Why Organizations Skip POs and How to Fix the Problem

Find out interesting insights with Jon Naseath , CFO & Strategic advisor

Moderated by Emily, Digital Transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Emily: Hello, everyone! This is Emily, and I’m a digital transformation consultant at Hyperbots. I am very pleased to have Jon on the call with me. Jon is a seasoned CFO. With experience in larger companies as well as startups and public companies. I’m so glad to have you on the call with us, Jon.

Jon Naseath: Appreciate it.

Emily: So the topic for today, Jon, is purchasing without purchase orders. This is an area that many organizations grapple with, and I’m looking forward to your insights. So let’s just dive into the 1st thing that I’d want to ask you is, what are the common reasons that you’ve observed? That leads to an organization, you know, to make purchases without using a purchase order.

Jon Naseath: Yup. A lot of times it comes down to using a purchase order may not be a key control, and it’s just an additional process. So they find ways to work around it if they need to. A lot of times. The ERP systems, whatever one you’re using, have complicated interfaces and so I’ve seen companies avoid not wanting to have to give everyone logins to those systems and looking for others. Well, they could be open to other ways. But that’s a key challenge to the system itself.

Emily: Got it. Can you provide examples of situations where you know bypassing the PO process might seem justifiable?

Jon Naseath: Well, I would argue that there are times when it is justifiable. I usually work and figure out where the threshold is. And so, if purchases are needed, they are below a threshold. There could be times when you decide as a company. We’re not going to do PO’s there. In those situations. What I usually do also is we’ll either provide a credit card for individuals for those smaller purchases that have a set limit to still control it or you could do kind of what we call a blanket PO for certain areas. So it’s not specified to a given vendor, but it allows them a defined budget that they can use within that function or project.

Emily: Got it, and any risks that you see associated with making purchases without a purchase order?

Jon Naseath: Well the purchase order itself is a tool, and I remember a situation where it was very difficult for projects and for different departments to understand how much budget they had, and they were constantly going over budget. And so we needed to find a way that enabled direct visibility to how much budget they had, and how much they were within budget to spend something and allow them the authority to control their own department or function or project budgets. In that example, we found that Pos could be a powerful tool because they’re already doing all this work to figure out the budgets and their projects. They want to feel like they own that budget so allocating that budget out into different POs for what the project says. Vendors are going to need, or for a blanket PO to catch. The remainder was a powerful tool.

Emily: Got it. And from your experience, Jon, how does the absence of a PO process affect vendor relationships and negotiation power?

Jon Naseath: Yeah so especially when there’s a large vendor or a strategic vendor you’ll negotiate terms, and there’s so much work that goes into establishing those contracts and all the terms around it. And so then opening up the PO, based on that contract, is a nice way to control and keep everything transparent and open. Now there are often situations where you might not use all of the PO, so it’s important to have visibility to how much is being used, and it’s not just purchase orders, but the purchase requests that then feed into those and then at the same time being able to see for vendor management how much available capacity is still on that old purchase order. For when you need to do the next project, and maybe you have to discuss it. Can we roll that over into the next purchase order that wasn’t used? Or is that money needed to be held back for the budget for another department?

Emily: Got it understood. And so how do you view the cost and complexity of implementing a PO system, particularly for smaller businesses?

Jon Naseath: Sure. I don’t know if it’s about the size, but also the operational maturity of the organization. You know, if you’re just starting. It’s not your biggest priority. You just have to get customers in the door and make sales or if you’re just in the process of scaling and you have tight you you feel like you’re in control of the spending. That’s happening. Then that’s fine. But when you reach that point where you, as an organization, are so big and so complex that you don’t know or have control over the demands of spending. And you people need to be able to, in different departments, own their budgets, instead of having kind of a centralized finance, be approving every spend as it goes out. The nice thing about pos is that kind of pre. It’s kind of a pre-approval for future spending. And so it’s allocating out budgets in an approved way so I’d look for the complexity when it becomes when you need a solution, and you’re looking for a way to control your spending. The whole process of that procurement process can be very helpful.

Emily: Got it makes sense. So, Jon, do you believe there is a you know. One-size-fits-all approaches to whether organizations should adopt a peer-driven process And why or why not?

Jon Naseath: I don’t think that there is just a 1 way. Many businesses are different. One example is you have recurring, spending that’s happening, or if all of your stuff is just transactional, and one-time spending there are also opportunities to do a lot of similar controls through different types of credit cards, and where you can get cash back from credit cards but especially with larger spends. You know, doing a purchase order, or purchase request process is a powerful way to do it. Again, I want to call out that concept of an open PO or a blanket PO for things that you. You can still allocate it to a department or a project, but then they can spend it against that blanket PO where it’s not exactly known how much it’s going to be. The other one, I’d call out, is for different utilities, or or recurring subscriptions. You might not need a Po, for, because you’re not getting an invoice, you’re just paying a recurring bill, but still creating that blanket open PO for your internal controls and budgeting can be helpful. You don’t need to tell the customer or the supplier about that PO but it’s just a way to control budgets.

Emily: Sure understood. And what alternative approaches can organizations take if they find a full peer-driven process? You know, too rigid or cumbersome.

Jon Naseath: Yeah again, it’s based on the size, the size, and the complexity of the organization. If you feel like you’re controlling it through your own active communication of people in real-time. Then that’s fine. It’s just when it becomes too complex. Like, I remember a situation where I had a product manager, set up a strategic planning workshop with one of his best friends who was a vendor, and they were amazing at doing what they were doing. It was an awesome strategy and marketing workshop over a few days. You know, they flew a large team in, and there were dinners that we thought they were paying for and I only got invited to one of the dinners. When I said that, we thought that this product manager was being paid by them. I attended one of the dinners, and I started talking to them at the dinner and realized that they were going to be charging us for everything back through that ended up being like 1.5 or almost 2 million dollars for their advisory consulting project that didn’t result in any transformational change that we did. So that was problematic. So avoiding those is kind of like spending. And just, it’s just a way of controlling spending is a nice way of thinking about it, and there can be. Usually, it gets put in place when something happens that shouldn’t have happened. Oftentimes, when I see it come into place it’s a way to tighten up controls.

Emily: Makes sense.

Jon Naseath: Sorry. One more point there. It’s oftentimes not the key control for Sarmeans, Oxley, or something. So it’s something that might not be required, for you know what accounting would push for but as , I think that as a finance leader is a very helpful tool from an FP and a perspective and again, just watching for where the demand is. That’s where it adds value.

Emily: Okay that’s pretty insightful. So in your opinion, what should organizations prioritize when deciding whether to implement a PO-driven process?

Jon Naseath:  I like to look at finance from the perspective of a finance business partner, and so a lot of times where there are lots of departments or lots of projects that are all asking for money literally. The terms are purchase, request, and purchase order. So I remember one time sitting down with a product development team and an organization where we had many different teams doing lots of different development. And they all had requests and I sat down with them, and we did a lean 6 Sigma style process map and mapped out the current state. And then we looked at it and looked for waste in the process, and we looked at how we could optimize what was happening and through that process of discussing, how can we help these teams fix their purchase request problems. I wrote in the box on the future state diagram. I said, this is a purchase request, and you guys make a purchase request when you need money, and then that gets approved. And this is a purchase order, and when it’s approved becomes a purchase order, and then you get a spend. And they were like, Wow! That’s a great idea. We should do that all the time, and if I had just gone in from the beginning and said, Oh, your answer is, you need personal purchase orders, and let’s put it in place. I’m sure there would have been pushback, but when you approach your app, your question is like, When is it needed? And my answer is when your different departments and teams your business partners in the business are asking for support, getting the funding that they need. This is a nice way of helping them feel like they’re at least participants and have a process for requesting funds. That’s literally what it is.

Emily: Funny. So just one last question to summarize everything. Jon. you know AI is the birth of the town. So how can AI help automate the PO process?

Jon Naseath: Yeah. I think it’s exciting what AI will be able to do for it because a lot of you know, even if companies don’t have what an accountant might call a purchase, order, purchase, request, procurement process. Every company is doing procurement. Every company is figuring out how to buy things in their way. So the idea of taking that current state process and saying, Well, how can AI enable that procurement process in whatever way it is? Maybe there’s a future state where, based on different insights that AI can do, you can make it so that AI will be able to approve more of the purchase requests without needing so much manual approval or manual touches. And certainly, there’s a threshold where you have to have the manual touch and manual check. But I think that AI could alert for risks when it needs to be double-checked or I look at AI as providing a kind of that 1st sanity check on things. And then it’s good at identifying problematic areas. But overall, it should be able to simplify and expedite that purchase request process. You never want to end up in a situation where the business departments feel like they’re not able to spend money because they’re waiting on a PO. They’re waiting on a purchase request, approval. And so whether it’s helping the AI could help identify the risks related to that purchase request, or it could help identify threshold approvals where certain ones can just be approved without manual touches. I think of it similarly to how I mean just a parallel example. Similarly to how, when you do your taxes say you’re using TurboTax as an example, and you’ll come. You’ll prepare your taxes. Think of that as kind of quasi, like a purchase request, and then, when TurboTax, it will go through everything, and it will say, Oh, we don’t see any issues in this, and if there are issues we’ll support you in mitigating them. But we think this will be fine and I’m a Cpa. I’ll confess I still use TurboTax, advanced stuff for my accounting in different ways and I think that similarly AI could be used for purchase requests and purchase orders to do that risk profile and help the person who’s submitting it. Usually, it’s stupid, simple things that might be wrong or might not be appropriate in a purchase order. I think that AI can help identify those for the person submitting it so they can modify them if needed, and get everything to go through faster.

Emily: Got it. Got it. Thank you so much, Jon, for sharing your insights, you know it’s clear that a peer-driven process offers many benefits. It’s not without its challenges. So your perspective on finding a balanced approach and leveraging AI to streamline the process will certainly help organizations make more informed decisions. So thank you so much for joining us today. It was great having you.

Jon Naseath: Pleasure have a great day.