Top 10 KPIs in Purchase to Pay

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Susie West
Jun 30, 2020

For us to be successful, we need to know what success “looks like.” Often, we will define and design this “look” with our team and our customers (our stakeholders). We then need to time-table it and identify key milestones. Underpinning this structure are your KPIs. These are easy-to-access data points that tell you, in an instant:

a)     If you are on target and moving towards your milestones and overall vision of success, or veering off track

b)    Where possible problems exist in your operation

Often KPIs are muddled up with metrics. We hear of a company having as many as 130 KPIs in their finance operation. The “key” part of KPIs should be your chief consideration. Out of a sea of metrics, each of which tells a small part of the story, come your Key Performance Indicators – great beacons of information that, taken together, articulate the whole story. There is no ideal number of items for your KPI set, but it should be low enough that you can refer to them once a day, week or month quickly, and garner a full interpretation of the truth. This is different from pouring over hundreds of metrics to try to arrive at the truth…

We have pulled together 10 of the KPIs that you might do well to consider including in your P2P KPI set. When you draw up your own KPIs, make sure aach has a taxonomy – or a clearly defined scope – and that each captures one or more of the following measures: financials (cost or cash), efficiency, productivity, quality, speed.

1) Cost per invoice

If you're serious about cost reduction, then cost per invoice will be an important KPI. The clock starts ticking from the moment the invoice arrives at your organization, be it in your shared services center or somewhere in the business. The clock usually stops once the cost of payment has been incurred.

You will want to be able to determine your headline cost per invoice. You arrive at this figure by either: applying an activity-based-costing exercise and mapping out the life of each invoice type, then looking at the average cost; or by looking at the sum of all salary and IT costs incurred during the time from receipt of the invoice right through to payment, and dividing it by the number of invoices coming in from third party providers, over the space of a year. This sum gives you your average unit cost per invoice.

You will want to know the cost per PO paper, PO electronic, PO OCR’d, EDI, ERS, P-card, non PO paper, non PO electronic, etc, but these details may sit better in your metric report rather than your KPI report. Knowing all these costs is essential to your P2P operation, especially if you are charging your customer based on invoice type, or considering outsourcing, or interested in continuous improvement on your cost base.

2) First time match rate

When calculating this KPI, you are looking at the percentage of invoices that pass straight through the purchase to pay system first-time, without delay or manual intervention, from receipt of invoice to posting of invoice.

Often there is dispute among companies as to whether first time match (FTM) should encompass invoices where the PO has been raised “before the event” or “after the event.” The “purists’” view is that this KPI would apply the FTM rate only to invoices that have had a PO raised “before the event.” This is the taxonomy that represents the ideal. Raising the PO after the event is not considered best practice, hence should not be the hook on which to hang your KPI.

I think of FTM rate as a loaded KPI. If it’s high, and your invoices are matching with POs when required, it suggests you have a compliant, efficient operation, where internal buyers and external suppliers are supporting your process requirements.

3) Payment on time

This KPI has come under the spotlight in the past few years. During the credit crunch, payment on time was reported by Hackett to have dropped from 95% for the top performers in 2008 to 90% in 2009. P2P organizations seemed to become less interested in cracking it, and instead shifted their focus onto stretching payment terms and days paid outstanding.

Being able to pay an invoice on time represents a number of key characteristics essential for a healthy P2P operation. Chiefly, it means finance and procurement are working together. Procurement has negotiated terms that suit the needs of the business (hopefully fair – but not too compressed – and standardized terms, avoiding 30 different terms across a region); and finance is aware of the importance of meeting these terms and runs its part of the process accordingly, thus aiding procurement in their long-term relationship management.

Dynamic discounting has become increasingly popular in the past few years, and this concept relies on a) your ability to approve an invoice quickly and b) your history of paying on time. Suppliers will be loath to sign up and take an early payment deal in return for giving you a discount if you’ve been inconsistent, or just routinely bad, at paying on time.

4) Days to approve an invoice

If you are running a dynamic discounting program, or looking to bring one into your process, the one KPI that will be vital to forecasting success of your program will be the average number of days it takes to approve an invoice.

Rarely do companies pay an invoice early and take a discount without the invoice having been approved. If the invoice is pre-approved by a PO, that’s great – the invoice can be paid immediately and a discount can be taken. However, if your PO compliance is less than 50%, you are relying on the company’s speed to approve an invoice, in order to pay early and take a discount. This points to the crucial importance of having the infrastructure, namely a rules-based workflow, in place to secure alacrity in your process.

You will need to do the math on how much is being lost by the business because it can only approve an invoice in an average of, say, 12 days versus 8 days. On an annual basis, this 4 day difference might amount to millions USD if your aim is to meet the world-class figure for negotiated discounts captured (see below).

5) Negotiated discounts captured

The fruits from a dynamic discounting or approved invoice financing program can be significant. Financially, they can dwarf any other invoicing initiative you are working on. Best in class stats tell us that for every billion USD of spend, you can save $13 million by paying early. For a company with $4 billion of spend, this is a sizeable annual savings. So it’s in your interest to make sure that these discounts, having been negotiated by procurement, are indeed being captured by finance. 

This KPI, like several in the top-10 list, clearly reflects the alignment between procurement and finance. Procurement sets up the discount, finance makes it happen. It’s a true partnership. Occasionally, a business may want to “dial down” on the early payments, should working capital be more important than profit, but if your working capital context remains steady, this KPI is one to track with an eagle-eye.

Finally, aim for negotiated discounts with all suppliers on all invoices and build on a low capture rate, rather than negotiating on a slither of invoices and suppliers and boasting a high capture rate. Keep in your sights the best in class figure of $13 million savings per billion USD of spend, and build your program and KPI plan according to this possibility.

6) Productivity per FTE

One of my personal favorites, this KPI is “loaded,” which means it gives you a very rounded view of your P2P organization. Many KPIs need to be seen as a pair. For example, “Cost per Invoice” is not always useful in isolation – you may have off-shored your invoicing process to a very low-cost location, but the process may still continue to be inefficient. Looking at the “Cost per Invoice” KPI alone may not give you a rounded view of your P2P organization’s health.

The “Productivity per FTE” KPI does. This KPI represents the number of invoices processed over 12 months per full-time equivalent (or staff member). When making the calculation, the generally agreed approach is to take your purchase invoice volume, including all invoice types (say this totals 500,000) and divide it by the number of staff in your accounts payable department (say 35 FTEs). This gives you a figure of 14,285. Some companies are inclined to make the volume divisable by the number of “keyers” only. However, it is recommended that you include all people in accounts payable, because the more efficient your process, the fewer people you actually need in your wider AP orgaization.

Below-average productivity is under 10,000 per FTE. Fair to good productivity is between 10,000 and 25,000. 25,000 to 50,000 per FTE suggests you have high PO compliance, great match rate and high automation/electronic levels. Companies that are at the 50,000 to 100,000 level are considered to be in the world class bracket, and have exceedingly high levels of electronic invoicing.

7) Percentage of invoice-less or electronic invoicing

Most shared services organizations have begun their electronic invoicing journey. Although figures representing e-invoicing adoption globally are not yet at “wow!” level (data suggests that out of all the invoices transacted globally, only 20% are electronic), it is vital to channel focus into increasing the number of invoices converted to electronic or converted to invoice-less (ERS or self-billing transactions).

Although it may be true that the direct financial benefits of e-invoicing or invoice-less processing are not as significant as the projects they enable (like supply chain financing and dynamic discounting), e-invoicing is fundamental to the scalability and sustainability of your P2P organization. E-invoicing sits at the core of your invoicing process’ health – nearly all your KPIs can be influenced by this one KPI.

8) Percentage of touchless invoices

Touchless processing is your P2P nirvana. It tells of high PO compliance, high electronic invoicing or invoice-less processing, high first time match rate and high payment-on-time. Touchelss processing is not the same as electronic. “Touchless” represents the transactions that match first time and need zero human intervention (sorry – workflowed transactions not included). This could be considered the King of KPIs, and should most definitely be in your P2P KPI set.

9) Number of suppliers per 1,000 invoices

These last two KPIs sit squarely in the “leading” KPI set. A leading KPI is one that tells you that trouble could be ahead if this KPI’s on red. Many KPIs we all work to are “lagging,” telling us that trouble hashappened when we see red on our dashboard. In a perfect world, more of our KPIs would be leading, so be aware if too many of your KPIs are the lagging kind.

A slim-lined vendor master database signals good P2P health. It suggests finance and procurement are aligned, that you likely know the health of all your suppliers, that you have worked your suppliers through a tendering process, and that these suppliers have offered attractive terms of business. It also suggests you have a plan to avoid OTOV (one time only vendors), which are costly to manage ($150 or more to set up).

A manageable number of suppliers also means you are likely to have “supplier knowledge,” which is great for all the P2P programs that affect and involve your suppliers, such as e-invoicing, supplier portal programs, supply chain financing, p-card programs, and PO compliance programs. The smaller your supplier base, the cleaner these programs are to manage – and the higher the chances of success.

10) Spend under management

Are you keen to have a clearer view of what your cashflow will look like in 60 days from now? To get an accurate image, you need to see that the percentage of spend that is captured at the time of purchase is as high as possible. During the credit crunch, the percentage of spend outside management was worryingly high. Senior executives panicked because revenues were dropping, but they had little idea as to what their liability line looked like for the next 60 days, and to what extent their profits would feel a squeeze.

Control is a huge driver for finance today, and is engendering a positive collaboration between finance and procurement. With procurement channelling more spend through the purchase order process, and with preferred or listed suppliers only, you then get to enjoy: leveraging of purchasing power, accurate cashflow forecasting, high PO compliancy (and therefore high first time match rate down stream), and high productivity.

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