“You can’t manage what you can’t measure” is one of the oldest clichés in management, but that may be because it’s true – especially when it comes to purchase to pay, the process of requesting, purchasing, receiving, paying for and accounting for goods and services.
But which are most critical? Susie West, TK of online outsourcing community sharedserviceslink.com, has shared her top ten key performance indicators to measure the health of your purchase to pay organization. We’re curious to hear how this list compares to yours, and what (if anything) you’d change.
1) Cost per invoice, taking into account:
Do you include the cost to create purchase orders?
Where do you start the clock ticking, –i.e., from invoice receipt or earlier?
Do you just include staff costs and some technology but ignore office space, desks and your ERP costs?
Do you average out all invoices (purchase order and non-purchase order) and all receipt methods (EDI, paper, e-invoicing, ERS, P card, OCR)?
2) First Time Match Rate, taking into account:
What does first time match mean to you?
Does creating a purchase order retrospectively count? (Probably not.)
Must all your product purchases have a goods receipt note?
What are your tolerances? If you stretched your tolerance how would that impact FTM?
How do you define FTM for non-purchase order invoices?
3) Payment on Time, taking into account:
How many terms do you have?
What is your average payment term?
If your average payment term is 90 days, what does this KPI actually tell you?
4) Productivity per FTE, taking into account:
This generally looks to include all accounts payable invoices (whether electronic or manual) divided by the total accounts payable headcount, (i.e., 120,000 invoices per annum divided by 10 people in the accounts payable team, means the productivity is 12,000 per FTE per annum.)
This is my favorite KPI, telling you a lot about the efficiency of your process.
Should master vendor and supplier query teams be excluded from these calculations? No. The productivity KPI tells you how efficient the whole of accounts payable is, so all teams need to be included.
5) Touchless invoices
This is a powerful KPI, and it doesn’t just mean electronic. It means electronic and straight through processing — (i.e., matched the first time).
This is the KPI that all shared services organizations are looking to boost either today or in the future.
Like the productivity KPI, it is loaded. If you have a high touchless process, productivity will be high, costs will be low, first time match and payment on time will be high. It’s a KPI that tells a full and accurate story.
6. Discounts captured, considering:
The US is all over discounting, and Europe is following. Not at the speed of light, but there’s a shift which is thankfully not glacial.
This awareness comes from alignment between procurement and finance.
If 10% of your spend has discounts enabled, how much of this are you taking?
How much is procure to pay saving/losing because of discounts captured/not captured?
How can the spend under discount be stretched?
7. Number of suppliers per 1,000 invoices, considering:
This is not always included in shared services’ top ten, but it helps put the focus on keeping the vendor master database lean.
It also helps you keep duplicates down, which thus helps procurement leverage the information to negotiate better contracts.
8. Spend under purchase order, considering:
This KPI became increasingly important in 2008 when the economy nose-dived and CFOs had little idea of what their true liabilities were.
Spend under purchase order feeds into cash flow forecasting which can help keep a company afloat.
The detail of your liabilities should determine what your days sales outstanding and days paid outstanding should be.
9. Days paid outstanding, considering:
For the last three years companies have been stretching their days paid outstanding and looking to shorten days sales outstanding so as to inflate working capital.
This is one reason why corporations are currently sitting on mountains of cash.
Awareness of days paid outstanding and how it feeds into working capital management is one way shared services is becoming more of a value-added service.
Question: What serves you more right now – stretching days paid outstanding or taking discounts through early payment?
10. Percentage of invoices in query, considering:
This gives you a pinpoint view of how efficient all users are being in the purchase to pay process – those that generate the purchase order, book in the goods receipt note, raise the invoice, and approve the invoice.
Analysis of this KPI normally tells you which part of the business is undermining the process.