Businesses across all industries have experienced their collective share of challenges in the past year. Even amidst the world’s fastest, largest vaccine rollout, the Coronavirus disease (COVID-19) pandemic has stymied economic growth and prosperity throughout the world. A complete recovery will take some time.
Here’s some source-to-pay (S2P), procurement and finance trends to watch in 2021.
Source-to-pay digitization
For most of the previous few decades, the S2P cycle has grounded itself in manual processes and procedures. Conversations between suppliers and purchasers can result in adjusted contracts or agreements, with sporadic oversight or tracking of the end result. The same goes for manual entry errors or incorrect billing.
Despite significant interest, automating the S2P process has not seen the investment needed to deliver a fully digital process – one that requires minimal human input. Several emerging technologies, however, including robotic process automation (RPA), machine learning and advanced artificial intelligence programs, or “cognitive agents,” have the potential to overcome traditional automation challenges.
According to McKinsey & Company, almost 56% of the hundreds of individual tasks involved in the S2P process have the potential to be largely or fully automated using today’s technology. McKinsey’s study likewise found, for an organization with an annual spend of $2 billion, completely eliminating profit leakage could add $70 million a year straight to the bottom line.
While achieving zero profit leakage is a lofty goal, the amount of lost spend or mistakes companies can avoid is significant thanks to these new technologies. The key will be in how they are implemented and their interoperability with existing systems and platforms. Companies must avoid additional complexity, while ensuring their S2P process is optimized for efficiency.
The shift to preventive
Finance teams have always sought to strike a balance between minimizing profit leakage and staying efficient. In a large company where tens of thousands of invoices are paid each month, conducting a complete manual review prior to invoice payment has been practically impossible. That is why companies establish post-payment recovery audit programs to identify and recover profit leakage.
Where recovery audits have evolved, however, is the speed at which audit information can be turned into meaningful data and insights. Artificial intelligence, machine learning and new analysis techniques are transforming recovery audits from reactive, post-event audits to a preventive approach.
With the right tools, processes and data in place, nearly 60% of issues leading to spend errors can be identified before payment and in many cases can be prevented altogether. The problem is many companies lack the staff, systems and strategies to flag and address systemic errors before they occur.
Capturing profit leakage closer to the transaction makes it easier for companies to recover lost profit or prevent profit leakage from occurring in the first place. Preventive and real-time audit processes allow vendors to account for discrepancies in their current budget cycle or avoid them altogether. This approach also enables companies to correct root cause issues or processes that may have caused the leakage.
Self-funding audit programs
Similarly, a tremendous amount of time and effort are invested in the supplier negotiation process and ensuring subsequent contracts are operating as intended.
That is why companies implement contract compliance programs with audits that review vendor contracts to root out value or profit leakage. But, most procurement departments lack the budget or bandwidth to continuously analyze all of the contracts they have with vendors.
More recently, companies have implemented self-funding contract compliance programs. An initial budget is established for these audit programs but is then reimbursed whole or in-part using the cash recouped from recovery claims. For example, recoveries can be accumulated in a central audit reserve which can then be used to fund the ongoing program.
Spend analytics and root cause analysis
Spend analytics is a rapidly emerging practice that complements recovery audit and contract compliance processes by leveraging deep, detailed S2P data as the all-encompassing single source of truth for each discipline. This allows companies to broaden their view and see the bigger picture, reel in spend leakage and recover lost profit.
Consider for example, at the beginning of the COVID-19 pandemic, consumers rushed to stores and stockpiled items, toilet paper, cleaning supplies and other essential goods. This caused a significant spike in sales – an almost 23% increase over the first five periods of 2020 vs. the same periods in 2019.
With this increase in sales, vendor expectations are that promotional funding will increase at the same rate. However, 2020 promotional funding rates have actually decreased over the past two years, causing larger discrepancies between sales and promotional funding. So, while on the surface an increase in sales may appear wholly positive, the lag in promotional funding increase shows there may be underlying inefficiencies or operational gaps.
Once companies have full visibility and access into all their products’ sales, cost, promotions and margin performance, they can accurately measure and compare the impact of each individual promotional program. This allows companies to also forecast promotion or program results based on past consumer behaviors and performance.
