Requisition-to-Payment: Getting to Best-in-Class
Requisition-to-payment (RTP) is an area many organizations have attempted to reengineer. There are sizeable organizational barriers to overcome in implementing RTP, which can also represent significant opportunity. The numerous leading practices and enabling technologies available in the RTP cycle can ultimately help organizations achieve best-in-class value.
In its simplest form, the RTP process can be defined in five major process steps: requisition, purchase goods/services, receive goods/services, invoice processing, and payment/remittance (Figure 1).
Purchasing and accounts payable (AP) should be treated as coordinated parts of a larger process. Departmental barriers must be removed to effectively drive down total procurement costs while adding value to the process. Why? Consider the following: Price establishment and purchase order generation drive the work effort in AP through accuracy and volume. Attempting to implement AP improvement initiatives without consideration of purchasing activities will result in suboptimal results.
Best-of-the-Better Practices
There are countless better practices associated with the RTP process. Often technology enablers are intermingled with better practices; however, technology will be discussed later. For now, the focus is on RTP process changes considered as "best-of- the-better practices." The foundation of many best practices is a true end-to-end RTP process design combined with an organizationally integrated purchasing and AP department. (Note: singular not plural.) The transaction processing components of RTP should be physically together and report to the same individual within the organization. The top five best-of-the-better practices are:
- No expense preapproval should be required below set tolerances. Purchase orders should be eliminated through extensive use of purchasing cards.
- Approve purchases once, upfront, and not again at time of payment.
- Code expense information (e.g., general ledger (GL) account codes, project codes, cost center, and product) at time of purchase (i.e., approval) instead of upon receipt of invoice.
- Utilize evaluated receipt settlement (ERS) capabilities for automatic matching of purchase orders and receivers, pay suppliers based on what was received, and eliminate both invoice matching and the invoice itself.
- Reduce paper invoice volumes into AP through electronic invoicing (e.g., EDI, XML, flat-files, PCard files, Web invoices, EBPP, etc.).
Performance Management
Performance management and measurement is critical to the success of achieving a highly effective and efficient RTP process. The end goal of performance management is to create a new performance-oriented culture for those within the RTP organization. Well-designed measurements will result in an environment of continuous improvement enabled by the right set of leading and lagging indicators. Within RTP, at least two levels of cascading key performance indicators (KPIs) should be developed, including:
- Top-down or process-level KPIs depicting metrics specific to overall RTP. For example, number and percentage of payments by type (check, express check, wire, and electronic funds transfer).
- Bottom-up or job-level KPIs targeted at the individual or functional team. For example, average entry time per voucher per full-time equivalent (FTE) and invoice lines processed per FTE.
These metrics will allow RTP management to understand, analyze, and adjust KPIs as appropriate. Goals, the second component of KPIs, are equally important. Goals must be determined for selected areas by applying best practices and benchmarks. Competency, proficiency, and a learning curve also need to be considered when developing the various goals associated with the KPIs.
Technology Enablers
After integrating the transaction processing components of purchasing and AP into one department, and utilizing better practices to design a true end-to-end RTP process, an organization should be able to process transactions relatively effectively. However, to obtain best-in-class processing efficiencies, an organization must make use of the abundant technology enablers in the marketplace. It used to be a worthy goal to strive for top quartile performance. Today, some benchmarking experts proclaim companies must set goals even higher, toward the top-decile performance.
Utilizing e-procurement technology should be near the top of the list. Although e-procurement solutions have perhaps been over-hyped in the past, there is still value and efficiencies to be gained. Some of the advantages of e-procurement solutions include: superior end-user interface, strong workflow management based on user profiles, commodity types, location, good catalog management capabilities, and a highly distributed Web-based architecture (Figure 2).
Some of the biggest obstacles that can diminish ROI are creating and maintaining product data electronically, enabling suppliers to support electronic transactions, filling the settlement and payment void, and limiting the scope of e-procurement purchases.
The effort associated with catalog development and maintenance should not be underestimated. Inside the buying organization, e-procurement tools allow efficient purchasing through electronic selection, workflow approval, and purchase order creation. However, most suppliers still cannot receive a purchase order electronically, much less invoice electronically. Some accept emailed or faxed purchase orders. Many still require paper purchase orders. To date, a majority of suppliers have not extended technology to electronic invoicing, settlement, and payment. Therefore, companies have continued to deploy traditional ways of transacting, which inevitably leads to significant amounts of manual processing for all parties. Finally, some companies have implemented e-procurement solutions limiting the number of suppliers, preventing ad-hoc off-catalog purchases, or even preventing purchases from suppliers not in the system. Typically this pushes the buyer to purchase through another method that may require even more cumbersome, manual processing on the back end.
Some of these issues may be addressed by turning to purchasing card providers. Integrating an e-procurement solution with a purchasing card overcomes the lack of electronic invoicing and fills the payment void. It is important to note that even this very effective combination is not a perfect solution since the purchasing card providers typically cannot automatically pass the purchase order information back to their clients.
Supplier self-service is another area that should not be overlooked. Even after making the buying and paying aspects of the process efficient, there will always be internal and external customers wanting to know their payment status. Of course, a well-honed call center can help, but supplier self-service should be part of a well-designed RTP process. Supplier self-service should allow suppliers to easily submit invoices and inquire about payments utilizing the Web, Internet, and/or interactive voice response (IVR).
Portals and workbenches can provide RTP process workers with access to and interaction with relevant and personalized information, content, applications, business processes, and knowledge assets. For example, envision a portal component that would facilitate the process of matching issue resolution. Consider a portal component that would provide automated alerts to indicate where work backlogs (transactions requiring manual and human attention) exists. Or imagine a portal that facilitates the dispute resolution process between the buying company and supplier. Workflow technology has been available with most ERP packages for many years. It is surprising how many companies implement ERP packages without taking advantage of the automated workflow within the RTP process.
Workflow technology is an essential tool for automating a business process to handle the interrelationships between the components of the RTP process. Workflow tools can be used for information routing, task processing, notifications, and work-in-process reporting. For example, after a requisition is created, workflow would take over to examine the commodity and/or purchase amount, automatically creating a purchase order if it meets certain criteria or passing it along to one or more levels for approval. Workflow rules can also be configured to send tasks to workers' queues for processing, thus automatically balancing workloads. Workflow can also be used to send email alerts based on definable parameters. For example: "Requisition #123 for product X at Y cost from requester Jane Doe is waiting for your approval." Finally, work-in-process reporting can assist in managing completed process steps, assess current work volumes, or even determine if processing is on schedule.
Beyond ERP
After many generations and releases, the core RTP modules of the major ERP vendors – SAP, PeopleSoft, and Oracle – offer comparable capabilities. What can really give the RTP modules of your ERP package a boost is third-party, bolt-on applications or solutions such as:
- Imaging and faxing o Travel and entertainment expense reimbursement
- Electronic invoicing and payment (EIP)
Leading-edge companies are those moving toward a less-paper environment through imaging the paper invoices that remain after ERS, purchasing cards, and EDI have worked their magic. A supplier or internal customer could fax an invoice that is routed through the image server, placed in a workflow queue for processing, automatically indexed, and automatically attached to a payables voucher. Alternatively, the paper invoice could be imaged on high-speed scanners rather than through faxing. The entire history of the transaction is then readily available for electronic look up. Imaging and faxing solutions save entry time, storage space and costs, and help facilitate efficient customer service systems.
Many companies have implemented ERP across their enterprise; however, numerous organizations still shoehorn employee expense reimbursement into AP vouchers. Organizations are stuck completing either spreadsheets or paper-based expense reports. In the back office, there tends to be a focus on processing the transactions, travel policy is not clearly communicated or enforced, and complete data to negotiate with suppliers is not readily available. The three big ERP vendors and many best-of-breed software companies offer solutions that fully automate the travel and entertainment (T&E) process through Web-based, self-service, and banking partner integration. Capabilities that contribute to a T&E solution's value include an intuitive browser-based user interface, flexible business rules that can imbed travel policies into the application for exception-based routing, easily configurable workflow, automated download of credit card transactions to eliminate manual data entry, adapters for integrating into ERP modules, and solid expense reporting facilitating analysis, control, and management of expenses based on spending patterns.
Implementing a T&E solution presents a compelling value proposition for companies wanting to reduce costs and eliminate the manual process of submitting, reviewing, and reimbursing expense reports. A T&E business case often includes:
- Increase in compliance/policy enforcement savings
- better data for vendor negotiations
- headcount reduction/redeployment
- Increased rebates through extended use of a corporate card
- Electronic record retention
- Value added tax (VAT) reclamations
- Productivity benefits/soft dollars
EIP solutions are beginning to appear in the marketplace. These EIP products targeted at businesses are coming from vendors who have traditionally targeted, and in some sense conquered, the consumer space. EIP products enable buyers and suppliers to leverage the Internet to automate the exchange of invoices, resolve disputed invoices online, execute payments, and deliver remittance electronically. In fact, some of these EIP offerings are targeted at both the requisition-to-payment and order-to-cash processes. To work seamlessly, EIP offerings must integrate into both buyer and supplier ERP applications. While these EIP platforms promise to provide good solutions for the electronic transfer of both invoices and payments, the most exciting component is that the EIP framework provides an online collaborative workspace to resolve disputes and reach agreement to pay. EIP has the potential for solving a significant hurdle in achieving a highly efficient RTP end-to-end, best-in-class process.
Outsourcing
Companies continue to focus on the core areas of their businesses while relying heavily on service providers to manage noncore services, such as administrative, human resources, payment service, supply chain, information technology, application maintenance, and customer-related processes. Key buyer values include:
- New process capabilities, including skills and technology
- Improved speed to market
- Improved flexibility
- Improved scalability
- Improved service levels
- Single point of responsibility
- Lower total cost of ownership
- Reduced risk
- Reduced human resources responsibilities
- Reduced asset ownership
Companies considering overhauling their RTP process should contemplate point outsourcing solutions as well as outsourcing the entire RTP process or subprocess.
Final Words
For many companies, purchasing and AP are commonly not integrated. For more advanced companies, the purchasing and AP functions are partially integrated but not viewed as a larger process. In best-in-class companies, purchasing and AP are treated as coordinated parts of an end-to-end RTP process. This removes departmental barriers and drives down total procurement costs. To create a best-in-class RTP process, a company must start with best practices supported through technology enablers, ERP extensions, performance management, and outsourcing. Failure to do so will result in higher processing costs, extra work, and suboptimal performance.
