Source to Pay 2.0: Using Smart Enterprise Processes to Drive Global Effectiveness in S2P
3 likes2,252 views
This document discusses how procurement organizations can achieve higher effectiveness and better business outcomes through the use of smart enterprise processes. It outlines that effective organizations focus on outcomes rather than just efficiency, and achieve performance levels 2-3 times higher than average organizations. The document then introduces Genpact's Smart Enterprise Processes methodology, which takes a scientific approach to creating smarter processes that drive greater effectiveness across the source-to-pay lifecycle. Key aspects of the methodology include establishing clear linkages between activities and desired outcomes, managing processes at a granular level, and removing non-value adding activities. The methodology helps organizations achieve significant improvements such as 30-40% increased spend visibility and 5-10% reduced working capital.
Source to Pay 2.0: Using Smart Enterprise Processes to Drive Global Effectiveness in S2P
- 1. PROCUREMENT SERVICES Source to Pay 2.0: Using Smart Enterprise Processes to Drive Global Effectiveness in S2P Best-in-class sourcing and procurement generates a lot of talk. However, only a very small number of companies achieve elite status wherein their sourcing and procurement organization delivers the highest possible global effectiveness, whether measured in lower total cost of ownership (TCO), higher working capital, or availability of materials. These “intelligent enterprises” are focused on achieving better overall business outcomes—the underlying principle of Genpact’s science-based Smart Enterprise Processes (SEPSM) methodology. The Difference Between Effective...And Not Elite sourcing and procurement organizations achieve their status by focusing on process effectiveness rather than simple efficiency. This enables them to extract maximum value from virtually every aspect of their source-to-pay (S2P) process. A focus on better outcomes ensures that every sub-process – every activity they perform – is consciously and specifically designed to help the enterprise achieve its desired business goals. This intelligent approach is validated by both empirical research and qualitative evidence showing that best-in-class sourcing and procurement organizations achieve performance levels that are – at a minimum – two to three times higher than average organizations. For a typical $5 billion revenue company, that can mean a spend reduction of $50-150 million over three years and a margin increase of between 100 and 300 basis points (Fig 1). FIGURE 1: SIGNIFICANT VARIATION IN AVERAGE Vs . BEST-IN-CLASS PERFORMANCE IN DRIVING SPEND REDUCTION AT STEADY STATE
- 2. Unfortunately, while many sourcing and procurement If your answer to one or more of these questions is negative, organizations pursue strategic transformation and continual Smart Enterprise Processes (SEPSM), a proprietary Genpact performance improvement of this kind, the vast majority never methodology for business process management, may be the achieve it because they: key to unlocking the strategic value in your source to pay • Fail to set enterprise-level strategies for identifying and function. systematically working toward desired business outcomes • Overemphasize process efficiency measures – cycle time and Connecting the Global Enterprise productivity, for example – while underemphasizing measures Smart Enterprise Processes is a scientific approach to creating of real S2P process effectiveness such as cutting costs and a more intelligent enterprise, turning common processes into optimizing working capital smarter processes that drive greater effectiveness from end • Overemphasize technology while underemphasizing process to end of the S2P lifecycle and across the enterprise. Built • Neglect to manage, measure, control and remove waste and on the principles of Lean Six Sigma ingrained in Genpact’s variation from their source-to-pay sub-processes and activities heritage since our founding as a captive of GE, SEPSM The First Step Toward More incorporates a compendium of leading practices, performance benchmarks, diagnostics based on analytics, and risk Intelligent S2P mitigation. It is a complete toolkit comprising policy, process, To evaluate whether or not your sourcing and procurement controls, information technology and ongoing performance organization is on a path to S2P 2.0 performance—or the next management that consistently delivers two to five times the level of S2P performance—answer these questions: end business outcomes when compared to processes that run • Are we aware of what performance levels are possible and at average or below. truly best-in-class for companies of our type? • Do we distinguish between process-efficiency and process- A hallmark of an intelligent enterprise is its ability to connect effectiveness measures? stakeholders, customers, and vendors by providing visibility, • Do we approach our source-to-pay sub-processes – spend access and transaction capability from anywhere in the analysis, category strategy, sourcing, negotiating and world. In this regard, a critical challenge for most companies contracting, procurement and payment – as interrelated and is approaching source to pay at a truly enterprise level. Let’s interdependent? say that a sourcing and procurement organization sets out to • Do we evaluate and adopt proven best practices for source to achieve the business outcome of reducing its TCO. However, pay? in its approach, the organization makes the common error • Do we manage and measure process execution at a granular of treating its source-to-pay sub-processes as discrete rather level and link it to business outcomes? than interrelated parts of a connected whole. In doing so, it • Do we focus on removing variation in source-to-pay process risks losing value at virtually every process handoff, as shown execution and outcomes? in Fig 2. So while the organization might succeed at delivering • Have we standardized and simplified our source-to-pay a lower TCO, it falls far short of delivering the lowest possible processes, sub-processes and key activities to reduce the total TCO. number of process steps and eliminate non-value adding activities? FIGURE 2: EVERYTHING IS RELATED AND INTERCONNECTED
- 3. Using Smarter S2P Processes to scientifically – draw linkages between their many daily activities Increase Working Capital and the business outcomes they are trying to affect. While they may achieve a certain level of success, their achievements While cost savings is a primary focus of many procurement come more or less by trial and error, and so are not predictable, organizations, freeing more working capital is increasingly the replicable, or sustainable over time. A good example of this can focus of many businesses. SEPSM’s holistic approach succeeds be found in electronic procurement. Sourcing and procurement in reducing working capital requirements by intervening across organizations frequently acquire e-procurement technology but sourcing, procurement and supplier payment processes. fail to ensure that the technology is used, and used effectively. Businesses that follow a siloed approach are destined For instance: to achieve suboptimal performance, while best-in-class • When companies don’t measure percent of spend under performance driven by agile, connected processes can unlock e-procurement, they get low adoption. significant cash. For every $1 billion in spend, a business that • When they fail to implement standard procedures and policies transitions from median to best-in-class can unlock $200 across their organization, they get inconsistent outcomes. million in cash – a significant business impact. • When they don’t employ standardized, high-quality catalogs wherever possible, they get inefficiencies. For example, favorable contract terms are often negotiated by • When they don’t train the organization properly they get poor, the sourcing organization, but inadequate vendor-master data inconsistent and even negative-impact results. controls result in incorrect terms being set up in transactional systems. Further, payment terms in contracts are often not Similar problems exist in electronic sourcing as well, where referenced while processing non-PO invoices. In fact, payment the acquired e-sourcing technology doesn’t match up to terms are often simply overridden in accounts payable expected outcomes. For example, when the organization fails functions where there is pressure to clear backlogs. Insights to implement a standard process for structuring e-sourcing from payment analytics focusing on metrics like weighted events, it results in inconsistent event outcomes. And as with average payment days often show wide disparity between e-procurement, inadequate training of the organization can payment terms being negotiated and actual data in accounts engender poor, inconsistent and even negative-impact results. payable systems. All of these negative outcomes impede the organization’s Typically in large companies with complex buying needs, only ability to achieve its ultimate business outcome, which is a 60-70% of supplier invoices are paid on time. SEPSM evaluates lower TCO. What’s more, without establishing clear lines the efficiency of the accounts payable function to determine of causality between activities and outcomes, it’s virtually and improve its readiness to pay from the day an invoice is impossible for the organization to set aggressive (but realistic) received. performance objectives, track progress against those objectives, and actively undertake the initiatives that will achieve the By paying on time, companies place their sourcing and objectives in the desired timeframe. Other challenges include procurement organizations in a strong position to negotiate identifying what to measure, understanding how various extensions of payment terms, thereby reducing their working metrics link together to influence desired business outcomes, capital requirements by as much as 2-3%. For a company with and designing metrics that drive desired business outcomes an annual spend totaling $500 million, this would amount to without stimulating unexpected or workaround behaviors. $15 million more cash in hand. Based in Lean Six Sigma and drawing from deep Companies employing the SEPSM methodology can very often operational experience and expertise across 30 negotiate additional price reductions of 1-2% by going one industries, 600 customers, and over 4,500 business step further and paying suppliers early. Typically, 10-15% of processes, the SEPSM methodology replaces trial and error a company’s existing supply base is willing to provide early with a proven, scientific approach. payment discounts rather than borrowing capital at high interest rates. The Smart Processes Difference SEPSM breaks the enterprise source to pay process first into As these examples illustrate, the SEPSM focus on business sub-processes and then into activities, mapping complex sets outcomes takes the intelligent organization far beyond simply of linkages to make certain that all activities and processes are assembling cross-functional teams to foster cooperation executed with the single-minded objective of delivering the among discrete corporate functions. Rather, it seeks a true desired business outcome, as in Fig 3 below. integration of formerly discrete functions into a seamless end-to-end process view. It digs deep into S2P processes and To provide organizations with a clearer strategy for setting process gaps, and uses metrics and analytics to make certain objectives and attaining goals, SEPSM documents – at each that the value achieved in one process step is fully preserved level – key performance measures or drivers that, when tracked and carried through to the next. consistently, enable full visibility into progress. It also creates an Linking Activities to Outcomes Drives ongoing ability to pinpoint where processes may be breaking down and threatening to affect performance and business Better Performance outcomes negatively. Strategic sourcing and procurement groups destined for mediocrity also typically neglect to systematically – and
- 4. FIGURE 3: A HOLISTIC, GRANULAR FRAMEWORK FOR MANAGING BUSINESS PROCESSES Taking the Enterprise to S2P 2.0 Proven Processes, Proven Results Operating in a vacuum, our hypothetical sourcing and By applying the SEPSM methodology correctly and completely, it procurement organization will assemble its own proprietary is possible for a company to achieve: mix of policies, perceived best practices, process changes or • 30-40% increase in addressable spend visibility, leading to a enhancements, procurement skill sets, and technology tools. 3-4% increase in total savings capture Very often it will succeed in delivering better performance. • 20-40% reduction in maverick spending, leading to a 1-3% There is no guarantee, however, that the organization is increase in year-over-year savings capture making all the best choices that will create a more globally • 5-10% reduction in working capital requirements effective and sustainable process. The path to S2P 2.0 requires • Incremental ROI on existing IT and ERP investments a set of proven choices resulting in processes that deliver better • Lean processes with virtually no non-value adding activities business outcomes in a more sustainable, repeatable manner. and consistent execution approaching Six-Sigma levels of One critical challenge to creating a more effective S2P performance (for example, process compliance at 4.37 Sigma) function is lack of access to competitive benchmarks or gold standards for S2P process performance by which sourcing and This intelligent application of outcome-focused smarter procurement organizations can set objectives and mark their processes can lead to a 2-3% increase in year-over-year cost achievements. SEPSM solves this challenge by drawing upon, savings by raising cross-functional alignment to a point where and continuing to populate, a deep knowledge base that many non-price levers can also be addressed effectively. For a already includes sourcing and procurement benchmark data very large company, achieving or even approaching S2P 2.0 for: performance levels through SEPSM can translate into millions • Three S2P business outcomes – even billions – of dollars that can be either banked or • 30+ S2P performance measures strategically reinvested. • Over 100 S2P performance drivers • A compendium of 200+ leading practices Driving down TCO and achieving a best-in-class source to pay • A toolkit comprising nine discrete diagnostics tools function is not a matter of luck, but of conscious focus on the prize: a more intelligent enterprise that combines innovative The knowledge base contains operational metric drilldowns, technologies with superior analytics and “smart” processes. which draw detailed linkages between business outcomes What emerges is an organization that is better connected from and process metrics. The “best practices” compendium end to end, adapts quickly to challenges, and is able to contain includes “How To’s” for each practice. An ”insight” database costs while delivering superior performance over the long term. comprises accumulated knowledge regarding the true drivers For more information of business value. These information sets enable a sourcing and procurement organization focused on driving effectiveness Peter Sowrey to conduct a diagnostic to assess their current state. The Vice President peter.sowrey@genpact.com diagnostic is a combination of: a. A data-intensive quantitative phase which analyzes various Isabelle Cole Vice President data sets from the source-to-pay systems and compares them isabelle.cole@genpact.com with peer groups b. A qualitative aspect that is collected through a series of www.genpact.com Copyright © Genpact 2011. All Rights Reserved focused interviews with sourcing, procurement and payables team members as well as stakeholders within the business The diagnostic enables the organization to understand both the gaps and the measures required to close them in a phased manner, employing a combination of process reengineering, shared services, analytics and technology interventions. The roadmap that emerges helps the organization move rapidly to a point where they are delivering results rather than wasting time and expense trying to assess, acquire and adapt what may or may not be best practices.