In January the highly regarded procurement analyst Jason Busch heralded 2013 as ‘the year of Source to Pay adoption in small to medium sized enterprises’. But at a time of continued economic uncertainty for most, can it really be the case that adding yet another cost line to already stretched IT budgets is considered a smart move? The answers lie not only in software becoming more accessible through the cloud but also in the increasing supply chain efficiency and financial pressures facing smaller organisations as they grow.
So what is Source to Pay?
All organisations need to buy hundreds if not thousands of different things – both direct materials such as goods for resale and operational resources such as facilities management, staff, and office supplies. A structured approach to sourcing – the process of carefully choosing who to buy this long list of goods and services from and at what price, then actually doing the buying – is essential to cost control and making your supply chain less prone to risk.
However, these savings can be traded off against a huge amount of resource wasted on the sourcing and buying process if you are trying to do all of this is manually. Source to Pay software provides a single system that takes the legwork out of that entire cycle from the starting point of analysing spend and selecting suppliers, through to the end point of paying the supplier correctly. In reality there is no end point to Source to Pay; it’s a cyclical process that feeds back into analysing what you have spent and whether your suppliers are performing.
What are the benefits of Source to Pay?
It can be difficult to visualise just how many costly pain points exist in the process of building a supply chain and buying from it. This is a natural evolving part of running a business which tends to get gradually and increasingly complex over time. Here’s a snapshot example based on sourcing and buying a particular set of products and services. We see five key ‘ailments’ in most businesses where Source to Pay can help alleviate the pain.
As an organisation you decide to analyse your spend on a particular spend category that includes hundreds of different products and services. This process shows that different departments are buying from tens of different suppliers creating lots of small ad hoc purchases at non-competitive prices. You decide to put out a tender to a vetted list of suppliers for a stripped down set of standard services. The aim is to consolidate what you buy and from whom so that you can increase buying power and negotiate a better price.
Pain killer #1: Selecting your preferred supplier
Going out to tender manually requires significant resource and can be so long-winded and error prone that the process of reviewing suppliers never really gets off the ground. Writing effective tender invitations, then sorting through and evaluating varied and difficult to compare responses, can slow the process and often make it harder to compare offers from suppliers. With Source-to-Pay this can be largely automated.
Tenders can be constructed within the system from pre-defined clauses dragged and dropped into place. Then suppliers actually respond within the system too, eliminating paperwork and manual checking. The beauty of using Source-to-Pay here is that the system also automatically checks, compares and scores responses against chosen criteria. Mid-sized organisations have reported up to 85% reductions in resource time through automation of the tender process with Source to Pay.
Pain killer #2: Managing supplier contracts
When an organisation enters into a contract with a supplier, the contract should not be simply left to run. It must be managed to ensure that both parties meet their contractual obligations. But contracts are frequently complex, may involve multiple products or services, last a long time and consume many resources. This makes the management process very time consuming which often results in adherence to the terms being left to chance. If suppliers are aware that they are not being monitored against their contractual obligations they may get careless about delivery. Equally the organisation might find itself buying services that are not covered by the terms agreed.
Pain killer #3: Ensuring compliant purchasing
Once contracts are in place staff begin to buy agreed products and services against them. But the next pain point is that these people are often resistant to change and may not want to use newly agreed suppliers or products when they have a relationship with a supplier already. The challenge here is to gain the trust of the people in the organisation who are buying, to ensure they purchase goods and services in a compliant way and are not maverick in their spending. Otherwise the contract becomes a waste of time.
Source to Pay enables this by providing an intuitive and simple to use buying system that acts very much like an online shopping website or Amazon. This means people need no training and can pick up the system quickly, soon realising it makes their life easier, not more complex. The system also ensures that people buy in line with agreed policies. For example buyers might be required to gain three competitive quotes on spend items over a certain value.
Pain killer #4: Avoiding manual financial process
So let’s assume staff now buy from the new supplier catalogue at agreed prices – a big step forward. The next pain point comes when budgets need to be approved and purchase orders created. This involves every member of staff buying, which could mean most of your employees, creating purchase orders and seeking approval manually often without the checks and balances in place to ensure orders and prices are correct and budget is available. It also means that a manual paper or email based document trail is being created which can escalate inefficiency down the line.
For the finance team the laborious task of checking and signing off purchase orders can slow deliveries and requires significant people resources. But that’s only the start. Once manually generated invoices come in from suppliers, they must be checked off against POs, inputted into the accounts system and paid. There’s also often a hiatus over the segmentation of duties – who is responsible for different parts of the process, approvals and so on. This level of manual effort can become insurmountable.
Source to Pay takes the bulk of manual pain and cost out of this and it holds all of the information about prices, spend permissions, budgets and buying policies. It can create completely accurate purchase orders automatically as part of the buying process. Not only that, when suppliers can access and use the system too it allows them to ‘flip’ the purchase order into an invoice which is also 100% accurate and correctly referenced and already ‘within the system’. No manual processing or scanning save for occasional exceptions required.
The final element of pain relief here is the payment chasing process. Finance teams doing these processes manually become inundated with contact from suppliers chasing payments. This is also largely eliminated by Source to Pay as the system allows suppliers to check their invoice and payment status in the system directly. In larger organisations the process of manual checks can require a large team of accounts payable clerks just to handle these manual interventions.
Pain killer #5: Continual improvement
So Source to Pay has dealt with the huge task of ordering, invoicing and paying. By now you have ensured that you are buying the right goods and services, the prices are correct and you are now wasting money on extensive manual financial processes. That takes us to the final pain point – the efficiency of your spending relies on two sets of data:
The first is predictive – what you thought you could save on what you you’d spent previously. The second is the truth in terms of what you have actually spent under those contracts and how well the suppliers have performed. Sourcing and managing suppliers should be a cyclical process of redefining what you need and what the price should be. Often it isn’t. Even when organisations go through a proper sourcing process they don’t revisit what has actually been achieved and what changes need to be made.
It’s quite possible that your organisation has bought less of some things or more of others than it thought it would. It may also be that some suppliers performed more efficiently and accurately than others, so some supply chain refinements are needed. You’ll only know the detail of this if you can easily analyse your predictive and actual data to see the difference.
Trying to do this manually is nigh on impossible. With Source to Pay all of this data is already in one place and it becomes much easier to get answers on the effectiveness of your suppliers and contracts, allowing you to see where renegotiations are required. This ensures that your management of suppliers becomes a constant strategic cycle based on really accurate information.
Why is this important for SMEs now?
Source to Pay came about through the development and evolution of eSourcing and eProcurement software systems. Traditionally it has been used by large enterprises that are buying hundreds of thousands of product and service lines from thousands of suppliers and have to process huge volumes of orders and invoices. But this is changing, for several reasons.
The first reason is that cloud technology is lowering the cost of high performance Source-to-Pay tools. These now don’t require a large capital investment or the customer to purchase hardware, data space or dedicated IT skills. Previously, payback on Source to Pay required big volumes of spend and process reduction that would only really benefit large organisations. Now they do not and can deliver significant ROI to smaller and mid-sized businesses too.
Taking this delivery model into consideration, the second reason is that a lot of Source to Pay’s benefits relate to finance, not purchasing. Smaller organisations don’t tend to have big procurement teams and skills in place, but they do have hard pressed finance teams who need to be adding strategic value to the organisation, not just processing and administering paperwork all day long.
They’re also less likely to have enterprise-scale ERP systems in place that provide some of the processes required in Source to Pay. It’s much more likely that a dedicated Source to Pay tool that can integrate with a simpler finance system is a better and less expensive fit for the small to medium enterprise.
The third and final reason is the level of turbulence and change that is experienced in the mid-market. I’ve previously likened mid-sized organisations to frigates compared to large enterprise aircraft carriers. Smaller organisations thrive on manoeuvrability and anticipate rapid change. Mergers and acquisitions and steep growth and decline against economic austerity mean that product and service spending can turn on a dime. What starts as a small set of well managed suppliers and inconsequential levels of spend one day, can become a complex supply chain with damaging process inefficiency the next.
We hear constantly about how smaller mid-sized enterprises are the engine room of the economy. If you’re one of them Source to Pay can ensure you maintain your supply chain and spending as a well oiled machine.