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

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

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

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

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

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

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

Characteristics of World-Class Purchase-to-Pay Organizations

World-Class Purchase-to-Pay Organizations Process Transactions for Significantly Less than their Peers 2.5 - 3x The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

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

World-Class Purchase-to-Pay Organizations Utilize Fewer FTEs than their Peers 40 - 50% The Hackett Group Purchasing Operations and Accounts Payable Benchmark 2005

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

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

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

End-to-End Accountability with Purchase-to-Pay

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

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

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

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%

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%

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

Automation of the Purchase-to-Pay Process

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

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

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

Continuous Process Improvement and Standardization

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

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

World-Class Purchase-to-Pay Organizations have also Consolidated Transactions and Spend to a Greater Extent 40 - 60% The Hackett Group Accounts Payable Benchmark 2005

Business Process Sourcing Strategy

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

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

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

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

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

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

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

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

Optimization of Supplier Payment Strategy

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

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

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

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

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

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.

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.

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

Questions or Comments? ? ? ? ?

For Further Information, Please Contact Pat O’Connor NASACT Association Manager Lexington, KY poconnor@nasact.org Ph: 859-276-1147 Jim Anthony Hackett Account Director Chicago, IL janthony@thehackettgroup.com Cell: 312-543-6938 Bill Kilmartin Accenture Account Director Boston, MA william.kilmartin@accenture.com Cell: 781-367-9576