Navigating the complex terrain of service procurement?

You’re not alone.

Many businesses face challenges when adopting purchase orders for non-material purchases.

Complex systems and lack of training are common hurdles. But here’s a fact: using purchase orders is a best practice that top-tier companies embrace extensively.

This guide is more than just an introduction; it’s a pathway to understanding the importance of purchase orders for services and unlocking strategies to boost their adoption in your company.

What Is A Purchase Order For Services?

A purchase order for services refers to a legal document used by a buyer (your company) to authorize the purchase of specific goods or services to a vendor or a supplier.

A purchase order for service servers is a legal protection between two parties involved in a transaction. It outlines the services, delivery date, shipping address, the agreed-upon price, payment terms, and other important aspects of the transaction.

Here’s what a purchase order for services usually includes and a short description of each:

• Purchase Order Number: A unique identifier for the order.
• Date: The date the order is issued.
• Buyer Information: Your company name, address, and contact information.
• Vendor Information: The vendor’s name, address, and contact information.
• Price: The agreed-upon total cost of the services. This may be a fixed price, hourly rate, or other pricing structure.
• Payment Terms: How and when will the buyer pay the vendor for the services? This could involve upfront payment, progress payments, or payment upon completion.
• Taxes: Any applicable taxes or fees that should be included in the total cost.

If you’re purchasing a service, here are some of the information a purchase order should require

• Description of Services: A clear and concise explanation of the services being purchased. This should include any specific deliverables, milestones, or deadlines.
• Scope of Work: A more detailed outline of the tasks or activities involved in delivering the services.
• Timeline: The expected timeframe for the completion of the services.

Most of the time, purchase orders have additional clauses. Here are some of the additional clauses that might be reflected in the purchase order:

• Confidentiality: Any agreements regarding the protection of confidential information.
• Warranties or Guarantees: Any guarantees or assurances the vendor offers regarding the quality and performance of the services.
• Termination Clauses: The conditions under which either party can terminate the agreement.

Take note that your purchase order’s format and content may vary depending on your company’s policies and the nature of your purchasing services.

Although, the items we listed above are typically the core elements of a purchase order.

Why Are Purchase Orders Important For Your Business?

There’s no doubt that purchase orders serve as a crucial binding agreement for your business. Here are some of the reasons why your purchasing department needs it:

• Clear Communication: A purchase order makes sure that two people involved (buyers and sellers), or shall we say, your business and your vendors, are on the same page about the expectations of the purchase. Knowing involved parties know the transaction details makes your procurement process more streamlined.
• Documentation: A purchase order is a binding contract in your procurement process. It’s helpful to use for any disputes that may arise.
• Control: A  purchase order helps your purchasing department track and manage expenses more effectively, authorizing specific purchases for your accounts payable.

What Are The Benefits Of Using A Purchase Order For Services?

There are a lot of benefits that purchase orders can bring your company.

We have typically seen that companies with more than $5M in annual revenue can benefit from a purchase order process.

Cash Flow Visibility

Having a purchase order process allows the finance team to gain immediate visibility into its expenses and obligations.

There are many benefits to that:

1. The finance team can accrue the expenses correctly without waiting for all invoices to be entered into the system.
2. The vendors are paid as per the agreed terms. If you don’t have a purchase order, the chances are that your invoices would show up with due-on receipt terms.

If you are mainly purchasing intangible services, it is not uncommon for you to dismiss the effectiveness of a purchasing process. The common theme is that we are not purchasing widgets, so we don’t need a purchase order process.

The truth is that most companies don’t know how to implement an effective purchasing process for services.

Contractual Obligation

A purchase order is a contractual obligation between the buyer and the seller. When the buyer sends the purchase order to the seller, it mentions both parties’ terms.

In a dispute, you can always refer to the purchase terms to identify a path for resolution.

You should have a separate contract with defined purchase terms or mention the standard terms on the purchase order.

Easy Reconciliation With Invoices

Purchase order plays a significant role in improving the productivity of your Accounts Payable team.

If an invoice shows up without a purchase order, the AP team has to spend time identifying the source of the purchase.

That is usually done by calling or emailing people and checking if they have received the goods or services for which the vendor raises the invoice.

This problem is easily solved if you have a purchase order issued to the supplier and issue an invoice against that purchase order.

Most purchasing systems can reconcile the invoice and purchase order and identify discrepancies, if any.

Example Cases Of Using Purchase Orders

We talked a lot about the value of purchase orders and their use cases, but now let’s look at the top use cases where the purchase orders are being used across companies.

On a broad level, anything you purchase from your vendors can be classified into one of the following categories.

1. Tangible products
2. Intangible services

Tangible Products

Using a purchase order for material purchases is straightforward and the most common use case.

Most users are used to creating orders online using eCommerce sites or for corporate purchasing.

Most vendors won’t even ship you the products until they have received a purchase order from the company.

Given the reasons above, it is not uncommon to see 80-90% adoption for orders related to material purchases.

Intangible Services

Not everything a company purchases is a tangible product. There is no good benchmark, but based on our experience, the services Spend could be as high as 60% of the total external spend.

Most of the services fall in what a Company calls Indirect spending. Indirect Spend is the Spend that doesn’t hit the Cost of Goods Sold (COGS).

However, this classic definition might not apply if you are a service company.

Given that up to 60% of Spend could be on purchasing services, it makes sense for companies to have greater visibility into this through a purchase order process.

Most of the companies, however, struggle with the adoption of purchase orders for services Spend. There are many reasons for that, mainly because end users don’t understand how to use purchase orders for services.

In the next section, we will cover some examples of how to use purchase orders for services.

Best Practices For Using Purchase Orders For Services

Let’s examine how employees can use a purchase order process for the following service scenario. One of the common questions is what “Ship to” address to use for services Spend.

To simplify the process, add a “N/A-Services” or something similar to Ship to address, which the users can use for services-based purchase orders.

Purchase Order For Software

Purchase of software is a very common scenario in any organization.

Most purchases include software maintenance services, licenses, or subscription services called Software as a Service (SaaS).

Here is how to use the purchase order for a software service.

Let’s say you are purchasing a database analyzer software license for the existing Oracle database license. You can use the purchase order in the following fashion:

A couple of things to note here

1. Item description would be, of course, the description of the item you are purchasing – in this case description of the software license.
2. The unit of measure should be Each.
3. The category should be a software license or equivalent from your classification schema. Selecting the right category helps identify the type of spend and helps in routing the requisition for approval to the correct stakeholders.
4. Item area should be Service, not material. This is an important concept, so let’s spend some time here. Assuming you are using a purchasing system or even a manual process – materials generally need a receipt to acknowledge receiving the product.

So if you identify a software purchase as a Material type, the system would request a receipt, which is an additional step in the process.

However, marking it as a service item could go through a different process where the end-user needs to accept the invoice. However, employees don’t need to create the receipt in the system.

Purchase Orders For Facilities Management Services

Facilities supplies and services are a common use case for service purchase. Facilities supplies could come under the material category and are easy to identify.

Let’s take an example of cleaning services – we assume you have a vendor offering window cleaning services. We assume the following.

1. You have a fixed monthly rate for cleaning services.
2. For example, they have a fixed schedule for cleaning services twice a month.

In that case, you can create a purchase order like the following:

A couple of things to note here.

1. The type of the purchase is of type “Service.” This is important because there is no physical receipt for this vendor.
2. Make the description as descriptive as possible. In this example, you can see that it mentions what the service is for and how many months. For example, here, we mentioned the purchase order is for 12 months.
3. Quantity and unit Price – Let’s spend some time on this because we see a lot of questions on this from users who are not used to a purchase order process.

So, how do you determine the unit price and quantity information? Let’s explain with the help of an example.

The vendor charges $500/month for cleaning services, and you want to create a purchase order for the entire year’s worth of services.

So, since you will make 12 equal monthly payments to the vendor, you can use 12 as the quantity and then add $500 as the unit price. The total amount of the purchase order is $6,000.

The vendor can then invoice once every month for the unit price of $500.

Purchase Orders For Marketing Spend

Every company spends money on marketing. The Spend could be for advertising, creative works, or agency services.

Let’s take an example of agency services – where an agency provides creative work.

We will see two example purchase orders – one where we have a fixed monthly fee and the second where you purchase ad hoc services.

In the first case, the agency charges a fixed monthly fee for various services.

You can create purchase order lines are as follows:

Since it is a fixed amount per month, it is straightforward to create the purchase order with monthly price as the unit price and 12 months as the quantity (assuming you are creating a purchase order for the entire year)

In the second case, you are paying the agency for purchasing media on your behalf. The agency might send you an estimate of their fees on your behalf.

If the fee is spread over multiple months, you can create a purchase order to reflect that.

If it is just a one-time purchase, you can add that to the purchase order as shown below:

Purchase Orders For Legal Services

Legal services is another category where we typically see lower adoption of purchase orders.

The challenge with engagement is minimal fixed-price projects, and the fee is based on the hours billed by the external counsel.

So, it is challenging to create a purchase order because you don’t know how much you will spend on legal services.

There are typically two types of purchases related to legal services – ongoing recurring service and the second specific to a specific matter.

So, how do you create a purchase order for these purchases?

For the fixed type of services, you can always create a recurring payment schedule.

Of course, you don’t want to create a purchase order every time you need a service.

Let’s say that your external counsel helps you file your quarterly reports. In that case, it is a recurring expense. Since it is a recurring expense, it is relatively easy to identify the total cost in advance.

So, in that case, your purchase order line item should look like the following.

A couple of things to note here

1. The description is apparent and says the services are to be billed every quarter. This is important so the vendor clearly understands what needs to be billed.
2. Since the billing is quarterly, we added a quantity of 4 (one for each quarter).
3. In this example, the monthly billing is $25,000, so that is the unit price – making the total $100,000.
4. Of course, this should be tagged as a service line so that no receipt needs to be created for this vendor.

This was an easy example of fixed charges, but legal expenses might not be a fixed fee in most cases.

Let’s take an example where you don’t know the expense amount. In that case, you should rely on the historical amount and create a blanket line that employees can use for expenses.

Let’s say you spend an average of $150,000 on legal services with one of your external counsel advisors.

In that case, the purchase order line can look like the following

Few things to note here

• The line item clearly describes a blanket amount to cover expenses, and the vendor should attach a detailed breakup with every invoice.
• Since we don’t know the billing frequency or the amount, we leave the quantity to one and the unit price the same as the anticipated Spend.
• The vendor can now submit the expenses against the purchase order until the whole amount is exhausted.

These are just two examples of how purchase orders can be used for procuring legal services. You can use the same concept across the board for any other type of legal service.

Purchase Orders For Consulting Services

This section covers consulting services, but you can use this for any scenario where the expense amount is not established, and the vendor will bill based on milestones or time and material basis.

We will take a few examples to explain how employees can enter non-recurring expenses on a purchase order.

Let’s take an example of a project where the amount is fixed, but the billing would be billed on milestones – for example, an IT consulting project.

Suppose you have contracted a vendor to develop a new website and would make the payment based on certain delivery milestones. Assuming three different milestones, the purchase order lines could look like the following.

Few items to note here

1. Each milestone is a new line item for the purchase order. In this case, the deliverables are spread across three milestones – Design, build, and launch.
2. Each milestone has a different required date, so the invoices can be billed accordingly.
3. The descriptions of the line items clearly describe the deliverables and conditions when the vendor should raise the invoice.

If the PO is structured this way, not only does the vendor invoice correctly, but it is also easy for the approvers to track the deliverables against which the invoice is raised.

Let’s take another example where the vendor is engaged hourly – audit services.

Generally, if it is T&M (Time & material) based, you would estimate the number of hours the vendor will bill.

You can always create a purchase order based on the initial estimate and refine it if need be.

A sample is as follows

Few things to note

• The unit price is the per amount of hours the vendor charges, and the quantity is the total amount of hours.
• Please note that you might have to revise the hours after the purchase order is created – in this case, the actual hours are more than the estimated hours.

What Are The Challenges Of Using Purchase Orders In Your Company?

As mentioned above, there are tangible benefits to having a purchase order, but why don’t most companies have a good handle on purchase orders?

However, there is limited purchase order adoption in small and mid-market companies even when they have a purchasing process.

Their purchasing process mandates purchase orders, but employees are still not adopting them, and companies have a low purchasing compliance rate.

Here are some common reasons for this.

The Convenience Of Credit Cards

When starting up, credit cards are a convenient way to purchase products and services. Most big vendors won’t give you a line of credit, so a credit card is necessary.

However, as the company grows, the practice continues, and employees still purchase the products on credit cards. It is a widespread practice to use credit cards for the office and ordering marketing promotional material.

It is not that these vendors don’t accept purchase orders. It is just that the employees are not used to placing a purchase order.

Moreover, if your purchasing is not standardized to one or two vendors, rolling out a PO program could add to the challenges.

Lack Of Purchasing Guidelines

It is common to see that companies don’t have a formal purchasing policy. A vital part of any purchasing policy is to inform the employees about the purchasing process.

Since there is no clear direction on purchasing from suppliers, employees use whatever method is convenient or that might make sense for them.

Of course, nothing is more convenient than picking up the phone and calling the vendor.

“Please take my order and just send me the invoice” is not an uncommon scenario.

Companies can avoid this scenario by clearly identifying the process for their employees, making sure the process is simple, and then training employees on the purchasing process.

This will enable a streamlined purchasing process – a process enabled by the purchase order process.

Does this mean that 100% compliance is guaranteed – the answer is NO.

But it does allow you to set up a process and then work with non-compliant users. You can adapt the user mapping technique to increase purchasing compliance.

Difficult Manual Processes

Last but not least, if you have a manual purchasing order process, that could be the biggest hindrance in using purchase orders for the organization.

If you don’t have an automated purchasing system, you are likely using a manual process with a PO created in a spreadsheet.

The process starts with the user filing the spreadsheet, followed by email approval.

By the time the process is over, many employees might question why I didn’t just put it on my credit card!

The manual process has a lower adoption rate, leading to fewer purchase orders.

Tips To Transitioning Into An Automated Purchase Order System

Purchase order automation is the solution to all your problems!

I wish we could say that, but after being in the procurement space for more than 15 years, we can easily say that is not the answer.

Purchase automation is a crucial first step toward moving your organization to a purchase order-based purchasing process. However, additional steps are required for your organization to adopt the purchase order process fully.

So, if automation is not the complete solution – what else is missing

Change Management

The initiative to improve the purchasing process is generally driven by the purchasing department.

They greatly care about this cause, hence the effort and resource investment in improving the process through purchasing automation.

However, most of the purchasing teams underestimate the change management process. You have to get over the resistant employees and ensure that they are adequately trained.

Before you embark on the automation initiative, ensure critical departments are brought into the initiative.

You don’t have to sell the concept to everyone, but at least the key executives in your company should support the initiative and provide support with the rollout.

Educating Employees

If you have support from key stakeholders, you are one step closer to successfully implementing the purchasing module.

The next step is to ensure that employees are adequately trained. The training is about the new system and how to use the new process.

The first year after you go live with the new system, you should continuously reinforce the system and process training.

The system is just automating the process you have put in place. That means you just made it worse if you have a flawed process!

Take continuous feedback about whether the process works and what changes are needed to improve it.

Working With Your Suppliers

Suppliers are a critical part of your purchase-to-pay process, and without successful adoption of the purchasing system, you are getting limited value from the process automation.

So, how is the success of purchasing automation dependent upon your suppliers?

Suppliers are critical to purchase order automation success in a couple of ways.

Catalogs

Catalogs can be a great aid in ensuring your users can easily find what they are looking for. Your suppliers would need to be engaged in the process to provide data for you to set up catalogs.

Alternatively, most big vendors support external catalogs, also called punch-outs. With the help of vendors, it should be pretty easy to set up the catalogs.

Accepting The Orders

With a purchase order system, Suppliers can provide advance shipping notices and acknowledge whether they can deliver the order on time.

Your suppliers should be on board with the new process to ensure that it happens.

If you are using a supplier portal, then the supplier onboarding must ensure that they can use the portal and submit their documentation through the supplier portal.

Invoice Automation

If you want to automate the invoice submission from suppliers, then supplier onboarding to the new process is required.

Automating Your Purchase Orders With ProcureDesk

Our tool ProcureDesk aims to help small to midsize companies automate their accounts payable process. We reduce the time spent creating and matching supplier invoices and purchase orders.

ProcureDesk has various important features that can help your business simplify handling purchase orders.

Budgets

ProcureDesk comes with built-in budget tracking and controls to ensure you stay within budget limits effortlessly.

Setting up the budget is a breeze – you can either input it directly or import it from a spreadsheet or systems like QuickBooks Online.

Once the budget is established, employees can select the relevant budget for their purchase.

The system then checks for available budget and assists in managing costs.

You have the flexibility to decide how the system responds when there’s insufficient budget – whether to display a warning message or block the purchase altogether. It puts you in control of your budget management.

 

Purchase Approvals

Automated purchase approvals make the process seamless for your employees, eliminating the need for them to know who approves each purchase.

You have the flexibility to configure purchase approvals based on factors like amount, department, location, budget owners, and more. Custom approval workflows are easily set up to match your specific needs.

The system examines the requisition against the configured approval workflow, determining the necessary approvers for the purchase. For instance, in this scenario, John is the requester, and Mark is identified as the approver who will review the approval request.

All the employee needs to do is submit the request for approval.

Once the request is submitted, the system notifies the approver of a pending request.

The approver can approve from the email without logging into the system or using the ProcureDesk mobile app for approvals.

Purchase Order Management

Upon approval of the requisition, the purchase order can be effortlessly sent to the vendor through automated processes facilitated by purchase order management software.

For those with a purchasing team, reviewing various requisitions becomes efficient for identifying potential cost-saving opportunities.

The supplier quote module lets you swiftly gather quotes from different vendors, facilitating easy cost comparison. For instance, here’s an example of comparing the cost of servers from two different vendors.

Once you have completed the quote process, you can convert the quote to a purchase order and issue the purchase order to the vendor.

Here are a couple of ways ProcureDesk helps you manage the purchase order management lifecycle.

 

 

 

 

Automated Purchase Order Creation

No need to stress about converting purchase requisitions to purchase orders—automated purchase order creation has got you covered.

This time-saving feature benefits those without a dedicated purchasing or buying team.

Identify suppliers that accept purchase orders and let the system handle the rest. Below is an example of a purchase order automatically generated by ProcureDesk.

You can customize the purchase order template to include additional fields.

 

 

 

 

Merging Purchase Request Into A Purchase Order

Vendors often set a minimum order threshold for free delivery, and some offer tiered pricing, providing discounts for larger quantities on the same purchase order.

To take advantage of these benefits, reviewing open purchase requisitions and considering merging them into a single purchase order is beneficial. This can optimize costs and maximize discounts.

You can save delivery and cost of shipping by merging the purchase requisitions into a single order.

The other thing to consider is negotiating free shipping with the vendor.

The vendor might offer you free shipping if you have a higher purchase volume.

Tracking Order Shipping Information

ProcureDesk enables you to monitor your order’s delivery status without visiting individual carrier websites.

The vendor can electronically send the Advance Shipping Notice (ASN), or you can input the shipping information on their behalf.

Here’s an example of how you can track the advanced shipping information:

Once you have the tracking information, the system can send you an email notification as and when the status of the package changes.

Receipts To Confirm Delivery Of The Purchase Order

Upon receiving the product, a supplier invoice follows.

The Accounts Payable team can match the invoice and proceed with vendor payment. However, without a receipt for a purchase order, the AP team lacks confirmation of product receipt, requiring invoice approvals before payment.

Therefore, it is crucial to generate receipts to communicate that the product has been received. Here’s an example of a receipt:

You can create partial receipts and enter the serial number and asset tracking information.

You can also track the expiration of items, for example, for different chemicals or other similar products.

The above features give you a complete order management system.

FAQs

Purchase Order vs. Invoice

Purchase orders are documents issued by a buyer to a seller. It outlines the details of the product or services the buyer wants.

On the other hand, an invoice refers to a document that a seller issues to the buyer after the goods and services is delivered.

What Are The Types Of Purchase Order?

There are different types of purchase orders. Let’s quickly run through what they are and how they are used:

Standard Purchase Orders

These are the most common types of purchase orders used in business transactions. Standard purchase orders specify details such as the quantity, description, and agreed-upon price of the products or services. They are typically issued for one-time purchases.

Planned Purchase Orders

These purchase orders are created before the actual need for goods or services. Planned purchase orders help forecast and plan, allowing businesses to anticipate future requirements and ensure timely procurement.

Blanket Purchase Orders

Blanket purchase orders are used for multiple deliveries of goods or services over a specified period. Instead of issuing separate purchase orders for each delivery, a blanket purchase order consolidates multiple transactions into a single agreement. This streamlines the procurement process for recurring needs.

Contract Purchase Orders

Contract purchase orders are used for long-term agreements with suppliers or vendors. These purchase orders establish a contractual relationship, often detailing terms, conditions, and pricing for an extended period. They provide a structured framework for ongoing procurement needs.

Digital Purchase Orders

These purchase orders leverage electronic systems for the creation, approval, and tracking of purchase orders. By using digital tools and platforms, businesses can automate the procurement process, reducing paperwork, enhancing efficiency, and improving overall accuracy in managing purchase orders.

Is Service Order Same As Purchase Order?

Although service and purchase orders are important in business transactions, both serve a different purpose and are typically associated with different types of transactions.

Purchase orders are used for the procurement of goods and tangible products. A purchase order specifies the details of a purchase, including the quantity, description, unit price, and other terms related to the acquisition of physical items.

On the other hand, service orders are used to procure services rather than physical products. A service order includes information about the services to be provided, such as the type of service, the scope of work, the agreed-upon rate or pricing structure, and any other relevant details about the service agreement.

The Bottomline

Looking at the end-to-end process from purchasing to invoicing, having a purchase order dramatically simplifies the processing of invoices and tracking if the product has been received.

Companies gain efficiency and get better visibility into future cash flow and obligations.

Purchasing automation is crucial for increasing the adoption of the purchase order within your company – To get there, companies need to do the following.

• Simplify and automate the purchasing process, making it easy for employees.
• Educate employees on how to use purchase orders, especially for services.

We look forward to your feedback on how you drive the adoption of purchase orders within your company – leave a comment!