7 October 2014
As we enter the final quarter of the year, CPOs will be budgeting new cost savings to be realised during 2015. But rather than focusing on strategic sourcing, they must turn their attention to taking control of their organisation’s maverick buying as a powerful source of new savings.
Although the contemporary procurement agenda targets a wide range of procurement-driven benefits, cost savings are still at the top of the agenda, with strategic sourcing, category management, volume leveraging, standardisation and renegotiation tactics being the main instruments for generating them.
However, most sourcing initiatives have an inherent weakness because they assume somebody else in the organisation will ensure new or re-sourced contracts are implemented and used. Just look at the classic sourcing process and its final stage entitled ‘implement contract’ or something similar. This stage is most often poorly executed; in reality this often means putting the new contract in a drawer.
1. Eighty per cent maverick buying is not uncommon.
In other words, very few companies have a purchase-to-pay (P2P) regime that captures the benefits of a sourcing initiative, for example contract usage and compliance. The result is maverick buying – uncontrolled spending, poor contract compliance and, as a result, low benefit realisation. In our experience, it is not uncommon to find that up to 80 per cent of all invoices are generated from uncontrolled buying, even in large organisations with professional procurement functions. Ineffective P2P also comes with a range of other problems with payments, supplier management, master data management, enforcing terms of business and fraud.
Many would recommend installing an e-procurement system, but while this is good for catalogue buying of consumable items, it does not change behaviours and can still be bypassed. Many organisations also find it challenging and costly to keep an e-procurement system’s product and pricing data up to date across a huge range of articles. E-procurement is great when it is rolled out in controlled stages, P2P processes and procedures work already, and the organisation is mature.
From our recent experience advising on procurement initiatives, we have found a few practical business changes, which don’t require investment in a new IT system, have proven effective in controlling maverick buying. Normally, these can be implemented using the business’ enterprise resource planning system as it is (simply for purchase order management and invoice payment), without having to employ additional personnel.
2. Roles must be clearly separated.
Most employees love to contact suppliers, negotiate prices and buy – and it’s this behaviour which is the root cause of uncontrolled spending. This needs to change. Employees (requisitioners) should only raise a requisition when they have a need to purchase, while ‘operational purchasers’ – those with a ’license to buy’ and the authority to raise a purchase order – should then carry out the purchase on behalf of the requisitioner using the correct P2P processes, purchase order management and available contracts that ‘strategic purchasers’ have arranged. Operational purchasers can easily serve many requisitioners within or across business units, locally or centrally, depending on how this is set up. Normally, this can be implemented without having to employ additional personnel.
3. P2P processes should be tailored.
One size does not fit all when it comes to P2P. Processes must be designed to cover all possible purchase types and take into account different roles. For example, buying direct material for inventory will not follow the same process as buying an indirect service based on time and material. Normally, 20-25 variants of a generic P2P process will cover all the bases.
4. Purchase orders have to be used for every purchase.
This may sound overambitious, but without a purchase order, the commitment of spend will not be in the ERP system and therefore unknown to management. Terms of business and payment terms will also not be communicated to the supplier, and, as a result, cannot be enforced. Moreover, there is nothing to match goods receipts and invoices to when goods and services are delivered. In our experience, around 90 per cent of all purchases should be raised on a purchase order, with the remaining 10 per cent covering purchases that will normally not require one, for example subscriptions, utilities and personal travelling expenses.
5. A P2P policy needs to be clear and communicated.
I refer to P2P as a ‘regime’ because it needs to be strict in order for it to work. The truth is the easiest way to buy something is simply to grab the phone and call a supplier – bypassing the purchasing policy and process (if there is any). At the same time, no one really dares to take responsibility for changing this behaviour. Therefore, eliminating maverick buying, gaining control of an organisation’s buying behaviour and realising cost savings will depend on how much the executives really want it. Their direction must be clear and well communicated in one common P2P policy, with compliance being monitored monthly and individual cases of uncontrolled buying addressed directly.
Organisations that fail to address these points can expect continued loss of compliance and benefits. Since a strong P2P strategy realises savings, reduces risk and streamlines invoice payment, the CPO should find it easy to team up with the CFO when establishing a P2P regime.
Jes Batting is a sourcing and procurement expert at PA Consulting Group