Companies set their budgets every year for the amount of money each department will need to spend on expected activities, services, materials, and tools. Managing the contracting for, and spending of, company funds can be a complex process with a requirement for careful scrutiny so that a company’s capital is deployed efficiently and effectively.
In larger companies, many purchases are handled by a procurement department, which provides visibility and control over the spending of company funds. Software developed over the last several decades to support the workflows around this centralized procurement practice is called “procure-to-pay” (P2P).
The concept of procure-to-pay systems is an efficient one. It automates workflows around a process that is operationally complex with cross-departmental roles and responsibilities. It addresses an array of requirements including the execution of contracts and then payments to vendors according to the terms agreed upon. It relies on good tools for visibility and control and it efficiently captures transaction activity to the general ledger.
Now, newer players are adapting the concept of “procure-to-pay,” to include spending made outside of the procurement process, as well as for procurement-type spending by smaller companies for whom complex and expensive procure-to-pay systems are a bad fit. These new lightweight systems are called “spend management” platforms.
The steps in a procure-to-pay process:
Let’s begin by looking at the many benefits of a procure-to-pay solution. The following steps are supported by the software.
- Supply management: Identifying, connecting to, and managing supplier relationships.
- Vendor selection: Researching and selecting the preferred vendor for specific purchases.
- Requisition: An internal process to secure formal approvals to order a product.
- Purchase order: Creation of a document containing order quantities and requirements for the vendor.
- Receiving: Taking in the physical shipment and entering it into inventory, tracking, and accounting systems.
- Invoice reconciliation: Comparing the invoice to the purchase order.
- Accounts payable: Sending the payment per the terms of the purchase order, and entering the amount into accounting systems.
What P2P solutions offer.
Procure-to-payment systems are designed to provide organizations control and visibility over the entire life cycle of a transaction, providing full insight into cash flow and financial commitments.
Some solutions have additional modules for:
- contract management
- sourcing optimization
- spend analysis
- savings tracking
- supplier information management
- supplier risk management
- employee expense management
Innovation continues to be added with AI being layered into vendor-management tools, price transparency, and ERP integrations. As the system became more complex, the P2P model was expanded to include source-to-pay systems, where the focus is on assessing competing vendors and negotiating those contracts.
Procure-to-pay systems have been available for decades and early entrants include Oracle, Baseware, and GEP. Other large providers of procure-to-pay software, like SAP, moved into the market via acquisition. A later entrant, Coupa, has come to dominate the sector, especially as legacy providers struggled with the shift to cloud-based services.
Intensive implementation requirements.
Still, the automation and analytic tools offered by procure-to-pay systems are not widely used, as only a little over half of all businesses operate with a full-time procurement department and, of those, about a third have adopted third-party cloud-based procure-to-pay software. One survey of businesses showed that only 10% of small and 16% of mid-market companies use P2P software solutions. For the most part, companies rely on a set of homegrown processes instead of a fully automated procure-to-pay system.
While these automation solutions can provide real value, there are cost barriers to adoption, especially since it is generally accepted that the implementation of a procure-to-pay system brings with it a meaningful requirement for change management in an organization. As with any system that touches a significant number of users, implementing a procure-to-pay system requires significant knowledge of both the current business processes and the aspirational process for that business. Many of the big players in this market use third-party partners (consulting firms like Deloitte and Accenture) for the implementation because of the complexity involved. These teams of consultants take months to set up and deploy a new system and train all impacted employees in its use.
Procure-to-pay software in a decentralized spending environment.
P2P systems solve the problems around centralized spending operations but, over the past several years, the purchasing process has been disrupted by a new way of operating. The move toward decentralized spending means that an increasing number of transactions occur outside the procurement system. We have written about the move to decentralized spending where high-performing teams are empowered to make their own purchase decisions, especially for software subscriptions, marketing expenses, and outside contractors for specialized work. This trend has been enabled by digital payment systems, most notably corporate credit cards and, more recently, virtual credit cards and virtual debit cards.
In the case of decentralized spend, the traditional model of contract negotiation followed by an invoice for goods or services has been replaced by an expense report for spending that is submitted after the purchase has been made. The shift is especially pronounced for software companies whose direct spend can include subscriptions to other software platforms. The shift to subscription-model pricing by companies for their software and services is expected to continue to grow and expand to other services and tools. When the cost for an individual to purchase a subscription is low, there is little need to involve a procurement department to assess vendors and negotiate contracts. The basis for the procure-to-pay model breaks down and more and more payments happen outside the process designed for visibility and control.
Accounting teams have scrambled to ease the burden that this decentralized spending places on an organization, especially transactions made with a corporate card. That process includes:
- approval request/granting workflows
- expense reporting
- reconciliation of spending
- capturing all transactions in the general ledger
Most procure-to-pay systems have worked to integrate corporate card transactions into their platforms with direct feeds of transactions into their systems. Management can then review and approve transactions and accounting teams can reconcile amounts against budgets. However, unlike in the procurement process, these transactions are only seen by accounts payable and oversight teams after the purchase has been made.
The procure-to-pay model has worked to deliver efficiencies to larger businesses for their centralized spending. For companies with fewer than 1,500 employees without a dedicated procurement department, the procure-to-pay solution is typically over-engineered and too expensive for their purposes. This leaves teams working to replicate the visibility and control with homegrown processes.
Enter spend management software.
In the wake of this shift in spending habits within companies, a new segment of the market is being defined as “spend management.” This is the need to manage payments made on a decentralized basis, for example, the marketing manager purchasing Google Ads or automation software, the developer purchasing subscriptions for software tools, or the product manager purchasing an analytics platform.
The recent advent of spend management software offers lightweight alternatives to the heavyweight procure-to-pay tools. Spend management platforms mimic the approach to solving the problem by looking at the full continuum from approval for spend, execution by accounts payable or via cards, and the booking of the transaction to the GL.
In its article Gartner Predicts 2020: Sourcing and Procurement Application Technology Disruptions, the first of three conclusions is: “Enterprise leaders will increasingly seek to increase the agility and flexibility of sourcing activities by expanding their supply base to include multiple supplier networks.” However, modern companies have found another way to achieve this type of agility and efficiency, which is to put the procurement decision in the hands of the expert using the service or tool. This is the power of decentralized spending. It allows those with the greatest knowledge the decision-making authority to transact within a budget. Until recently, there have not been systems designed to support this activity with necessary oversight, control, and automation. When well designed, spend management platforms have the added benefit of real-time visibility into actual spend since everything is captured to the platform as it happens.
The ROI for a fully-integrated procure-to-pay platform depends on the size and needs of a procurement department. For companies without a procurement department, or where decentralized spending has been delegated to various departments, a spend management platform can provide the type of automation, visibility, and control that large enterprise companies enjoy with their procure-to-pay software. Perhaps even more valuable is that, as a lightweight solution, a spend management platform can be adopted at a lower cost and without the burdensome change management implementation required by procure-to-pay software.