The PO is Not The Decision

The PO landed on her desk on the 28th. The contract had been signed three weeks earlier. The supplier had been picked four months before that. She was being asked to find budget for a decision that had been made without her, and to do it before close.

By the time the purchase order is cut, every meaningful procurement decision has already been made. Supplier picked. Scope defined. Pricing structure locked. Commitments sitting on the balance sheet whether anyone has booked them or not. Finance keeps showing up to the wrong artifact at the wrong moment, and then takes the heat when the numbers don't reconcile. 

This episode is for finance and accounting partners: controllers, FP&A leaders, AP managers, and the CFOs they support. It covers why the PO is the wrong artifact to organize the partnership around, how to read accruals as a procurement signal instead of a closing entry, where budget timing creates real leverage with suppliers, and a working operating cadence built on the four moments in the fiscal year when finance and procurement need to be in the same room.

Primary audience: Finance & Accounting Partners

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Website: https://procurexcellence.com 

Email: robert@procurexcellence.com 

Topics covered: vendor proposals, procurement rejection, discovery process, risk management, mission-driven purchasing, stakeholder alignment, supplier relationships

Transcript

SPEAKER_00 0:01

A peer of mine called me a while back about something he had run across in his organization. He was prepping for an internal audit. It was routine work, 500 POs pulled at random from a prior fiscal year. He was looking for the usual things: missing approvals, single source justifications without documentation, contracts referenced, but not attached. What he found, however, was different. In about one out of every six POs in that sample, the date on the supplier's invoice was earlier than the date the PO had been created. Not by a day, in some cases by weeks, and in a handful of cases by months. The pattern was clean, the work had been done, the supplier had delivered, the invoice had landed in the accounting team's inbox. Accounting needed a PO number to process the payment. Someone in the requesting department got an email asking for a PO. They went into the system, they created a PO that matched the invoice, and routed it for approval. The PO was approved, the invoice was paid, the audit trail looked complete. If you walked through that file folder, you would see a PO, an invoice, a goods receipt, and a payment all properly sequenced on paper. The dates, though, told a different story. I'm telling you this story because in many organizations this is not an exception. This is the operating model. The PO is not the instrument that authorizes spend. The PO is the artifact that documents spend after it's already happened. Let me say what that means out loud. A purchase order in its proper form is a transactional contract. It is the document where the buyer commits to pay and the seller commits to deliver on specified terms at a specified price. The legal weight of a PO depends on it being issued before the work is done. That's the whole point. The PO is what tells the supplier the obligation exists. When the PO is issued after the invoice, the PO is not a contract anymore. It's a tracking number. It's a paperwork that exists to give the accounting system a field to populate so payment can be coded against the budget line. It performs none of the protective functions a PO is supposed to perform. This is episode 8 of the other side of the table. I'm Robert Brindle, and today I want to talk to finance and accounting partners, controllers, accounting managers, FPA leads, accounts payable directors, CFOs of smaller organizations. The people who own the books, who close the books, who own the audit, and who deal with the procurement and who deal with procurement most often through the artifact that gets created last. I want to make a case to you that I have not heard made very often. The purchase order is not where the procurement decision happens. By the time the PO is being cut, every meaningful choice has already been made. The PO is the receipt for a decision that happened upstream. So if you as a finance partner are spending most of your procurement-facing energy on POs, requisitions, and three-way matches, you're showing up to the part of the process where neither of us can change the outcome. The work that produces good books, clean accruals, defensible spend, and real cost discipline does not happen at the PO. It happens before the PO ever exists. Let me walk through where it actually happens. There is a pipeline that runs through every dollar your organization commits to, a supplier, from end to end. It looks something like this budget, need, sourcing, negotiation, contract, purchase order, receipt, invoice, payment, reconciliation, and finally renewal termination. Eleven stages. The purchase order sits at stage six. By the time you're at stage six, the decisions made at stages one through five have already set the price, the supplier, the terms, the cancellation rates, the payment timing, the audit rights, the integration scope, and most of the things you actually care about as a finance partner. Stage six is where those decisions get turned into an entry in your ERP. The procurement function and the finance function are both present at stage six. We do three-way matches together. We resolve coding questions together. We chase down receipts together. That is the part of the relationship most finance partners experience most often. It is also the part of the relationship that produces the least value. Because the value has already been captured or lost upstream. The value is at stages one through five and stages seven through ten or seven through eleven, the places where procurement and finance both have something material to contribute, and where in most organizations, neither of us has been invited to the other into the room. I want to be specific about what I mean, so let me give you two stories. The first story is the backwards PO one that I opened up with. My peer walked me through the full picture over a follow-up call. The organization in question, which I'll leave unnamed, had grown fast over the four years. Revenue had roughly doubled, headcount had grown faster than that. The procurement function was thin. The accounting function was even thinner. The systems they had implemented at half the size were now operating at twice the load. The PO process had degraded gradually. It didn't collapse, it just slipped. Requesters discovered they could get work started faster if they skipped the PO and asked the supplier to send the invoice when the work was done. The suppliers learned that an invoice would get paid even if it arrived without a PO, because the accounting team would chase the PO down on the back end. Once that pattern was established, it spread. Within two years, roughly 15% of the organization's spend was running through that channel. The consequences were not small. I will name three of them. First, accruals. At month end and at year end, the accounting team's accrual estimates were based on what they could see: open POs, known commitments, recurring contracts. None of that visibility extended to work that had been authorized informally and yet not invoiced. The accrual was always way under. Every quarter the accruals came in higher than the actual accrual. Every quarter, someone explained it as timing. It was not timing, it was the absence of an upstream signal. Second is leverage. When the supplier learns that they can deliver work without a PO and still get paid, they have learned that the organization does not insist on commercial discipline. The next thing they learn is that they do not need to compete aggressively at renewal either, because the relationship is sticky and the buyer is not paying close attention. Pricing drifts up, terms erode, the organization does not realize it's losing, that it's losing value because the comparison case has disappeared. Third is audit. When the external auditors looked at the sample, they did not flag the backwards PO as fraud. They flagged them as material weakness in an internal control. The fix the auditors wanted was a control. Procurement and finance jointly designed it, it took 18 months to implement properly, and it consumed FTE time on both sides that was not budgeted for. Because nobody had projected the cleanup cost when the practice was tolerated. The reason I tell you that story is not to embarrass anyone. The pattern is incredibly common. It exists at organizations you would probably recognize, in industries that pride themselves on financial discipline. It exists because the PO is not a load-bearing document in the way that it's supposed to be. And once it becomes the local culture, it's very hard to reverse without leadership pressure from both functions at the same time. The second story is the contrast. This one was relayed to me by a different peer, a different procurement leader I've known for years, different organization. Same problem set, but they addressed it differently. Her organization had also grown fast. They had similar pressure on their systems. She and her CFO, in the second week they started working together, sat down for 90 minutes with no agenda, other than to map out where the two functions actually touched. Not where they were supposed to touch on the org chart, but rather where they actually touched in practice. What they found was that the only formal point of contact between finance and procurement was at the PO in the three-way match. Every other interaction was ad hoc. Procurement found out about a new budget allocation from the requesters. Finance found out about new supplier contracts when the invoices start arriving. Renewal conversations happened at the requester's department with no finance visibility until the new commitment was already signed. They changed four things. I'm going to walk you through them because they are the working model for what a finance slash procurement operating cadence actually should look like. One, procurement was added to the budget build process at the start, before the annual budget conversation went to leadership. Procurement looked at every line item that involved third-party spend. Where the budgeted amount was meaningfully below current contract value, that was flagged before the budget got locked. Where the budget amount was above current contract value, with no corresponding scope change, that was flagged too. The conversation about why the variance existed happened in the budget cycle, not in the variance explanation cycle nine months later. Finance was added to the sourcing process at intake. When a request department brought a new need for procurement, the intake went to both procurement and finance at the same time. Finance had the ability to ask before any supplier conversation started whether the spend was actually budgeted, whether the budget line was the right one, and whether the timing aligned with the actual fiscal year, and whether the proposed structure would create issues at month end. Most of those questions have been getting answered after the fact and badly. Now they were getting answered before they could cause any damage. Procurement and finance built a joint renewal calendar. Every contract over a defined threshold had a renewal date in a shared system. Six months before renewal, both functions got an automated reminder. They sat down together to decide whether the contract should be renewed, restructured, retendered, or terminated. The decision was joint. The procurement lead drove the supplier conversation. The finance partner drove the budget conversation. The supplier saw a unified buyer. Accruals stopped being a finance only exercise. Every month, procurement provided a list of commitments authorized but not yet invoiced, broken out by category and supplier. The accrual estimate was built from that list, not from inference. Year end accruals variants dropped by more than half in the first cycle and continued dropping. That organization did not eliminate backwards POs entirely, nobody does, but the rate dropped from where it had been to below 2% within a year. And the conversation about why each one had happened became a productive one rather than a defensive one. Same problem space, same constraints, very different outcome. The difference was that finance and procurement decided to partner across a full pipeline instead of meeting only at the PO. So if you're a finance partner listening to this, here's what I want to leave you with. You hold the highest leverage lever in the procurement process. It is not the lever you have been told to use, though. The lever you have been told to use is the PO approval. The lever that actually moves outcomes is the budget conversation, the intake conversation, the renewal conversation, and the accrual conversation. Procurement cannot fully use those levers without you. We need finance in the room for the conversations to land. And in most organizations, we're not asking, because we have been trained to engage with finance only at the transactional layer. That's on us as a function. It is also on the system that both of us have oriented the wrong state in the pipeline. If you take one thing away from this episode, I want it to be this. Ask your procurement partner this week when the next major contract renewal is coming up. Ask whether you can be in a conversation six months out, not six weeks out. If the answer is yes, you have just doubled the value finance brings to that decision without spending an extra dollar. There is a related thing I want to say to controllers and accounting managers specifically. If you are spending material time chasing down POs to match invoices, you are seeing a symptom of an upstream problem that procurement should be hearing about. The volume of backwards POs in any given month is one of the cleanest signals available about how disciplined the front end of the spend pipeline is. Share that signal with us. We will act on it. It is one of the most useful pieces of operational data we get. And most of the time we do not get it. And to CFOs, the procurement function in your organization is the early warning system for supplier financial health, for category cost pressure, and for contract drift. We see things in the data months before they show up in the accruals. If procurement function reports to you, ask for that signal directly. If it does not report to you, build the relationship with whoever does. Either way, the cost of not having that line of sight will show up in your variances. The cost of having it as a reoccurring meeting on the calendar. Before I close, the framework. Four moments in the fiscal cycle when finance and procurement need to be on the same room. Plus the cadence that holds them together. Moment one, the budget build. Not after the targets are set, during the conversation about what targets should be. Procurement has visibility into current contract values, market direction in your major spend categories, and known renewal cycles. That information should be in the budget before it's locked. Moment two. Procurement can tell you which categories are running hotter than the budget and why. Finance can tell procurement which categories have headroom for strategic moves and which do not. Together you can decide whether to absorb the variance, renegotiate, or cut scope. Apart, you discover that answer in October. Moment three. The pre-renewal sourcing window, six months before any major contract renewal. This is the highest leverage moment in the entire spend pipeline because it is the moment when the organization has full optionality. After that window closes, leverage degrades by the week. Finance and procurement should be in that conversation jointly with the requesting stakeholder with a shared view of what success looks like. And finally, moment four, the year-end accrual review. This is where the discipline of the prior 11 months gets tested. If procurement and finance have been operating across full of the pipeline, the accrual is mostly mechanical. If you have been operating only at a PO, the accrual is mostly guesswork. The quality of the accrual is the scoreboard for the partnership. The cadence that holds the four moments together is simpler than people assume. A standing monthly meeting between procurement leadership and finance leadership, 45 minutes, agenda built from a shared list, upcoming renewals, variance drivers, intake volume, supplier risk signals, anything either side wants to know or wants the other to know before it becomes urgent. The meeting does not need to produce decisions, it needs to produce shared awareness. Decisions follow shared awareness. Surprises follow the absence. Here is what I want you to take away from this episode. The purchase order is not the decision. By the time the PO exists, the decision has already been made. The supplier is chosen, the price is set, the terms are locked, the PO is actually the receipt. If your relationship with procurement happens mostly at the PO, you are showing up to the moment when the outcomes cannot be changed. The relationship that produces good books, clean accruals, defensible spend, and real cost discipline happens at the budget. It happens at intake. It happens at the renewal. And it happens at the accrual. Four moments, standing cadence, shared list. The reason this matters is not philosophical, it's operational. The organizations that fix the finance procurement relationship at the pipeline level see measurable improvements in closed cycle time, in audit findings, in variance accuracy, and in actual cost outcomes. The ones that do not eventually pay for it, the ones that do not eventually pay for it in the same places, just in the opposite direction. You are not the back end of the procurement process. You are the one of two functions that determines whether the process produces value or absorbs it. The PO is the wrong place for us to meet. There is a much better place. This is episode eight of the other side of the table. I'm Robert Brindle. Next week we go back to the C suite. For the episode that pairs with savings is a lie, procurement as the early warning system for your organization is already paying for and not using.