Digital communities and the technology underlying them have changed the world. As consumers, we are more connected and enabled to shop, share information, and make better decisions than ever before. And these technologies are having a similar impact in business for the procurement function. Procurement has traditionally been recognized and rewarded on the basis of its ability to wring costs out of the business. But through the productive use of automated systems and business networks, the function has been able to move beyond simply meeting savings targets to work more collaboratively with finance, and help address larger, more-complex issues such as minimizing liability and risk, and enforcing compliance.
Take ING U.S. While many companies were still debating whether the Internet was a viable channel for business—or even a tool to power it—ING tapped into the Ariba Network and began leveraging the cloud-based applications delivered on it to align its procurement and accounts payable functions and transform its procure-to-pay process. James McDonald, director of procurement operations, recently discussed the move and the results that ING has seen since making it.
ING U.S. was an early adopter of procure-to-pay automation. Why did ING make the move so early on, and what were key elements of the business case?
McDonald: ING is the result of many acquisitions, and the firm had no managed procurement function or centralized accounts payable group. In the early 2000s, ING saw this as an opportunity to eliminate redundancies, consolidate spend, and gain new leverage from these acquisitions by bringing procurement and accounts payable in alignment and introducing automation across the procure-to-pay function. The opportunity to implement an integrated procure-pay solution suite that could link back to sourcing while enforcing compliance to purchasing policies, provide visibility into spend across all business units, and automate the invoice process were key components of the business case.
PO invoicing is important to ING. What steps have you taken to drive higher volumes of PO invoicing?
McDonald: About 60 percent of our spend—essentially any controllable expense where we can assign a general ledger and commodity code—requires a purchase order. We also have catalogs for certain commodities, and when buyers order off a catalog, this really streamlines the approval flow. Plus we know that the goods and service being purchased are from the right supplier at the right price, and this will automatically be applied to the invoice coming into AP. This drives a touchless process end-to-end, from procure to pay.
In addition, we have strict rules governing our PO policy, with training for all employees on how to follow the process, so support across the company is very high. Whenever a PO invoice comes into accounts payable without the PO, it’s flagged as an exception, and the requester must create a PO after the fact. This serves to discourage people from not following the policy. The same holds true for our suppliers. They know that PO numbers must appear on their invoices, and when they don’t follow our policy, their payment is delayed. That’s quite an incentive for them to go along with it.
What advice would you have for organizations that have low PO usage?
McDonald: Begin by identifying the types of expenses, categories, and commodities where you need increased control. Then, define a clear procure-to-pay policy and promote it broadly. Have consequences when people don’t follow the process. And it’s very important is to have senior leadership support. They must know the value of invoicing against POs and other aspects of compliance, and commit to supporting the policy.
How does ING handle invoice exceptions?
McDonald: We immediately validate invoices and auto-reject those that don’t match to an open PO or meet other critical reconciliation rules. We create an invoice reconciliation document for every invoice that comes into our procure-to-pay system. This document can automatically reconcile invoices to POs and, once completed, sends the invoice to a PO approver, who serves as a pseudo receipt function before the invoice is scheduled to pay.
Invoices that don’t meet our price and quantity tolerances, or fail some other business rule, go into an exception status. Some are returned to suppliers for correction and re-submission, while others are flagged, where approvers can see the reasons for rejection and take quick action to resolve them. The upshot is that our people spend very little time managing exceptions. The business rules in the network that we use to collaborate with our suppliers handle that for us.
Was scanning-OCR ever considered as part of the solution?
McDonald: No. We think of procure-to-pay as a holistic process, and see great value in getting an electronic invoice that has been automatically matched to a PO for touchless processing as a much better option than adapting an imaging system for invoice processing. With scanning and OCR, you still deal with large amounts of paper. When you also factor in all the costs and resources required to manage the system and the significant effort in exception handling, it’s just not attractive. From an efficiency standpoint, it makes more sense to devote the same resources to push suppliers to e-invoicing, while simultaneously engaging sourcing on the front end in the negotiations/contracting process. For that portion of suppliers that will continue to submit paper invoices, we are looking into directing those invoices to an outsourced service that could handle the processing for us.
Onboarding suppliers onto your business network is essential to a successful procure-to-pay initiative. What steps have you taken to drive supplier adoption?
McDonald: The Ariba network is a key asset for collaborating with suppliers, and we’ve taken several approaches to onboarding suppliers to our electronic process. The most effective is to make supplier enablement a heavily weighted objective for the team. It’s not something we ask people to do when they have time. We’ve allocated resources to drive supplier enablement and set measurable targets. We’ve also worked with our business partner, Ariba, to assist with messaging and providing resources when necessary.
Another key to success is getting support from our strategic sourcing partners within ING on the back end of the process, so they fully embrace what we are doing. We educate them on this new way to transact with our suppliers, and have them include clauses about this new process in their contracts.
Discuss the benchmarks and reporting that you rely on to monitor and measure performance.
McDonald: Some of the things we look at include the number of annual invoices processed per full time staff, Days Payable Outstanding, and many things relating to process compliance, such as comparing PO date to invoice date. When the invoice date is before the PO date, we know that a PO has been created after the fact. Today, we are running about 82 percent compliance. In most cases, failure to comply is due to lack of awareness , not resistance to the process. With this data, we can target people who need to be educated on our policy.
We’re also building a corporate warehouse that will greatly expand our reporting and data analysis capabilities by providing daily, automated feeds on critical spend data that has been enriched and rationalized. This will allow us to monitor KPIs from a dashboard, so we can proactively identify spending trends, and savings and cost avoidance opportunities.
At ING, AP reports to procurement. Explain the rationale and why more organizations don’t follow this structure.
McDonald: Traditionally, procurement and accounts payable have operated as silos, where procurement manages the buying process and accounts payable handles the payment process. The lack of synergy between the two organizations can lead to conflicting metrics and incentives; for procurement, around the contract to purchase requisitioning process, and for accounts payable, for just paying the invoice. At ING, we saw great value from having procurement and AP collaborate as partners to establish policies that enforce compliance and help us better manage our spend. A lot of our success is directly related to bringing the two groups together. In my view, the most effective approach is to consolidate procurement and payables into one integrated P2P function, reporting to the CFO. This reporting structure provides visibility to our projects and executive-level support for our policies to ensure broad adoption.
What are some other benefits of aligning procurement and AP and automating the procure-to-pay process?
McDonald: By aligning procurement and payables, you can shift your focus to more value-added tasks, and work smarter, not harder. If you look at our accounts payable group, before we automated, the focus was on the manual keying of invoices, and one metric we tracked was the number of invoices we would key in a day, a week, or some other timeframe. Today, by automating most of that activity, we’ve reduced our AP staff by over 75 percent, and built up a procurement operations team that is focused on process improvement, supplier enablement, and leveraging technology to help us better manage our spend.
Another benefit is that we have better reporting and enhanced controls. Our procure-to-pay platform is the view into procurement for all of ING. Everyone from sourcing on through to payment is part of the process, and they have visibility into everything from our strategic spend down to individual transactions. To get status on an order or invoice, no one has to call a colleague in AP or procurement. They can access that information themselves. And the system has also made support for external audits a breeze.
How would things differ if you were to be starting this journey today?
McDonald: Looking back, we probably would have examined the larger source-to-settle process and assessed how complementary solutions could have delivered even greater value. We may have implemented a spend visibility solution earlier, and done a better job bridging the gap between the contracting process and the PO-invoice process. I see more companies today taking a full suite approach to optimize the opportunity. What makes this easier today is that innovations such as cloud applications reduce the dependency on internal IT resources to drive the transformation. Also, there are more industry best practices that exist today that didn’t exist several years ago. The one thing that wouldn’t change would be the alignment of procurement and accounts payable. That’s a best practice that will stand the test of time.
What advice would you give organizations still struggling with manual processing of paper invoices?
McDonald: You need to really examine the larger P2P process, understand the makeup of your supply base, and develop a strategy with an automation roadmap. Realize that transformation doesn’t happen overnight. It’s a journey that proceeds in phases. Having the roadmap in place will prevent you from implementing stop-gap solutions such as scanning-OCR that will only address one part of the end-to-end process, and that you may walk away from in a year or two.
Just as social networks have made it easier than ever to drive conversations, gather intelligence and manage relationships, business networks have opened the door to a new way of collaborating. And as ING illustrates, they can drive new levels or productivity, performance and profits and differentiate the modern day competitor from competitors of the past.