I used to be on the other side. In previous jobs, I received messages from the finance department reminding me to get a Purchase Order (PO) for my purchases and before I make the purchase. Why? Because Finance needed control over the company spending and cash flow. I rarely followed their instructions because I didn’t see the point of it. I felt I had good control over my budget – my purchases were too small to rock the boat anyway – and the suppliers always got paid in time. Hence getting a PO was an unnecessary hassle.
Procure-to-Pay is easy in theory
It’s interesting how one’s opinions change if one gets a chance to walk in someone else’s shoes. Since starting at Statkraft I have gotten much better insight into the Procure-to-Pay process. In fact, I have turned into somewhat of a Purchase Order advocate. Procure-to-Pay (P2P) is the process starting with the definition of a purchasing need and ending with the payment of the invoice. In theory, it is a simple process: you formalise and document what you need (called requisition in SAP), run a procurement process (best by having competition, see my last blog on that), and create a PO. The approved PO is when the company is financially committed; it contains specific information on how much is to be paid for which part of the delivery as well as billing information, e.g. the cost centre or project to be debited. Once the delivery has arrived, you check that you got everything agreed upon (called Goods- and Service receipt in SAP). Finally, you pay the invoice.
Overview of the Procure-to-Pay Process
Financial leakage in P2P process averages 5% of spending
So what’s the big deal? The problem is that many companies, including Statkraft, lack some control in various stages of the P2P process. Lack of control can result in losing money. Consultancies suggest that the oil and gas sector has an average financial leakage of 5% of its spend each year. Similarly, the Hackett Group P2P Performance Study 2015 suggests that average P2P Performers lose 5.05%. And that is only the direct cost. All hidden costs, for example the time Finance and Controlling spends to figure out where to book an invoice etc. is not included.
A leak can happen at every step of the P2P process. For example, if we describe the scope of work vaguely, we may allow for incremental and uncontrolled growth in a project (scope creep). If we don’t check what the contract specifies, we may pay consultants overtime or other extras which were not agreed upon. And if we choose to buy outside of framework agreements we may pay higher prices.
Statkraft is not alone with this sort of problem. Another company recently presented their P2P improvement programme to us. The presenter stated: “The only thing we’re really good at is paying invoices”.
What you do to stop the leak
Statkraft recently started a project to stop the financial leak. The standard way of stopping financial leakage is to get control over the procure-to-pay process. Once that is achieved, companies push to make the P2P process more effective by simplifying and automating as much as possible. Our project focuses on three areas:
Improve process compliance
Today, some people think the same way I used to think. Instead of creating a requisition (even by email or post-it), they just pick up the phone and order what they need. Hence, they bypass the procurement process entirely. Many, even bigger purchases, are completed without competition. In the future, we will require that requisitions are logged in the system, ensuring that purchases go via procurement and hence are commercially tested. We will also tighten the rules on PO compliance. PO compliance today is at 69%, and we aim to get that up to around 95%. This will ensure that we have a central overview of the money committed to be spent before we have the invoice in the house. Higher PO compliance will also simplify the life for Finance and Controlling. Finally, we will have stricter rules on the Goods- and Service receipt. By tightening the grip in the first steps of the P2P process, we will prevent financial leakage and we will be able to spend less time with invoice handling.
Improve the user-friendliness
The current IT interface in Statkraft (SAP) is perceived as rather complicated to use, people feel that e.g. approving POs in SAP is a cumbersome task. I personally am quite fond of SAP and I suspect that some of the resistance against it might be due to its reputation of being complicated and/or missing end-user training. Regardless of that, we are striving to make the systems as intuitive as possible. For example, for non-professional buyers we will introduce apps to perform Goods- and Service receipts and to approve invoices. The use of apps has been tested with great success in some of our business areas and we intend to make them available for the entire Statkraft family.
Standardise the way we buy and automate
Today, little of the P2P process at Statkraft is standardised. We will reinforce a common way of buying for the whole of Statkraft and we will simplify this process wherever possible. For example, we will introduce self-billing for some contract types and we will implement new catalogue solutions and improve existing ones. We will also work to reduce the large supplier base of over 20’000 suppliers, for example by negotiating new framework agreements.
What does it take to change behaviour?
Implementing apps, catalogues and framework agreements is the easy part of the project. The more difficult part is to convince people to follow the process and give them good training. One way to achieve that is to visualise how much money we save by following the process. However, maybe an even better way to change behaviour is to make people walk in someone else’s shoes: for example, Statkraft could post short and fun videos by people involved in the Procure-to-Pay process where they explain the necessity of an action. Project leaders could tell us how much a clear scope helps during project execution, Procurement officers could give us examples of the benefits of competition and Finance and Controlling could tell us why they absolutely need PO’s.