What’s your policy on purchase orders (POs)? What about during a crisis?
In establishing and maintaining strong, healthy business relationships, companies must often set, and enforce, policies designed to protect themselves from needless risk and malfeasance (intentional or otherwise). These policies are of particular importance during times of economic uncertainty, such as the COVID-19 pandemic currently disrupting supply chains and economies across the globe.
For procurement professionals, one of the most important and sometimes challenging policies to implement—in both fair times and foul—is known as a No PO, No Pay Policy.
Connected to and driven by the humble purchase order—the most common, and most important, document in procurement—this policy has the potential to protect your organization from a range of unnecessary risks while preserving proper internal controls and preventing damaged relationships due to miscommunication, fraud, and error. Understanding the best ways to implement it (and how not to abuse it) will set your business on the path to more effective procurement, and help protect its profitability and competitive performance when things get tough.
What Is a No PO, No Pay Policy?
On the surface, a No PO, No Pay policy is what it says on the tin: any invoice without a matching PO number (from a valid purchase order) doesn’t get paid.
But while the concept is simple, the execution isn’t always so straightforward. Procurement professionals, working with their accounts payable teams, need to strike a balance between effective procurement policy and relationship management, meeting the company’s financial commitments, and process optimization for critical procure-to-pay (P2P) landmarks such as spend transparency, strategic sourcing, etc.
Having such a policy in place makes it much easier to navigate the difficulties that accompany economic disruptions, and helps guard against the increased risk of supplier and invoice fraud that can accompany international conflict, natural disasters, and, of course, global pandemics.
Developing a strong No PO, No Pay policy ensures:
- All corporate spend is routed through procurement and accounts payable, eliminating maverick spend and forming a firm defense against invoice fraud.
- Suppliers only fulfill orders that come with a valid purchase order number.
- Companies can achieve full spend transparency to reduce risk, improve financial analysis and reporting, and ensure complete audit trails.
- Valid PO numbers are matched to all documentation, including any communication, project notes, etc. as well as invoices and receiving paperwork.
“To be effective, No PO, No Pay Policies have to be supported by a thorough understanding of how they work, why they can fail, and how to ensure they don’t.”
Challenges of Implementing a No PO, No Pay Policy
Beyond the obvious benefits afforded by spend transparency, accountability, and process optimization, many organizations are tempted to implement No PO, No Pay policies as a “quick fix” for existing issues in procurement and accounts payable. Unfortunately, while such policies are very effective when used properly, they’re neither panaceas nor “one-click” fixes for companies looking to transform their poorly optimized procurement workflows or struggling with business process management in general.
To be effective, No PO, No Pay Policies have to be supported by a thorough understanding of how they work, why they can fail, and how to ensure they don’t. Companies who may not have such a policy already in place but want to implement one during the current pandemic should carefully consider their approach in order to minimize additional disruption of their supply chain and existing workflows, as well as protect their relationships with their vendors.
Depending on the size and type of organization involved, procurement transformation to support these policies will fail for a number of reasons.
For large organizations, failure to make a successful implementation is often due to:
- The time, resources, and expense involved in effecting cultural change to accommodate concepts such as No PO, No Pay, eProcurement with automation, and other elements of digital transformation.
- A lack of organizational flexibility and agility due to enduring process inefficiencies and outdated methodologies that consume resources that might otherwise be devoted to change. This lack of flexibility may prove particularly challenging to overcome during a crisis, where more conservative corporate cultures may provide additional resistance out of fear of disruption or change.
For small businesses and other organizations that lack the size or organizational complexity of corporations, the challenge in putting a No PO, No Pay policy to work often arises from the other end of the spectrum. A desire to wear “all the hats” or a failure to acknowledge the value of procurement as a distinct function within the organization (especially for small businesses) can mean even agile organizations with the ability to quickly implement better procurement policy simply let the opportunity slip away. In addition, small or medium businesses may struggle to implement a No PO, No Pay policy during a crisis or other disruption because they lack the “clout” required to renegotiate with key suppliers on short notice, particularly if they are relatively new. However, being able to create and implement such a policy during disruptions is perhaps more important for smaller organizations, as they may also lack the extra resources or ready credit often afforded to their larger brethren and must therefore be more aggressive in seeking to protect themselves from losses due to fraud and process inefficiencies.
A Note on Policy Exceptions
One other challenge that accompanies No PO No Pay policies is determining how best to customize it to accommodate exceptions. Every organization makes a range of purchases, from break room pizza on a casual Friday through huge industrial equipment for production facilities. And while the former most likely doesn’t require the same financial scrutiny and planning as the latter (or, for that matter, a valid official purchase order), you can certainly develop a payment policy that accommodates these purchases while preserving spend visibility.
No two companies will have an identical approach, but in general you can bring exceptions “in from the cold” by:
Setting spend thresholds for purchase orders. All purchases below a certain level can be made by pre-approved buyers using procurement cards (also called purchasing cards or simply P-cards), or directly submitted to finance as categorized expenses for reimbursement without the need to create a valid PO number.
Establishing excluded spend classifications. Working with the accounts payable team, procurement can determine which categories—such as communication, meals, insurance, travel, etc.—are exempt from the policy, and how such expenses are to be tracked and recorded.
Ensuring procedural consistency regardless of purchase type. Even if a purchase doesn’t require a purchase requisition or valid purchase order number, ensure your payment policy requires all supplied invoices be verified with at least two other data sources, and all related documentation is recorded, not just the financial entries. This will not only preserve spend visibility, but streamline invoice processing, too.
Develop contingencies for exceptional circumstances. The only true certainty in business is the inevitability of uncertainty. Occasions may arise—including disasters and other emergencies—where a purchase order and official PO number are in order, but are also unavailable. Having contingencies in place to integrate these purchases once the dust has settled will give you the flexibility to adapt and grow while still keeping a tight rein on your spend and ensuring compliance, productivity, and effective data management.
Implementing Your Own No PO, No Pay Policy
For organizations of all sizes and types, the first and most important step in creating and successfully implementing a No PO, No Pay policy is to invest in one of the most powerful and versatile tools available today: professional procurement software.
Both procurement and accounts payable—the two departments responsible for optimizing P2P—benefit from centralized data collection, organization, and management. More importantly, with tools like deep data analytics, robotic process automation, and machine learning, creating a procurement system that supports advanced policies like No PO, No Pay is much easier.
NOTE: Choosing a complete procure-to-pay solution like PurchaseControl also gives organizations of all sizes a bit more “breathing room” during a crisis like the coronavirus pandemic, as it allows for modular improvements that build upon one another. This makes it easy to implement the most important improvements, such as a No PO, No Pay policy in conjunction with process automation for essential processes (including PO and invoice management), quickly and without needing to totally overhaul their entire business process management approach. This same convenience also makes it possible to expand the implementation once the crisis passes, building on the improvements achieved during the disruption to return to normal business with even greater efficiency and competitive performance.
Consider these other benefits that come with a comprehensive, cloud-based solution like PurchaseControl:
- Elimination of rogue spend and invoice fraud.
- Improved compliance for both vendors and internal controls.
- Optimal efficiency and performance across the P2P process.
- Human error and delay are eliminated through automation.
- Automated workflows for purchase orders, approvals, and invoice processing.
- More staff time and talent devoted to high-value tasks.
- Automated three-way matching.
- Full integration with supplier relationship management and contract management for automatic population of supplier data and the correct payment terms for every purchase.
- Clear communication and enhanced collaboration reduce duplicate, late, and erroneous payments, strengthening vendor relationships and supporting more strategic supply chain development.
- Support for education, training, and ongoing support before, during, and after implementation to ensure complete buy-in and effective implementation of all policies and processes.
- Support for transforming procurement and accounts payable from centers of cost savings to strong value producers for the company as a whole.
- Flexible and scalable implementations make it easy to start small with P2P optimization and expand with your needs and budget, or lock in the benefits of digital transformation from the jump with a broad-scale implementation and integration with existing accounting, marketing, sales, and enterprise resource planning (ERP) software.
The right tools at hand will make implementing your No PO, No Pay policy much faster and more efficient, with fewer “growing pains” for your teams.
In addition to choosing the right procurement software don’t overlook the importance of both communication and collaboration.
Purchase orders are legally binding agreements, and having full buy-in for your procurement policies from both your own organization and those you’re doing business with can go a long way toward ensuring those policies are successful. Sell No PO, No Pay to your team and your vendors as a benefit, not a restriction or punishment. If your business needs to make some cultural changes to understand and acknowledge the strategic importance of good procurement, be ready to invest the time and resources necessary to bring everyone on board, from the C-Suite down.
Understand that this may take a little extra educational effort and time if you’re seeking these changes during a pandemic or other major economic disruption. Be prepared to explain how they can help your organization stem losses and protect against fraud while still protecting vendor relationships and your company’s ability to remain agile, strategic, and productive.
Discuss the benefits for staff (more time for high-value work and project management, mobile-friendly access, less drudgery, greater efficiency and less frustration) and vendors (no-touch, electronic invoicing, faster, more accurate payments, greater opportunities for shared innovation, product development and market expansion, etc.). With COVID-19 rocking economic boats across the stormy seas of global commerce, these benefits can be strong selling points.
Get feedback, and make use of it when crafting your policy.
No PO No Pay Policy Essentials
When you’ve finalized your policy, established your processes, and you’re ready to make the change, make sure your notification to vendors includes:
- A policy overview, with a clear and concise explanation of how it works and why you’re making it part of your procurement practices.
- A list of frequently asked questions (FAQs), with answers.
- Clear and complete contact information so vendors can reach out for clarification as needed.
- Full information on your purchase order numbering system and the preferred format for vendor supplied invoices, along with specific information for where invoices should be sent.
- An explanation of your exceptions policy, with an exceptions list (as applicable).
A Proper No PO, No Pay Policy Helps Protect Your Business
Big or small, procurement policy changes can be seriously challenging for businesses and organizations of all types, especially in these uncertain times. A collaborative approach to No PO, No Pay, combined with clear communication and the right procurement solution, will empower your team to get it right the first time—and start boosting productivity, reducing risk, and building value for your business that will help it outlast disruptions of all kinds and emerge stronger, more efficient, and ready to thrive.
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