best practices briefing in purchase-to-pay kurt albertson, the hackett group jim anthony, the...

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

Discussion Items

Objectives of Briefing

Hackett Insights and Metrics in Purchase-to-Pay

Emerging Trends

World-Class Purchase-to-Pay© 2006 The Hackett Group. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 3

Objectives of this Briefing

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


Finance Operations Executive Advisory Program

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


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 100 and 90% of the Dow Jones Global Titans Index

World-ClassDefined

Objectively Quantify Gap

Identify Certified Practices

Prioritize and

Manage

Measure

Execute


Hackett uses actual data to identify world-class performers in Finance

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

Hackett Value Grid™

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

ABC Org.Company

Comparing your organization to peer group and world-class performers

Finance Sample

Finance Sample


Purchasing Travel & Expense Purchasing Card Administration

Hackett’s Purchase-to-Pay advisory and benchmark services are based on this defined taxonomy

Accounts Payable

Requisition processing

Purchase order processing and distribution

Supplier master file maintenance

Item master file maintenance

Receipt processing

Purchasing policies and Procedures

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

Procurement cards

Travel cards Combination

cards

Characteristics of World-Class Purchase-to-Pay Organizations


World-Class Purchase-to-Pay Organizations Process Transactions for Significantly Less than their Peers

Cost per Transaction

Peer World-Class 1st Quartile

Purchase Order Invoice Line Item

2.5 - 3x

The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005


World-Class Purchase-to-Pay Organizations are Much More Productive than their Peers

Transactions per FTE


Purchase Order Invoice Line Item

3 - 4x



World-Class Purchase-to-Pay Organizations Utilize Fewer FTEs than their Peers


Purchasing FTEs per Billion $ Spend AP FTEs per Billion $ Revenue

40 - 50%



World-Class Accounts Payable Organizations have Flatter Organizational Structures

Span of Control (reports per manager)

9.4

16.3

12.2

0

4

8

12

16

20


The Hackett Group Accounts Payable Benchmark 2005

23%


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


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

End-to-End Accountability with Purchase-to-Pay


World-Class Accounts Payable Organizations are Aligned More Often with Purchasing than their Peers

Designated P2P Process Owner

27%

50%

0%

15%

30%

45%

60%

Peer World-Class


2 x


Organizations with P2P process ownership seem to outperform others in transactional process costs…with varying degrees

Selected P2P Transactional Costs

Cost per Invoice Line Item Cost per Order Cost per Receipt

P2P Process Ownership All Others

+ 22%

+ 140%

+ 11%

Hackett 2005 Benchmark Data


Similar to costs…it also seems that P2P process ownership is also having a positive enabling effect on productivity.

P2P Process Ownership All OthersP2P Process Ownership All Others

-28%- 55%

Invoice Line ItemsProcessed per FTE

OrdersProcessed per FTE

Hackett 2005 Benchmark Data


34%31%

13%

24%

15%

9%

0%

10%

20%

30%

40%

P2P Process Re-Engineered

ERS Used for InventoryPurchases

ERS Used for Non-Inventory Purchases


P2P process ownership does seem to enable process improvement across the end-to-end process…but again, it’s not the only enabler.

- 30%

- 30%- 52%

Percent of Organizations Engaging in Selected P2P

Process Improvement Efforts


Even though stronger working relationships exist in with P2P process ownership…it isn’t a guarantee!

0%

10%

20%

30%

40%

50%

60%

70%

80%

Purchasing and Payables have PositiveWorking Relationships

Purchasing and Payable considerthemselves part of the "same team"


100%

25%

75%

42%

50%

12%

- 43%

- 75%Perc

ent o

f Org

aniz

atio

ns

50%


P2P integration and deployment of technology at various process points is higher, some only slightly, in those with process ownership.

0%

20%

40%

60%

80%

100%

Percent ofCompanies with

IntegratedPurchasing and

PayablesSystems

Percent of PO'sDisseminatedElectronically

Percent ofCompanies with

ElectronicApprovals (not

tied to HRSystem)

Percent ofInvoicesReceived

Electronically

Percent ofElectronicPayments


88%

52%22% 21%

75%

33%12% 20%

- 14%

- 50%

- 46% - 1%

“A difference of about 70% between the cost of processing an electronic transaction versus a paper invoice.” – Hackett AP Process Benchmark, October 2006

65%

32%

- 51%

Automation of the Purchase-to-Pay Process


Electronic focused Organizations have lower process cost and are more productive than their peers

Cost Measurements

Cost per Line Item Cost per Invoice

E-Focused Peer Group

Performance Measurements

Line Items per FTE Invoice per FTE

E-Focused Peer Group

+ 57%

+ 54%

- 57%- 58%


World-Class Purchasing Operations Organizations Disseminate Purchase Orders Electronically Significantly more than their Peers

Electronic Purchase Order Dissemination - Indirect

0%

20%

40%

60%

80%

100%


The Hackett Group Purchasing Operations Benchmark 2005

3x


World-Class Accounts Payable Organizations Leverage Electronic Invoicing and Payments Significantly more than their Peers

Electronic Transactions

0%

20%

40%

60%

80%

100%


Invoicing Payment


2 - 6x

Continuous Process Improvement and Standardization


World-Class Purchase-to-Pay Organizations have a Standard Set of Procedures Across Businesses More Often than their Peers

Standard Procedures Across Businesses

44% 37%

58%

92%

0%

20%

40%

60%

80%

100%

Peer World-Class

Purchasing Accounts Payable



World-Class Accounts Payable Organizations have Reengineered Procedures to Minimize Low-value & Redundant Tasks More Often

Reengineered Procedures to Minimize Low-Value and Redunt Tasks

31%

75%

0%

20%

40%

60%

80%

100%

Peer World-Class


2.5 x


World-Class Purchase-to-Pay Organizations have also Consolidated Transactions and Spend to a Greater Extent


Percent of Suppliers Representing 80% of Invoice TransactionsPercent of Suppliers Representing 80% of Spend


40 - 60%

Business Process Sourcing Strategy


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


• Proximity to the Business• Company Knowledge Driven

Low High

Low

High

What factors are considered in sourcing decisions?

Advanced Skill Sets

Non-Core

On-shore

Offshore

Near-shore

Non-Standardized

Standardized

• Strategic Importance• Intellectual Property• Management Decision Support

Risk to Accuracy/Timeliness/

Quality

Centralization


1. Decentralized

2. Centralized / shared services – onshore within the country or region being serviced

3. Centralized / shared services – offshore at a lower labor cost location outside the country or region being serviced

4. Outsourced onshore or offshore – to a third party

5. Fully automated

On-going Research – Business Process Sourcing Survey


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

19%9%

10%

15% 9%

10%64%

68%63%

58%

28%

12%19%

3%

3% 3%3%6%

0%

25%

50%

75%

100%

2004 2005 2006 In 3Years

Decentralized

Centralized SharedServices Onshore

Centralized SharedServices Offshore

Outsourced OnShoreor Offshore

Fully Automated


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

7% 6%

29%8% 13%

19%

13%

53%49%

34%

39%36% 31%44%

3%3%6%

6% 3%

0%

25%

50%

75%

100%

2004 2005 2006 In 3Years

Decentralized




Fully Automated


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

32%9%

16%

8%

13% 9%

10%

61%

61%50%

42%28%

14%25%

6%6%3%

7%

0%

25%

50%

75%

100%

2004 2005 2006 In 3Years

Decentralized




Fully Automated


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

19%16%

19%

6%10%

10%69%

68% 56%

52%

17%10% 16%

3% 6%7%6%5%

6%

0%

25%

50%

75%

100%

2004 2005 2006 In 3Years

Decentralized




Fully Automated


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

13%

19%

10% 9%

13%64%

71%

53%

45%

28%

12%

28%

10%

3% 3% 3%4% 6%6%0%

25%

50%

75%

100%

2004 2005 2006 In 3Years

Decentralized




Fully Automated

Optimization of Supplier Payment Strategy


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


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


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

Supplier Payment Strategies

8%

13%

20%

20%

22%

36%

49%

0% 10% 20% 30% 40% 50% 60%

Suppliers are able to selectfrom standard payment terms

Early payment discounts aretaken even when not earned

Early payment discounts arepart of standard T&Cs

Smaller suppliers are typicallypaid in a shorter time frame

No formal policy exists

Extend payment terms tomaximize float

Actively pursue early paymentdiscounts


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

Percentage of Companies Measuring "Dollar Amounts or Percentage of Discounts Taken of Not Take"

20% 29%51%

0%

20%

40%

60%

Currently utilizing thismetric with establishedtargets and/or control

limits

Currently utilizing thismetric without

established targets&/or control limits

Not currently utilizingthis metric


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

Discount as a Percent of Total Spend

0.36%

0.04%

0.00%

0.10%

0.20%

0.30%

0.40%

Actively Pursue No Policy

Based on study results, a 10% cost of capital, a 25 day reduction in working capital, and a 2% average discount

$2 million per $ billion in spend


What is the Prompt Pay Discount Opportunity?

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

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.

Furthermore, we believe a combination of factors, organizational, process, and technology improvements, make this a feasible and realistic undertaking.

Major Payee Groups Vendor Trade Payables


The Value Proposition: Hard and Soft Dollar Savings

Also, Suppliers benefit from quicker cash flow and easier payment processes.

HardDollar

Savings

Net $30M per billion in payment

volume

Soft Dollar

Savings

$8-15 per

transaction event

Accounts Payable Optimization (Prompt Pay Discount Realization) • The generally accepted business practice for vendor trade payables is 2% discount if

paid in 10 days, and full amount (no discount) if paid in 30 days• Most governments strive to make payments in 30 days• While this practice avoids late penalty interest, it does not harvest prompt pay

discounts• Paying a vendor 98% the face amount of an invoice, representing full satisfaction of

the amount owed, generates a savings to the government (slightly less than 2% due to interest income foregone)

• Vendors already pay the equivalent to 2%, or more, to accept your P cards

Organizational and Process Reengineering and Automation• Decentralized and organizationally distributed processing locations causes higher

costs for managing accounts payable and disbursements• Manual processing is responsible for a lot of the high costs of managing accounts

payable and disbursements.• Many government business processes can be streamlined, in a manner consistent with

leading practices, to reduce or eliminate the number of processing steps • Accenture analysis suggests that automating and streamlining the accounts payable

process can save labor and overhead costs $10-15 per transaction.

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.


The “Value Calculator”

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

Terms Days % DiscStandard 30 N/AEarly Discount 10 2%

3%

80%

4%

Cost Net Opportunity

States Gen

eral

Sta

te

Exp

endi

ture

Inte

rgov

ernm

ent

Exp

endi

ture

Dir

ect

Exp

endi

ture

Com

mod

ity

Spe

nd

Value Realised if Early

Payment Adopted

Value Based on % Probablity

Value Lost thru' Reduced Interest

Income

Early Payment value less opportunity

lost through holding balance in bank

(a) (b) (a) - (b) CALCULATED CALCULATED 80% CALCULATED CALCULATED

UNITED STATES 1,109,227,448$ 364,789,480$ 744,437,968$ 22,333,139$ 446,663$ 357,330$ 48,949$ 308,381$

CALIFORNIA 158,235,437$ 74,687,370$ 83,548,067$ 2,506,442$ 50,129$ 40,103$ 5,494$ 34,610$ NEW YORK 96,528,968$ 38,982,253$ 57,546,715$ 1,726,401$ 34,528$ 27,622$ 3,784$ 23,839$ ILLINOIS 42,678,167$ 13,090,976$ 29,587,191$ 887,616$ 17,752$ 14,202$ 1,945$ 12,256$ OHIO 42,361,985$ 15,052,078$ 27,309,907$ 819,297$ 16,386$ 13,109$ 1,796$ 11,313$ MICHIGAN 43,827,413$ 19,067,058$ 24,760,355$ 742,811$ 14,856$ 11,885$ 1,628$ 10,257$ NEW JERSEY 32,935,974$ 9,320,357$ 23,615,617$ 708,469$ 14,169$ 11,335$ 1,553$ 9,783$ MASSACHUSETTS 28,470,834$ 6,283,972$ 22,186,862$ 665,606$ 13,312$ 10,650$ 1,459$ 9,191$ OREGON 14,884,121$ 4,212,673$ 10,671,448$ 320,143$ 6,403$ 5,122$ 702$ 4,421$ Amounts in Thousands

Annual Spend Opportunity

Discount APR Equivalent

% Spend subject to Early Payment Discount

% Value that could be realized from early payment

Deposit Rate

Analysis NotesThis analysis is based on publically available data supported by Accenture analysis. The purpose is to determine the opportunity available to organizations which adopt the best practice of early discount realization.

Expenditure subject to analysis (ie early discount) = 3% of Direct Expenditure

Information Source:State Government Finances: 2002 (Updated at July 2004) http://www.census.gov


Questions or Comments?

? ?? ?


For Further Information, Please Contact

Pat O’Connor NASACT Association ManagerLexington, KY [email protected]: 859-276-1147

Jim AnthonyHackett Account DirectorChicago, [email protected]: 312-543-6938

Bill KilmartinAccenture Account DirectorBoston, [email protected]: 781-367-9576

best practices briefing in purchase-to-pay kurt albertson, the hackett group jim anthony, the...

Documents

worldclass purchase

advisory group

unmetered hackett advisory

hackett group bill kilmartin

hackett group jim anthony

hackett group bryan

nasact slide

cash purchase