Procurement is becoming more and more digital and for good reason: McKinsey estimates that companies can automate 36 percent of their procurement processes using technologies that are already available today. For example, many procurement departments have begun to digitally transform their procurement-related processes with purchase-to-pay software.
By digitalizing procurement, you can make the entire purchase-to-pay process leaner, more transparent and more efficient. As is so often the case, however, the devil is in the details when it comes to this topic: many companies only digitalize parts of all relevant processes. The result is media discontinuity between digital and analog data processing, which creates the dreaded data sinks and data silos and negatively impacts all downstream workflows.
Perfect Use Case: Digitalization of Incoming Invoice Processing
A good indicator of the quality of the purchase-to-pay process in a company is incoming invoices. This is because, beyond the purchase-to-pay process, customer invoices are of great importance for cash flow within a company and enable major efficiency gains through digitalization. These 10 important key performance indicators (KPIs) for the P2P process will show you why this is so and how you can better assess the status of your procurement digitalization in your company.
KPIs are business performance indicators that help a company to evaluate the course it has taken. KPIs are not an end in themselves, but should always be understood as a compass that enables changes in your own company to be documented, rationally evaluated and compared with other companies in the industry. In the best case scenario, KPIs help you to get an indication of efficiency deficits, detect hidden costs and optimize your business processes.
1. Cost Per Invoice
At first glance, the cost per invoice is one of the most important KPIs that can be determined in the accounts payable department. Put simply, it quantifies the average total costs incurred by a company in processing an invoice. However, when evaluating this KPI, you must keep in mind that this value can vary greatly from business to business as in some cases very different factors are taken into account when determining this KPI.
If you want to determine the costs per customer invoice, the KPIs must adequately reflect all factors. For example, the labor and operating costs incurred include expenses for personnel, administration, IT, printing and mailing, but also costs arising from billing errors and late payments, lost supplier discounts and any audits that may be required.
In doing so, make sure that you include the human factor in the cost calculation for paper-based P2P processes, e.g. by taking into account additional effort for correcting errors. When evaluating the digitalization of the purchase-to-pay process, you must keep in mind that the investment costs resulting from the digitalization measures may initially increase the cost per invoice. However, some of these investments will increasingly pay for themselves over the next few years and lower the “cost per invoice” KPI even further.
2. Invoice Processing Times
In order to better classify primary KPIs such as cost per invoice, it’s helpful to use secondary KPIs, such as invoice processing times. They give you information about the efficiency of your purchase-to-pay process or incoming invoice processing. Different cycle times can be of interest here:
- The cycle time of the entire invoice processing. How long is the average cycle time that a process takes in total, from receipt of invoice through to verification and payment release? The point here is to evaluate not only the individual technical process steps, but the entire P2P process. The cycle time provides you with information on how targeted and efficient your accounts payable department is as a whole. By way of comparison, according to a survey by benchmark experts APQC, this value across the industry is an average of around 15 days.
- The duration of the individual process steps. How long does a single invoice processing step take on average? You can compare the individual steps or add up all the times from receipt of the invoice through the various stages of verification to release and payment of the customer invoice. Even a test with a few documents will give you good insights into the technical effectiveness of your invoice processing. This way, you can also check what influence the digitalization of individual steps has on the effectiveness of invoice processing.
3. Average Payment Period
Another KPI for managing the P2P process is the average payment period. This comprises the average period of time that elapses between receipt of a supplier invoice and its actual payment in a company. The average payment period is calculated by dividing the average accounts payable by the cost of sales (cost of materials plus input tax) multiplied by 365 days.
By comparison, the average payment period for companies in the S&P 1500 Index was 48.4 days in 2019. Ideally, a company’s average payment period should be longer than its accounts receivable cycle time in order to have a positive internal cash flow (cash conversion cycle) and more financial resources available. Digitalizing the purchase-to-pay process allows you to improve the average payment period by flexibly adjusting the relationships with your suppliers in a data-driven manner with a view to the respective payment terms.
4. First-Time Match Rate
If the purchase-to-pay process is set up as seamlessly as possible, from the order and invoice receipt to posting, only a few manual interventions in the payment cycle are necessary and the process can run without delays. How well this process is set up in your company is revealed by the first-time match rate (FTMR). It’s calculated using the percentage number of matching invoices with the associated purchase orders divided by the total number of all processed invoices (purchase orders) in the accounts payable department in a given period.
The higher the percentage value, the more effectively customer invoices are handled in the P2P process. A low first-time match rate is usually related to a missing link between purchase order and purchase order processing. Reasons for this can be disruptive media breaks, (too) many manual steps in the purchase-to-pay process, inefficient internal communication between finance and procurement, or insufficient technical quality in the digitalization of documents. It may be helpful to check again for which invoices 3-way reconciliation is necessary and for which purchase orders 2-way reconciliation is sufficient.
5. On-Time Payment Rate
The on-time payment rate records the percentage of invoices for which you pay your suppliers on time. A streamlined P2P process enables the accounts payable department to time invoice payment deadlines precisely so that they are paid at the best possible time – neither too early nor too late – enabling your company to have optimal cash flow while maintaining positive supplier relationships over the long term.
Incidentally, one common reason for late payments – in addition to a number of other sources of error – has to do with problems in the incoming goods inspection process. In many cases, a paper delivery note often still has to be acknowledged and reconciled with the goods before the transaction can be forwarded to procurement. This error-prone process, in conjunction with the 3-way reconciliation that is usually necessary here, often leads to payment delays.
6. Realized Cash Discount Rate
Another performance indicator that is closely linked to on-time payments is the cash discount rate: how many discounts did your procurement staff negotiate and how many of these negotiated discounts could actually be realized in the purchase-to-pay process?
In contrast to other payment processes, it’s particularly annoying when your accounts payable system fails. Not only does your company miss out on cash that could otherwise be booked as profit; your employees in procurement have also previously invested valuable working time in order to negotiate special conditions for the payments of goods with suppliers.
By the way, according to a P2P benchmark study, only 10 percent of all companies actually manage to convert at least 80 percent of all negotiated discounts into revenue due to a poorly organized P2P process. To become best-in-class here, you should digitalize your workflow so that you can automatically match your orders with invoices and goods receipts.
7. Duplicate Payments Rate
This KPI serves as the litmus test for the error-proneness of your accounting. Duplicate payments can be caused for quite trivial reasons: typing errors and copy-and-paste mistakes in your accounting department or on the part of the supplier. In extreme cases, fraud may even be behind it. Whatever the reason, duplicate payments are not only annoying; they can also grow into larger amounts for smaller sums and installments in the hundredths of a percent range, as well as consume cost-intensive resources and grate on the nerves of colleagues in accounting.
It’s very easy to drastically reduce duplicate payments with the help of digitalization. In the digital purchase-to-pay process, you can build in various control mechanisms that take effect at different points and put an end to typos or fraudulent manipulation in the accounts payable department.
8. Supplier Rate Per 1,000 Invoices
This KPI gives you a transparent overview of the structure of your supplier network. A master database with a small value of suppliers is one of the surest indicators that your entire purchase-to-pay process is well structured. This is because a smaller number of suppliers indicates that procurement is acting transparently when negotiating contracts, has lower administrative costs and enjoys an excellent overview of all suppliers.
To make this possible, you should make sure that supplier data is clearly prepared so that it can be accessed transparently even at line item level. The prerequisite for this is a digitalized purchase-to-pay system in which all relevant data converge in one and the same system and can be analyzed there.
9. Automatically Processed Invoices Rate
This KPI measures the percentage of all invoices that enable a fully automated invoice flow. This key performance indicator records how far you and your suppliers have already come on the road to electronic invoicing. The rate of fully electronically processed invoices is therefore the KPI that best enables you to see over time how much progress you’ve already made in digitalizing procurement in your company.
10. Contactless Invoice Processing Rate
Contactless processing includes all operations that pass through the purchase-to-pay process entirely without human intervention. At first glance, contactless processing could be equated with automated invoice processing, but this is wrong. What is measured here is how many transactions pass through the P2P process without any additional work, e.g. work caused by the fact that the invoice must be matched with the purchase order, a contract or master data. Contactless invoice processing also includes all processes that mean manual entries are no longer necessary in accounting.
The contactless invoice processing rate is therefore, in a sense, the KPI that distinguishes a modern and effective procurement department: the higher it is, the more successful your company is on its way to digital transformation.