This session will examine the business case for automating procure-to-pay functions and explore related hard and soft-dollar savings and process improvements. You will hear about essential benchmarks for purchase order (PO), invoice and payment automation, as well as supplier management, working capital and compliance. Panelists will discuss the next wave of F&A outsourcing for labor cost savings and transformational change. They will also share the latest strategies for setting targets and measuring results against stated objectives. Session participants will walk away with an actionable blueprint for effective performance measurement.
Overall, as Europe moves into a period of recovery and revenue growth, the issue at question is whether the changes made are sustainable and whether companies are truly creating a “cash culture.” Although 60 percent of the companies featured in the survey improved their working capital in 2010, based on previous survey results, only 40 percent to 50 percent of these can be expected to sustain this improvement in 2011. Only 5 percent of companies have achieved upper-quartile performance within their industry and have managed to improve in all three working capital elements over a five-year period to 2010. And just five companies within the survey have improved their DWC every year for the past five years and are in the upper 50 percent in all three elements of working capital.So what can companies and CFOs do to ensure ongoing focus and sustainability?
Performance MeasurementA process for collecting and reporting information regarding the performance of an individual, group or organizations. It can involve looking at whether outcomes are in line with what was intended or should have been achieved.To Evaluate how well a public agency is performing. To evaluate performance, managers need to determine what an agency is supposed to accomplish. (Kravchuk & Schack 1996). To formulate a clear, coherent mission, strategy, and objective. Then based on this information choose how you will measure those activities. (You first need to find out what are you looking for).Benchmarking is a traditional form of performance measurement which facilitates learning by providing assessment of organisational performance and identifying possible solutions for improvements.To Improve What exactly should who- do differently to improve performance? In order for corporation to measure what it wants to improve it first need to identify what it will improve and develop processes to accomplish that.Also you need to have a feedback loop to assess compliance with plans to achieve improvements and to determine if those processes created forecasted results (improvements).To Motivate Giving people significant goals to achieve and then use performance measures- including interim targets- to focus people’s thinking and work, and to provide periodic sense of accomplishment.To Promote How can public managers convince political superiors, legislators, stakeholders, journalists, and citizens that their agency is doing a good job.Between your strategy and performance measures, you require a set of performance objectives that describe what you must do well in order to execute your strategy. Objective statements are just that - concise statements that describe the specific things you must perform well if you are to successfully implement your strategy. The objectives you create will act as bridge from the high-level strategy to the performance measures that you will use to determine your progress toward overall goals.Strategic performance measures monitor the implementation and effectiveness of an organization's strategies, determine the gap between actual and targeted performance and determine organization effectiveness and operational efficiency.Good Performance MeasuresFocus employees' attention on what matters most to success Allow measurement of actuals to targetProvide a common language for communication Are explicitly defined in terms of owner, unit of measure, collection frequency, data quality, expected value(targets), and thresholds Are valid, to ensure measurement of the right things Are verifiable, to ensure data collection accuracy
"What you measure affects what you do. If you don’t measure the right thing, you don’t do the right thing." -- Joseph Stiglitz (1943–), US economist -- Source: Quoted in the New York Times (October 4, 2009) "If you don't know where you are going, you will probably end up somewhere else." -- Laurence J. Peter (1919–1990), Canadian academic and writer -- Source: The Peter Principle: Why Things Always Go Wrong (cowritten with Raymond Hull, 1969)
Brain Storming – What are the elements of performance measurement in the procure-to-pay (buy-side) and order-to-cash (sell-side) processes?Example:Process efficiency/effectiveness – on-time, price per document, docs per FTE, discount captureCompliance: Sarbox, PO, Contract, VAT/tax, price, vendor, etc.Working Capital – cycle time (eg. DPO, DSO), Supplier (Customer) Management: e-enabled, quality, on-time delivery,
This overall strategy can increase your discount savings 2-5x what you are earning today. Many companies have some level of prenegotiated early pay discounts typically with less than 5% of their supplier base. And due to inefficient, paper-based invoice processing, most companies capture less than half of the discount savings available to them. By implementing electronic invoicing with approval workflow, companies are able to approve invoices in 5 days or less and therefore able to capture about 2x what they are today with their existing opportunities. Companies, like Republic Services, are leveraging Ariba’s cloud-technology and best-practice services to increase their savings 3-5x what they previously captured by increasing the number of suppliers participating in their discount programs during the enrollment process, and introducing sliding scale or dynamic discounts to capture discounts on targeted hurdle rates aligning the buyer’s and the seller’s objectives (i.e. bottom line savings / getting paid faster). Ariba Discount Professional provides buyers and suppliers the visibility and control they need to manage cash better with the Ariba Network by connecting you to nearly 1 million trading partners, many of whom you are already doing business with and many of whom are looking for improved cash flow. Ariba also assigns a customer management executive who helps measure your success against the stated objectives for continuous performance measurement and program adjustments. The result is an increase of 3x-5x in your early payment discount savings, earning you an APR of 10-30% while providing needed liquidity to your suppliers. This is the “treasure” in treasury.
We discussed the innovative tools Ariba offers for optimizing working capital; ; another area that can help move the Net Income needle in the right direction is by capturing the savings of spend under contract. This Hackett Group study reveals the potential significant savings that will directly impact profitability by reducing spend by over $9 million per $ billion in spend under contract by increasing compliance rates by just 10%!!
NWC DefinitionInventories+ Receivables- PayablesWACC: Weighted Average (Annual) Cost of Capital Focus: We pay supplier for our raw materials until customer pays us for the sold finished goodsAim: We negotiate longer terms with our supplier and shorter terms with our customers to have the shortest cash gap possibleInternally:- Early posting of supplier invoice enlarges payables durance at process start- On time (as actually many early payments => later payments) enlarges payables durance at process end- Early invoicing of sold goods to customer enlarges receivables durance at process start- On time payment from customer (no overdue) enlarges receivables durance at process end=> All four effects combined optimize (shorten) the cash gap
With this slide we go into a little more detail about the agreed and the effective payment terms. The agreed term is the average of all negotiated payment terms and the effective is the average term when the payment effectively was released.Agreed and Effective can’t correlate 100% due to external invoice transit time (by mail); acceptance zone of three days hat been set as baselineEffective Payment depends on the payment FrequencyStoryline: What are we focusing on / measuring
Gap between agreed and effective term days over five times bigger than defined (equal to 80% optimization potential)Complexity reduction from 786 to 68 payment terms as per 01.01.2012
The Smart Enterprise Processes approach involves:It identifies the most important business outcomesComprehensively defining the process in terms of adequate width (enterprise wide) and depth (four levels).We establish the key linkages between outcomes, process metrics & performance drivers.Opportunities are identified and a roadmap developed, with the flexibility to deliver modularly; Business outcomes can be realized irrespective of where you begin in the process value chain.Execution leverages Genpact’s unique strengths in targeted analytics, focused IT solutions and pragmatic reengineering. Ongoing measurement against the key metrics enables us to deliver ongoing improvement. This approach and the related IP (Intellectual Property) is available for a select set of core processes today. Genpact will continue to build out this asset, focusing on those processes where we can have the most impact.
Key Messages – There is a relation between all the sub-processes within S2P as well as they are inter-dependentHere you can see specific symptoms between sub process and the business impact that they go to influence. For e.g. an incomplete market assessment that connects Category Strategy and Negotiating & Contracting leads to Wrong negotiation Strategy.
The Big Finance Payoff - Top Performance Metrics and How to Achieve Them
Process Automation AND Performance Measurement • Process automation gives top performing organizations a 92% cost savings advantage • However, technology alone is not a silver bullet… “If you do not re-engineer and measure your processes you will fail to gain the full benefits of the technology.” – Pierre Mitchell, The Hackett Group3 Ariba, Inc. 2012 All rights reserved.
"What you measure affects what you do. If you don’t measure the right thing, you don’t do the right thing." -- Joseph Stiglitz, US EconomistSource: Quoted in the New York Times (October 4, 2009)
Four Performance Pillars for Finance $15 Million for every $1 Billion in Spend CHALLENGE OPPORTUNITY “ Process “ 1-for-1 60-80% cost take out – or about $1 million for average to large Payables organizations “ Discount “ 2-for-1 $2 Million in discount savings for “ every $1 Billion in discountable spend Compliance “ 9-for-1 $9 Million in contract leakage savings for “ every $1 Billion in spend under contract Working Capital “ 3-for-1 $2.74 Million in working capital impact for 1 days of payables extension (DPO) on every $1 Billion in spend Source: The Hackett Group 2011 P2P Benchmark Report and Ariba Results6 Ariba, Inc. 2012 All rights reserved.
Compliance If compliance is defined as buying from the right vendor at the right price, what percentage of your purchases are fully compliant? Over 90% 70% - 90% 50% - 70% Under 50% Don’t knowSource: Defining and expanding the value proposition of P2P survey, ISM, Forrester, Ariba; February2011; relative population sample.
Peter Beyeler Group Procurement Services 10.05.2012The Big Finance PayoffPeter Beyeler | Global eProcurement and Automation Manager
Clariant – Key Facts ■ Clariant is a world leader in colors, surface effects and performance chemicals ■ Annual sales of CHF 7.4 billion in 2011 ■ HQ in Muttenz near Basel, Switzerland ■ World-wide operations, with more than 100 group companies in over 70 countries ■ Approximately 22,100 employees ■ Products and services of 11 BUs are based on innovative specialty chemicalsPeter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) Slide 25
Procurement Evolution @ Clariant Procurement management for strategy growth Source of innovation Shareholder Value Faster introduction of new markets Manage Cash Exclusive knowledge capture and leverageImpact to Clariant Procurement is a strategic key activity Long term securing of price, volumes, service Traditional “Purchasing Mindset” Supplier consolidation / Global lead buyer Service to the Company concepts Fragmented supplier base Reduce complexity (PRAGMATISM and SIMPLICITY) Cost Negotiate case by case Global view and global negotiation Local view Supplier consolidation etc. Tool Standardization Operational Strategic Scope Peter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) 10.05.2012 Slide 26
P2P Transformation ProjectOrganizational Structure EC EC CFO Operations Cash Performance Team / NWC Finance GPS Services GPS Region Process & Performance AP SSC 11 Business UnitsPeter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) 10.05.2012 Slide 27
P2P Fact Sheet • Globally 18 Countries with eProcurement • 368 Active Relationships on the Ariba Network • Total 698 eProcurement Suppliers (Ariba, OCI, SAP) • 50% of all Indirect Spend PO line items are eProcurement • 50 % or 200`000 PO Line Items are eProcurement within Indirect Spend (no eProc for Direct Materials today) • Worldwide about 1 Mio. Invoices processed. • Direct Spend 100% PO coverage • Indirect Spend 92% PO coverage Target 95%Peter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) 10.05.2012 Slide 28
P2P enablement Targets • Reduction of NWC • Cash Flow Savings • Reduction of Invoice ageing • P2P Process Speed up • AP Process Optimization • Realizing more cash discount • Process compliance • Back Log reduction • Failure Rate ReductionPeter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) 10.05.2012 Slide 29
Net Working Capital EffectsThe Cash GAP You purchase inventories You sell goods (as soon as invoice has been (as soon as invoice has been booked, payables increase) issued, receivables increase) INVENTORY NWC PAYABLES RECEIVABLES Effect Depending on CASH GAP invoice booking date payables period 10 later 20 starts 30 40 50 60 70 80 90 100 110 120 You pay for your purchased You receive payments for inventories your sold goods (CASH OUT) (CASH IN)Peter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) 10.05.2012 Slide 30
Agreed vs. Effective Term Days Purchase Goods Invoice Invoice Payment Order Receipt Receipt posting Term Term invoicing Due date date 60 days 45 days invoicing invoicing date date AGREED Baseline Date EFFECTI VE1. 05.01. 15.01. 20.01. 25.01. 31.01. 05.02. 10.02 05.03. 01.03. agreed effective If posting is done before month end => Payable at end of January If posting is done after month end => No Payable at end of January Stalder Frédéric, Group Procurement Services, Performance and Process Management (Copyright Clariant. All rights reserved.) 10.08.2011 Slide 31
P2P Metrics to be considered Payables Goods Invoice Order Invoice Posting Payment Receipt Receipt Actual, late posting, non aligned terms, 1 early payment 3 2 10.05.2012 NWC Savings Agreed vs. Effective Days If effective < agreed (most likely) Effect 1: Early(er) posting • 1 Posting performance Effect 2: Pay Term alignment Effects (today FI 5 days shorter than MM) • FI is not equal to MM 2 Effect 3: On due date payment pay term, (FI Shorter) • (as today early = later payment) Early Payment 3Peter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) Slide 32
Past P2P Process Enduser is creating his Procurement issues the PO Material request in SAP According the first in first out To send it to the responsible principle. Procurement Person Payables Manual Handling and plausibility check OCR Approval Cockpit Transfer Interpret Verifier ScanningPeter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) 10.05.2012 Slide 33
P2P Process optimization Invoice Cockpit and the approval workflow are the only process steps which are unchanged. The Procurement process for Payables Indirect Materials will be also changed into a eProcurement process if possible. Approvals Approval Cockpit in case of quantity and value mismatch only. End-user accesses one of the over 250 catalogs and selects eInvoice GR the needed Products and orders immediatelyPeter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) 10.05.2012 Slide 34
eInvoice Process design Supplier Invoice StatusInvoiceFailed Invoice PO # Compli ance entity Business Rule Check Digital Signing on Digital Signature Validation behalf of the Supplier on behalf of Clariant Open Text Archive Original Document Sphere segregationPeter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) 18.11.2011 Slide 35
Project Setup and Lessons Learned Schedule and Next Steps Q3 / Q4 2012 Q1 / Q2 2013 Q3 / Q4 2013 Q1 / Q2 2014 CH GER FR, SP, IT, UK, B, AT, Nordics NAFTA LATAM APAC MEA Learning Lessons • Corporate Initiative (Top Management Support) • Procurement is responsible to monitor accounts payable (Purchase to Pay Leverage) • Clear dedicated Responsible within key departments (Cross Functional) • Advanced Guard organizational concept • Process verification Region / Country wise (Tax and Legal Compliance) Time Consuming • “Slice the Elephant” detail roll out plan necessary including Region / Country specific regulations / requirementsPeter Beyeler, Group Procurement Services (Copyright Clariant. All rights reserved.) 10.05.2012 Slide 36
Linkages between business outcomes, performance measures 41 and drivers of that outcome … % spend negotiated <5% 20% 25% with e Auctions % Spend under < 5% 40% E-RFx Contract Closure 8 Wk 4 Wk Cycle Time % Spend under 82% 15% 81% contracts % spend under 20 98% management Early Engagement 15% NASourcingEffectiveness 3% % savings achieved 10% 3% YOY 7% % active suppliers 17 3.4% for 80% spend % spend accurately extracted and 90% 100% categorized % Vendors introduced by 5 NA Sourcing Note: Savings achieved YOY is basis Savings realized on Total Sourcing spend Customer Median Best-in-Class