A simple truth for every business the world over, big or small, is that it must buy goods and services. Buying something for cheaper than you sell it is perhaps a pretty good (though admittedly reductive) definition of a successful business, in fact. As such, it is fair to say that every single enterprise – even a one-man band selling seashell bracelets from a beach hut – has a procurement process of some description.
However, maintaining intelligent buying and procurement processes can be a rather tricky task, especially as a business grows, and even more so when it starts to conduct business on a global basis. The reality is that even large corporations with established and experienced procurement teams can sometimes find the design and use of a value-driven automated source-to-settle process elusive.
Research by supply management experts Ardent Partners shows that in 2014, “a standardized, linked, and/or automated source-to-settle process remains the exception and not the rule with only 24.3% of all enterprises reporting that they have and follow a standardized and complete source-to-settle process. The number drops to 19.9% when looking at the percentage of all enterprises who have fully automated their source-to-settle process.”
Understanding The Source-To-Settle Process
The source-to-settle process is long and complex. Sometimes referred to as the “req-to-check” process, it includes initial requisitioning and approvals, sourcing, procurement, spend analysis, receiving, payment settlement, management of accounts payable, and general ledger accounts.
Along the way, there is, as you can imagine, plenty of opportunity for money to “leak away” from companies, especially if the process isn’t fully optimized. In order to avoid this, the source-to-settle process – and particularly the procure-to-pay activities within it – need to be managed as an end-to-end activity. Business performance can suffer, and higher costs and risks incurred, if processes are not sufficient to monitor invoice errors, capture early payment discounts, and fix invoices that don’t match contracts or Purchase Orders.
Ariba, an SAP company, and one of the biggest B2B networks worldwide, have recently released the results of a survey of over 100 procure-to-pay professionals around the globe. Below is a breakdown of the participants of the survey:
Where Companies Leak Money In The Source-To-Settle Process
- Invoice Exceptions
64% of respondents to the Ariba survey said that over 20% of all invoices require manual intervention. Since the average company in the survey receives roughly 200,000 invoices a year, and each will take an estimated 15 minutes of employees’ time, this equates to five full-time employees on the payroll every year just handling invoice exceptions.
- Duplicate Payments and Overpayments
Overpayments and duplicate payments still remain a large problem for businesses. When this happens, often the solution is to hire the services of audit recovery firms who will attempt to capture payments that should never have been made in the first place.
The Ariba survey shows that at least 70% of respondents either use audit recovery services or at least recognize the need to do so in order to capture savings that are lost over the source-to-settle process.
The survey shows that 35% of procurement professionals have no idea how much they have lost or recovered. This is worrying to say the least. The above image indicates that 32% of companies recovered more than 1% of their overall payments in their last audit. Considering the size of some these companies, it should be pointed out that 1% is not an insignificant amount – with 1% of $1 billion equaling $10 million. This is a serious leakage indeed.
- Un-captured Early Payment Discounts
Without a fully automated and functioning invoice and procure-to-pay process, it is inevitable that companies are losing out on millions that could be saved by capturing early payment discounts.
Over three-quarters of the companies surveyed have less than 10% of their suppliers set up on early payment discount contracts. But, of these, only 30% are even managing to capture half of these negotiated discounts at all.
The Ariba survey found that 15%-20% of suppliers will take early payment discount opportunities when offered – which means that it is in a buying company’s absolute best interest to organize and automate their source-to-settle processes quickly to take advantage of this – so they are not leaking away any more money and missing out on more immediate savings.
Closing The Loop
So, what will it take for a company to plug those leaks that are costing them millions and millions every year? Can a seamless source-to-settle process really be achieved?
Yes it can. Of course it can. What’s needed is a sound design for source-to-settle success. And success in this process is absolutely measurable and impactful. According to a recent Accenture study, “it takes at least $5 in new sales to equal the same impact as a $1 reduction in procurement costs”. What is clearly needed to close the loop is the ability to connect the enterprise data (POs, invoices, and transaction information) with the financial flow. Today, these represent two – and often mismatched – sources of truth, and the root cause of costly reconciliation nightmares. This is where companies need to demand a Dynamic Payments Platform from their source-to-settle software provider. Only with dynamic payments is it possible for businesses to complete transactions with a single source of truth – one that includes absolute transparency and predictability into both the transaction data and the financial flow for buyers and suppliers. A source-to-settle solution that includes dynamic payments will put an end to overpayments, duplicate payments, and the need for audit recovery. And that would enable a company to process all its payments quickly and efficiently so that it captures every single early payment discount available while optimizing the lifeblood for every company involved – cash flow.