ra2 studio - Fotolia
Put simply, procure to pay is the process by which companies buy and pay for goods and services, from the initial decision to make a purchase to processing and paying the supplier invoice.
By submitting your personal information, you agree that TechTarget and its partners may contact you regarding relevant content, products and special offers.
Procure-to-pay software aims to automate this process, enabling organizations to operate more efficiently, save money and reduce risk by providing more financial controls.
But there are other, more sophisticated ways CFOs can take advantage of procure-to-pay software to realize additional benefits, including improving cash flow, building up working capital, extending and managing credit, and performing analytics on spending.
"The most interesting thing to me is the link between analytics on spend and machine learning and artificial intelligence to validate transactions," said Duncan Jones, vice president and principal analyst at Forrester Research, based in Cambridge, Mass. "Either to validate procurement transactions before they happen or to validate invoices and invoice discrepancies."
A basic use of procure-to-pay software would only replicate a manual procure-to-pay process, including approving invoices, Jones said. In contrast, an advanced procure-to-pay (P2P) system would learn from what people do and do not approve, either formally with business rules -- e.g., if certain conditions are met, the invoice will be approved -- or informally just by "learning" what people approve, according to Jones.
"We replace the [basic use] with automated validations and analytics that look for patterns after the fact, and then identify problems that need to be addressed," he said.
For example, managers can't determine if an employee is overspending by looking at one requisition at a time. They can only spot that overspending by using procure-to-pay software to uncover the pattern of the employee's spending.
"It really needs a mindset change from finance. Some [Forrester] clients say the goal they're trying to get from procure to pay is compliance with policy," he said. "But I say that shouldn't be the goal because the policy is not written in stone. It's your way to try and control spending to avoid waste. The goal is avoiding waste. [Compliance] was the best you could do when you had manual systems. Now that you have software, you can be much smarter."
Coupa Software Inc.'s Donna Wilczek agreed that CFOs should be using procure-to-pay software to track this rogue spending.
"A lot of [the] time, people are expensing things that should have been on a contract or purchased via purchase order," said Wilczek, vice president of strategy and product marketing at Coupa, a cloud spend-management software vendor based in San Mateo, Calif.
She told the story of a Coupa client whose administrative assistants were buying bottled water from Costco and expensing it. "Then the company implemented Coupa and realized there was a contract available for bottled water and they saved over $100,000 annually on bottled water for one location."
Cash flow, working capital benefits can be significant
The power of procure-to-pay software lies not just in the information it can provide about how organizations spend money, but in helping them leverage that information to make better decisions, said Brian Rosenberg, CEO of The Rosenberg Group, based in Las Vegas.
Procure-to-pay software can also help CFOs gain more control over cash flow, according to these experts. "You can more globally be able to make adjustments in your cash flow to pay vendors faster if there are financial incentives to do so," Rosenberg said.
Jimmy LeFeverdirector of research and consulting, PayStream Advisors
The cloud-based supplier financing system offered by Taulia Inc. helps buyers and suppliers unlock that functionality by automating vendor discounts.
Taulia allows suppliers to get paid faster in exchange for giving buyers early payment discounts, which can improve productivity, lower costs and automate outdated business practices, said Markus Ament, co-founder and chief strategy officer at San Francisco-based Taulia.
CFOs can ensure that that their supply chains have cash on hand when they need it so they can remain competitive and profitable, he said. Companies using Taulia's software include Coca-Cola, PayPal, Hallmark, Salesforce and Warner Bros. Entertainment.
Here's how it works: A supplier for Taulia's customers can request that an invoice be paid sooner than the set term if it agrees to give the buyer a discount on the invoice. The size of the discount varies according to when the supplier wants to get paid. That's called dynamic discounting, Ament said.
CFOs can also use tools that come with procure-to-pay software for treasury functions, such as forecasting days payable outstanding and working capital, said Jimmy LeFever, director of research and consulting at PayStream Advisors, based in in Charlotte, N.C.
In addition, CFOs can use the reporting and analytics capabilities of advanced procure-to-pay software to help manage spend, according to LeFever.
"If I want to know how much my northwest regional sales team spent on pencils the first week of October in 2015, I can drill down to that in a matter of seconds," he said. "In older, less advanced solutions, that would be a report that would have to be generated and it would take a while. The more advanced solutions allow you do that in six to seven clicks."
Global Health Exchange's most sophisticated customers -- suppliers as well as buyers -- are starting to deploy analytics on top of their requisition-to-order platforms, said Chris Luoma, vice president of product management at GHX, based in Louisville, Colo., which offers procurement software for the healthcare industry.
Customers are also looking for other opportunities, whether it's consolidation of suppliers or strategic relationships with particular suppliers, he said. Health systems that grow through acquisition, for example, find themselves having to manage new supplier relationships at the departmental level.
As the healthcare supply chain matures, CFOs are using technology to drive great efficiencies for their organizations, according to Luoma.
"I need analytics tools to understand where I can go in and start to consolidate basic services such as laundry, linens and electricity, all the way up through more complicated arrangements where I'm going to a single supplier for both my trauma and my orthopedics supplies," he said.
With the analytics tools, the CFO can understand how the combination of those lines of services allow the supplier to be more efficient and, as a result, offer greater benefit to the healthcare provider, Luoma said.
However, it's not just the analytics capabilities -- it's also about the content. "While our most sophisticated customers understand where they want to get in terms of spend analysis and category management, they struggle with the underlying data," he said. "So, they come to GHX for content solutions that allow them … to understand what they're buying and who they're buying it from to consolidate that down."
Reducing the 'friction' in supply chains
Extending and managing credit is important in P2P and business networks because the "expense of credit comes at the point of friction and lack of information in the traditional processes," said Drew Hofler, senior director of financial solutions at SAP Ariba, a procure-to-pay software and networked marketplace provider based in Sunnyvale, Calif.
For example, when a supplier "factors" an invoice (sells it to a third party at a discount) or goes for a line of credit, the credit provider will want assurances that the supplier will be paid for the invoices it submitted to the buyer, Hofler said.
That information is often hard to come by in paper-based and non-networked processes, he said.
"But inside of networks, we have years of data on the relationship between that buyer and supplier that shows, particularly when that payment is being executed through us … exactly how long it took a buyer to pay a supplier, how often they miss that date [and] if there's a long-term relationship between that buyer and seller," Hofler said. "All those pieces of information directly go into a calculation of risk."
When buyers and suppliers have visibility into such data, "friction" and costs go down in the overall system, he said.
That means when companies are on a P2P platform, especially one that is tied into a business network, and have all this information, "they're able to remove artificial barriers and let liquidity flow where it needs to with as low a cost as possible," Hofler said.
"Maybe that money comes from their buyer who happens to have a lot of cash on hand, or maybe it comes from a third-party funder providing liquidity to purchase the invoice from a supplier," he added.
In this case, neither the supplier nor the buyer is incurring any debt. Rather, it is a flow of funds that is able to retire receivables and extend payables without creating balance-sheet debt or the need for external credit, Hofler said.
Coordinate finance and procurement departments
Get the e-procurement buyer's guide
Read a definition of supply chain finance