Procurement 101The ‘No PO No Pay’ Policy – Meaning and How to Implement It
The purchase order (commonly abbreviated as PO) is at the heart of every company’s procurement process. The no purchase order no pay, or ‘no PO no pay’ policy is designed to enhance the efficiency and purpose of the PO for both buyers and suppliers.
Despite many sources raising concern over the difficulty of implementing a ‘no PO no pay’ policy, companies regularly make the mandate work wonders. There’s no doubt about it – a ‘no PO no pay’ approach to procurement significantly benefits everyone involved.
But it needs to be done the right way, or not at all.
Aliyu Ali – Procurement Professional
With a comprehensive understanding of everything related to the ‘no PO no pay’ policy, procurement professional Aliyu Ali has graciously shared an in-depth recount of his practical experiences, from implementation to working with the ‘no PO no pay’ policy successfully.
You can listen to Aliyu’s entire commentary on the ‘no PO no pay’ policy here or hear his insights in segments throughout the context of this article.
The meaning of the ‘no PO no pay’ policy
“The ‘no PO no pay’ policy is first an ideology.
Secondly, it is a tool for the procurement professional.” -Aliyu Ali
The concept is simple:
If an invoice is received from a vendor with no PO associated with it, the invoice doesn’t get paid.
While basic in nature, understanding who the policy will impact in your company, and what processes will be affected, are essential things to consider before planning out an implementation.
As a procurement professional, Aliyu has had experience in both the corporate world, working with Procter & Gamble, as well as with companies like Fetchr, one of the fastest growing startups in Dubai.
Whether applied to an enterprise or to a small business, the principle behind the ‘no PO no pay’ policy is the same.
As an ideologythe policy aims to create an efficient environment in which a company can track every dollar it spends by simply reviewing its purchase order history.
As a tool used for external company activitiesthe policy ensures that suppliers only engage in business transactions when a purchase order is presented to them. It assures the supplier that it’s safe to commit their resources to fulfilling the purchase order while adhering to the agreed terms.
As a tool used for internal company activitiesthe policy serves to channel company spending through the procurement experts. By centralizing the procurement process, companies align and approve their expenditures by authorized personnel before committing to them.
Common misconceptions about the
‘no PO no pay’ policy
Most of the horror stories and red flags you’ll read about online discuss companies who went about implementing a ‘no PO no pay’ policy the wrong way or attempted to do so for the wrong reasons.
The most common mistake that companies make when it comes to ‘no PO no pay’ is trying to use it as a “magic-wand” or “quick-fix” solution for their current procurement process.
It doesn’t work that way.
The policy is a tool that needs to be adopted and complied with by everyone on the team. Companies that don’t actively nurture their team’s understanding of the ‘no PO no pay’ policy, or those that simply don’t implement it to begin with, commonly run into scenarios that allow misguided expectations and maverick spending habits to prevail.
What failing to implement or comply with the ‘no PO no pay’ policy looks like:
The best way to understand the importance of the ‘no PO no pay’ policy is to look at the procurement process of companies that fail to diligently adhere to its practices, or those that operate without it entirely.
The recruiter reaches out on their own to contact a supplier,
In this example, the procurement department wasn’t aware that this purchase took place.
In fact, the purchasing experts, as the most qualified individuals to execute a sourcing event and secure the best quality of service, weren’t involved in the procurement process whatsoever.
Furthermore, when an invoice is received from the supplier, the financial department will be dissatisfied with the integrity of the purchase.
When no sourcing event takes place, financial personnel may refuse or hesitate to carry out payment, because they’ll have no way to compare prices, assure quality, or verify that due diligence was performed on the products or services rendered.
Finally, time will be wasted investigating and cleaning up the breech in policy.
In this scenario, we can see why a proper implementation of ‘no PO no pay’ requires an understanding from the entire team:
• Was the recruiter aware of the ‘no PO no pay’ policy?
• Did they understand why it was put in place?
• Are measures being taken to increase their understanding,
and increase their compliance in the future?
The effectiveness of the ‘no PO no pay’ policy is ultimately determined by the compliance of individual personnel within a company.
Understanding why companies implement the ‘no PO no pay’ policy
Seeing companies implement the ‘no PO no pay’ policy can tempt a blind hop onto the bandwagon.
However, many companies fall victim to this trap, and their “why” becomes based on an uninformed decision that causes the policy’s implementation to fail, and even hinder their business.
Being only partially informed is another reason why companies decide to move forward with the ‘no PO no pay’ policy. They understand what they want, and how the change will benefit their business, but fail to follow through with a proper implementation.
To make a fully informed decision, understanding why companies sometimes wrongly avoid the policy can also be an important point of consideration.
Why companies avoid ‘no PO no pay’:
Large companies often struggle with changing their procurement process:
• Realigning the company’s “DNA” to include an understanding of the ‘no PO no pay’ policy takes a considerable amount of time and money.
• Avoiding implementation for larger companies doesn’t stem from a lack of desire – but instead from a lack of agility.
Because of the daunting nature of the task, many larger companies fail to begin making the shift at all.
Startup companies avoid the policy for the opposite reason:
• Despite having the capacity to make changes rapidly, these organisations don’t see the value of procurement professionals.
• Startups often fail to see procurement as a profession and decide to undertake business negotiations on their own. When this happens, qualified procurement personnel get stuck performing administrative duties.
Implementing a policy for a profession that isn’t valued or understood becomes impossible in these situations. The policy can even be falsely labelled as a bottleneck and avoided for fear of inhibiting the speed necessary to operate in a startup environment.
How to implement the ‘no PO no pay’ policy successfully
There are several crucial steps to undertake to ensure the implementation of ‘no PO no pay’ goes smoothly, some of which have been mentioned already.
1. The ‘no PO no pay’ policy is not a magic wand or a quick fix for a lackluster procurement process. It’s an ideology and a tool that must be worked gradually into your company’s DNA. For small businesses, this can be as simple as taking a few hours to explain the importance of the policy to your colleagues. In larger businesses, conveying the importance of the policy on a regular basis is a critical first step.
2. Implement procurement software. By its very nature, the ideology of the ‘no PO no pay’ policy is embedded within cloud-based procurement solutions and will allow for a seamless transition. As your team adopts software that makes their work easier, they’ll inherently be getting used to the way the new policy works too.
3. Promote the benefits of procurement as a discipline, particularly in startups. It’s essential for all departments to recognize the new policy as a benefit that enables business, and not as a hinderance.
4. Use new departments as an opportunity to implement the policy. If one department sees success through the use of ‘no PO no pay’, others will be more likely to follow suit.
5. If you run into difficulty while selling your team on the ‘no PO no pay’ policy, don’t label it as a policy. ‘Policy’ typically has a negative connotation associated with it. In an example provided by Aliyu, getting his team to adopt a new procurement software that made their lives easier was an approach that spoke to their interests.
6. Don’t forget about your vendors and suppliers! When discussing the ‘no PO no pay’ policy with your business partners, focus on how the policy will make their lives easier. Not only will they receive payments faster (or even in advance), but when using procurement software, human error is removed by automating the 3-way matching process.
The benefits of a ‘no PO no pay’ policy
“We’re at a stage where speed is essential.
Technology helps companies adapt to these changing times faster.
Procurement is no different.” -Aliyu Ali
The benefits of the ‘no PO no pay’ policy and procurement software have aligned to become almost identical in recent years. Because much of business is done online, cloud-based procurement solutions and policies commonly work in harmony to enhance the same benefits in modern companies.
Here’s a breakdown of the benefits for successfully implementing a ‘no PO no pay’ policy:
•The end of rogue invoices. Without a purchase order to accompany them, suppliers know that sending an invoice will not result in payment. With an online procurement solution, sending invoices to the system without linking it to a purchase order is impossible. This also eliminates the risk of retrospective purchase orders being issued by maverick spenders.
•Centralizing workflow. All purchase orders are issued only by professionals, ensuring that the appropriate qualifications and sourcing events are performed prior to payment. Ultimately, the company saves money by securing better supplier negotiations.
•Increased compliance. Suppliers know that to engage in business, they need to first receive a purchase order. The purchase order then serves as a legally binding document that builds trust and ensures both parties deliver upon the agreed terms.
• Enhanced efficiency. By setting up an approval system, purchasing requirements are directed to a procurement department to be processed. When the procurement process is followed, less time is wasted on execution, and all purchasing activities are documented to increase spend visibility and control.
•Peace of mind. Both buyers and suppliers get what they want, when they want it, in a sustainable manner. Purchasing requirements align internally, and everyone can focus on their role in the company.
Remember that implementation will take time. In order for the policy to work, everyone needs to be on board. Don’t try to rush the process to attain these benefits – but look forward to them and keep them in mind to motivate a steady advance in the right direction.
Exceptions to the ‘no PO no pay’ policy
Not every purchase made by a company requires a purchase order. But that doesn’t mean that every purchase the company makes shouldn’t be visible.
Let’s say a company grants some credit to its employees for snacks and beverages. If someone pops into a Starbucks for a cup of joe, it wouldn’t be worth anyone’s time to have a PO written up detailing the expenditure (although the price point at Starbucks may seem to justify one at times).
Just because a PO isn’t created for the purchase doesn’t mean that the spend shouldn’t be tracked. There are many ways to customize the ‘no PO no pay’ policy to fit the needs of your company.
One option is to have employees submit their low cost transactions through software designed to track expenses. When someone makes a purchase under a certain threshold, they can either submit their receipt to finance for entry, or report and verify the expenditures that take place on a company card themselves.
Another popular way to handle minor purchases in a company is to issue P-Cards (purchasing or procurement cards) to employees. You can read more about how P-Cards work here.
It’s also worth considering a list of established exceptions for your ‘no PO no pay’ policy. Common examples of expenses that are designated as exceptions include travel, communication, dining, and insurance costs.
When dealing with trusted suppliers on a regular basis, it can also be beneficial to build a list of approved vendors with which business can be performed in exception to the ‘no PO no pay’ policy.
To begin developing your strategy, understand the industry you’re in. Decide who you want to collaborate with to build the strategy, both internally and externally. Consider the needs of those involved in the procurement process and structure your ‘no PO no pay’ policy to facilitate efficient business for all parties adhering to it.
Sending a ‘no PO no pay’ letter to your suppliers
Drafting a letter or a notice to your suppliers to inform them about a ‘no PO no pay’ policy isn’t a one size fits all situation, because every company is different. However, there are many examples that you can use online as a template to get started.
When creating a letter to notify suppliers of a ‘no PO no pay’ policy, consider providing this information as a basic template:
1.Give a brief overview of what the ‘no PO no pay’ policy is, how it works, and
why your company is implementing it.
2.Highlight exceptions. As described above, every company is different, so it’s important to communicate your exceptions list with suppliers for clarity.
3.Include details about how your PO numbering system works, and what information needs to be included on sent invoices.
4.Provide information about where invoices should be delivered. Include specific department information if applicable.
5. Provide contact information so that suppliers can get in touch with you if they have any questions about the policy.
To succeed with ‘no PO no pay’, companies need to be mindful that implementing the policy is a journey. Having patience while conveying the nature of procurement as a discipline and the policy as an ideology and a tool is essential to succeeding.
During implementation, consider taking procurement to the next level with online procurement software. Not only does procurement benefit from automation, but the principles of the ‘no PO no pay’ policy are naturally applied when using an e-procurement solution to do business.
“Be confident. The ‘no PO no pay’ policy is great. It is, however, a process.” -Aliyu Ali
Want to read more about the ‘no PO no pay’ policy?
Is ‘no PO no pay’ working for you? (by Tim Marshall)
‘No PO no pay’ – Getting the balance right (by Pete Loughlin)
No PO – No Pay – No Exceptions (by Pete Loughlin)
Swissport introduces ‘no PO, no pay’ policy (by Francis Churchill)
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