Procure-to-Pay risk management

by | Jun 2, 2022 | Contract Management

procure-to-pay risk management

Back in the day I did some work for a wealth management firm in New York. At that time, I was introduced to the area of Behavioral Finance, and more broadly, behavioral economics. While not new concepts, they gained new relevance – and urgency – during the financial meltdown 10 years ago. As my client used to say, investors are often their own worst enemies. In times of stress, even the most solidly constructed investment portfolio can be undermined through panic, overreaction and poor decision making. Part of the advisor’s role was, and is, saving people from themselves. There are parallels in procure-to-pay decision making.

spend analytics

Goals and procure-to-pay management risk.

Not being a pop psychologist, this article is more about general observations than learned insights. Still, it’s interesting to note how consistent disparate people across the spectrum can be in their approach to making choices. This also applies to when, how and why source-to-pay and enterprise contract management practitioners decide to implement a new Procure-to-Pay solution, sourcing, supplier management or other solution.

The comparison to financial decision making is apt, in that there is an investment at stake (in the case of technology, the investment is not just monetary, but professional, reputational and even organizational). And when there is money involved, the critical component of decision making is risk, and risk tolerance. As Daniel Kahneman and Amos Tversky first illustrated back in the ‘70’s, risk aversion is indelibly linked to loss aversion; in general, people prefer avoiding loss than acquiring the equivalent gain (in addition to their own works, author Michael Lewis explores their influence on the rest of us in The Undoing Project).

Seeking biases.

Think about Yelp. You’re out with friends, you’re hungry and you want to grab a bite, but you’re in an unfamiliar neighborhood. You could just pick a restaurant, but more likely you fire up the app and check the ratings and reviews. Risk aversion.

Heuristics is, for lack of a scientific explanation, the mental shortcuts you make to arrive at a decision. One common example of that, is crowdsourcing: if everyone else chooses something, it must be good, right?

More broadly applied, your organization finds it needs a new solution – for example, contract management. What do you do? Likely, fire up the industry analyst websites and check the ratings and reviews. Which, like Yelp, is fine. But how you need to look at a solution to meet your specific requirements is different from the next company. In this way, objectivity is often lost in the crowd.

A rationale for a rational approach.

If risk is always underneath those decisions somewhere, there are also other forces at work. Rational decision making – and deviations from it – is another area that has been widely explored, and is intertwined with behavior economics. Rationality takes into account how much information is available, which in the case of source-to-pay solutions, is quite a lot.

Depending on where you are in the digital transformation process, the information can range from too much to completely overwhelming. But how that information is processed brings in a whole slew of messy filters, called cognitive biases, operating unseen in the background. Which, and how many, of those come into play depends on things like how quickly a decision needs to be made, previous experience, stakeholders and influencers involved, how far down the path you are, how much of the information you remember, etc.

So, while you think you are making a considered, rational and fully informed decision, the truth is often less tidy. Being rational takes discipline – you need to recognize your own biases, and those being forced upon you. In the case of source-to-pay solutions, it also takes homework. Sure, consult the industry waves, quadrants and maps. But get hands-on: nothing will help you decide better than an in-depth, highly-personalized product demonstration (or several – the more familiar you are, the clearer your choice becomes).

When it comes to making the right decision, your ultimate goal is to eliminate uncertainty. That way, you have a better chance of trading risk for reward.

Speaking of demonstrations, wherever you are in your decision-making process for new technology, we invite you to schedule a personalized demo. You can also view on-demand product demos here – we’ll be holding different live demos each month, so stay tuned..

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Par Olivier Audino, le 02/06/2022

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