The Tidal Wave of Automation and Its Implications for Purchase-to-Pay
March 15, 2017 by David Griffiths, CEO
Automation can bring substantial benefits and is an important part of any evolving finance department, but when it moves too fast and rips through existing talent and processes especially within Purchase-to-Pay (P2P), the results are surprising, counter-intuitive and sometimes devastating.
I have witnessed many automation projects within finance and typically the cost per invoice goes down and the investment is paid back after a year or two - but at what true cost? The following examines four areas of cost that are often missed by or hidden from finance and procurement leaders, concluding with a simple remedy to ensure a risk free transition to a fully automated P2P world.
In many cases, automation projects involve making people redundant which is a primary driver of the return on investment. Unfortunately, when this happens it is often the most experienced people that are let go, the people who have years of knowledge working with suppliers, managing their idiosyncrasies and payment peculiarities. This knowledge is paramount to running an effective secure financial operation and amounts to the loss of considerable value, which many senior managers may not appreciate. Providing a system to capture this knowledge will be paramount to automation success.
First Line of Defense
Research through P2PBenchmarking.com identifies that P2P staff carry out numerous tests on every transaction and supplier. These are usually unreported and often unconscious, and can range from simple error checking, through to compliance monitoring, all way up to risk assessment and fraud detection. Examples of this could simply be recognizing the style of an invoice, the type of goods purchased, the quantities and even the time of the month the invoice comes in. These checks add up. They are an essential part of the process of protecting spend in the financial supply chain, acting as an early warning system. Unfortunately, automation generally takes these people out of the process and tries to substitute them with improved purchase order compliance, three-way matching and other simple controls. This partly works, but we find due to increasing complexity of distributed supply chains and globalization, risk is still increasing. Replicating these tests in real-time will be essential to reducing this risk exposure.
Growing Hidden Costs
It is not often appreciated that automation can significantly increases costs, especially around procurement because of the added compliance required for three-way matching the purchase order (PO) with the invoice and goods received note. This investment can be significant and necessitates growing the procurement team, increasing contract administration, generating new policies and procedures, and managing a deluge of purchase requisitions and orders. While PO compliance is a good thing, it can be expensive and is often not included in the normal cost per invoice calculations. It should be to understand the true cost of automation.
Purchase order blindness
Interestingly PO compliance also adds complexity to the purchase-to-pay process inevitably adding more steps with more people involved. This may remove some risk, but also adds back other risks. One example of this is the reverence sometimes given to a purchase order. Once a PO number is included on an invoice, the transaction almost becomes invisible with very little additional scrutiny taking place before money leaves the corporate bank account. It is easy to argue that this is the whole point of POs because all the checks have been done prior to its raising, however from years of analyzing invoice transactions we find many POs are incorrect for a multitude of reasons. For example they may have been raised retrospectively, prepared with inadvertent, are duplicated, or are fraudulent. This might go some way towards explaining the latest Kroll 2016/17 fraud report which shows that procurement fraud has increased from 17% to 24% in the organizations they surveyed.
Improving your risk profile after automation is both simple and complex at the same time. Simple because organizations can now empower the transactional experts in their finance team namely P2P by buying in advanced real-time monitoring systems that help reduce risk and increase fraud prevention while also driving process improvement. The maturity of these systems means you can set up within days with little or no professional services.
The more difficult part is for finance and procurement to take ownership of this solution and fend off other departmental heads from internal or external audit, loss prevention or even information security.
Ultimately the hardest part is transforming the role of your typical P2P professional into an internal controls specialist. There is a cultural and role step change required to motivate staff to fully embrace their new monitoring tools so that the benefits can be felt on the bottom line.