Exposing hidden business costs with eProcurement

Written by Gary Waylett, CEO, Eclipse Group

In a volatile economy, organisations continue to jeopardise business success by failing to achieve any visibility over purchasing commitment. With almost two thirds of purchases only revealed when the supplier invoice arrives in accounts payable, organisations are failing to control cash flow, understand expenditure against budget and potentially jeopardising important supplier relationships.

If organisations are to achieve visibility of committed spend as the purchase occurs, rather than after the event, it is essential to answer four key questions: Who is buying? Who is checking? Who is assessing procurement value? Who is managing payment processes?

Poor Process

The recession has led to improvements in financial management over the last five years; however, organisations are still failing to impose adequate control over expenditure. According to research by Proactis, over two-thirds of purchasing happens before an order is even raised and 38 percent of companies estimate that in excess of 60 percent  of inbound invoices are “invisible” to the organisation prior to receipt by Accounts Payable (AP).

Despite the vast majority of companies claiming to have some form of procurement process, few organisations have even considered issues such as supplier on-boarding or rationalisation of suppliers to achieve the best prices. Furthermore, typical processes account to nothing more than some form of purchase order generation, typically on a spreadsheet which has often only been put in place because growing numbers of suppliers refuse to deliver products or services without a PO number.

There is often no commitment or accruals, no assessment of the impact of the purchase against available budget and no central visibility of the purchase orders. AP only becomes aware of the purchase when an invoice arrives and even then the invoice may not be registered in the finance system. Due to the inadequate processes organisations have in place, there is sometimes a fear that if the invoice has been entered into the finance system it will be paid before approval. Instead, the invoice is sent off to the relevant department for approval, where it is sometimes lost, forgotten or simply buried under a mound of other ‘more critical’ tasks.

Financial Implication

Having looked at the above situation, is comes as no surprise that the latest British Chambers of Commerce (BCC) survey of more than 5,000 businesses found that 94% of firms have been paid late, with one in four reporting that over 40% of their payments were received late. The problem is not just organisations delaying payment to maximise cash flow but endemic poor processes.

Currently, even if a basic purchase order process is in place, it is hard to manage. Organisations struggle to keep track of orders, whether they have been approved – and by whom – plus  whether or not the goods or services have been received. Furthermore, many invoices become buried or even lost, suppliers will often resubmit and with no systematic approach to matching invoice value to order value and actual deliverable, organisations risk duplicate spending.

Too much time is wasted on paper chases; supplier relationships are compromised and, critically, with limited visibility of expenditure against budget, organisations have no view of corporate exposure and limited cash flow control.

It is common for organisations, especially service companies with few suppliers, to feel too small to justify the adoption of an official procurement process. At a time when every organisation is operating with minimal spare capacity, many are also justifiably concerned about business disruption.

In the current economic climate, effective cash control is essential. Organisations need to understand purchase commitments in real time. No business can truly justify a lack of visibility into expenditure or a lack of control over spend against budget. Furthermore, in a financial climate that offers discounted rates to businesses that make early payments, poor procurement processes are restricting opportunities to cut costs.

Achieving Visibility

eProcurement delivers centralised visibility of the entire procurement cycle, which can transform the purchase process. With electronic recording of documents – from purchase orders to invoices and delivery notes – as well as actions and approvals; plus automatic posting of commitments, accruals and invoices, organisations can transform purchasing insight. 

This need not be an arduous process – by exploiting a template approach organisations can get up and running with eProcurement relatively quickly. Using a best practice model can provide rapid access to a state-of-the-art-solution that delivers upwards of 90 percent of requirements from day one. With a proven process that covers the basic end to end process of requisition through purchase order creation, authorisation, three way matching (order, receipt, invoice) and automatic generation of accounting entries, a business will achieve immediate visibility of soft commitments, accruals and actuals.

Critically, the system must be intuitive and non-intrusive. A web based solution that is integrated with the email system and enables requisitioners and authorisers to access the information from PDAs or iPass is key.

eProcurement does demand some cultural change; therefore making the process simple to use, with one click requisition and approval – plus the chance to click through for additional detail if required - is essential to ensure staff buy-in to the benefits of using the system.

Imposing Control

Taking a templated approach transforms the speed of implementation and also delivers far quicker Return on Investment (ROI), which can be measured in both time saving and hard cash. Implementation of a procurement system will save time in every step of the process – from supplier on-boarding to streamlined and efficient payment processes. 

Organisations can immediately benefit from improved visibility at an early stage when using eProcurement. Instant insight into the impact on budget of a requisition request will enable organisations to impose control over corporate expenditure, while good approval processes and the automatic matching of invoices to purchase orders and delivery notes will flag invoicing errors early and eliminate the risk of duplicate invoicing which cuts down costs.

Depending on the size and type of organisation, cash savings will vary. Those with higher volumes of expenditure to approve will gain greater benefit from streamlined processes and a reduction in the time consuming paper chase; organisations with high levels of expenditure will gain significant value from consolidating suppliers and negotiating better pricing. Crucially, improved insight into purchasing enables a business to understand not only current commitments but to highlight rolling commitments – a growing issue in a world of Software as a Service(SaaS) based monthly subscriptions with rolling contracts, as well as insurance, equipment leases and rent. By transforming visibility into the purchase process organisations will be far better placed to effectively manage cash flow in a volatile marketplace and drive ongoing improvements in procurement policies that will deliver year on year savings.