Advanced Operating Models
May 18, 2015

Do global procure to pay process owners really control the payables ecosystem?

You don't have to look far to find research, whitepapers, or case studies that demonstrate how technology and transformation levers are dramatically changing the payables world by more than halving operations costs. After riding the initial waves of automation, centralization, and labor arbitrage from cost-effective delivery locations in an outsourced or captive model, studies show how organizations can quite conceivably trim costs another 40 to 50 percent in a second round of sweating out inefficiencies.

Very rarely, though, does such research refer to the predictions and recent changes in the wider business environment, and the impact of such external factors on the payables ecosystem. Viewed at a macro level, it is worth reflecting on why a business case that looks enticing on paper may end up with significant deviations from projected cost savings and, ultimately, fail to achieve the objectives.

Taking recent trends in the automotive industry as a case in point, it is useful to explore their impact on procure to pay (P2P).

Lighter, fuel-efficient vehicles are on the rise in urban areas
This trend is driven especially by the evolution of Japanese car manufacturers and increasingly active environmental advocates. This change in the finished product mix directly impacts procurement and payables departments in the following ways:

  • Procurement must source new material such as carbon fiber, titanium, and magnesium
  • Payables must deal with new suppliers, regions, and sourcing locations
  • New materials may have non-conventional sourcing terms and conditions depending on the market space and product portfolio
  • Procurement and payables teams need to communicate more effectively

Notably, the vendor master data, helpdesk, invoice processing, and resolution activities are all impacted by these industry changes. Whether this impact is positive or negative will depend on how proactively the finance organization adapts itself to this new community of suppliers and sourcing locations. The increase or decrease in the operational cost of payables may depend on the number of organized suppliers and their billing efficiency and accuracy, monopoly markets, and adoption of technology.

Overcapacity requires innovative thinking
Overcapacity driven by economic slowdown, and falling demand in certain regions or geographies, is another under-appreciated external factor impacting the larger payables ecosystem. To deal with such slowdowns, many companies have come up with innovative ideas to negate the impact of overcapacity, including the following:

  • Industry consolidation, joint ventures, and alliances: Companies have established alliances and partnerships and started sharing assembly line units and joint dealerships to reduce costs. In such cases, especially in sharing production plants and assembly lines, this leads to an arrangement to either pay out for shared assembly units to partners in permutation or a combination of man, machine, and utilities payouts.

    This trend may require a new process for invoices and/or mechanisms for payments to partners and for managing validation/approval processes for such invoices.

  • Increased exports: Companies are adopting export strategies to leverage developing economies and exploit surge and demand in such geographies. The strategies may involve completely built units (CBUs) or completely knocked down units (CKDs), which result in expenses for inter-company billing, and import, and cost and freight (C&F) invoices. These invoices may show a sudden surge in volumes.

    The supplier base in certain spend categories in developing economies may also be operating under an unorganized market model, especially in the transportation sector and C&F agents. Challenges posed for payables teams from these changes include a rise in operational costs and an inability to leverage technology levers and process effectiveness.

  • Production cutback: Many companies, without other alternatives, have adopted the non-preferred path of plant shutdowns and production cutbacks. This leads to sub-optimal production and reduced material procurement from original forecasts. Much time is spent on open purchase orders for bulk purchase items and services and material forecasts that may not have been revised, which leads to un-reconciled goods receipts/invoice receipts and increases in pending invoices due to buyer/supplier communication issues.

Such changes in the external ecosystem are bound to impact the payables function. The challenge lies in how outsourcing organizations that claim to be at the center of driving transformation and reducing the total cost of ownership are taking these factors into account and integrating them into the target operating model to strengthen and deliver their clients' business cases.

While advances in technology and automation continue to have a positive impact on procure to pay processes, forward-thinking organizations must stay on top of the wider economic landscape to ensure their P2P functions meet their efficiency targets, and can adapt to current and future trends.

Author: Manik Singh - Assistant Vice President, Genpact