Best Practices Briefing in Purchase-to-Pay
Kurt Albertson, The Hackett Group
Jim Anthony, The Hackett Group
Bryan DeGraw, The Hackett Group
Bill Kilmartin, Accenture
Pat O’Conner, NASACT
Kinney Poynter, NASACT
November 16, 2006
Discussion Items
Objectives of Briefing
Hackett Insights and Metrics in Purchase-to-Pay
Emerging Trends
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Objectives of this Briefing
To introduce the topic and our knowledge of best practices to NASACT members
– NASACT Benchmarking experience Based on state benchmarking experience, Accounts Payable and
Purchase to Pay have consistently been the top areas of opportunities for improvement
– Hackett Finance Executive Advisory (NASACT) Hackett has a focused research and advisory group dedicated to this
area, monitoring use of organizational best practices to help achieve world-class performance
Accenture has significant state government client experiences on how to incorporate these best practices to improve performance
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 4
Finance Operations Executive Advisory Program
Was designed to help clients stay connected with the latest best practices, research, client networking - learning, and unmetered Hackett advisory, for the following 5 business process groups:
– Finance Shared Services– Invoice to Cash– Purchase to Pay– Payroll– Account to Report
Memberships available through NASACT
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 5
Hackett Group defines World-Class Enterprise Performance
The Hackett Group is a global Business Process Advisory Firm providing: Insight, advice and certified practice recommendations
obtained through 13 years and 3,300 benchmark studies to guide executive efforts to materially improve back office operational efficiency and effectiveness levels.
Benchmarks, business transformation services and advisory programs that empower executives to achieve world-class enterprise performance.
Hackett’s continuously updated knowledge repository has been leveraged by over 1,865 of the world’s leading private and public sector organizations, including: 93% of the Dow Jones Industrials 76% of the Fortune 100 and 90% of the Dow Jones Global Titans Index
World-ClassDefined
Objectively Quantify Gap
Identify Certified Practices
Prioritize and
Manage
Measure
Execute
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 6
Hackett uses actual data to identify world-class performers in Finance
EFFECTIVENESS
Role of finance in strategic planning and decision making
Integration of strategic planning with tactical business planning
Percent staff is experienced in both finance and company operations
Time allocated to Planning and Analysis
Use of balanced scorecards, simulation models
Working capital - days sales outstanding (“DSO”)
Percent credit sales collected within terms
Effective Tax Rate; Cost of Capital Quality metrics (billing, tax,
reporting, forecasting) Accuracy of forecasts and analysis
Hackett Value Grid™
EFFICIENCY
Total cost of finance as a percentage of revenue
Process cost as a percentage of revenue
Staffing levels by process grouping Span of control Technology cost per finance FTE Technology cost as a % of revenue Unit cost of transactions Cycle times Utilization of self-service for inquiry Application complexity Automation of transactions Reliance on spreadsheets Days to Close; Days to Report Days to complete the budget
ABC Org.Company
Comparing your organization to peer group and world-class performers
Finance Sample
Finance Sample
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Purchasing Travel & Expense Purchasing Card Administration
Hackett’s Purchase-to-Pay advisory and benchmark services are based on this defined taxonomy
Accounts Payable
Requisition processing
Purchase order processing and distribution
Supplier master file maintenance
Item master file maintenance
Receipt processing
Purchasing policies and Procedures
Supplier set-up Pre-processing Verification and
approval Electronic and
paper processing Discrepancy
resolution Payments Customer inquiry
and response File, store and
retrieve Reconciliation,
accrual & compliance
Travel advances Travel expense
processing/filing Auditing Payments Reporting and
analysis Central bill
reconciliation Travel policy
Procurement cards
Travel cards Combination
cards
Characteristics of World-Class Purchase-to-Pay Organizations
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World-Class Purchase-to-Pay Organizations Process Transactions for Significantly Less than their Peers
Cost per Transaction
Peer World-Class 1st Quartile
Purchase Order Invoice Line Item
2.5 - 3x
The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 10
World-Class Purchase-to-Pay Organizations are Much More Productive than their Peers
Transactions per FTE
Peer World-Class 1st Quartile
Purchase Order Invoice Line Item
3 - 4x
The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 11
World-Class Purchase-to-Pay Organizations Utilize Fewer FTEs than their Peers
Peer World-Class 1st Quartile
Purchasing FTEs per Billion $ Spend AP FTEs per Billion $ Revenue
40 - 50%
The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 12
World-Class Accounts Payable Organizations have Flatter Organizational Structures
Span of Control (reports per manager)
9.4
16.3
12.2
0
4
8
12
16
20
Peer World-Class 1st Quartile
The Hackett Group Accounts Payable Benchmark 2005
23%
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 13
World-Class Purchase-to-Pay Organizations Outperform their Peers across Most Dimensions
A third the cost to Process Transactions
Three to Four Times as Productive
Forty to Fifty Percent Fewer FTEs
Greater First-Pass Yield on Invoices
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Selected Best Practices Driving World-Class Performance
End-to-End Accountability of the P2P Process
Automation of the P2P Process
Business Process Sourcing Strategy
Continuous Process Improvement and Standardization
Optimization of the Supplier Payment Strategy
End-to-End Accountability with Purchase-to-Pay
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World-Class Accounts Payable Organizations are Aligned More Often with Purchasing than their Peers
Designated P2P Process Owner
27%
50%
0%
15%
30%
45%
60%
Peer World-Class
The Hackett Group Accounts Payable Benchmark 2005
2 x
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Organizations with P2P process ownership seem to outperform others in transactional process costs…with varying degrees
Selected P2P Transactional Costs
Cost per Invoice Line Item Cost per Order Cost per Receipt
P2P Process Ownership All Others
+ 22%
+ 140%
+ 11%
Hackett 2005 Benchmark Data
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Similar to costs…it also seems that P2P process ownership is also having a positive enabling effect on productivity.
P2P Process Ownership All OthersP2P Process Ownership All Others
-28%- 55%
Invoice Line ItemsProcessed per FTE
OrdersProcessed per FTE
Hackett 2005 Benchmark Data
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 19
34%31%
13%
24%
15%
9%
0%
10%
20%
30%
40%
P2P Process Re-Engineered
ERS Used for InventoryPurchases
ERS Used for Non-Inventory Purchases
P2P Process Ownership All Others
P2P process ownership does seem to enable process improvement across the end-to-end process…but again, it’s not the only enabler.
- 30%
- 30%- 52%
Percent of Organizations Engaging in Selected P2P
Process Improvement Efforts
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Even though stronger working relationships exist in with P2P process ownership…it isn’t a guarantee!
0%
10%
20%
30%
40%
50%
60%
70%
80%
Purchasing and Payables have PositiveWorking Relationships
Purchasing and Payable considerthemselves part of the "same team"
P2P Process Ownership All Others
100%
25%
75%
42%
50%
12%
- 43%
- 75%Perc
ent o
f Org
aniz
atio
ns
50%
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P2P integration and deployment of technology at various process points is higher, some only slightly, in those with process ownership.
0%
20%
40%
60%
80%
100%
Percent ofCompanies with
IntegratedPurchasing and
PayablesSystems
Percent of PO'sDisseminatedElectronically
Percent ofCompanies with
ElectronicApprovals (not
tied to HRSystem)
Percent ofInvoicesReceived
Electronically
Percent ofElectronicPayments
P2P Process Ownership All Others
88%
52%22% 21%
75%
33%12% 20%
- 14%
- 50%
- 46% - 1%
“A difference of about 70% between the cost of processing an electronic transaction versus a paper invoice.” – Hackett AP Process Benchmark, October 2006
65%
32%
- 51%
Automation of the Purchase-to-Pay Process
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Electronic focused Organizations have lower process cost and are more productive than their peers
Cost Measurements
Cost per Line Item Cost per Invoice
E-Focused Peer Group
Performance Measurements
Line Items per FTE Invoice per FTE
E-Focused Peer Group
+ 57%
+ 54%
- 57%- 58%
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World-Class Purchasing Operations Organizations Disseminate Purchase Orders Electronically Significantly more than their Peers
Electronic Purchase Order Dissemination - Indirect
0%
20%
40%
60%
80%
100%
Peer World-Class 1st Quartile
The Hackett Group Purchasing Operations Benchmark 2005
3x
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World-Class Accounts Payable Organizations Leverage Electronic Invoicing and Payments Significantly more than their Peers
Electronic Transactions
0%
20%
40%
60%
80%
100%
Peer World-Class 1st Quartile
Invoicing Payment
The Hackett Group Accounts Payable Benchmark 2005
2 - 6x
Continuous Process Improvement and Standardization
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World-Class Purchase-to-Pay Organizations have a Standard Set of Procedures Across Businesses More Often than their Peers
Standard Procedures Across Businesses
44% 37%
58%
92%
0%
20%
40%
60%
80%
100%
Peer World-Class
Purchasing Accounts Payable
The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005
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World-Class Accounts Payable Organizations have Reengineered Procedures to Minimize Low-value & Redundant Tasks More Often
Reengineered Procedures to Minimize Low-Value and Redunt Tasks
31%
75%
0%
20%
40%
60%
80%
100%
Peer World-Class
The Hackett Group Accounts Payable Benchmark 2005
2.5 x
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World-Class Purchase-to-Pay Organizations have also Consolidated Transactions and Spend to a Greater Extent
Peer World-Class 1st Quartile
Percent of Suppliers Representing 80% of Invoice TransactionsPercent of Suppliers Representing 80% of Spend
The Hackett Group Accounts Payable Benchmark 2005
40 - 60%
Business Process Sourcing Strategy
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The Business Process Sourcing Decision is the final consideration on a journey of Process Improvement and EnablementOther steps ideally come first, and yield the greatest results
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• Proximity to the Business• Company Knowledge Driven
Low High
Low
High
What factors are considered in sourcing decisions?
Advanced Skill Sets
Non-Core
On-shore
Offshore
Near-shore
Non-Standardized
Standardized
• Strategic Importance• Intellectual Property• Management Decision Support
Risk to Accuracy/Timeliness/
Quality
Centralization
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1. Decentralized
2. Centralized / shared services – onshore within the country or region being serviced
3. Centralized / shared services – offshore at a lower labor cost location outside the country or region being serviced
4. Outsourced onshore or offshore – to a third party
5. Fully automated
On-going Research – Business Process Sourcing Survey
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Accounts Payable – Supplier Set Up: General trend away from Decentralized towards Centralization and Fully Automated
19%9%
10%
15% 9%
10%64%
68%63%
58%
28%
12%19%
3%
3% 3%3%6%
0%
25%
50%
75%
100%
2004 2005 2006 In 3Years
Decentralized
Centralized SharedServices Onshore
Centralized SharedServices Offshore
Outsourced OnShoreor Offshore
Fully Automated
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Accounts Payable – Pre-Processing: Move away from Decentralized towards Outsourced and Fully Automated
7% 6%
29%8% 13%
19%
13%
53%49%
34%
39%36% 31%44%
3%3%6%
6% 3%
0%
25%
50%
75%
100%
2004 2005 2006 In 3Years
Decentralized
Centralized SharedServices Onshore
Centralized SharedServices Offshore
Outsourced OnShoreor Offshore
Fully Automated
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 36
Accounts Payable – Processing: Move away from Decentralized and Centralized towards Outsourced and Fully Automated
32%9%
16%
8%
13% 9%
10%
61%
61%50%
42%28%
14%25%
6%6%3%
7%
0%
25%
50%
75%
100%
2004 2005 2006 In 3Years
Decentralized
Centralized SharedServices Onshore
Centralized SharedServices Offshore
Outsourced OnShoreor Offshore
Fully Automated
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Accounts Payable – Payments: Continued migration away from Decentralized with a move towards Centralization and Fully Automated
19%16%
19%
6%10%
10%69%
68% 56%
52%
17%10% 16%
3% 6%7%6%5%
6%
0%
25%
50%
75%
100%
2004 2005 2006 In 3Years
Decentralized
Centralized SharedServices Onshore
Centralized SharedServices Offshore
Outsourced OnShoreor Offshore
Fully Automated
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Accounts Payable – Inquiry Response: Continued migration towards Centralized, Outsourced, and Automated
13%
19%
10% 9%
13%64%
71%
53%
45%
28%
12%
28%
10%
3% 3% 3%4% 6%6%0%
25%
50%
75%
100%
2004 2005 2006 In 3Years
Decentralized
Centralized SharedServices Onshore
Centralized SharedServices Offshore
Outsourced OnShoreor Offshore
Fully Automated
Optimization of Supplier Payment Strategy
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Should organizations take early payment discounts or should they push out terms? While it depends, some do both.
An organizations payment strategy must be linked to the overall corporate strategy
The payment strategy should be a product of collaboration between Procurement, Treasury, and Accounts Payable
The organizations cost of capital and cash position are primary factors in driving the payment strategy
Organizations should segment supply base based on their propensity to extend discounts (or supplier’s need for cash)
Technology like “Pay me know” functionality helps enable the payment strategy
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Hackett research shows that the trends for companies has been an attempt to extend payment terms with suppliers
In 2004, 53% of organizations said that they expected to have standard payment terms of 45 days or more within three years
The median 2004 Days Payable Outstanding (DPO) figure was at 28.0 days (Excluding automotive)
42% of the US sector from 2003 to 2004 showed a deterioration in DPO, however
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Based on a recent Hackett Group Survey, however, nearly half of the respondents said they actively pursue supplier discounts
Supplier Payment Strategies
8%
13%
20%
20%
22%
36%
49%
0% 10% 20% 30% 40% 50% 60%
Suppliers are able to selectfrom standard payment terms
Early payment discounts aretaken even when not earned
Early payment discounts arepart of standard T&Cs
Smaller suppliers are typicallypaid in a shorter time frame
No formal policy exists
Extend payment terms tomaximize float
Actively pursue early paymentdiscounts
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According to our benchmark, however, over 80% of companies are not Tracking Supplier Discounts Taken
Percentage of Companies Measuring "Dollar Amounts or Percentage of Discounts Taken of Not Take"
20% 29%51%
0%
20%
40%
60%
Currently utilizing thismetric with establishedtargets and/or control
limits
Currently utilizing thismetric without
established targets&/or control limits
Not currently utilizingthis metric
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Survey Results showed that organizations that actively pursue early payment discounts can reduce the bottom line by as much as $2 million per $ billion in spend
Discount as a Percent of Total Spend
0.36%
0.04%
0.00%
0.10%
0.20%
0.30%
0.40%
Actively Pursue No Policy
Based on study results, a 10% cost of capital, a 25 day reduction in working capital, and a 2% average discount
$2 million per $ billion in spend
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What is the Prompt Pay Discount Opportunity?
Employees Other Governments (grants etc) Recipients (such as Welfare, Unemployment,
etc) Beneficiaries (such as Pension, Worker
Compensation) Health and human service providers (such as
Medicaid and social service provider organizations)
Bond holders Customers receiving revenue refunds Vendor Trade Payables
Suppliers already agree to contractual terms and already accomplish prompt pay discount
Suppliers already agree to contractual terms but not accomplishing prompt pay discount
Suppliers do not yet agree to contractual terms, but probably would if requested
We believe governments are motivated to seek improvements and efficiencies, especially when significant value can be accomplished.We believe there is a major, unrealized, opportunity to implement accounts payable improvement programs that target certain payee groups and can accomplish prompt pay discounts.
Furthermore, we believe a combination of factors, organizational, process, and technology improvements, make this a feasible and realistic undertaking.
Major Payee Groups Vendor Trade Payables
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The Value Proposition: Hard and Soft Dollar Savings
Also, Suppliers benefit from quicker cash flow and easier payment processes.
HardDollar
Savings
Net $30M per billion in payment
volume
Soft Dollar
Savings
$8-15 per
transaction event
Accounts Payable Optimization (Prompt Pay Discount Realization) • The generally accepted business practice for vendor trade payables is 2% discount if
paid in 10 days, and full amount (no discount) if paid in 30 days• Most governments strive to make payments in 30 days• While this practice avoids late penalty interest, it does not harvest prompt pay
discounts• Paying a vendor 98% the face amount of an invoice, representing full satisfaction of
the amount owed, generates a savings to the government (slightly less than 2% due to interest income foregone)
• Vendors already pay the equivalent to 2%, or more, to accept your P cards
Organizational and Process Reengineering and Automation• Decentralized and organizationally distributed processing locations causes higher
costs for managing accounts payable and disbursements• Manual processing is responsible for a lot of the high costs of managing accounts
payable and disbursements.• Many government business processes can be streamlined, in a manner consistent with
leading practices, to reduce or eliminate the number of processing steps • Accenture analysis suggests that automating and streamlining the accounts payable
process can save labor and overhead costs $10-15 per transaction.
Our hypothesis and business case is based on realizing “hard dollar” savings derived from actively managing early payment discounts. Additional and significant benefits arise from process efficiencies, and generate “soft dollar” savings.
World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 47
The “Value Calculator”
We have developed a “top-down” model to estimate the magnitude of the opportunity in US State Government
Terms Days % DiscStandard 30 N/AEarly Discount 10 2%
3%
80%
4%
Cost Net Opportunity
States Gen
eral
Sta
te
Exp
endi
ture
Inte
rgov
ernm
ent
Exp
endi
ture
Dir
ect
Exp
endi
ture
Com
mod
ity
Spe
nd
Value Realised if Early
Payment Adopted
Value Based on % Probablity
Value Lost thru' Reduced Interest
Income
Early Payment value less opportunity
lost through holding balance in bank
(a) (b) (a) - (b) CALCULATED CALCULATED 80% CALCULATED CALCULATED
UNITED STATES 1,109,227,448$ 364,789,480$ 744,437,968$ 22,333,139$ 446,663$ 357,330$ 48,949$ 308,381$
CALIFORNIA 158,235,437$ 74,687,370$ 83,548,067$ 2,506,442$ 50,129$ 40,103$ 5,494$ 34,610$ NEW YORK 96,528,968$ 38,982,253$ 57,546,715$ 1,726,401$ 34,528$ 27,622$ 3,784$ 23,839$ ILLINOIS 42,678,167$ 13,090,976$ 29,587,191$ 887,616$ 17,752$ 14,202$ 1,945$ 12,256$ OHIO 42,361,985$ 15,052,078$ 27,309,907$ 819,297$ 16,386$ 13,109$ 1,796$ 11,313$ MICHIGAN 43,827,413$ 19,067,058$ 24,760,355$ 742,811$ 14,856$ 11,885$ 1,628$ 10,257$ NEW JERSEY 32,935,974$ 9,320,357$ 23,615,617$ 708,469$ 14,169$ 11,335$ 1,553$ 9,783$ MASSACHUSETTS 28,470,834$ 6,283,972$ 22,186,862$ 665,606$ 13,312$ 10,650$ 1,459$ 9,191$ OREGON 14,884,121$ 4,212,673$ 10,671,448$ 320,143$ 6,403$ 5,122$ 702$ 4,421$ Amounts in Thousands
Annual Spend Opportunity
Discount APR Equivalent
% Spend subject to Early Payment Discount
% Value that could be realized from early payment
Deposit Rate
Analysis NotesThis analysis is based on publically available data supported by Accenture analysis. The purpose is to determine the opportunity available to organizations which adopt the best practice of early discount realization.
Expenditure subject to analysis (ie early discount) = 3% of Direct Expenditure
Information Source:State Government Finances: 2002 (Updated at July 2004) http://www.census.gov
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Questions or Comments?
? ?? ?
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For Further Information, Please Contact
Pat O’Connor NASACT Association ManagerLexington, KY [email protected]: 859-276-1147
Jim AnthonyHackett Account DirectorChicago, [email protected]: 312-543-6938
Bill KilmartinAccenture Account DirectorBoston, [email protected]: 781-367-9576