Sink or Sail? Avoiding the Cash Drain from Contract Leakage
When I was in seventh grade, my parents rented a beach house on Balboa Island near Newport Beach in Southern California. Down the street was a sailboat rental shop. One day, I rented a sabot, easy enough for an inexperienced sailor like me to operate on my own. Speed was the goal, and when I got enough wind, I heeled so far on one side that water rushed into the boat. Rather than cut back the sail, I held tight, letting the water sink the boat. At that point, I swam alongside the boat, pulled it toward the dock in front of our house, emptied all the water, and went out again.
This bit of folly reminds me of what must be a common practice in accounts payable—approving and paying invoices from unapproved suppliers, or from contracted suppliers but at non-contracted rates. This is the flip side of my youthful boating exercise; instead of observing water rushing in, you watch the cash leak out of your organization.
This contract leakage needs to be plugged. Your procurement group may do a great job negotiating contracts with suppliers, but how do these contracts get enforced? If they don’t, employees buy from the wrong suppliers, order the wrong products and services, and pay higher prices.
What does this cost your business?
If you have no idea, you’re in good company. Many organizations appear to ignore this cash sink hole because they don’t have the means, resources, or commitment to get a better handle on it. But today, the ability to collaborate over a business network offers new potential to address this problem, and save A LOT of money: potentially tens to hundreds of millions of dollars annually for Fortune 1000-size companies.
For those organizations that have embraced PO and invoice automation over a business commerce network, a common service feature is the PO-Flip®. This is where a supplier receiving an electronic purchase order can “flip” it into an electronic invoice, guaranteeing the two-way match. Now, these same capabilities can be extended to non-PO invoices by matching the invoice against—or creating an invoice from—a contract.
This can be especially useful for suppliers providing services on an ad-hoc, often unplanned basis. Having these suppliers craft an invoice off an established contract goes a long way to driving compliance, as well as removing the burden from AP of managing review and approval of these invoices. In this case, invoice approval merely involves ensuring that the work was completed. The automated invoice-contract match replaces a manual process fraught with errors and exceedingly high processing costs.
Paying attention to contracted spend is low-hanging fruit for corporate finance organizations looking for dramatic cost reduction opportunities. The key is getting AP and procurement on the same page, or in the same boat.
Next week, we’ll look at the flexibility you have with contract invoicing, and some different use cases.