Best Practices to Optimize the Procure-to-Pay Process

Global commercial spending in 2004 is estimated to have reached nearly US$55 trillion annually, up from $41.5 trillion five years ago. For 2005, global commercial consumption expenditure is predicted to reach US$58.5 trillion.

The commercial consumption expenditure is estimated using four key data elements:

• Business-to-business purchases to acquire goods and services used in production.
• Wholesale and retail purchases of final goods.
• Selected business capital expenditures.
• Government spending on goods and services.

There is a large opportunity for increased efficiency and cost savings for today’s businesses simply by converting more than 80 per cent of these commercial payment transactions that take place via paper checks to electronic payments. Such a migration will help seamlessly integrate corporate payment activities with automated procurement processes.

Beyond the use of more efficient payment methods, businesses can realize additional cost savings through optimization of procurement and expense management processes. Visa commissioned Deloitte Consulting to conduct a comprehensive study of procurement and payment best practices for companies based in the United States.

The study focused on three key areas of a companies’ business processes. The first was the company’s procure-to-pay foundation as defined by overall procurement strategy, organization and technology. The second was how the company managed its commercial card program, including purchasing cards, T&E corporate cards, and fleet cards. The third was the procure-to-pay process itself, including sourcing, order placement, payment/settlement, reconciliation, control audit and reporting.

More than 50 large corporate and mid-sized companies considered to have leading procure-to-pay practices participated in the study. They were identified by a process to ensure proper distribution by revenue size, geography, industry type and company culture. The make-up of the companies included in the study is summarized in the following charts:

Key Findings for Procure-to-Pay Optimization

Based on the study findings, Visa and Deloitte developed 60 best practices to help companies attain greater work efficiencies and cost savings. These procure-to-pay best practices provide practical ways for companies to achieve an optimized procurement and expense management process by addressing six key areas:

• Proactive, ongoing senior management sponsorship for procure-to-pay initiatives
• Collaboration to ensure communication and enforcement of procure-to-pay policies and procedures
• Progressive migration to automating the entire procure-to-pay information technology platform
• Aggressive strategic sourcing focus to enhance vendor relations
• Comprehensive data aggregation and reporting to support management and enable continuous improvement of procure-to-pay functions
• Commercial card objective alignment with a company’s overall procure-to-pay strategy

Selected Procure-to-Pay Best Practices

Of the 60 best practices developed from the study, some of the most relevant practices for optimizing the procure-to-pay process and generating increased efficiencies are:

• Minimize use of paper purchase orders
• Eliminate manual check payments
• Optimize the number of suppliers
• Utilize e-sourcing tools to find suppliers
• Implement use of purchasing and corporate cards
• Require suppliers to accept commercial cards
• Establish policies for commercial card use
• Incorporate a commercial card training program
• Mandate use of commercial cards for eligible expenditures
• Utilize data for better spending visibility

Best Practices Adoption Patterns

The study indicates that the procure-to-pay best practices are equally applicable for both large corporate and mid-size companies that have similar goals and challenges in obtaining a leading procure-to-pay function. Differences among companies exist only in scale. How companies handle implementation of best practices depends on size, organizational structure and company culture.

Companies in the manufacturing industry have been leaders in the adoption and use of innovative procure-to-pay best practices, since supply chain management, sourcing and efficient procurement of goods and services is fundamental to business. Financial services and consumer-business companies are fast followers in best practices adoption, and mid-size companies tend to follow the lead of large companies.

Results of Best Practices Implementation

On average, study participants who adopted these best practices saved $1.8m to $8.3m annually, not including potential cost savings associated with vendor discounts or front-end processing efficiencies. Select companies individually achieved the following results:

• 98 per cent compliance with audit criteria
• 90 per cent of all spend with preferred vendors
• 90 per cent of all trips booked through an in-house Web travel tool
• 80 per cent of suppliers under contract
• 75 per cent of office supplies purchased through e-procurement
• 75 per cent of e-procurement orders paid using the purchasing card
• 71 per cent of payments automated
• 29 per cent discount on negotiated airline rates

Emerging Procure-to-Pay Trends

Today, corporations are working to coordinate accounts payable, procurement and strategic sourcing activities, while also modifying their processes to improve information sharing. Center-led management of these disciplines supports optimal vendor selection, negotiation, and management. The 52 companies that participated in the study provided detailed insights into their current and future procure-to-pay goals. Study responses highlighted three emerging trends:

1. Benchmarking

Leading companies have created a group of benchmarking partners, including companies outside their industry and companies with which they have a complementary relationship (such as suppliers or vendors). Some companies use third-party companies to conduct blind benchmarking studies against their immediate competitors. Leading companies also participate in external benchmarking studies on a periodic basis.

2. Internet Applications for Booking and Reporting Travel and Entertainment

Use of the Internet for booking travel and automation of expense reports continues to increase. Companies report anticipated process savings of 80 per cent as well as a significant reduction in data entry errors. Forty per cent of companies surveyed have already implemented Web-based booking and another 10 per cent plan to do so. More than 25 per cent of companies surveyed have implemented automated expense reporting and 36 per cent of companies plan to do so in the future.

3. E-Auctions

Use of e-auctions, Internet-based reverse auctions that create a competitive environment where suppliers bid for the lowest delivery price of goods or services to buyers, can be a source of significant cost savings. If not already in use, e-auction applications will soon be deployed by a larger percentage of the study’s survey participants.

• 17 per cent of study participants have already implemented an e-auction solution.
• An additional 22 per cent of study participants plan to implement e-auctions.

Conclusion

Because the vast majority of business-to-business payments are still taking place via paper check, there is much to be gained from the migration to electronic payments and the refinement of the entire procure-to-pay process. Best practices that focus on each step of the procure-to-pay process chain are invaluable in helping to identify where companies can make improvements to enhance efficiency and realize cost savings.