There’s a tremendous library of technology vendor-sponsored drivel regarding the supposed alignment of A/P and procurement. This nonsense talk often has the people involved in purchasing more closely linking transactional procurement activities to accounts payable automation. Much of it reads the same and talks about how both activities are essentially 2 sides of the same coin. And I admit, I may have even written some of it myself in a former life. (Okay, I’ve come clean – but it was a long time ago!)
Despite the simplistic rhetoric, the unfortunate reality inside the majority of companies is that A/P and procurement are far from being connected, and any tech initiatives to date around A/P automation and e-procurement have largely happened more through happenstance than coordination. At the same time, it’s important to note that e-invoicing and connectivity networks alone – as with electronic data interchange – are slightly different animals. Closer coordination between them with transactional procurement systems, both indirect and direct, is a bit more common, yet still all too often loosely coupled.
Of course, this begs the question: What can be done to bring A/P and procurement – and by extension treasury and other aspects of finance teams – closer together when it comes to purchase-to-pay, payables and working capital programs? There’s no doubt that enabling portal, invoicing and trade financing technology from providers like Taulia Inc. is helping to bridge the gap. But technology alone won’t cut it.
Based on studying the actual kitchens of procurement and finance organizations for years – not to mention the cookbooks from various consultancies and advisors they’ve worked with in the past – I think I’m finally prepared to propose a new recipe for alignment, albeit with weights, measures and cooking times that may vary between organizations.
To align A/P and procurement, use the following ingredients:
- A perceived compelling need to create greater coordination between A/P and purchasing, in the form of a burning platform. This need could take many forms: collecting A/P-centric vendor file information to successfully notify thousands of suppliers of new payment terms or reducing headcount costs for transactional activities, perhaps after Hackett’s REL has been introduced into the mix. Don’t have a burning platform? Create one with the help of your colleagues by manufacturing a broader issue based on industry norms and benchmarks or recommendations by esteemed third parties. (Spend Matters can even help with our research and recommendations.) My own mayor in Chicago, Rahm Emanuel, offered a great, succinct thought on never wasting a burning platform: “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”
- Perceived vs. actual visibility into combined A/P, procurement and payment-centric analytics information. In 95% of companies Spend Matters works with, there is a huge information gap between the data sets different teams use within procurement and finance to run the business. Part of the problem comes down to a lack of aligned key performance indicators (KPIs) mapped back to shared reporting approaches. But more often than this, the basic fact is most organizations have no idea how to bring together different information sets, let alone how to collectively align and make sense of them. A major part of the challenge comes down to a lack of systems used by both groups. After all, baseline analytical inputs are really only transaction exhaust unless enriched by third-party sources. Making the case for the ability to create the right set of data inputs can help lead to better intelligence outputs – ultimately with a strategic and prescriptive bent. A last point here: Most companies typically have wretched insight into payables-centric analytical reporting and information. Starting with aligned A/P and procurement data sets and reporting can serve as a first step to tackle payment and working capital specific analytics as an integrated overlay.
- Shown potential revenue and operation vulnerabilities based on supplier financial viability, obtained by coordinating with internal audit groups or others tasked with tackling supply chain risk. There is a strong case to be made with long-tail suppliers – especially those that may be critical to the business but do not have the type of overall spend to come out on the top of a spend analysis cube – to proactively help mitigate supplier financial risk by offering an early payment program at reasonable APRs compared with other supplier alternatives, such as factoring. A/P, procurement, supply chain and internal audit teams can all find common ground through collaborating here.
- (For an investment-grade company) A financial argument to use as the end to achieve the means. Investment-grade companies can generally borrow at interest rates that have never been lower, but smaller and mid-tier suppliers find themselves with comparably higher borrowing costs from a spread perspective. When you start running the numbers by sorting suppliers into different tiers based on their own weighted average cost of capital compared with your own company – an assignment that will nearly always open many eyes that previously would not pay attention to the argument – it quickly becomes clear that to ignore the arbitrage potential is foolish. Of course, the means can become one of any number of programs: e-invoicing combined with invoicing and dynamic discounting, reverse factoring and supply chain finance or other methods.
It is said that when one bakes, it is essential to follow precise recipes. Cooking, on the other hand, lends itself to a bit more improvisation. But whatever the roots of your recipe and the end product you want to serve, it’s important to think about how various sets of ingredients mix together and then how collectively they further transform when placed in the oven or on the cooktop.
Ultimately, aligning A/P and procurement requires that each function not only give of itself, but expand its charter as well, venturing into new territory that others in the business see as key areas. It’s a bit like expanding the specific ingredients in your cupboard. But remember – it’s how you combine them that matters most, not to mention their quality, freshness and other attributes. I encourage you to follow the above set of ingredients as an initial guide to create your own cooking bill of materials. No doubt the best dishes will be improvised along the way based on what the market has on offer for the day.
(Cross-posted @ Spend Matters)