How to build a source to pay solution business case that gets approved
- Posted by: David Watters
- Category: Best Practices
If your business case is solely focussed on high level financials – it’s not believable. Business cases that cover all aspects of the change that your business will go through based on a bottom-up value assessment provide confidence that the change can be delivered. It can also be very effective in driving the project during implementation.
Despite the focus and importance of the business case in being able to get a procure to pay or source to pay solution transformation greenlit, it is typically the process that gets oversimplified and ends up being focused only on numbers – money going out and money coming in.
It’s interestingly seen as the most stressful part of whole process, will your business case be approved? What documentation do you need to prepare? How will it be received? What extra questions will your Executive team ask? Do you have a compelling enough story?
How are business cases typically prepared in businesses?
A high level, financials focused business case usually driven by the software providers template with unvalidated ROI claims
What result does this usually drive for the business?
Executive buy-in for the project is low and the project is unlikely to be approved. If the project is approved the business case never gets referred to and the project typically doesn’t deliver the promised return on investment.
The numbers we see going into business cases are usually going to be heavily influenced by the software providers business case template that they’ve prepared. The majority of businesses understand that they can’t take the software providers numbers too seriously as they are based on limited information and not driven by a deep understanding of your business. So they drop their ROI numbers down by a percentage and compile it all into a spreadsheet and make sure that you have all the financials in place to calculate ROI and NPV for the life of the project.
The end result? As the business case is based on assumed or unvalidated costs and savings it’s hard for executives to really buy in to the expected benefits and ROI. They may still approve the business case because the ‘softer’ benefits (like fixing a compliance issue and reducing overall risk) to address a burning issue. But the business case is filed and archived away and never reviewed again.
Mapping the expected benefits against the project proves to be too difficult as there was not enough detail aligned with how the project will be delivered to do an accurate comparison. We see this play out in post project reviews, where there are usually more questions than answers related to return on investment – your Executive team are left frustrated and disappointed at the project and the project team. This can all be avoided if the business case is done correctly.
So, what should businesses be doing differently?
The starting point is acknowledging that your business case is not a spreadsheet. Financials are an important component of the business case but they are not the only component. Your business case needs to address three overarching points to be approved and drive the project to deliver on its promises:
- Trust – the business case needs to be well researched so that Executives trust that you know what you are talking about
- Honesty – it should be honest in its assessment of this project, giving confidence to the Executive team that you understand what are the things that will accelerate and slow the project down, what are the financial and project delivery assumptions?
- Governance – it should plot a clear path with robust monitoring and evaluation points that will ensure that the project will deliver on its promises. Having a robust plan that outlines the key ‘transformation’ metrics that need to be achieved and what corrective action can be applied.
To do this your business case should have the following elements:
Change Management Assessment
Your business case should include a detailed assessment on the people impacts of your project. This should outline the people factors that are going to both support the implementation of your project as well as hinder it. You should be considering the following:
- Your current culture and value system
- Your businesses capacity for change including how much change is underway or planned
- The leadership styles and power distribution across the organisation
- Impacts and perceptions of previous changes
- Your middle management’s attitude toward the change – they will be key in driving end user adoption
- Employee readiness and openness to change
- The executive sponsorship required to drive the change across the organisation
Alignment to strategic goals
There should be a very clear an obvious line from one or more strategic goals of your organisation and the transformation that this business case will deliver. This is vitally important in gaining executive support for the project and getting board approval for the spend. This needs to be more detailed than just it aligns with Goal X around digital transformation as it is a digital project. So, how do you get to the level of detail required?
- Review the corporate and departmental strategic plans and if none exist meet with the senior executive team to gain an understanding of the key strategic priorities.
- Identify the specific outcome/s of your project that will support the corporate and/or departmental strategic plan.
- Align the success metrics and timelines of your project with those of the corporate and/or departmental strategic plan.
Test out your findings with a couple of key stakeholders to ensure they make sense – this also helps seed the idea for your project with that stakeholder.
Risk is such an important part of the business case decision-making process so you need to demonstrate that you’ve done your homework and understand the risk across three key areas:
- Project risks – what are the risks involved in the delivery of the project
- Inaction risks – what are the corporate risks that the business continues to face whilst not doing the project
- ROI risks – what are the risks of not achieving the expected return on investment.
For each of the risks you should be able to identify the likelihood, impact, risk rating and mitigation strategy and owner. Project risks should be derived from your project planning process, these are usually the risks that are highlighted in the business case. The areas that are usually missed are the inaction risks and the ROI risks.
Risk of Inaction
The risk of inaction refers to the very real corporate risks that a business faces specifically around their procurement and accounts payable process. Every business faces these risks, the question is to how high the risk is based on the systems and processes you have in place. These are the 10 corporate risks across a business’s procurement and accounts payable processes that you should be focussing on:
- Fraudulent invoices – the risk that you will pay an invoice that you shouldn’t
- Supplier Non-Compliance – this incorporates a whole range of supplier-side non-compliance risks around the types of documentation/processes that you require them to hold. The risk here is that you start working with a supplier that doesn’t have the required documentation in place or an existing supplier’s documentation lapses. This could include compliance to:
- Environmental, social and governance requirements (ESG)
- Modern slavery
- Industry Accreditations
- Industry assessments
- Duplicates invoices – the risk that you pay the same invoice twice for a supplier.
- Tax compliance – the risk that you are not able to comply with relevant tax submissions/laws due to issues with your data or processes.
- Maverick spending – the risk that there is unauthorised corporate spend for goods/services.
- Spend approval – the risk that you are unable to demonstrate approval of corporate spend for goods/services in adherence to your financial policies and procedures.
- Incorrect invoice data capture – the risk that you capture invoice data incorrectly resulting in issues around supplier payments
- Conflict of interest – the risk that corporate spend decisions are made without a clear assessment of conflict of interests (e.g. a contract is awarded to an employee’s friend or other business interest.
- Contract lifecycle risk – this risk incorporates a whole range of contract related risks including areas such as:
- Unfavourable and/or potentially damaging contract terms being agreed to without a proper contract risk assessment
- Contract documentation going missing
- Approval of contracts by unauthorised employees
- Contracts unknowingly coming to an end
- Damaging supplier relationships – this risk relates to issues that can arise in your procure to pay process that could damage the relationship you have with your suppliers. This could include factors such as:
- Late, delayed or missing invoice payments
- High cost to service due to manual follow-up processes
- Orders being missed or incorrect due to manual ordering processes
- Business disruption – this risk relates to the possibility that your core procure to pay business operations are disrupted due to key staff leaving who hold key, manual process knowledge.
Your financials are, of course, an integral part of the business case and need to be calculated based on a level of detail that provides confidence to your board and executive that the numbers are both realistic and based on your business data. Your analysis of your current and future business processes will be incredibly useful to help drive your financials. Business case financials that get approved typically contain the following information:
- As-is cost breakdown
- Spend analysis
- Future-cost breakdown
- Procurement related benefits
- Invoice processing cost reductions
- People benefits
- Overall return on investment (ROI) and net present value (NPV).
As-Is Cost Breakdown
Your as-is cost breakdown should measure the costs involved in running your current procure to pay processes, this should include:
- The people time involved in executing the process – map your existing processes research to calculate the time taken for each task and the roles that are involved in completing them. You should aim to get a fully loaded cost per hour for each the roles (this should include the persons salary, on-costs, etc)
- The cost of current infrastructure and software – map out all the technology used in your current processes and assign the direct (e.g. licence) costs involved and the indirect costs (e.g. platform support) of the current technology involved in your procure to pay processes.
An important and often missed part of the business case for procure to pay projects is analysing your current spend in as much detail as possible. Most organisations will likely only have accounting level information for each of their transactions. Whilst you may feel that this gives you detailed information on your spend, you are missing key information that enables a true understanding of where your money is being spend and what on. Take Administration as an example, think of all the different costs that get hidden in there that you don’t have good visibility over.
The spend analysis should be aimed at being able to answer the question: where are we spending our money? Your spend analysis should:
- Analyse at least 80% of your spend by dollar amount
- Be based on extracted spend data for the last 12 months
- Be mapped by supplier, Business Unit/location
- Map out the commodity that each transaction is for (you can use a combination of GL account code and spend description to identify this)
- Identify what was contracted spend vs non-contracted spend (this should be conducted at a transaction level rather than a supplier level to ensure accuracy)
This will give you an accurate view on where the company is spending its money, with who, on what and whether that spend is managed or not (i.e. contracted spend vs non-contracted spend).
Your future-cost breakdown should capture all the costs involved with implementing the new technology and processes. You should align this with a future process map and transformation roadmap so that you have absolute clarity over the delivery methodology, delivery timeframes and resources required to have an accurate view over at least a 3-year period of the costs involved in the transformation. You are seeking to get an understanding of the total cost of ownership of your new technology and processes.
These future costs should include:
- Software costs
- Change management costs
- User training/support costs
- Integration/s cost
- External system implementation costs
- Operating model change costs (e.g. new staff salaries etc)
With these three pieces you should have all the information you need to understand the costs involved in your current processes, cost of implementation and future process along with a clear view on where and how you are spending 80% of your expenses.
Procurement related benefits
The other side of the financial business case are the benefits, what is the return that you will get from undertaking this activity. Procure to pay projects are rare in that the benefits as well as the costs are completely measurable and predictable. Let’s start with procurement related benefits.
Procurement-related benefits are driven from greater systematic control over your spend and data-driven spend insights. From the spend analysis you should have an idea of which commodities you are spending most of your money on. For these commodities you can then identify:
- Based on this data analysis what opportunities are there to increase our leverage over our currently suppliers – this could be through supplier consolidation, minimising non-contract spend etc)
- What commodities are you spending a lot of money on that are currently not under contract? This gives you a great opportunity to negotiate preferential rates based and drive cost savings
- Of your contracted spend, what contracts are due for renewal over the next 3 years and how more effective could your procurement teams be armed with real-time, accurate spend data?
These procurement related benefits can add up quickly, our research shows that cost savings benefits could range up to 15% in some spending categories. Take a conservative view for each of your categories based on your confidence of being able to drive cost savings, our suggested rates would be:
- Low confidence – 1-2% cost savings
- Medium confidence – 3-5% cost savings
- High confidence – 6-8% cost savings.
Invoice Processing related benefits
There are three main areas that you can leverage through a source to pay transformation that will drive the cost of processing invoices down:
- Reducing time spent on processing invoices through automation – with the right technology and processes you can cut a lot of unnecessary manual work operations and button pushing through eInvoicing, purchase order matching and fraud detection.
- Digitising and automating approval workflows – through pre-approval of spend with implementing purchase orders makes the approval of invoices largely automated and where exceptions required, the approval workflow is automatically identified and routed.
- Drive focus into process accountability and efficiency – providing key efficiency insights into the whole invoice processing workflow you can baseline performance and improve over time reducing processing and handling time.
To calculate the invoice processing related benefits, assign time and roles to your future-process map utilising the average loaded salaries that you calculated. The invoice processing costs related to your future process can then be subtracted from the cost your as-is related costs.
People related benefits
The people related benefits are a little bit more speculative as they are going to be harder to measure accurately. The basic premise is seeking to assess what benefit can be achieved from staff spending more time on value generating activities rather than admin work.
As an example, imagine you have front line staff or management who are spending 2 hours a week on administrative tasks to support your existing procure to pay processes (you can measure this from your existing process map work completed earlier). With your new process this administrative burden drops to half an hour a week, with that extra 1.5 hours a week what extra value can your front-line staff or management create? Can they do more trying to get more customers, upsell customers or focus on customer retention?
Conducting key stakeholder interviews of people involved in your current processes will provide some insights into what their current time spent on the procure to pay process is stopping them from doing, use those insights to identify an expected benefit of your people focussing on more value adding activities.
This could result in any of the following:
- Percentage increase in profitability
- Percentage increase in sales
- Percentage decrease in churn/wastage
- Percentage increase in productivity.
An additional, perhaps unmeasurable, benefit that will come from your staff focussing on more value adding activities is improving staff morale – your team feeling that they are having a greater impact by focussing on activities that they are seeing move the dial.
Calculating ROI and NPV
Once you’ve completed this analysis you should have the following figures:
- Current costs to run your procure to pay process per year (CC)
- Procurement related savings per year (PS)
- Future costs to run your procure to pay process per year (FC)
- Implementation Costs (IC)
- People related benefits per year (PB)
From this you’ll be able to calculate your expected return on investment percentage over 3 years through the following formula:
Calculate total Costs: IP plus ((FC minus – CC) multiply by 3)
Calculate Total Benefits: ((PS plus PB) multiply by 2*)
ROI: (Total Benefits minus Total Costs) divided by Total Benefits
*We assume that benefits will only be realised year 2
Mapping out each of the figures above into each year to calculate an annual loss/benefit will enable you to then calculate the net present value of the investment utilising a NPV formula.
The end result?
A business case built on detailed and genuine analysis of the business considering factors such as costs, change management, risk and strategic alignment
An accurate business case that will get approved and be used to track progress of the project driving it through its lifecycle to achieve the benefits calculated.