Procure-To-Pay Best Practices: Cut The Approval Levels, Improve The Monitoring

Earlier this week I was in Milan, speaking at the CPO Forum event about the importance of good procure-to-pay (P2P) systems to deliver sourcing's theoretical savings into real bottom-line improvements.  As England's ex-goalkeeper Robert Green showed us last week, savings opportunities aren't the same as real savings. :(

I had some subsequent discussions with attendees about P2P best practices and how you maximize adoption by business users. One tip relates to the optimum number of approval levels — my conclusion is: the fewer the better. As one procurement director put it, "We empower our people, and show that we trust them, but not unconditionally. We monitor individual expenditure closely, so each person knows that we may subsequently ask him to justify anything exceptional that shows up in the report." His firm had actually cut consumption of health & safety equipment by 20% by eliminating pre-approval and replacing it with exception reporting. He'd also streamlined the MRO procurement process. "We approve the maintenance work order, but then we used to have to separately approve the parts used to do the job.  I convinced my colleagues that the second approval was a waste of time."

In contrast, what can happen if you have too many approval levels?

  1. People simply bypass the system, because it takes too long to generate a PO and they can't wait for their goods or services.
  2. They accumulate personal inventory, to compensate for the increased lead time.
  3. They exert less self-control than if they were given responsibility to control their own expenditure.
  4. Governance is actually reduced. Managers have too many transactions to approve, and they tend to abrogate responsibility to the other approvers later in the process.

Unfortunately, technology makes it easier for incompetent consultants to implement superfluous process steps. Email-driven workflow looks less painful than when we had to physically pass paper requisitions around the building. Mobile integration is especially dangerous, because it's so tempting to just click, click, click without even looking at the transaction you're supposed to be evaluating.  It would be much better to restrict transactional approvals to the bare minimum and use KPI and exception reporting to prevent abuse of this empowerment.