As digital transformation sweeps across the globe, organizations are looking to use technology to improve efficiency in all departments. The procurement department, which owns the overall procure-to-pay (P2P) cycle, is no exception. Digital or e-procurement has the potential to hugely impact P2P.
What Is Procure-to-Pay?
Procure-to-pay is an umbrella term for the process of requisitioning, ordering, purchasing, and receiving goods or services for an organization. It’s a standard, necessary part of any business operations that may or may not involve multiple stakeholders depending on the size and hierarchy of the company. The process usually requires a lot of paperwork and time to complete fully.
How Does the Procure-to-Pay Cycle Work?
The process typically includes the following steps:
- Identifying the need for the goods and services the business seeks to obtain from an external supplier
- Exploring and choosing a vendor
- Negotiate the contract with the supplier
- Approving an internal purchase requisition
- Create the purchase order
- Receive invoice and complete payment
- Record and audit the delivery for accuracy and quality purposes
- Keep records of invoices
What Is the Current State of Procure-to-Pay?
Overall, P2P cycles seem to be improving with 61% of respondents in the Deloitte Global Chief Procurement Officer Survey 2018 experiencing better year-on-year savings. There’s also an increasing awareness of the benefits of digital procurement, with 33% saying their digital strategy will help them achieve their goals.
However, there’s still a long way to go in terms of organizational efficiency and adoption of technology. Some of the most common problems in procurement include:
- Maverick spending: Hasty, overly risky decision-making in an effort to respond quickly to new technologies and innovate faster. While being open to new processes is a valuable skill, going overboard and purchasing more than necessary leads to waste in the long run.
- Unnecessary risk: This goes hand-in-hand with the above. New purchases often come with a fair amount of risk but rather than working to reduce that possibility, decisions can be made on a whim or rush without thinking about consequences down the line.
- Too much bureaucracy: On the other hand, too many restrictions and rigid procedures can slow down procurement and delay product launches. Streamlining paperwork can help reduce this problem.
- Corporate Social Responsibility (sustainability): According to IBM, 97% of highly successful organizations are heavily involved in CSR, compared to just 61% of all companies. Sustainability is a key area for procurement to assist with significant cost savings and innovation for the entire institution. Yet many procurement teams aren’t engaging with the opportunity.
Problems are caused by old-style, inefficient processes and organizational mindsets like “That’s how we’ve always done it.” But the world is changing rapidly and companies must drag procurement and its priorities into the 21st century.
Why Is the Procure-to-Pay Process Going Digital?
Research from Deloitte shows that over the next two years, analytics will have the most impact on procurement. However, organizations still have a long way to go before this technology becomes the norm.
Currently, only one-third of leaders use digital technologies like predictive analytics.
What Are the Benefits of Digital Procurement?
Using procurement automation software to implement e-procurement is just one part of the equation when it comes to going digital. While many organizations have already adopted software to digitize signatures, forms, and store documents in the cloud, the bigger picture of digital procurement reveals a greater, untapped potential for companies.
It Improves Efficiency
Equipped with data, procurement teams can increase transparency across all levels of their organizations and spot potential bottlenecks. Making purchasing decisions also become more efficient because the key stakeholders can see the live data behind the decision and make informed decisions rather than resorting to intuition and guesswork.
e-procurement also digitizes all traditional paperwork, minimizing processing times while acquiring all signatures and filing them into appropriate departments. Forms can be filled out digitally and across mobile devices so that delays don’t occur just because people are away from the office.
It Helps Manage Risk
One of the biggest problems in procurement is a lack of transparency. A majority of procurement leaders (65%) only have visibility for their tier 1 suppliers. Beyond that, it’s hard for organizations to see any tangible data to figure out where the problem points lie.
Predictive analytics and real-time data offered by digital procurement address this problem hands-on, especially when quickly changing compliance regulations and fluctuating economies make it imperative for companies to find ways to save costs wherever they can.
It Boosts Collaboration
Finally, digital procurement improves collaboration between third-party vendors and suppliers as well as within the procurement team. Digital platforms and processes allow suppliers to gain access to data that will empower them to deliver results and ideal pricing against competitors.
Keeping suppliers in the loop throughout the P2P process can also lead to building trust and improved communications.
How Is Procure-to-Pay Going Digital?
Compared to last year, more procurement officers realize the importance and urgency of going digital. A survey by SAP Ariba showed that almost two-thirds of CPOs are using cloud computing while 82% see that digital will matter more for procurement in 2019 than in the year before.
However, the major roadblock to going digital is budget restrictions. Large companies might use commercial e-procurement solutions such as Zycus or SAP Ariba. Small businesses cannot justify the cost. Maybe they’ll upgrade from paper to emailing Excel around. But that doesn’t really address some of the main concerns.
Modern, visual process automation solutions offer an alternative. Even a small business without significant IT resources can easily create an automated solution that meets real business requirements.
Software like Frevvo offers pre-made templates that anyone can access and customize to create purchase orders and invoices. Visual builders make it easy for procurement teams to add or delete elements they need on the forms and add rules, e.g. automatically email a copy to all relevant stakeholders.
These smaller, efficient solutions offer small businesses a way out of their budget restrictions compared to larger enterprises, while still getting the primary benefits of digital procurement.
Best practices to follow when going digital
Research from Efficio and Cranfield University shows that 48% of procurement officers are driven to go digital not because they truly understand its importance but because of the “fear of missing out.”
To avoid mistakes resulting from an uninformed decision, follow these tips before launching a digital transformation.
- Start small and take it one step at a time: Going digital doesn’t mean you have to completely revamp your entire P2P process. Start with a small piece of the pie. Whether it’s digitizing your paperwork or simply moving to eSignatures, it’s important to understand exactly what it is you’re implementing and how it benefits your process.
- Ensure you can analyze data to prepare for the future: Before investing in complex data analytics, be sure you understand what kind of data you need and how to interpret the information you’ll get. Think about what numbers would help you drastically improve your P2P cycle, i.e. how would you apply findings from the data?
- Align with corporate priorities such as sustainability: Tapping into the potential within the larger organization is key. Make procurement a fundamental part of the company’s innovative practices.
- Find or train procurement talent for digital technologies: Technology alone isn’t going to help solve all your problems if your team doesn’t understand how to use it. Invest in finding or training talent that will be in alignment with your digital strategy to ensure your team doesn’t get blindsided.
- Get leadership onboard: Remember, procurement isn’t a lone-wolf operation. To truly make meaningful changes, you need organizational support. Do some research and present the key findings. Why is it imperative to go digital? What’s the impact it’ll have on profit margins? How much will it improve efficiency?
A Quick Procure-to-Pay FAQ
Procurement describes the entire end-to-end process that goes into identifying, buying, and reviewing organizational investments. One part of that is purchasing.
So while procurement refers to the broader set of activities related to acquiring goods and services such as coming up with a strategy, looking at data and market trends, and maintaining supplier relationships, purchasing only refers to the narrower act of obtaining quotes, comparing vendors, and processing payments.
2. What is the difference between Purchase Orders (POs) vs Invoices?
These two forms often get confused but they are not interchangeable. Purchase orders (POs) mainly help the supplier and buyer keep track of orders. They’ll include:
- Items and quantity requested
- The date
- Contact/company info of the buyer and supplier
- Any special terms such as discounts or recurring timelines
Invoices are used to track payments. They’ll include:
- Invoice number
- The date
- Contact/company info of the buyer and supplier
- Items ordered
- Price for each item ordered
- Shipping costs
- Discounts, if any
- Total amount
- Payment details such as due date terms
3. What is the difference between Purchase Orders vs Purchase Requisitions?
The main difference between a PO and a PR is that a PR is an internal document. The procurement team generates a purchase requisition to submit for review and approval before making an outside purchase.
Once this gets approved, a purchase order is created and sent to the outside vendor to initiate the buying process.