1. Best Practices Briefing in Purchase-to-Pay
Kurt Albertson, The Hackett Group
Jim Anthony, The Hackett Group
Bryan DeGraw, The Hackett Group
Bill Kilmartin, Accenture
Pat O’Conner, NASACT
Kinney Poynter, NASACT
November 16, 2006

2. Discussion Items Objectives of Briefing
Hackett Insights and Metrics in Purchase-to-Pay
Emerging Trends

3. Objectives of this Briefing
To introduce the topic and our knowledge of best practices to NASACT members
NASACT Benchmarking experience
Based on state benchmarking experience, Accounts Payable and Purchase to Pay have consistently been the top areas of opportunities for improvement
Hackett Finance Executive Advisory (NASACT)
Hackett has a focused research and advisory group dedicated to this area, monitoring use of organizational best practices to help achieve world-class performance
Accenture has significant state government client experiences on how to incorporate these best practices to improve performance

4. Finance Operations Executive Advisory Program
Was designed to help clients stay connected with the latest best practices, research, client networking - learning, and unmetered Hackett advisory, for the following 5 business process groups:
Finance Shared Services
Invoice to Cash
Purchase to Pay
Payroll
Account to Report
Memberships available through NASACT

5. Hackett Group defines World-Class Enterprise Performance
The Hackett Group is a global Business Process Advisory Firm providing:
Insight, advice and certified practice recommendations obtained through 13 years and 3,300 benchmark studies to guide executive efforts to materially improve back office operational efficiency and effectiveness levels.
Benchmarks, business transformation services and advisory programs that empower executives to achieve world-class enterprise performance.
Hackett’s continuously updated knowledge repository has been leveraged by over 1,865 of the world’s leading private and public sector organizations, including:
93% of the Dow Jones Industrials
76% of the Fortune 100 and
90% of the Dow Jones Global Titans Index
World-Class
Defined
Objectively Quantify Gap
Identify Certified Practices
Prioritize and Manage
Measure
Execute

6. Hackett uses actual data to identify world-class performers in Finance
Hackett Value Grid™
Finance Sample
EFFECTIVENESS
Role of finance in strategic planning and decision making
Integration of strategic planning with tactical business planning
Percent staff is experienced in both finance and company operations
Time allocated to Planning and Analysis
Use of balanced scorecards, simulation models
Working capital - days sales outstanding (“DSO”)
Percent credit sales collected within terms
Effective Tax Rate; Cost of Capital
Quality metrics (billing, tax, reporting, forecasting)
Accuracy of forecasts and analysis
EFFICIENCY
Total cost of finance as a percentage of revenue
Process cost as a percentage of revenue
Staffing levels by process grouping
Span of control
Technology cost per finance FTE
Technology cost as a % of revenue
Unit cost of transactions
Cycle times
Utilization of self-service for inquiry
Application complexity
Automation of transactions
Reliance on spreadsheets
Days to Close; Days to Report
Days to complete the budget
Company
ABC Org.
Comparing your organization to peer group and world-class performers

7. Purchasing Card Administration
Hackett’s Purchase-to-Pay advisory and benchmark services are based on this defined taxonomy
Travel & Expense
Purchasing Card Administration
Purchasing
Accounts Payable
Requisition processing
Purchase order processing and distribution
Supplier master file maintenance
Item master file maintenance
Receipt processing
Purchasing policies and Procedures
Supplier set-up
Pre-processing
Verification and approval
Electronic and paper processing
Discrepancy resolution
Payments
Customer inquiry and response
File, store and retrieve
Reconciliation, accrual & compliance
Travel advances
Travel expense processing/filing
Auditing
Payments
Reporting and analysis
Central bill reconciliation
Travel policy
Procurement cards
Travel cards
Combination cards

8. Characteristics of World-Class Purchase-to-Pay Organizations

9. World-Class Purchase-to-Pay Organizations Process Transactions for Significantly Less than their Peers x
The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

10. World-Class Purchase-to-Pay Organizations are Much More Productive than their Peers
3 - 4x
The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

11. World-Class Purchase-to-Pay Organizations Utilize Fewer FTEs than their Peers%
The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

12. World-Class Accounts Payable Organizations have Flatter Organizational Structures
23%
The Hackett Group Accounts Payable Benchmark 2005

13. World-Class Purchase-to-Pay Organizations Outperform their Peers across Most Dimensions
A third the cost to Process Transactions
Three to Four Times as Productive
Forty to Fifty Percent Fewer FTEs
Greater First-Pass Yield on Invoices

14. Selected Best Practices Driving World-Class Performance
End-to-End Accountability of the P2P Process
Automation of the P2P Process
Business Process Sourcing Strategy
Continuous Process Improvement and Standardization
Optimization of the Supplier Payment Strategy

15. End-to-End Accountability with Purchase-to-Pay

16. World-Class Accounts Payable Organizations are Aligned More Often with Purchasing than their Peers
2 x
The Hackett Group Accounts Payable Benchmark 2005

17. Hackett 2005 Benchmark Data
Organizations with P2P process ownership seem to outperform others in transactional process costs…with varying degrees
+ 140%
+ 22%
+ 11%
Cost per Order has not been updated
Cost per Receipt has not been updated
Hackett 2005 Benchmark Data

18. Hackett 2005 Benchmark Data
Similar to costs…it also seems that P2P process ownership is also having a positive enabling effect on productivity.
Invoice Line Items
Processed per FTE
Orders
Processed per FTE
-28%
- 55%
Orders Processed per FTE has not been updated
Hackett 2005 Benchmark Data

19. P2P process ownership does seem to enable process improvement across the end-to-end process…but again, it’s not the only enabler.
Percent of Organizations
Engaging in Selected P2P
Process Improvement Efforts
- 30%
- 52%
- 30%

20. Percent of Organizations
Even though stronger working relationships exist in with P2P process ownership…it isn’t a guarantee!
100%
25%
50%
- 43%
Percent of Organizations
75%
50%
- 75%
42%
12%

21. P2P integration and deployment of technology at various process points is higher, some only slightly, in those with process ownership.
“A difference of about 70% between the cost of processing an electronic transaction versus a paper invoice.” – Hackett AP Process Benchmark, October 2006
- 14%
- 51%
88%
- 50%
75%
65%
- 46%
- 1%
52%
33%
32%
22%
21%
20%
12%
Percent of POs disseminated electronically has not been updated
Percent of Organizations with electronic approvals has not been updated

22. Automation of the Purchase-to-Pay Process

23. Electronic focused Organizations have lower process cost and are more productive than their peers
+ 54%
- 57%
+ 57%
- 58%

24. World-Class Purchasing Operations Organizations Disseminate Purchase Orders Electronically Significantly more than their Peers 3x
The Hackett Group Purchasing Operations Benchmark 2005

25. World-Class Accounts Payable Organizations Leverage Electronic Invoicing and Payments Significantly more than their Peers
2 - 6x
The Hackett Group Accounts Payable Benchmark 2005

26. Continuous Process Improvement and Standardization

27. World-Class Purchase-to-Pay Organizations have a Standard Set of Procedures Across Businesses More Often than their Peers
The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

28. World-Class Accounts Payable Organizations have Reengineered Procedures to Minimize Low-value & Redundant Tasks More Often
2.5 x
The Hackett Group Accounts Payable Benchmark 2005

29. World-Class Purchase-to-Pay Organizations have also Consolidated Transactions and Spend to a Greater Extent %
The Hackett Group Accounts Payable Benchmark 2005

30. Business Process Sourcing Strategy

31. The Business Process Sourcing Decision is the final consideration on a journey of Process Improvement and Enablement Other steps ideally come first, and yield the greatest results

32. What factors are considered in sourcing decisions?
High
Non-Core
On-shore
Offshore
Near-shore
Non-Standardized
Standardized
Advanced
Skill Sets
Centralization
Risk to Accuracy/
Timeliness/
Quality
Low
Proximity to the Business
Company Knowledge Driven
Low
High
Strategic Importance
Intellectual Property
Management Decision Support

33. On-going Research – Business Process Sourcing Survey
Decentralized
Centralized / shared services – onshore within the country or region being serviced
Centralized / shared services – offshore at a lower labor cost location outside the country or region being serviced
Outsourced onshore or offshore – to a third party
Fully automated

34. Accounts Payable – Supplier Set Up: General trend away from Decentralized towards Centralization and Fully Automated

35. Accounts Payable – Pre-Processing: Move away from Decentralized towards Outsourced and Fully Automated

36. Accounts Payable – Processing: Move away from Decentralized and Centralized towards Outsourced and Fully Automated

37. Accounts Payable – Payments: Continued migration away from Decentralized with a move towards Centralization and Fully Automated

38. Accounts Payable – Inquiry Response: Continued migration towards Centralized, Outsourced, and Automated

39. Optimization of Supplier Payment Strategy

40. Should organizations take early payment discounts or should they push out terms? While it depends, some do both.
An organizations payment strategy must be linked to the overall corporate strategy
The payment strategy should be a product of collaboration between Procurement, Treasury, and Accounts Payable
The organizations cost of capital and cash position are primary factors in driving the payment strategy
Organizations should segment supply base based on their propensity to extend discounts (or supplier’s need for cash)
Technology like “Pay me know” functionality helps enable the payment strategy

41. Hackett research shows that the trends for companies has been an attempt to extend payment terms with suppliers
In 2004, 53% of organizations said that they expected to have standard payment terms of 45 days or more within three years
The median 2004 Days Payable Outstanding (DPO) figure was at 28.0 days (Excluding automotive)
42% of the US sector from 2003 to 2004 showed a deterioration in DPO, however

42. Based on a recent Hackett Group Survey, however, nearly half of the respondents said they actively pursue supplier discounts
However based on a recent survey the Hackett Group conducted nearly half the respondents said they actively pursues early payment discounts
There seems to be a disparity between what Organizations perceive they are doing versus what they are actually doing or can at least actually measure how they are doing

43. According to our benchmark, however, over 80% of companies are not Tracking Supplier Discounts Taken
Based on the Hackett Group Benchmark 80% of Organizations do no formally target and track supplier discounts taken as part of the key performance scorecard

44. Survey Results showed that organizations that actively pursue early payment discounts can reduce the bottom line by as much as $2 million per $ billion in spend
$2 million per $ billion in spend
This is striking when one considers the results of the survey which showed the advantages that Organizations that actively pursue such discounts can achieve over their peers
Based on a $billion of spend and some estimates for cost of capital, days reduction in working capital, and average discounts, the Hackett Group found that as much as $2 million could be reduced from the spend amount through supplier early payment strategies
This takes into account the cost of money
Based on study results, a 10% cost of capital, a 25 day reduction in working capital, and a 2% average discount

45. What is the Prompt Pay Discount Opportunity?
We believe governments are motivated to seek improvements and efficiencies, especially when significant value can be accomplished.
We believe there is a major, unrealized, opportunity to implement accounts payable improvement programs that target certain payee groups and can accomplish prompt pay discounts.
Major Payee Groups
Vendor Trade Payables
Employees
Other Governments (grants etc)
Recipients (such as Welfare, Unemployment, etc)
Beneficiaries (such as Pension, Worker Compensation)
Health and human service providers (such as Medicaid and social service provider organizations)
Bond holders
Customers receiving revenue refunds
Vendor Trade Payables
Suppliers already agree to contractual terms and already accomplish prompt pay discount
Suppliers already agree to contractual terms but not accomplishing prompt pay discount
Suppliers do not yet agree to contractual terms, but probably would if requested
In the past, considerable emphasis has been placed on ERP implementations to deliver business benefits for the larger organization, focusing on total cost of ownership reduction, integrated data model and end to end process integration. This has resulted in sub-optimal operations for specific functions.
The Accounts Payable function is often targeted as an area for cost reduction ; but is equally challenged to continually deliver process efficiencies.
Many accounts payable functions adopt discrete initiatives to address the symptoms of associated with an inefficient invoice to payment process (e.g. managing exceptions , avoiding late payment penalties) rather than holistic initiatives which target the cause inefficiencies.
Accounts Payable functions are seeking to add value back to the organization through improving the management of the invoice to payment cycle and delivering real value business value (e.g. business intelligence in payables, participation in supplier negotiations, realizing early payment discounts).
Considerable emphasis now exist in the market place for complimentary solutions which help an organization to improve the efficiency and effectiveness of managing payables.
Internal Pressures
Continued Cost Reduction: Drive to improve process efficiencies in invoice to payment process.
Compliance & Control: Renewed interest and rigor around process controls. In ability to process efficiently is viewed as a lack of internal controls.
Recognition that cost containment is insufficient : Must be seen to add value: Internal functions must offer compelling propositions to demonstrate its value to the organization.
Pressures to adopt other business models: Other organizations are demonstrating value and improved service delivery from shared services and business process outsourcing. To be competitive, AP functions must find new ways to demonstrate cost containment and value delivery.
External
Market – ERP & Niche Vendors : Renewed interest in Electronic Invoicing ; ERP vendors seeking new ways to add value to its client base through new electronic enablement solutions, challenged by niche players who are building credibility and critical mass in the market place (Xign, BottomLine Technologies, CheckFree).
Evolution of Credit & Collections Solutions: Debtors management capabilities have advanced significantly in recent times to allow sellers to manage its debt collection more effectively. In doing so, they are able to dynamically apply terms to seek early payment
Finance Supply Chain Integration: Financial institutions have traditionally had offering it invoice discounting but are increasing new solutions and partners to offer more comprehensive solutions.
Business Process Outsourcing: Organizations which support multi-client accounts payable operations are seeking new and innovative ways to reduce cost and add value to its client base. With the critical mass required to effect change,
Furthermore, we believe a combination of factors, organizational, process, and technology improvements, make this a feasible and realistic undertaking.

46. The Value Proposition: Hard and Soft Dollar Savings
Our hypothesis and business case is based on realizing “hard dollar” savings derived from actively managing early payment discounts. Additional and significant benefits arise from process efficiencies, and generate “soft dollar” savings.
Accounts Payable Optimization (Prompt Pay Discount Realization)
The generally accepted business practice for vendor trade payables is 2% discount if paid in 10 days, and full amount (no discount) if paid in 30 days
Most governments strive to make payments in 30 days
While this practice avoids late penalty interest, it does not harvest prompt pay discounts
Paying a vendor 98% the face amount of an invoice, representing full satisfaction of the amount owed, generates a savings to the government (slightly less than 2% due to interest income foregone)
Vendors already pay the equivalent to 2%, or more, to accept your P cards
Organizational and Process Reengineering and Automation
Decentralized and organizationally distributed processing locations causes higher costs for managing accounts payable and disbursements
Manual processing is responsible for a lot of the high costs of managing accounts payable and disbursements.
Many government business processes can be streamlined, in a manner consistent with leading practices, to reduce or eliminate the number of processing steps
Accenture analysis suggests that automating and streamlining the accounts payable process can save labor and overhead costs $10-15 per transaction.
Hard
Dollar
Savings
Net $30M
per billion in payment volume
Soft
Dollar
Savings
$8-15
per
transaction
event
Also, Suppliers benefit from quicker cash flow and easier payment processes.

47. The “Value Calculator”
We have developed a “top-down” model to estimate the magnitude of the opportunity in US State Government
Formulae Used
=Disc. Rate/(1- Disc. Rate)*365/(Std Days-Days Early)
Also valid:
[ (1+ Disc. Rate) ^ (360/(Std Day –Days Early)) ] -1

48. Questions or Comments? ? ? ? ?

49. For Further Information, Please Contact
Pat O’Connor
NASACT Association Manager
Lexington, KY
Ph:
Jim Anthony
Hackett Account Director
Chicago, IL
Cell:
Bill Kilmartin
Accenture Account Director
Boston, MA
Cell: