Strategies for Effective PO Compliance and Cost Control

Spend approval processes and Purchase Orders (POs) are essential mechanisms for maintaining financial control in a company. Without a robust system in place, companies risk both unjustified spend, as well as poor visibility into their spending patterns, which can severely undermine budget allocations and financial planning.

Despite their vital role in maintaining financial control, POs often get a bit of a bad rap. Many organisations find themselves wrestling with implementing them effectively, with a significant proportion of employees preferring to bypass proper purchase requisition and approval. In fact, over half of companies surveyed by Kloo and The CFO reported that POs are frequently raised after the spend has already been committed. This article will look at practical strategies to help finance teams maximise adoption and compliance to POs in their organisations.

The Impact of Unapproved Spend

• Poor spend visibility: Limited financial oversight makes it challenging to track and manage expenditures effectively, which often results in budget overruns and inaccurate forecasting.
• Wasted spend: The absence of approvals can lead to duplicate or unnecessary expenditures, further straining a company’s financial health.
• Higher prices: Research by the Hackett Group found that 63% of surveyed businesses reported diminished realisation of sourcing savings as a consequence of maverick spend. When purchases are decentralised and go undocumented, opportunities to negotiate better terms with suppliers, especially when multiple purchase orders are issued to a single vendor, are often lost.

Selling PO’s to Your Organisation

To ensure the successful implementation of Purchase Orders (POs) within your organisation, it’s crucial to understand both the ineffective methods and the proven strategies that encourage adoption and compliance.

What Probably Won’t Work

Emphasising the Importance:

While it’s important to communicate the benefits of using POs — such as improved budget tracking and enhanced spending visibility – it is highly unlikely to change people’s spending behaviour. Employees often need more direct incentives or improvements to their experience to alter their habits.

Pressuring Employees: Implementing strict policies, such as ‘no PO, no pay’ policies, might seem like a straightforward way to enforce compliance. However, this approach can be very challenging to enforce once spend has already been committed.

What Does Work

1. UX, UX, UX:

User experience is arguably the most crucial component of driving behaviour change in an organisation, with positive user experience able to drive change far more effectively than any amount of education about the importance of good spend management.

For example, a city government wants more people to combat air pollution. Asking people to cycle won’t work. Telling people about the environmental benefits won’t work. However, creating a great experience for cyclists, with well-maintained segregated bike paths and prioritised right of way will encourage more residents to get pedaling.

The same can be said for financial systems. Implementing a purchase management tool that prioritises user experience for both finance and non-finance users can be highly effective in driving compliance to spend approval policy.

2. Demonstrate Ease of Use:

So, you’ve implemented a new user-friendly purchase management system – time to show your employees just how simple it is to request and approve spend. This can help to demystify the process and combat the negative connotations around POs.

3. Approval Workflows That Actually Flow:

Slow approvals drive maverick spend, with employees perceiving the process as too inefficient, and forgoing proper purchase requisition in the interest of speed. Kloo speeds up the approval process in several ways:

• Auto-assignment to workflows: Based on pre-configured factors e.g. department and cost, purchase requests are automatically assigned to the correct approval workflow. This means that only the necessary stakeholders review each spend, meaning senior approvers aren’t overwhelmed with smaller requests.
• Email-integrated approvals: Approvers can review, and approve or reject spend directly from their email inbox, without having to log in. While it might seem like a small difference, integrating approvals into people’s daily flow of work can have a significant impact on the speed of approvals.
• AI-generated approver insights: In these emails, approvers are also given AI-generated insights into how the spend will impact budget compliance, any flagging of duplicate spend, and historical data on spend with that supplier. This allows approvers to make informed decisions, without trawling through spreadsheets or their ERP data.
• Analytics: Knowledge is power, and the same goes for approvals. With Kloo’s AP Analytics, finance teams can see who are the fastest and slowest approvers and intervene accordingly. Are slow approvers featured in too many approval workflows and are snowed under? Is a nudge enough to improve approval speed?

By addressing the usability and functionality of PO systems rather than relying solely on policy enforcement or the abstract benefits of compliance, companies can foster a more cooperative and productive environment that naturally encourages the use of POs.

The Bottom Line: The Strategic Value of Spend Approvals

While the concept of POs may sometimes be met with scepticism within organisations, their role in maintaining robust financial oversight cannot be underestimated. From preventing maverick spending to enabling better budget management and cost savings, POs are vital tools in the financial toolkit. However, simply imposing strict policies or emphasising their importance is unlikely to change ingrained spending behaviours. Instead, focusing on enhancing the user experience, simplifying the approval process, and integrating these systems seamlessly into the daily workflow can drive real change. By making the process of managing spend as intuitive and hassle-free as cycling on a well-designed bike path, companies can shift the perception of POs from being a bureaucratic necessity to being a beneficial tool that everyone values. This approach not only secures the financial health of the company but also fosters a culture of accountability and efficiency that is key for financial control.

Want to learn more about spend approvals and accounts payable in the age of AI? Visit Kloo’s website