Procure-to-pay is one of the most challenging and complex organizational operations to manage as it typically involves the integration of several systems and collaboration of multiple departments and teams. At its most basic level, this is the process by which a purchase requisition is created, an order is placed, and payment is made based on an invoice from the supplier after the purchase order is received.
Every procurement team’s concerns lie in making the organization’s procure-to-pay process smooth, efficient, and error-free. Procure to pay process provides businesses complete control and visibility over a transaction’s entire life cycle. A small error can cost organizations heavily, in both financial and reputational terms, and that’s why it has the power to make or break an organization.
Whether depending on the manual P2P process to acquire products and services or digitally transforming them, there are various challenges procurement teams need to overcome along the way.
5 Procure-to-Pay Challenges
Here are the top 5 challenges that need to be addressed by your procurement team now:
1. Justifying the ROI
When businesses invest in any process, they expect to see a return on their investment in two ways: more revenue and lowered costs. Return on investment (ROI) is generally calculated as follows:
|Return on Investment =||Profit Earned (Revenue – Cost)|
|Total Cost of the Investment|
Once the investment is made, financial leaders get impatient to see the results in the form of increased profitability or reduced costs. Whereas following the investment, procurement teams face immense pressure to justify the return on investment in the P2P process.
Since the P2P process investment requires time to reap benefits, procurement teams often find themselves in a complex situation. Apart from that, calculating return on investment also involves identifying and accounting for each and every cost across multiple departments, which becomes difficult to encompass.
Procurement teams need to communicate that strategic procurement up-gradation needs time and commitment to achieve maximum benefits. It is to be noted that organizations that try to invest and reap the advantages of investments in a short time period sometimes miss out on the long-term worth of those efforts.
More importantly, if procurement teams are using traditional P2P processes, it gets difficult to provide visibility to financial leaders of the improvement brought by the investment. Since there is no past data to compare the existing performance, procurement teams are unable to provide a picture to the financial leaders.
2. Slow Processing Time and High Costs
According to Bain’s research, world-class procurement teams may cut a company’s purchasing cost base by an average of 8%–12% and provide extra yearly savings of 2%–3%. But not every organization is able to do so. Wonder why?
Your procurement team might be processing hundreds of transactions during a month or even more. Although this might sound like more business coming into your organization, you must be careful not to let the costs hike up unreasonably.
One of the main reasons for the increasingly high costs per invoice involves slow invoice processing time. When the procure-to-pay process is manual, it comes along with a lot of drawbacks. Traditional P2P processes are prone to human error, which results in duplicate invoices, wrong invoices, math errors, and late payments and ultimately leads to increased costs in the form of double payments, fines, or loss of rebates.
Imagine how many cycles are affected when a finance person has to go back and find out what went wrong to compute the appropriate modifications. All of these mistakes result in strained relationships with suppliers that no business can afford. When these errors occur frequently, your reliable supplier starts looking for other clients to work with which gives an edge to your competitors.
3. Lack of Visibility
Visibility into P2P operations requires knowing who, where, what, and when the requisition was placed and where the goods and services are at any given moment, following its movement and delivery, along with properly understanding who you’re doing business with.
Lack of visibility leads to maverick and dark purchasing as it gets difficult for teams to trace the requests to the departments, authenticate approvals and estimate the cruciality and need of the requisition. With no visibility into the operations, it is challenging to know which invoices are paid for and which are due.
Moreover, with no single source of truth, procurement teams fail to make any data-driven decisions to develop necessary strategies for improvement and stay at the top of the competition.
4. Retrieval of Data
Manual processing of invoices and other data involves handling and recording all these transactions on paper. Even if companies are now making computerized invoices, they print them for further use.
Apart from the costs associated with the printing of hundreds of invoices, physically storing them is also a challenge. You probably have to pile up monthly invoices on your desk or keep them in a cupboard, considering them processed and long-forgotten. But the data recorded in invoices are frequently used, for which procurement teams have to go through the pile of invoices to find the relevant information.
For example, one time, your organization required some kind of specialized service. After a year, your organization needs the same kind of service from the same vendor. Procurement teams now have to find one specific contract or invoice that had the supplier details. Physical storage and manual processing could take hours to retrieve the relevant information.
If there is a need to check something, there is also the extra inconvenience of needing to retrieve all papers related to a P2P process. This is common during audits or when suppliers question a specific invoice. According to Gartner Research, at least two-thirds of financial audits will mention the accuracy of supplier data.
5. Lack of Governance and Compliance
Procurement governance and compliance entails creating, following, and enforcing protocols for corporate spend management in other words, ensuring that every expenditure follows company-approved policy and that rogue spending does not occur.
It’s not simple to achieve compliance in your purchase operations. Team resources are stretched, laws are always changing, and new leadership may further alter objectives. Depending on your business, you may be subject to considerable industry or governmental regulation.
To top it off, many businesses lack access to meaningful or reliable data to form the right compliance strategy. Without proper governance and compliance in place, suppliers, buyers, and employees deviate from the terms laid out in their contracts, exposing your organization to fraud and corruption, among other things.
Moreover, without the set of defined rules, employees of the organization would hesitate to take the steps, requiring approvals from superiors to avoid any disciplinary actions, thus delaying the process.
In addition to this, if there are no policies in place, the complexity of the P2P process increases, which makes the life of the procurement team miserable and increases the chances of mistakes and costly misunderstandings.
Procure-to-pay process has the potential to add value and returns across the board, allowing you to compete, expand, and innovate – but only when done correctly. Every team around the world is now realizing the shortcomings of traditional manual processes.
As the world continues to leap forward toward the digitization and automation of processes, it is high time that procurement teams start looking to leverage technologies that streamline their procure-to-pay process and overcome the challenges posed by the existing methods.
Prasanna Rajendran is the Vice President at Kissflow, where he heads the business operations of Kissflow Procurement Cloud, a flexible procurement software for procurement teams to streamline all their purchasing processes in a single place. He has over 20 years of experience in technology and has helped Fortune 500 companies with custom solutions in the sourcing and procurement space.