FAO and PO Suppliers Meeting in the Middle to Create Procure-to-Pay Offerings | Article
Diamond Rio had a country hit called “Meet in the Middle.” Today the lyrics of that tune could describe what’s happening in the finance and accounting outsourcing (FAO) and procurement outsourcing (PO) space. The two are slowly meeting in the middle to create an end-to-end process known as procure-to-pay (P2P).
A just released study (February 2008) by the Everest Research Institute entitled “Outsourcing the Procure-to-Pay Process” found outsourcing P2P processes is “gaining traction as companies expand their focus beyond accounts payable (AP).”
Here’s why this is happening: As more buyers realize benefits and savings from their existing AP outsourcing initiatives, they have begun seeking out next steps in driving out ever-greater value. These companies have achieved some of their goals but continue to deal with pain points in their financial supply chain like high rates of manual intervention, a large number of paper invoices, lack of data visibility, and large numbers of disputed invoices. This is where P2P outsourcing comes in since it can impact the buyer’s business beyond cost savings by directly addressing lingering pain points.
And why now? Because buyers of both flavors of outsourcing have become more comfortable with outsourcing’s benefits. Now they are interested in extending outsourcing’s reach to deal with those pain points. At the same time, buyers new to outsourcing have learned from the sidelines what they can achieve through outsourcing and are comfortable starting off with a more comprehensive, though practical, end-to-end approach. Instead of just outsourcing AP, these buyers start off tackling P2P.
In addition, buyers now have more choices than before of suppliers capable of delivering on these services. AP suppliers are expanding their value proposition and PO suppliers are putting more focus on the operational side of procurement. Suppliers on both sides are evolving their service offerings to provide an end-to-end process for the buyers now willing to try P2P.
One key area of supplier investment is around technology. With the shift in focus from AP to P2P, buyer technology strategies are also changing. Everest Research found that more and more buyers are looking for end-to-end technology solutions from their P2P outsourcing providers. Compared to past approaches focused on add-on technologies, end-to-end technology platform solutions are becoming more important as suppliers expand the scope from AP to P2P. While technology was already pivotal in most PO offerings, today buyers and suppliers are having conversations about PO technology “platforms.”
The supplier landscape: FAO suppliers
AP, of course, is part of the P2P process. Buyers now realize they can significantly increase their savings if they expand their FAO scope from AP to the broader P2P. Business and strategic impacts have been elusive when they just outsource AP; P2P helps them move up the value chain.
But the increasing demand is driving suppliers to shift their thinking. Some FAO suppliers see the P2P market as an opportunity because it becomes a point-of-entry to the PO market. The study found 75 percent of FAO suppliers are expending their offering to include P2P or are expanding the depth of their current P2P offerings.
FAO suppliers can expand their AP offerings from the bottom up to expand into the procurement space. Companies like Capgemini, HP, and Genpact are making investments in building delivery capability through internal additions of people, processes, and technology. Others are trying to get there through acquisitions, partnerships, or alliances. For example, Accenture purchased Advantium for more procurement expertise and SAP has formed partnerships with many suppliers who use its procurement platforms.
Offshore-based FAO suppliers, including HCL, Infosys, Satyam, Tata, and Wipro are leveraging their existing FAO and global sourcing capabilities to offer P2P. Infosys even set up a procurement academy in Lodz, Poland.
The question here is: Which model will FAO suppliers new to the PO game adopt? Everest sees three scenarios:
- Build out P2P capabilities in order to enhance the value of their core FAO business
- Focus on only the P2P piece and be really good at it
- Over time move into the source-to-pay (S2P) space, building the requisite capabilities over time
Moving into the S2P space is not without its challenges. For example, new entrants will have to build buying networks, delivery centers, and category management and sourcing expertise to fully compete. Time will tell how this will all shake out.
The Indian suppliers face a challenge because procurement typically happens closer to where the buyer buys. American and European buyers generally don’t source their supplies in India. The Indian suppliers may have to acquire some closer-in procurement companies to be able to perform the procurement piece.
The supplier landscape: PO suppliers
The same thing is happening on the procurement side; many enter the equation primarily as sourcing specialists. This is a directional change for many procurement outsourcing suppliers with an S2P legacy. Until now, their value was to help people get the goods and services they needed at a better price. Their focus was to optimize spend. This, however, is difficult to do.
It’s easier to optimize the transactional side of procurement. It’s this aspect that’s taking off, even though it only represents about 15 percent of the potential outsourcing savings.
Procurement suppliers will have to reprioritize where they want to drive value; today they have to think more about labor arbitrage and applications than they did in the past. They have to tweak their model to increase efficiency.
In the end, we will see a widening of the supplier landscape in the P2P space.
The rise of global sourcing
Today, the operational aspects of global sourcing have proved to be a viable delivery model for many business process areas. Right now that model is not very sophisticated in the case of PO. At the time of the study, offshore workers completed only 40 percent of the P2P work. In five years we predict that percentage might go as high as 75 percent. The anticipated rise in global sourcing for PO is closely related to the rise in P2P, for which many areas, such as AP, purchasing, and help desk, have high potential for offshoring. Beyond P2P, Everest expects analytics-intensive processes like contract compliance, spend analysis, and bid evaluation to find their way offshore as well.
How the study was done: The Everest Research Institute staff conducted an executive-level survey, analyzed multi-process procurement outsourcing contracts signed since 2007, and interviewed FAO suppliers. This spring it will do a similar study focusing on PO suppliers.
Lessons from the Outsourcing Journal:
- P2P is gaining traction today because it can impact the buyer’s business beyond cost savings since it directly addresses the pain points in the buyer’s financial supply chain.
- Buyers that have outsourced their AP are now interested in P2P because it helps them move up the value chain.
- Suppliers are building their capabilities to seize this entry point opportunity.
- The FAO suppliers are acquiring companies and forming strategic partnerships to add the procurement piece. But do they want to manage delivery centers?
- The PO suppliers have to now focus on the transactional side of the P2P equation.
- For the first time, global sourcing can become the norm. Today workers only perform 40 percent of the P2P work offshore; it may grow to 75 percent.
Category: Articles, Finance & accounting, Procurement & purchasing
