Supply management organizations are often judged by the efficiency of a process which they often don't completely own.  The Procure-to-Payment (P2P) [or Source-to-Payment (S2P)] process is a series of activities which includes:

• Sourcing
• Contracting
• Transactional Procurement
• Receiving
• Payment Processing
• Supplier Management

But how can we hold Procurement responsible for a function it doesn't directly manage?  In a large portion of companies and governmental agencies, the Procurement organization reports to a different senior officer than does the Accounts Payable organization.  And while Procurement groups do sometimes fall under a Chief Financial Officer, they rarely report to the same person who directs Accounts Payable.

But some companies and governmental groups are beginning to benefit from the consolidation of Procurement and Accounts Payable under the same leadership chain-of-command. 

For example, one of Strategic Procurement Solutions' clients (a large publishing company with global operations) experienced significant benefits from transitioning their "Corporate Procurement" group into a P2P organization named "Expense Management".  They combined the staff and operations of Sourcing, Contracting, Procurement, Travel Management, pCard Program Management, and Accounts Payable together into a single combined group that seamlessly supported the entire P2P process.  Political/organizational roadblocks were eliminated.  Staff shared responsibilities and worked collaboratively to accomplish shared goals.  Supplier relationships flourished because commercial compliance was combined with efficient processes.  And considerable savings resulted.

This article will discuss four ways Procurement and Accounts Payable can work more-collaboratively together: 

Method 1 - Shared Goals Create Cooperation:  How often have we seen supplier leveraging opportunities minimized because of poor payment performance (late payments, non-captured payment discounts, penalty financing).  Let's be honest, sometimes this occurs because Procurement isn't working pro-actively with AP and other departments to resolve 'matching' errors that prevent timely supplier payments.  But often it is because the Accounts Payable group reports to a manager who does not grasp the importance of on-time payments to the supplier community.

Often, management enforces inefficient delegation of responsibilities by making Procurement responsible for resolving all 'matching' issues.  I've observed a tendency for some accounting managers to push all matching responsibilities back onto the Procurement group rather than empowering Accounts Payable to resolve certain categories of matching errors themselves.  This ends up creating additional work for both the Accounts Payable and the Procurement staff members.  For example:

• Divided organizations often make AP responsible for notifying Procurement about missing receipt postings.  AP is not allowed to contact the Receiving group to verify delivery quantities, so the AP person has to explain the situation to the Procurement person (usually in the form of a written email message), who then has to contact the Receiving employee themselves.  Any questions or answers then require the Procurement person to reconnect with the AP person. 

• Similarly, many Procurement professionals find themselves solely responsible for directly-contacting suppliers about every matching issue; which are usually matters that could efficiently be handled by Accounts Payable personnel if they were just empowered to contact suppliers themselves.  Just like the missing receipt example in the foregoing paragraph, collaborative sharing of responsibilities can eliminate a lot of redundant/unnecessary work for both Procurement and Accounts Payable.

But what if the two groups sat down and cooperated to develop the "best" way to work as a team to resolve matching problems? Of course, if both groups report to the same director who challenges them with overall process-improvement objectives, this is much more-likely to happen.  But collaboration can occur through a pro-active approach to teamwork.  Shared objectives for Procurement and AP might be KPIs like:

• Payment of >95% of supplier invoices "within terms";
• >95% of matching errors corrected within two weeks;
• Successful capture of >85% of available payment term discounts;
• Electronic processing of >65% of supplier invoice line items; or
• Increase of pCard supplier rebates captured.

If the two groups don't share objectives, the tendency of separate management chains-of-command is to politically-push activities toward the other group...resulting in continued gridlock.

Method #2 - P2P Improvements Require Involvement by Multiple Departments: 

One governmental client organization is facilitating a procurement transformation initiative.  Their various project teams have reported impressive results, including the 'Billing/Payment' team.  That team is a cross-functional group made up of Procurement, Accounting, and Information Technology personnel that is working to improve the efficiency of the city's payment/settlement process.

In just ten meetings of just one-hour each, the team has already (i) targeted 30+ Thousand suppliers for inactivation in the ERP system; (ii) identified a way to automate nearly 50% of total supplier billings; (iii) developed a strategy to increase capture of payment term discounts; and (iv) developed a methodology to increase electronic payments to suppliers.

Formation of a special project team isn't as necessary if Procurement and Accounts payable report into the same organizational leader.  The natural synergies of shared reporting will drive cooperation and avoid political gamesmanship.

Method #3 - Improved Supplier Relationships:

Many 'accounting leaders' fail to understand the significant impact of timely payment upon supplier performance.  There are many ways to motivate superior supplier performance, but too often companies and governmental groups underestimate the simple message relayed by of paying supplier invoices on time.

As a popular boutique consultancy, Strategic Procurement Solutions has the advantage of choosing with which of our customers we'd like to continue working.  In a few notable cases when a customer failed to pay bills on time, our firm's leadership decided to either (i) to increase that client's fees; or (ii) to discontinue working with them.  One of these clients was unfortunately one of the world's largest technology firms which had outsourced their accounts payable operations to a third-party firm located in another country...and was running six months in arrears on their supplier payments.

When my colleagues and I train corporate and governmental groups about techniques that improve supplier performance, we bifurcate positive incentives (the "carrot") from negative incentives (the "stick").  Unfortunately, procurement professionals use the "stick" more often than the "carrot".  We put SLA penalties into contracts, threaten to cancel contracts, say we'll not renew purchase orders, etc.  But a buying organization's timely payment of invoices is a free way to enhance the perception of the supplier's management team about the value of our firm's relationship. 

It also communicates our organization's financial stability to the supplier.  Our readers should not underestimate the importance of timely payments in supplier relationships.  Numerous court actions around the world are beginning to treat timely payments a matter of increasing importance.  For example, in the United Kingdom the passage the Late Payment of Commercial Debts (Interest) Act was designed to ensure that debts are paid on time by allowing for high rates of interest to be charged on commercial debts which are not paid on time. The law allows companies to charge 8% over the Bank of England's base rate of interest...whether or not that finance charge is stipulated in a contract between the supplier and their customer. Similar governmental acts or studies are currently underway in the EU and United States.

But again, failure of an organization to harmonize the perception of Procurement and Accounts Payable leadership about the importance of timely payments to the supplier community is a roadblock to P2P performance.   

Method #4 - Better Float Management:  

As I've written in prior journal articles (available for complimentary download on the Publications page at www.StrategicProcurementSolutions.com), there needs to be balance between the Procurement and Accounts Payable groups regarding their combined approach to "float" management of the supplier payment stream. 

Different approaches to float management certainly exist; just compare the payment timing abilities of a company with great liquidity versus one with constraints on its cash assets.  The former company may orchestrate a strategy to solicit and capture supplier payment discounts while the former might seek to increase liquidity by extending payment terms.

But the execution of the foregoing types of approach require Procurement and Accounts Payable to work together in a close strategic manner.  And one of the best ways to do that is if they both report into the same senior director.

A month ago, I traveled to present additional training sessions for a large health care sector client with which our firm has worked for the last five years.  I was pleased to see that this firm (which is rated by Gartner as having one of the top supply chain organizations in the healthcare industry) has recently moved their entire Accounts Payable team to be co-located with their Sourcing and Procurement organizations.  Several comments arose in the training sessions about the benefits of being able to work more-closely with the Accounts Payable group.

Strategic Procurement Solutions helps private and public sector organizations find many other ways to save money across the entire Procure-to-Payment (P2P) process.  If you would like information about a simple P2P efficiency review, or tailored training programs, we'd be happy to send a PDF brochure which summarizes our techniques.  Information can be requested at Info@StrategicProcurementSolutions.com