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Best Practices Briefing in Purchase-to-Pay

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  1. 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

  2. Discussion Items • Objectives of Briefing • Hackett Insights and Metrics in Purchase-to-Pay • Emerging Trends

  3. 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 Objectives of this Briefing

  4. 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 Finance Operations Executive Advisory Program

  5. World-Class Defined Measure Objectively Quantify Gap Execute Prioritize and Manage Identify Certified Practices 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 100and • 90% of the Dow Jones Global Titans Index

  6. Hackett uses actual data to identify world-class performers in Finance Hackett Value Grid™ Finance Sample 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 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 Company ABC Org. Comparing your organization to peer group and world-class performers

  7. Hackett’s Purchase-to-Pay advisory and benchmark services are based on this defined taxonomy Travel & Expense Purchasing Card Administration Accounts Payable Purchasing • 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 • Requisition processing • Purchase order processing and distribution • Supplier master file maintenance • Item master file maintenance • Receipt processing • Purchasing policies and Procedures • Procurement cards • Travel cards • Combination cards

  8. Characteristics of World-Class Purchase-to-Pay Organizations

  9. World-Class Purchase-to-Pay Organizations Process Transactions for Significantly Less than their Peers 2.5 - 3x The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

  10. World-Class Purchase-to-Pay Organizations are Much More Productive than their Peers 3 - 4x The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

  11. World-Class Purchase-to-Pay Organizations Utilize Fewer FTEs than their Peers 40 - 50% The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

  12. World-Class Accounts Payable Organizations have Flatter Organizational Structures 23% The Hackett Group Accounts Payable Benchmark 2005

  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

  14. 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

  15. End-to-End Accountability with Purchase-to-Pay

  16. World-Class Accounts Payable Organizations are Aligned More Often with Purchasing than their Peers 2 x The Hackett Group Accounts Payable Benchmark 2005

  17. Organizations with P2P process ownership seem to outperform others in transactional process costs…with varying degrees + 140% + 11% + 22% Hackett 2005 Benchmark Data

  18. Similar to costs…it also seems that P2P process ownership is also having a positive enabling effect on productivity. Orders Processed per FTE Invoice Line Items Processed per FTE -28% - 55% Hackett 2005 Benchmark Data

  19. P2P process ownership does seem to enable process improvement across the end-to-end process…but again, it’s not the only enabler. Percent of Organizations Engaging in Selected P2P Process Improvement Efforts - 30% - 52% - 30%

  20. Even though stronger working relationships exist in with P2P process ownership…it isn’t a guarantee! 100% 25% 50% - 43% Percent of Organizations 75% 50% - 75% 42% 12%

  21. P2P integration and deployment of technology at various process points is higher, some only slightly, in those with process ownership. “A difference of about 70% between the cost of processing an electronic transaction versus a paper invoice.” – Hackett AP Process Benchmark, October 2006 - 14% - 51% 88% - 50% 75% - 1% 65% - 46% 52% 33% 32% 21% 22% 20% 12%

  22. Automation of the Purchase-to-Pay Process

  23. Electronic focused Organizations have lower process cost and are more productive than their peers + 54% - 57% + 57% - 58%

  24. World-Class Purchasing Operations Organizations Disseminate Purchase Orders Electronically Significantly more than their Peers 3x The Hackett Group Purchasing Operations Benchmark 2005

  25. World-Class Accounts Payable Organizations Leverage Electronic Invoicing and Payments Significantly more than their Peers 2 - 6x The Hackett Group Accounts Payable Benchmark 2005

  26. Continuous Process Improvement and Standardization

  27. World-Class Purchase-to-Pay Organizations have a Standard Set of Procedures Across Businesses More Often than their Peers The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

  28. World-Class Accounts Payable Organizations have Reengineered Procedures to Minimize Low-value & Redundant Tasks More Often 2.5 x The Hackett Group Accounts Payable Benchmark 2005

  29. World-Class Purchase-to-Pay Organizations have also Consolidated Transactions and Spend to a Greater Extent 40 - 60% The Hackett Group Accounts Payable Benchmark 2005

  30. Business Process Sourcing Strategy

  31. 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

  32. Non-Standardized On-shore Near-shore Offshore Non-Core Standardized What factors are considered in sourcing decisions? High Advanced Skill Sets Centralization Risk to Accuracy/ Timeliness/ Quality Low • Proximity to the Business • Company Knowledge Driven High Low • Strategic Importance • Intellectual Property • Management Decision Support

  33. On-going Research – Business Process Sourcing Survey • Decentralized • Centralized / shared services – onshore within the country or region being serviced • Centralized / shared services – offshore at a lower labor cost location outside the country or region being serviced • Outsourced onshore or offshore – to a third party • Fully automated

  34. Accounts Payable – Supplier Set Up: General trend away from Decentralized towards Centralization and Fully Automated

  35. Accounts Payable – Pre-Processing: Move away from Decentralized towards Outsourced and Fully Automated

  36. Accounts Payable – Processing: Move away from Decentralized and Centralized towards Outsourced and Fully Automated

  37. Accounts Payable – Payments: Continued migration away from Decentralized with a move towards Centralization and Fully Automated

  38. Accounts Payable – Inquiry Response: Continued migration towards Centralized, Outsourced, and Automated

  39. Optimization of Supplier Payment Strategy

  40. 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

  41. 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

  42. Based on a recent Hackett Group Survey, however, nearly half of the respondents said they actively pursue supplier discounts

  43. According to our benchmark, however, over 80% of companies are not Tracking Supplier Discounts Taken

  44. 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 $2 million per $ billion in spend Based on study results, a 10% cost of capital, a 25 day reduction in working capital, and a 2% average discount

  45. 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 What is the Prompt Pay Discount Opportunity? 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. Major Payee Groups Vendor Trade Payables Furthermore, we believe a combination of factors, organizational, process, and technology improvements, make this a feasible and realistic undertaking.

  46. The Value Proposition: Hard and Soft Dollar Savings 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. Hard Dollar Savings Net $30M per billion in payment volume Soft Dollar Savings $8-15 per transaction event Also, Suppliers benefit from quicker cash flow and easier payment processes.

  47. The “Value Calculator” We have developed a “top-down” model to estimate the magnitude of the opportunity in US State Government

  48. Questions or Comments? ? ? ? ?

  49. For Further Information, Please Contact Pat O’Connor NASACT Association Manager Lexington, KY poconnor@nasact.org Ph: 859-276-1147 Jim Anthony Hackett Account Director Chicago, IL janthony@thehackettgroup.com Cell: 312-543-6938 Bill Kilmartin Accenture Account Director Boston, MA william.kilmartin@accenture.com Cell: 781-367-9576