Cash & Liquidity ManagementPaymentsPayments OutsourcingWorld-class Purchase-to-Pay Processes

World-class Purchase-to-Pay Processes

Processing financial supply-chain (FSC) transactions is a burden carried by all businesses. However, the size of this burden varies considerably from business to business and varies irrespective of business type or business sector. Why is this? Why is it that two businesses buying similar products from the same vendor/supplier arrive at two very different cost models for processing what would appear to be very similar financial transactions? And why is it that the perception of risk is so different that these two businesses will have widely different control and authorisation processes? What aspects of their purchase-to-pay (P2P) process are so different, that those businesses that operate the most cost-effective world-class P2P processes are able to process a purchase order (PO) through to settlement for one tenth of the cost incurred by other businesses? A guideline cost for a European business to process a PO through to payment using reasonably manual processes is around €32 (£22). The same PO, if processed automatically, would cost less than €3 (£2), about one tenth of the cost of a manual PO. Businesses that operate world-class P2P processes manage to process transactions faster, with much greater efficiency and at a lower cost, and also achieve higher levels of transaction quality than most other businesses. What are the key attributes of their process model that enables them to achieve such dramatically different results? A number of these attributes are discussed within this paper.

High Levels of Processing Automation

A common theme through all of those businesses that provide world-class P2P processes is their focus on processing every aspect of the purchase transaction automatically; in a lights-out production-line environment, often referred to as straight-through processing (STP). Maintaining high levels of process automation is the key to delivering substantially reduced transaction handling costs together with huge gains in process efficiency and FTE productivity. Introducing process automation also begins to address the internal controls and process compliance shortfalls identified by Sarbanes and Oxley and covered within section 404 of the Sarbanes-Oxley Act of 2002 (SOX). The buying organisation controls how their processes operate, and therefore control how automated the process is or could be. The assertion is therefore, that businesses providing world-class processes exhibit greater process awareness and cost-focus, with a greater willingness to tackle back-office inefficiencies than other businesses. World-class processes are evidence of a single-minded approach by the buying organisation to remove all non value-adding activities throughout the financial supply-chain. This includes one of the largest cost-adding activities carried out by almost all businesses: keying-in data. Most data will have been keyed in before, sometimes several times before; PO details by the buying organisation and delivery and invoice details by the selling organisation. Removing the inefficient and costly double handling of data by automatically transmitting and receiving transactions is a fundamental component of a world-class P2P process. Most businesses will regularly produce management information using spreadsheet software such as Excel, and will not think twice about emailing the result to colleagues and business partners. Why then, is this same approach not regularly applied to delivering POs and invoices? Rarely would a business advocate printing the spreadsheet and then posting it on to their colleagues. Using this simple example of how easily and efficiently an Excel document is delivered, and how regularly businesses use this technology, why then are the vast majority of POs and invoices still printed and posted?

Procurement Message

A common attribute of those businesses that operate world-class processes is the clarity of their procurement strategy and the strength of the message given to their supply-base. This message provides the supplier/vendor with a clear understanding of the business drivers and the mutual benefits, together with precise details of how the processes work and the level of process compliance that is expected.

Supplier e-Commerce Portal

Leading businesses use a web-based supplier portal to deliver their procurement message and to handle the regular communications to its supply-base. This portal acts as the conduit for information to flow into and out of the business. These businesses mandate that all suppliers/vendors use the supplier portal to register their business details to improve the pre-contract verification process and to automate supplier registration. The supplier portal also provides the means for the supplier to self-administer their own master data on an ongoing basis. The supplier portal provides a single central repository of all the suppliers’ information. This benefits the buying organisation by addressing the regular master-data harmonisation issue that often occurs where there are several ERP systems, as well as placing the onus on the supplier to maintain accurate information. The supplier portal also benefits the supplier/vendor by providing the means to interact with transactions as they occur, such as acknowledging receipt of a PO or to view or upload the detail of a remittance advice. There are also facilities for the smaller or infrequent suppliers, such as being able to turn-around a PO to produce a compliant PO-matched e-invoice.

Purchase Orders

The majority of financial supply-chain transactions refer back to the purchase order (PO) as the authoritative baseline for delivery management, invoice checking and payment approval. Therefore, for the buying organisation to achieve high-levels of downstream process automation, the quality and timing of the PO is the single most important aspect of the whole P2P process to get right. Inaccurate, incomplete or ambiguous POs will almost certainly lead to manual intervention throughout the delivery checking and invoice reconciliation process and will therefore lead to increased processing cost and delays in downstream activities. Providing a PO exists and provides sufficient detail about the product required, the price and unit, product code, quantity, and delivery dates, then there is every reason to expect that incoming order acknowledgements and order responses, advance shipment notices (ASNs) or AP invoices can be matched to provide an automatic two-way match. Low-value differences covering such items as postage or delivery charges, that may not have been included on the PO, can be handled automatically by applying business rules that determine whether acceptable or not.

Zero Tolerance of AP Invoices Without a PO

As discussed above, the presence, or not, of a valid PO is a key determinant in the level of process cost and the level of automated processing that can be achieved. To maintain the high levels of automation achieved by those businesses delivering best practice, there is a zero-tolerance towards purchasing anything, outside of p-card purchases, not covered by a valid PO. To underline this, leading businesses maintain a strict ‘no PO, no pay’ policy. If a PO does not exist, or the purchase is not covered by an automatic transaction handling process, such as with p-card purchases, then manual intervention is required and handling costs start to escalate. Retro-entry of the PO information is even more damaging, as this not only contributes to increased process cost, it also provides the opportunity to circumvent normal procurement controls and masks the true level of outstanding commitments.

Automated PO Delivery with SLA-based Order Acknowledgement and Response

Delivering purchase orders electronically via the supplier portal is the most efficient and most effective method of ensuring that the suppliers receive each and every PO. And, by insisting on an order acknowledgement and order response, the buying organisation can be confident that firstly, the correct supplier has received the PO and secondly, that the supplier understands what has been ordered and can commit to delivering what has been ordered, at the order price and on the expected delivery date. All three of these phases of PO delivery through order acknowledgement and order response are essential when aiming to take cost and effort out of delivery and invoice query activities. These activities include, but are not limited to, resolving incorrect deliveries, dealing with incorrect invoice prices and minimising the risk of products and/or services not being delivered.

AP Invoices

Buying organisations operating world-class processes require their supply-base to deliver invoices electronically, and automatically match the e-invoice to the PO and register the matched invoice in the buyer’s ERP application. This reduces the invoice delivery to processing time from days to minutes. Delivering invoices electronically provides the supply-base with quickest and most effective route to payment as well as influencing when an invoice is registered within the buyer’s ERP application. If the supplier’s invoice matches the PO exactly and complies with all the business rules, then it is passed to the ERP with a status of ‘Matched against PO – awaiting delivery and payment approval’. The supplier will, in effect, have carried out the AP invoice registration activity for the buyer.

An additional benefit of the automatic transmission and input of the supplier’s invoice is that the tax regulatory bodies can be assured that the invoice and VAT information in the supplier’s accounts is exactly the same as in buyers’ accounts. Therefore compliance auditing for e-commerce accounts will take less time than with paper-based accounts.

The improvement in process efficiency, especially the savings in the time it takes to process an AP invoice, can be further leveraged to reduce the buyer’s cost base. This is achieved by offering early payment in exchange for additional discount. Improvements in the efficiency of processing AP invoices could provide the opportunity to further reduce supplier/vendor costs by 1.5 per cent to 2 per cent by offering to pay in say 15-20 days rather than net 35 days. This equates to an opportunity to reduce the buyer’s cost-base by £1.5m to £2m per £100m of those purchases considered for early payment.

AP Invoice Validation and Verification

Using the purchase order as the baseline for validating the authenticity of AP invoice and then applying business rules for additional verification and compliance checking, AP invoices will fall into three broad categories;

  1. Match PO exactly and comply with all business rules – process automatically
  2. Match PO but with differences that need manual intervention – process manually
  3. Does not match PO or materially fails business rules – reject back to supplier

The route 1 option is the most efficient, lowest-cost, lowest-effort processing route and is the benchmark route that should be aimed for with all suppliers. Route 3 relies on business rules to reject non-compliant invoices before they are presented to the ERP application and before any process cost is incurred. Route 2 is the route that has to be closely monitored, as AP invoices that need manual intervention cost significantly more to process than automatically cleared AP invoices. To reduce the volume of invoices that require route 2 manual intervention, root cause analysis is used to determine where action is needed; whether the procurement team need be involved, if the problem is with the POs, or the supplier needs to be involved if they are providing non-compliant invoices, or the business rules need to be updated to improve the logic so that in the future, similar AP invoices with similar exceptions will either be accepted through route 1 or rejected through route 3.

It is worthwhile noting that as the automatic matching and validation process beds down, almost all of the remaining AP staff budget previously attributable to invoice clearance will now be channelled to resolving queries or exceptions. The huge cost differential between processing transactions automatically and processing them manually provide the focus to achieve further cost-savings by reducing the number of manual interventions.

Dispute Resolution

From time to time, significant differences will occur between what was ordered, what was delivered, and what was subsequently invoiced. Supplier portals provide a web-based collaborative environment for dispute resolution. This approach minimises the amount of non-productive manual time spent making telephone calls or faxing copies of documents related to the query or dispute. The collaborative workspace maintains a single repository of all documents enabling all parties to refer to the same information. Also, sequenced copies of emails are kept providing a complete audit trail of issues and decisions as they are raised and agreed. Once agreed, and action taken, the dispute is closed but with a permanent record being available for later examination and interrogation should the agreed action be disputed or to handover knowledge as and when personnel change.

Automated Receipting – Advance Shipping Notices and ERS

The receipting process has the most labour intensive activities within the P2P process. However, with certain types of supply or certain key suppliers, the processing of advance shipping (or shipment) notices provides the ability to automate much of the receipting of product deliveries and can be used to generate either an authenticated goods received note (GRN) to provide the supplier with the ability to automate the input of supplier/vendor proof-of-deliveries, and can therefore drive the production of more compliant invoices, or to automatically produce an evaluated receipt (ERS or self-billing invoice) instead of processing a supplier’s AP invoice and therefore completely removing the need to handle and match AP invoices. The automotive and aerospace industries consider that processing ASNs and producing automatic evaluated receipts (self-billing) is best practice.


Best practice in the payments area includes the automation of all payments based on delivery date (US) or invoice date (Europe) and to make all payments via EFT thus avoiding the added process cost of raising and authorising cheques. There is a growing trend to leverage the opportunities that improvements in invoice handling efficiency have created, by amending the supplier payment terms. Some businesses have pushed out the net payment days from say 35 to 45 days, and provided an early payment discount say 2 per cent discount for 20 days payment, otherwise net is 45 days (2 per cent 20 net 45). A number of businesses provide a supplier portal service that allows a supplier to independently bring forward payments, accepting an early settlement discount, thereby trading profit for cash.

Shared Service Organisations (SSOs)

To further improve the performance and efficiency of the P2P process leading organisations have removed the responsibility for transaction handling and processing from within individual group businesses and created a group-wide transaction shared services centre (TSSC). The transaction SSC is usually based in a low-cost economy such as Poland or India but where there is access to a highly trained and highly skilled workforce. Switching to the use of a transaction SSC provides the opportunity to standardise business processes and to focus on improving process performance. For a transaction SSC, handling transactions is their raison d’être. For everybody else, handling transactions is a back-office activity seen as a necessary and unavoidable overhead. Which scenario is more likely to drive quality and performance up and operational cost down?


World-class processes are not achieved easily or quickly and are as much about addressing the internal behaviour within a business as it is about improving the performance and quality of the supplier’s transactional documentation.

The P2P process comprises of several sub-processes each with its own attributes that in turn contribute to world-class performance. Achieving world-class levels of performance can begin at any one of the sub-processes and each will deliver significant benefits and each will be significantly better than your competitors.

Those businesses that have achieved world-class standards have done so through the aggressive use of automation technologies and applying similar techniques as used in a manufacturing environment to minimise waste and achieve zero production defects.

Should those in the back-office aim to produce the same high-quality products as those on the production floor, and with the same low-levels of error? What prevents us from aiming for a Six Sigma rating – imagine handling one million AP invoices where only four of them have an error? That’s the level of product-quality that manufacturing industries are working towards.

It is possible to reduce invoice transaction handling costs by more than 90 per cent using a combination of e-technologies that together eliminate the labour components of the process and work towards a fully automated, lights-out transaction processing environment.

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