Chapter 4 – Hell is a Forty Page Spend Policy
A vendor has contacted you to complain that they have not been paid for services performed. Since the firm has no avenue to contact the firm about the matter, they have suspended services until paid. In addition to billing you for services performed, they have included fees for time spent trying to collect their money.
Individuals in Purchasing and Accounts Payable belong to a class of operators that can be helpful and who do add value to every function in a company. Customers actually respond with statements like “Can you really tell me who has spent what money over the last two years? Can I use this card to purchase everything I need for the job? Do you know the per hour market rate for event marketing coordinators in San Jose and Denver?” A minority of executives understands that the procure-to-pay teams are not just a necessary cost center but a valuable tool. Procurement teams should offer as much information about what you purchase as you allow to accumulate. The more you know, the better decisions you can make.
But within the corporate environment, individuals often treat knowledge as property to be protected and defended. Knowledge is seen as a precious treasure that allows them to rise in the pecking order. As a result, they focus on personal metrics, a bias that is often not in the best interest of the Company. This bias is reinforced by narrowly defined objectives. For example, employees on Purchasing and AP teams can be led to believe that they are the only individuals who can prevent fraud or save money. At worst, they begin to behave as if enforcing bureaucratic controls are acts worthy of distinction and job validation.
Instead of creating a maze of complex rules, Purchasing and AP teams should be focused on providing service, purchases and payments with the least amount of friction possible. Teams should not be incentivized to take actions that optimize local objectives that are not in the best interest of the Company. Many back office teams in fast growing businesses have as many personnel allocated to reviewing expense reports and credit card payments as monitors who focus on why vendors were overpaid, unpaid, paid late, or paid for discontinued services. Employees are rewarded for finding math errors on an expense report instead of ensuring that services, especially from utilities and landlords, are not cut off. Unsurprisingly, this misallocation of resources leads to planning errors and strained relations with key vendors and partners.
What are the objectives of good customer service? First and foremost, a good procure-to-pay team makes it simple for employees to purchase the goods, services and property necessary to run a business. They should make a specialty of capturing and classifying cost elements so that managers can effectively assess the results of their operations. Also, paying bills should be a nominal concern to business managers, only to the extent that they confirm services or goods were received at the appropriate price and time requested.
So how do you get to simple? You ask “why” until you get to the root cause of friction – time constraints. Focusing on time is a straightforward way to identify problems in your process. The question of “why can’t we pay all requests for payment, within two weeks after their submission,” is a place to start. Asking this question quickly identifies deeper and often unexpected issues.
At the center of asking “why” – and the reason it’s so effective – is a basic insight: We think more deeply about the choices made every day. Choices are not limited to working longer hours, but rather about working smarter and paying more attention with regard to cost and the internal controls of your team. “Asking why,” in the context of time targets, empowers back office teams to take initiative, experiment, and improve current processes.
“Asking why,” in the context of time constraints, allows individuals to challenge standards and policies without making it personal. If the principal aim is to reduce time to perform a task, awareness of a problem will become self-evident without offending. Explain how written support for purchases, in the context of classifying expenses, avoiding duplicate payments, and preventing fraud, actually saves time and money for employees and the company. What employees usually do not understand is how much brain-numbing work goes into verifying purchases and classifying the purchase data. However, what they do understand is the pain and effort required to obtain documentation or explain how fraud could occur to their auditors at the end of the year.
There are a few self-evident problems that “asking why” will usually address: overly complex Signature and Spend or Credit Card policies, purchasing teams that treat vendors as adversaries, a voluminous maze of purchasing requirements, failures to implement a scalable expense report system, and attempts to detect fraud through brute force instead of using tools or analytics to prevent it.
If you are looking for a quick win, procurement is a good place to start. Improvements to the procurement process are quicker and easier to implement than improvements to other areas. And, much like improvements to payroll, employees appreciate getting reimbursed for their expenses as quickly as possible.
- Takeaway questions:
- How many vendor accounts are past due over 60 days or overdue? How many of these accounts relate to disputes?
- How many pages are your purchasing policies? Do employees have access to the policies?
- Were any commitments made this year without proper approval? What amount is potentially due related to these commitments?
- How many hours a month do back office teams spend reviewing expense reports? How many reports must be re-submitted and what is the dollar amount of the errors found each month?
- Have you encountered a similar problem? How did you deal with it? Share your story.