The business case for procure to pay automation
Procurement and Accounts payable automation has many benefits including productivity improvement, process cost reduction, and so on.
However, Like any other investment, companies need to justify the investments to the finance team for such an initiative.
In this post, we will cover the key benefits of purchasing and invoicing automation and how to build your own business case for investment in such a solution.
The post is structured into tangible and intangible benefits. We are also breaking the section into purchasing automation and invoicing automation. If you are only looking for purchasing automation – for example, investment in an e-procurement solution then use the purchasing business case.
If you are only looking for automating only the A/P function then use the invoicing section.
And finally, we have put this in an excel template so that it is easy to build the business case.
If you have not read this already, we highly recommend the following before you proceed further
Let’s first look at the tangible benefits of procurement automation
Purchase order cost is the cost of processing a purchase order. The process includes the following steps.
The complexity could vary from company to company based on the level of automation and complexity of the process. Let’s take an example
1. The first step is the need recognition, for example, an employee needs to order office supplies.
2. If the employees know where to buy these items, this might be a straightforward step.
3. Once they identify what to buy and where to buy, the approval process starts. The order is ideally sent for approval before it is shipped to the supplier.
This whole process adds cost to the process, and the more manual the process is, the longer it takes the process the purchase order.
So how does procurement automation reduce this cost?
First of all, you should know your purchase order cost, the cost varies from industry to industry, and the complexity of your purchasing process.
As per different industry benchmarks, the cost of processing a purchasing order varies from as low as $35 to as high as $1,000.
As per a recent analysis by Levell research, the cost of purchase per PO is $89.73
As per this survey, the cost of a purchase order decreases from $89.73 to $30.72 when you implement a cloud-based eProcurement software. That is a reduction of 65%.
Our recommendation is that you calculate the purchase order cost by studying your purchasing process.
You can read our purchase order cost guide to read more about it or here is a brief summary
You can use the purchase order cost template to calculate your own cost.
By the end of this exercise, you should have calculations like this
The above calculation is achieved by taking the average time per step and the per-minute cost of the resources involved,
As you can see above the average time to create a PO in the above calculation is more than an hour.
Using the above example, with automation you can drive down the cost by almost 30 mins or 46.2% (based on our customer’s own calculations).
That is a savings of ~$29/purchase order and let say if you issue 10,000 purchase orders in a year, the total savings could be as high as $290,000 per year.
The obvious benefit of purchasing automation is the efficiency gain due to the automation of the end-to-end purchasing process.
With the increased efficiency, you can look at relocating the current resources to higher value add activities.
So even though the title says headcount reduction, it is generally assigning the current resources to more value add opportunities like getting quotes from suppliers and cost negotiation instead of processing purchase orders.
So how do you go about identifying the correct headcount for running your purchasing operations?
You can rely on benchmarks to calculate the number of orders which can be processed per FTE (Full-time Employee).
As per APQC (American Productivity & Quality Center)
Companies that have implemented an e-procurement systems for automating purchasing processes see a significant increase in productivity.
Without automation, per FTE productivity is 615.7 for purchase order processing. however, with automation, the number goes up to 1,302.1 purchase orders per FTE. That is an improvement of 52% with purchasing automation,
As per the Hackett group, the difference in best-in-class companies vs. others is pretty stark.
As you can see above, the order per FTE is almost 4 times the capacity of the peer network.
The following factors increase employee productivity
Most of the small to mid-sized companies might not have dedicated sourcing teams who are responsible for negotiating the cost down with the suppliers.
But even if you don’t have a dedicated team, increased visibility will drive better cost savings.
For example, if you know that you are purchasing hardware from multiple suppliers, then consolidating your volume to one supplier could easily result in 5-10% cost reduction.
Now, this might not be possible in case the volume was very low, to begin with, however, in that case, you can leverage ProcureDesk marketplace contracts.
Here is what you should expect from a cost savings perspective. As per Bain research, in terms of a % of revenue spent with external vendors.
43% of a company’s revenue is spent with third-party vendors.
Again this depends upon industry to industry.
For example – in the semiconductor industry, the number is 60% because of the high requirement for direct materials vs indirect materials.
However, in industries where there is not much direct material spend, for example – financial services, the average is as low as 17%.
So if you are a semiconductor company with $1B in revenue, $600 M is spent with third-party vendors which can be addressed by procurement.
How much you can save?
You probably hate the answer that “it depends” but unfortunately that is the case here.
Here is why
Having said all that, we will try to build a conservative model.
We will build a hypothetical case, assuming 40% of a company’s revenue is spend which can be addressed by procurement
On average, the estimated annual savings could be in the range of 8-10% of the Spend addressed in a year. So we took an average of 9% savings across all categories addressed.
So a conservative business case for a $100M revenue company is that they can save $1.2M
annually on negotiated cost savings across different products and services purchased.
If you are using a homegrown system, then there are IT costs associated with it. The IT cost falls in the following categories
This is the cost to manage the physical infrastructure for your system. This includes the cost of monitoring the hardware infrastructure, power and space cost, replacement of hardware over a fixed schedule.
When you move to a third-party solution, these costs are absorbed by the solution provider. Most of the procurement solutions provide a cloud solution so the cost of the infrastructure is part of their solution.
If you are using a homegrown system, then that needs to be supported to ensure that internal stakeholders can use the system as desired.
The support includes answering questions or training new employees on how to use the system as well as resolve any ongoing queries.
When you move to a third-party system, the support cost is absorbed by the company providing the procurement solution. That frees up your resources for more value add activities.
This cost includes the cost of development for new features as well as bug fixes. Most of the companies would brush off this cost because they already have resources who are working on other projects, so it is just a marginal cost.
When you look closely, you would realize that sometimes you have specialized resources on the payroll just to manage old legacy systems.
It is hard to provide an estimate on these costs because of the nature of the system as well as the cost structure of your IT department.
The best way to assess this cost is to have the IT department provides an annual cost based on the last 12 month of data across the different cost buckets.
Companies spend an enormous amount of time negotiating better rates with the suppliers for the product and services they purchase.
However, once the contract is negotiated, companies don’t have a good mechanism to ensure that all employees are aware of the negotiated rates and employees are using the negotiated rates for products and services.
Let’s take an example.
Let say you set up a business account with Staples and negotiated a discount on the office supplies purchases.
As part of that, you also negotiated Staples brand products to further reduce the cost.
Now how do you ensure that employees are purchasing that product from Staples and not from Office Depot or Amazon.com
That is the challenge with enforcing contractual savings and that leads to contract savings leakage.
With a procurement system, you can automatically route your employees to your preferred contracts, thereby achieving a 100% contract compliance rate and hence 100% negotiated cost savings.
You can capture an additional 8-10% of contracted savings by automatically routing the employees to preferred vendors.
Not all Spend is negotiated by companies, there are multiple reasons for that
• They don’t have a mechanism to review the Spend before it happens. Those companies are receiving invoices without a purchase order and they have no way to influence that spend.
• Procurement teams are busy with large spend items and don’t have time to look at small purchases.
With a purchasing system, you have better control and better spend visibility and that increases Spend under management.
More Spend under management, the more opportunities for the organization to reduce cost through better-negotiated pricing.
With the automation of the purchasing process, certain activities can be completely touchless and that allows procurement to spend time on reviewing spend which was not negotiated earlier.
What is the opportunity for increasing spend under management?
As per a KPMG survey, most of the companies have less than 60% of spend under management.
As you can see above, Spend under management varies by industry and the maturity of the procurement function within the organization.
For example in Financial services 34% of the companies have less than 60% Spend under management and 20% have more than 90% Spend under management.
There is an opportunity to increase Spend under management by 30% as per the above example.
What does this mean for you?
Let’s assume you are a $100M revenue company in financial service. As per Bain’s research, only 17% of revenue can be managed by procurement.
That means $17M of spend can be managed by procurement.
Now in the above example, we said that companies can improve their Spend under management by 30%, that is an increase of $5.1M in Spend which your procurement team can negotiate now.
Let’s say that you can save 10% on this additional spend – that is a savings of $510,000 ($5.1M * 10%)
We looked at the tangible benefits of implementing a purchasing system. By tangible we mean benefits that can be quantified in dollars and has an impact on the bottom line.
Now let’s look at some of the intangible benefits. Some of these like Cost control can be easily quantified in dollars but since this is cost avoidance, we added this into the intangible bucket.
Rogue spending or maverick Spend is defined as Spend which doesn’t follow defined purchasing policies. Some example of maverick spend includes
In all the instances mentioned above, there is an additional cost to the company when an individual doesn’t follow the process.
Let’s explain why this is a problem and how to quantify the cost associated with it.
Every time someone purchase from a non-preferred vendor, you are losing on the preferred pricing but also risk getting rebates.
For example, your contract offers a 2% rebate when you hit a $100,000 threshold. Now let’s say employees are purchasing from Amazon.com because the item is cheaper by 10 cents. This one single purchase could stop you from hitting the threshold and getting a $2,000 rebate on your purchase.
There is also a process cost when employees don’t follow the set process.
For example, every time a non-PO invoice shows up, the A/P department has to follow additional steps to identify who is the budget owner and accordingly charge the department.
With a purchasing system, you can route your Spend to preferred vendors and since the process is system-driven, most of the employees will follow the standard process.
We said “Most” because there will always be employees who don’t like to follow the defined purchasing process or are ignorant of the process. That can be corrected by additional education and training.
We covered this topic in the user based technique for increasing adoption of the purchasing system.
The other intangible benefit is better reporting for management. The procurement team, of course, benefits from better data and granular Spend reporting because now they have better data for analysis and finding saving opportunities.
However, the management reporting also becomes much better with the help of a procurement system, here are some examples
A modern purchasing system provides a simpler experience for employees. Rather than filing forms for purchasing products or services, they can easily purchase the products they need with few clicks.
That only saves time across the whole cycle, it leads to a better experience for employees, and that increases employee morale.
In today’s age where you call a cab with the click of a button, why not offer a better purchasing experience to employees.
Cost control or cost avoidance is the Spend that companies can avoid through better purchasing controls.
For example, if the purchase orders are reviewed by an authorized team, they can check if the products can be made available through other channels or the product or service doesn’t need to be purchased at all.
The biggest benefit of a purchase order approval process is that allows the organization to review the purchase before it happens.
When employees can directly purchase the product, the only time the organization comes to know about the spend is when the invoice shows up or when they submit their expense reports. That is too late for anybody to do anything.
As per Spendmatters, mid-market companies can avoid 2-3% of their total Spend.
For example, if you are spending $20M annually with vendors, you can avoid $400,000 to $600,000 in cost.
Since it is cost avoidance, companies generally land up allocating this cost to other critical projects.
If you are manually sending purchase orders to your suppliers, then chances are that they are either delayed, or sometimes suppliers claim that they didn’t receive the purchase order. This might not be an issue if you only issue 1-2 purchase orders a day.
But in a high volume scenario, it is likely the orders are getting delayed or misplaced.
That causes the deliveries to be late. If it is an office supplies order, we don’t think that it is a big issue, however, if this was a critical product then late or misplaced orders could have a serious impact on your availability to meet your customer goals.
With a purchasing system, you can request your vendors to acknowledge the orders. That serves two benefits
Both these actions go a long way in ensuring on-time delivery of products from suppliers.
As per APQC (American Productivity & Quality Center) research, companies who are using e-procurement systems can significantly reduce the purchasing cycle.
Lead times have a direct correlation with the working capital, the lower the lead time the later you can place the order. That results in lower working capital.
Let’s first look at the tangible benefits of invoice automation
Similar to the cost of a purchase order, there are many cost components involved in the cost per invoice.
Let’s look at some of the cost drivers.
The cost to index the invoice
This is the cost of creating an invoice in the system. Based on the format of the invoice, the time to create an invoice in the system could vary.
To get an accurate handle on the cost of indexing the invoice, you should look at how you are receiving your invoices.
For example, a paper invoice, of course, takes more time since you need to scan the physical copy and then email it for indexing.
If the vendor is sending an electronic copy then you are saving on the time to scan the invoice.
Similarly, if you are using EDI (Electronic data interchange) for receiving invoices, then your cost for indexing or creating the invoice will go down further
The cost for matching and approval
The next step in the invoice creation process is matching the invoice and routing for approval.
The time required for this step could greatly vary depending on whether the Invoice is tied to a purchase order or not.
If the invoice is not a PO invoice, the A/P team has to spend time on identifying the correct budget owner and route for approval.
If the Invoice is a PO invoice, then the process is simplified because the approval routing can be done based on the order contact on the purchase order.
The time required for matching also depends on whether there is a 2-way or 3-way match process in place. If it is a 2-way match process, then the process is simpler.
The cost for exception management
As per recent research by Ardent partners, 24% of A/P staff time is spent in resolving exceptions with the invoices.
Having an automated exception resolution process can help you drive down these costs.
Let’s take some examples
This is the most common exception faced by the A/P department. If you don’t have all your transactions in one system, A/P might have to manually chase individuals to track receipts.
If you have a centralized warehouse where everything is shipped, this might not be such a big issue.
However, if the products are directly shipped to the individuals then this task might be a little challenging.
Over shipped quantity
It is not uncommon for vendors to send more than what is ordered.
This could be due to the fact that they sell in a different Unit of measure than ordered.
For example, you ordered in each and they only sell in Dozens.
It is also possible that the supplier over shipped the quantity by mistake.
If you don’t have an automated workflow for exception resolution, then A/P has to chase the right teams to ensure if the invoice can be paid or not.
Extra charges on the invoice
Anytime there are extra charges on the invoice, it could lead to an exception. This could be additional shipping or the unit price is more than what is on the order.
You should have an exception workflow that automatically routes such exceptions to the right people.
For example, the Unit price exception should be routed to the purchasing department because the end users would not know the reason for discrepancies in the unit cost.
Similarly, additional shipping charges should be routed to the user who ordered the product so that they can confirm if the additional charges are valid or not.
The cost per invoice is anywhere between $11 and $15 today.
This is based on Ardent partner’s research as well as research by pay stream advisors. For this discussion, we will take an average of $13.
Let’s look at the tangible benefits of Invoice automation with the help of an example.
So assume that you process 2,000 invoices per month.
Total monthly cost: $26,000 [2000 x $13]
Annual cost: $312,000 [$26000 x 12]
With automated payables systems, the process from indexing, matching and exception management can be fully automated.
You can easily reduce your cost by 40%.
Assuming a 40% reduction in cost, you can reduce cost as follows
Monthly cost reduction: $10,400 [$26,000 * .4]
Annual cost reduction: $124,800 [$312,000 * .4]
New Annual cost: $187,200
New Cost per invoice: $7.8 [$187,200/24,000]
With automation, you can drop your cost from $13 to $7.8 per invoice.
In the above section, we talked about the impact of automation on the cost of invoice indexing.
In this section, we will talk about the impact of moving to the index of invoices to suppliers.
As per ardent partners’ research, only 24.7% of invoices are submitted electronically by the suppliers. You can further reduce your invoice processing cost by asking your vendors to submit more electronic invoices.
There are many benefits of moving the indexing of the invoices to the suppliers
All these steps reduce the cost of processing the invoice. It is not just about reducing cost but also improves the relationship with suppliers.
Do you have early payment discounts negotiated in your contracts, and if so, are you able to take benefit of them?
For example, a supplier offers 2% 10, Net 30 terms.
That means the invoice needs to be paid in 30 days from the date of receipt or date of invoice. However, if you pay within 10 days, then the supplier is willing to offer you a 2% discount.
So let’s say the invoice amount is $10,000 then the discount on that is $200 [$10,000 * .02]. Assuming you are able to take advantage of early payment discounts for $1M in payments, then that is savings of $20,000.
We are sure that the savings are more than your cost of capital.
Whether your company is able to take advantage of early payment discounts depends on two factors
• Whether you have negotiated early payment discounts in the first place.
• Whether your company has additional Cashflow to pay these invoices early.
Most of the companies are unable to take advantage of early payment discounts due to the following reasons.
As per Ardent partner research, only 19% of A/P departments are able to take advantage of early payment discounts.
Invoices not processed on time
Your vendors are giving your discounts on early payments is that they need the Cashflow to run their business.
So for the invoices to be paid early, they need to be approved in your system so that the vendor can be paid.
Here are the typical challenges with invoice processing
Payment by check vs ACH
The other factor which impacts the ability to avail of early payment discounts is manual payments.
As per Ardent research, 41% of companies are still paying their suppliers manually via check.
Though checks are good for your Cashflow – you can always say the check is in the mail, but if you are looking to reduce total processing cost then you should look at using electronic payment methods.
This obviously impacts your early payment discounts, because electronic payments can reduce the payment cycle from days to 24 hours.
We looked at some of the tangible benefits of Invoice automation, now let’s look at some intangible benefits.
Having an automated procure-to-pay system helps you get better visibility into your Cashflow requirements when it comes to your Accounts payable.
Companies can plan better by having better visibility into how much amount is owed to the vendors and at what time.
When you have better visibility into Cashflow, the treasury department can plan better.
Companies lacking the basic procure to pay automation suffers from the following issues
If the invoices are not getting processed on time because of the process delays, that obviously impacts your ability to pay on time.
Paying late to certain suppliers might not impact your business, but it could be a problem if the supplier is a critical supplier and they rely on your payments to fund their working capital.
When you don’t have automation or a central place for suppliers to submit invoices, the invoices generally get lost.
Consider a scenario where a supplier sent the invoice to the business stakeholder and the business stakeholder forgets to send the invoice to A/P. Now the supplier didn’t get paid, the salesperson’s reason reaches out to business and the invoice is not escalated for payment.
And now everybody is scrambling to pay the invoice because treasury didn’t factor that in the cash requirement.
Companies that have the issues mentioned above have lower supplier satisfaction. Suppliers generally treat this relationship as transactional.
If the procure-to-pay process is not automated, then the communication with the suppliers is generally a manual process.
Communication with the vendor includes communicating about the status of the purchase order, acknowledgment of the vendor order, and so on.
On the invoice side, the common vendor query is when the supplier will get paid.
Having a central supplier portal not only allows suppliers to submit invoices electronically but also provides a mechanism to see the status of their invoices.
That way, the suppliers are not continuously reaching out to the A/P department.
Most A/P departments with the manual process have a dedicated team member responsible for the A/P email inbox and responding to queries.
Automating the invoicing process leads to a better experience for your suppliers but also leads to reduced costs for the A/P support staff.
Having looked at the benefits of both purchasing ad A/P automation, the next step is to create the business case for getting approval for this investment. Let’s look at some aspects of preparing and presenting the business case
When are you selling the business case to your senior management, this is one of many projects they are considering where they can allocate the available capital and resources.
The management goal is to get a better return on investment, so though they care about productivity improvements and better employee experience, it needs to be translated to an ROI (Return on Investment) calculation.
Also, you need to clearly define the impact on revenue. Most projects fall into one of the two buckets
a) Increase revenue: The idea here is that by investing capital, the company is able to generate more revenue and hence increase EBITDA (Earnings before interest, tax, depreciation, and amortization).
b) Decrease cost: The second bucket is of cost reduction. So your project doesn’t increase revenue but decreases operating cost and hence increase EBITDA. Cost reduction is always a focus for management because it is easier to cut cost then generate new revenue. Not always but in most of the cases.
Before you start building the business case, understand your audience and who will be reviewing the business case.
In most companies, the capital allocation for new projects is decided by a committee instead of a single individual. But it is also possible that a single individual might be able to make the investment decision. Generally, that is decided by the investment threshold.
So based on the amount of investment you plan to make, find out who needs to approve the business case.
Most companies use one of the following methods for evaluating projects.
We will not get into the pros and cons of each method but we will briefly explain these methods.
We have seen business cases generally in the 3-5 years range but check with your finance team on what they prefer.
Return on investment is the simplest method, It is calculated as the following
Amount of profit / Amount invested
So if you invested $100 and the cost savings is $300, then ROI is ($300-$100)/$100 = 200%
NPV is the present value of all future cash flows (In and out).
The rule of thumb is that if the NPV >0 then it makes sense to invest and if it is less than 0 then it doesn’t.
IRR method is used to identify the profitability of the project. It is the rate at which the NPV of all cash flows is zero. Generally, companies fund projects where the IRR is above a certain hurdle rate or above the WACC (The weighted average cost of capital).
The payback method calculates the time it will take for the project to return its initial investment in the form of profits. Most companies use the payback method for calculating return on investment. We will explain with an example
Let’s say you invest $100,000 total in a procure-to-pay system over 3 years. The system delivers cost savings of $50,000 every year. Considering the 3-year time frame, the payback period is 2 years (2*$50,000=$100,000) because in 2 years the initial investment is returned and the rest is pure profit.
Don’t worry, you don’t have to understand and calculate all the metrics. We have taken care of that in the template.
Just understand from your finance team their preference of project evaluation methods and accordingly present the business case.
Most likely your finance team might prefer the payback method.
The next step in the process is to identify the clear ownership of the business case.
In other words, who owns the deliverable on the business case and whose neck is on the online if the business case is not delivered.
Essentially, executives are looking for a return on their investment, and for that, they need to ensure that someone is responsible for delivering the business case.
Don’t get bogged down that this will be used to point fingers if the project fails, not all projects are successful but some of the underlying assumptions might not be true.
However, if one person is responsible for it, that person can ensure that numbers are vetted and there is no fluff in the business case.
When presenting the business case, executives/decision-makers are not only interested in the expected outcome but also the risks for the projects.
For example, what if the purchasing system is not well adapted or suppliers don’t’ adopt the solution for e-invoicing.
All these are potential risks to the project. Identifying then while building the business case helps with the following
Identifying risks helps in validating the likelihood of success, there is no point in presenting a case that has a lot of risks.
Having risks identified helps you to garner support for mitigating the risk. For example, if you identified adoption as risk, then present a mitigation approach and ask executives for support on that mitigation plan.
Change management is a highly underrated subject, especially at the time of building the business case. Middle-level managers are so busy building the financials that change management is considered a problem already solved.
But change management is one of the top factors which has a direct impact on the success or the failure of the project. The following tips are not a complete primer on change management but few ideas for you to get started.
To ensure that everyone is bought into your vision of transforming procure to pay process, it is important that all key stakeholders are informed about the transformation plan.
The first step is of course to identify the key stakeholders who will get impacted. Some key stakeholders include
of course, procurement would be impacted with any procure to pay transformation project. Some might argue that is just the purchasing function that is getting impacted but you should inform your sourcing team also so that they can understand how the better spend data would simplify their day-to-day job.
b) Accounts payable
If the scope of transformation is the entire procure-to-pay process, then it will also impact the accounts payables team. So needless to say Accounts payables should be your key stakeholders.
c) Supply chain
The supply chain team is also a key stakeholder in the transformation project. Generally, the supply chain department is power users for purchasing systems, so you must have complete buy-in before you move on to the transformation project.
When selling the business case to them, just focus on what is in for them. Don’t focus on financial benefits but how the efficiency of their individual teams will increase with the transformation project.
When you launch a new product, you would normally identify champions who can sell the solution to the entire user base or in other words help you with the change management process.
The thought process is that if you have few users who are happy with the solution, they will say good things about the product and then from there, word of mouth takes care of the adoption.
Sounds logical but if you are waiting till launch to identify champions, it is already too late.
Identifying the champions early in the rollout process helps you to not only understand the adoption challenges but also identify any course correction which is required for a successful implementation,
Your champions are ideally your power users and few casual users.
After the business case is approved, work with your champions to explain the need for change, the potential benefits from the tool implementation, and how it would simplify their day to the day purchasing experience.
When it comes to building the business case for procure to pay transformation, first identify the use case, for example purchasing or entire procure to pay automation.
Second, gather all the relevant data about the transaction volumes and all potential costs including the cost of the solution.
ProcureDesk Procure to pay business case template is designed with key benchmarks based on industry and our personal experience across multiple deployments but feel free to adjust the numbers based on your industry.
And last but not least, keep it simple. Focus on a few key areas which would have tangible benefits while building your business case.