- March 13, 2018
- Posted by: aquiliti
- Category: Automation, Business case, Procurement
Making the business case for procurement technology
Investments in procurement technology have a mixed track record with some senior executives. Some may have been burned by previous projects where the business case benefits proved difficult to realise in the scale, and at the time, originally envisaged. This post explores some key tips about investing in procurement technology.
What is the problem / opportunity that we are addressing?
It sounds simple doesn’t it? Let’s take an example of registering new supplier details on a supplier database in a procure to pay system. Staff time is spent sending a form to the supplier, checking their response, seeking approval from the appropriate manager, and then transferring the information from the form into the relevant payment system. This is one example of countless similar tasks within organisations that involve transcribing information from one form or system to another. In this example, the elapsed time to register a vendor was up to five days because of queuing issues and manual approval routines.
Robotic process automation (RPA) could be a potential solution for this problem. The robot could scan the supplier’s application form, ‘read’ the contents, and transfer the data into a spreadsheet, which can then be batch approved, prior to uploading into the supplier database. In this example, robot process automation reduced the average cycle time from five days to 30 minutes. So, what was the original problem?
- That suppliers provided partial or incorrect information which delays establishment on the supplier database? A robot doesn’t fix that.
- That suppliers need to be approved prior to establishment on the supplier database? That is an internal process design issue, the process could be re-engineered to simplify the process.
- That staff time needs to be expended transcribing from a Word document into a client system? Could that be solved by asking the supplier to enter details into a quarantined database, or simply substituting an Excel form for the Word document?
Be clear about the problem (or opportunity) that we are trying to address. Define your problem in an agnostic way and explore all potential solutions to the problem.
What are the potential benefits?
Imagine a situation in which there are 2500 invoices a year sent to a part-time procurement and accounts payable person (Penny) in a small organisation. Each invoice is an enclosure in an email, and takes Penny six minutes to open the email, access the enclosure, open it, and a further six minutes to enter the details into the payment system for approval by the relevant budget holder. What is the problem in this case? Well, the problem is that the data contained in the supplier invoices needs to be accessed and entered into a client solution to be processed. This takes staff time that could be better spent on value adding activities. Like procurement!
Let’s say that Penny saves ten times their $80,000 wages each year. Processing 2500 invoices each year takes 500 hours (67 working days a year or just over a day a week!). Research shows that streamlining processes is the number one reason for procurement managers investing in technology solutions. But number two is driving cash-releasing benefits which in this case would be the additional savings that Penny could generate in the time previously spent processing invoices (hence ‘Show me the money!’).
The point is that investing in technology may not be the only or the most appropriate solution. Don’t ‘back fit’ a technology solution to a problem without exploring other potential solutions
There are at least two tangible benefits from a technology solution for the invoice administration problem. Firstly, a solution (technology or otherwise) will free up staff time to do something else. “Doing more with the same” is a key benefit of many initiatives. In this case, if we free up 66 days and the stakeholder is paid $80,000 a year, that ‘saves’ $24,000. Is that number real? Can the CFO harvest it? No! Only if we had a larger team, and efficiency gains could lead to a reduction in headcount could the staff time saving be harvested as a cash-releasing benefit. The harvestable benefits come from diverting staff time from low or non-value adding tasks to value adding tasks. (we’re excluding the on costs to her salary for the sake of simplicity)
$24,000 is the most that could possibly be released, but any re-engineered process will require some administration. So, we might express the potential time saving benefit as a range, for example, between 50% and 75% of the theoretical maximum benefit. This equates to between $12,000 and $18,000.
Penny delivers audited savings of $800k per annum. That equates to $696 per productive hour (i.e. excluding the time taken to open emails and enter invoices into the payment system). The second benefit source is that IF Penny’s time was switched from low or non-value adding tasks to procurement tasks, and she achieved the same savings ‘run rate’ to her time freed up by a better process, she would save an extra $347,000 a year!
Are those dollars real? Can the CFO bank them? Well, it’s complicated. The cash releasing benefit depends upon a number of things. Does Penny use the ‘released’ time to do value adding tasks, or does she engage in other low or non-value adding activities? And if she does engage in managing other procurement projects, will those projects generate the same ‘run rate’ as other projects? Might some new projects be more challenging and take longer to generate benefits?
Baseline the ‘as is’ situation as accurately as you can. The distinction between tangible and intangible impacts of technology is important as, by definition, we can’t measure intangible impacts. But without a baseline, we can’t scale the benefits
The benefits from improved procurement throughput (doing existing things better) or getting better outcomes (doing new and different things) will often far outweigh time efficiency benefits
Time-saving and cash-releasing benefits are tangible. There may also be intangible benefits from freeing up staff from mundane, boring and routine tasks. All organisations claim ‘people are our most important resource’, but Penny might not be challenged by spending 66 days a year doing mundane, clerical tasks! Might she be better motivated by doing more challenging tasks than opening emails and doing data entry? Might that impact upon staff churn, or her performance at work? Possibly! Could we claim that as a non-cash releasing, intangible ‘soft’ benefit? We can try. But it’s not going to get a marginal project across the line, is it?
Classify your benefits into tangible (measurable) benefits and intangible benefits. Tangible benefits need to be credible and evidence based. Good practice is to relate benefits to corporate goals and priorities
Most organisations use at least two investment appraisal criteria, with net present value and payback period being the most common financial hurdles. Payback period is important, as if the implementation period for a procure-to-pay solution is 18 months, the benefits realization may take 36 months, or longer. Who knows what will happen internally or externally over three years?
The longer the payback period, the more vulnerable benefit realisation is. This is one reason why robotic process automation is so attractive. The implementation period for a robot in Penny’s example might be three to five days. There are three typical phases that clients experience in their journey into robotic process implementation;
- ‘toe in the water’ adoption of a single ‘proof-of-concept’ application
- a program of ad hoc projects to address the most obvious and simple opportunities,
- a strategic approach to re-engineering a function or a department.
The example of the supplier database is an example of an RPA project that generates a staff time saving, but such efficiency gains may not translate into harvestable cash-releasing benefits. The second example of opening invoices and entering the contents into a payment system might be an example of the ‘toe-in-the-water’ proof of concept of RPA. There may be other ways to solve the problems presented, but with a positive NPV and a payback period measured in a couple of months, who cares?
Benefit projections are often conditional upon assumptions. Validate that your assumptions are realistic, and consider expressing benefits as a range, with ‘best case’ and ‘worst case’ outcomes as a form of sensitivity analysis
If your CFO wants you to ‘show them the money’, or if you are curious to know which procurement processes may best lend themselves to RPA, or if you just want someone to demystify the hype around RPA, contact Matt Dunn on firstname.lastname@example.org