your procurement organization. This is the reason many business cases become diluted. Most organizations are afraid or do not have the mandate to adjust processes and the organizational structure based on a technology supported setup. Organizations tend to stick to old models with the belief that just using new technology with legacy structures and processes will result in a positive business outcome. To drive a business case, organizations need to rethink their size and skill level setup in their operational procurement department. Furthermore, unmanaged tactical spend should be considered as a significant opportunity to drive bottom-line savings.
3. Buying Channel Strategy
In order to drive efficiency, your organization has to have the right buying channel strategy. This means defining the way your organization makes purchases by spend as well as the amount of transactions per sub-category and country or business unit. Implementing private and public marketplaces is an important step, but will not completely support your automation agenda. More intelligent buying channels are needed such as supplier forms and price check requests. In many cases, large organizations face different maturity levels per country. For example, in some countries contracts are in place, in other countries they are happy to just get spend under control as an initial step. Hence the buying channel mix is not only dependent on categories but also regional maturity level of the organization’s buying behavior.
We routinely work with organizations to determine the right starting point for a buying channel mix and a mid to long-term buying channel strategy. Benchmarks enable organizations to find the right setup of buying channels from the beginning, which is also the basis for supplier activation planning. It is down to mathematics to create the numbers for the automation impact if the buying channel strategy and related supplier onboarding project per country are defined. The business outcome can then be calculated by comparing the existing level of automation with the automation and efficiency rate per year as an outcome of the buying channel strategy. A typical automation rate goal is between 70% and 90% depending on your starting point.
4. Leaner Operational Procurement
A leaner operational procurement setup as an outcome from automation should ideally be leveraged to focus relieved resources on higher value tasks such as tactical spend and related processes. This means a shift of skill level from pure requisition handling to tactical purchases. As much as 30 to 40% of spend is on average untouched due to ongoing negotiations because of a lack of resources or interest from strategic sourcing departments in low-value purchases. However, a spot buying process can create bottom line savings of up to 8-10% on addressable long tail spend, which can be measured and used as an essential driver of the overall business case.
5. Higher Purchase Order Quality and Accuracy
Often the last and least discovered driver is the impact of higher purchase order quality and accuracy to accounts payable. Key data for calculating efficiencies in this area are the analytics on invoice exceptions, queries, and blocked and parked invoices. By categorizing invoices into typical purchase order quality related clusters like wrong prices, wrong article number, missing information, you can calculate the impact of increased purchase order accuracy over a period and the related impact on invoice handling time and therefore invoice handling volume per FTE.
What can be achieved?
If you can demonstrate that your organization has:
- $1 billion indirect spend, whereof 60% is addressable through order based shopping
35% of addressable spend is already on contract
500,000 requisitions a year with an automation rate of 30%
500,000 invoices a year
This means a potential for:
- $6.5 million end of contract compliance savings in the second year plus additional savings in the following three years
- 19 FTE efficiency gain in the upstream process
- $2.4 million yearly savings due to an industrialized tactical buying process
- 7 FTE efficiency gain in the Accounts Payable process
To summarize, a proper business case for purchase-to-pay is based on contract compliance, efficiency and effectiveness and the impact on accounts payable. However, to create a viable and measurable basis, assumptions need to be reduced to a minimum. We have templates and tools, like the Tradeshift Value Estimator to help you get started.
If you take the right approach and make the effort, you will be surprised how quickly you can gain buy-in and support within your organization for any eProcurement initiative. The devil is in the details. Do the right math, then focus on good execution and follow-up, and in the end, it will be your key stakeholders who will be pleasantly surprised with the results.
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