Many established companies use Key Performance Indicators (KPIs) as a way to measure the success of a particular activity that it is engaged in. The Procure to Pay Cycle is an important component to many businesses – and establishing a measure of it’s success is essential.
Cost Per Invoice
The cost of managing an invoice depends entirely on the internal processes an organization has established. An established, well-oiled procurement function will greatly improve the efficiency of the procure-to-pay cycle, reduce costs and help prevent errors. Most companies with procurement departments using procurement software are able to significantly lower their costs, when compared with those who are still managing invoices on paper. The cost per invoice is measured based on the amount of time an employee spends on drafting an invoice. This responsibility usually belongs to the accounts payable department.
The Institute of Finance and Management recently published a survey that found that most companies spend an average of $11.85 per invoice, while the top 20% of respondents, all of which use an automated invoicing process, spent $1.44 per invoice. These results are staggering – they clearly show that companies using automated invoicing processes significantly lower their cost per invoice.
First Time Match Rate
First time match rate (FTM) is the measure used to determine the accuracy of the three way matching process. Three way matching is based on the concept of verifying three critical documents: the invoice, the purchase order and the receiving documents. Many companies hover at a first time match rate of about 70%, while leading organizations can reach up to 90%. Worst performing companies, typically, drop below a 50% match rate. FTM is critical to lowering the cost of processing Invoices and improving the procure-to-pay cycle.
Productivity per FTE (Full time employee)
In order to track cost reductions in the procurement process, managers must be able to measure the productivity per full time equivalent employee (PPFTE). PPFTE is based on a simple 0-1 scale, where 0.5 represents a part time employee, and 1 represents a full time employee. PPFTE will allow a company to quantify larger processes, based on the total number of FTEs required to complete a specific task. That said, Increasing productivity per FTE can be challenging, unless certain processes are streamlined.
Spend Under Management
Spend Under Management (SUM) is the de facto measurement of procurement success. It measures the percentage of total spend that falls under a procurement function’s responsibility. However, measuring SUM is only possible with an IT solution in place that tracks invoice processing. Once that IT solution is in place, there is a host of criteria that needs to be met when tracking SUM. For example, to be considered when analyzing SUM, purchases must meet the following criteria:
1) Be from an approved supplier
2) Purchase was properly authorized
3) Paid on correct terms and pricing
4) Transactions are clearly visible and approved by management
These suggestions, of course, are only a few ways your purchasing and accounting departments can improve your procure-to pay-cycle. One last suggestion, one that cannot be overrated, is to empower departments in your organization and provide them with analytics to measure their performance. When measuring these KPIs, make sure to create a scorecard with a simple rating system, which will allow management to understand how procurement is performing.