Cloud Procurement Saves Healthcare Group $5.5 Million

Avalon Health Care Group reduced costs and gained budget visibility by deploying an automated procurement solution.

As margins tighten and greater focus is placed on controlling costs, managing spend has become even more important. Automating procurement and spend management can improve efficiency, helping provide greater visibility into budget planning. Salt Lake City-based Avalon Health Care Group has used automation to help centralize its procurement operations and saved an estimated $5.5 million over four years against an annual spend of $72 million.

Avalon Health Care Group provides long-term care, skilled nursing, rehabilitation, and memory care services in dozens of facilities in five states, making it difficult to gain complete visibility into procurement activities that were largely managed manually.

Before 2013, the company used a mix of paper invoicing processes, spreadsheets, and an EDI (electronic data interchange) solution for e-procurement that required suppliers to register with the network and pay a percentage of the transaction value. Only a limited number of vendors participated in that system, with the rest managed via a cumbersome paper-based process. The EDI system also required all purchases be part of the catalog submitted by the vendor, making it difficult to document ad hoc purchases.

“About 60 percent of what we did was paper, and the rest electronic,” says Hyrum Kirton, vice president of procurement at Avalon. “We had invoices that came in via EDI, but paper invoices were handled manually.”

The company had poor controls over paper invoices, as well as poor visibility into document storage. “Audits were difficult because we had to find the paper with the approval initials on it,” Kirton says. “That was hard to validate, and it took time to move the paper around and store it.”

Avalon began searching for a procurement solution in order to gain better control over cost and budgeting. The company planned to centralize its accounts payable department, so finding a technology solution to automate billing and accounting processes would be critical to improve efficiency. “Handling all that paper centrally would have been possible but expensive, and people out in the field would no longer have any way to fi nd their invoices,” Kirton says. “We wanted visibility for end users and the business units into that central accounts payable, but without phone calls or faxing.”

The existing EDI tool required more training than Avalon had anticipated and required users be at a desktop PC to authorize purchases. Avalon wanted to give end users a way to automatically budget their spend without calculating it in Excel spreadsheets or trying to manually track how much they spent each month. “We also wanted a purchase order system that could be used outside of the electronic purchase orders, so we could manually create a PO by filling out a form,” Kirton says. “The EDI tool we had did not support punchout catalogs. All the catalogs had to be manually loaded into Excel and updated that way.”

The company wanted a procurement solution that would allow it to bring all its vendors into the system electronically, without fees, and would make it easier to handle ad hoc purchases with new vendors or for items not in an existing vendor’s catalog.

Avalon also hoped automation would provide a way for managers to be more proactive about spending and budgeting. Before, managers at each facility wouldn’t know how they were performing against budget until they got their profit and loss statements. Instituting changes to improve spending practices was nearly impossible, because the bulk of the evaluation came after the fact.

Cloud-Based Procurement Improvement
Avalon selected a cloud-based solution from Coupa Software because it met Avalon’s requirements and was competitively priced. The solution also integrated with the company’s existing ERP solution, so the systems could exchange budget data, invoice remittance information, and approved invoices.

According to Kirton, the Coupa solution was intuitive and also provided a native iPad and iPhone app, as well as the ability to approve invoices directly from an email. The fact that Coupa is cloud based was an added benefit, as Avalon did not have to invest in purchasing or supporting a new server. Kirton estimates using a cloud solution saved the company 75 percent of the time and eff ort that would have been involved in implementation and support. “We looked at one on-premise tool, but the upkeep and management of that were outside of the capabilities of our internal IT department,” Kirton says.

Instead of a pilot, the company signed a two-year agreement with a provision that during the fi rst six months based upon performance that Avalon could terminate without penalty. “If they didn’t meet certain obligations, we could cancel that contract without penalty,” Kirton says. Th e company worked with ERP provider Sage and Coupa to integrate the ERP and procurement systems. “We had to build and set up all of the users and accounts in the system and build EDI interfaces for two vendors that only dealt with legacy EDI transmission,” Kirton says.

The company also consolidated its 38 different vendor masters into a single master in the ERP solution. “We had to build a customization in the ERP that made every individual company share the same list of vendors, regardless of location, and then we synced that with Coupa so our end users could create purchase orders and invoices against them,” Kirton says.

Automated Approvals, No Paper
In the original process, an invoice would be mailed to an individual business unit or to corporate headquarters. The invoice was emailed to the end user that needed to approve it. “If it were mailed directly to them, it would end up in a stack of paper on their desk, and then they would sign it, scan it to accounts payable, or key it in locally,” Kirton says. “If anybody needed to see it later, they had to pull it and scan it again.”

The EDI tool included catalogs. In order to buy from those suppliers, users had to pull from the catalog and then receive an electronic invoice. “Our accounts payable team would download the data in Excel format, run a macro or two, and then upload that into the ERP system,” Kirton says.

Coupa now acts as a single point of entry for any order or invoice. If an invoice arrives by mail, it is scanned in to the central accounts payable team. Once an invoice is in the system, it is routed automatically to the appropriate person for approval. The approved invoices are then fed into the ERP system for payment every two hours.

“If we receive an electronic invoice, the system compares it to the issuing purchase order,” Kirton says. “If it matches within our tolerances, it automatically gets approved and goes in as an approved voucher. If we are keying in an invoice, we can do a classic PO flip to match it, hit submit, and it doesn’t have to receive approval from the end user.”

The procurement solution handles medical equipment, pharmaceutical, contract staff , maintenance, cleaning products, food, and other purchases centrally. Local managers also oversee some purchases like snow removal, which are entered into the Coupa web forms for approval.

Managers can access data via mobile devices and provide approvals using their smartphones. “We also use the mobile tool to key in expenses,” Kirton says. “The mobile component was a critical one for system selection.”

Millions In Savings
Before the transition, Avalon had 72 full-time staff members approving and administering invoices at 55 locations. Now, there are just a dozen in a central procurement department. In addition, the software has made the entire billing and invoicing process more efficient. “It’s been difficult to estimate because we also centralized our operations, but we’ve figured that we’re saving 10 to 15 hours in administrative time per month,” Kirton says. “Across our 70 branches, we have probably saved the equivalent of 10 to 15 full time employees.”

The company has also saved roughly $5.5 million over four years against its annual spend of $72 million. “We calculated that based on everything the Coupa system does that was previously not electronic. If we had to pay for all of that, that’s what we would have spent to handle it manually.”

Risk reduction was another benefit. “We had invoices that were unaccounted for, and they wouldn’t be found until after the budget period had closed,” Kirton says. “Our controls are better, and our accounts payable staff doesn’t need to know who the invoices go to. It’s handled automatically. We also don’t have to store invoices locally. There’s been a lot of risk mitigation.”

The system has improved approval cycle times and the budgeting process. Before, managers had to access the e-procurement solution on a desktop computer to submit an approval. Now, staff can receive the approval requests on their phones, at their desk, or on a tablet computer and quickly approve purchases from within the application. Staff can also automatically calculate spend on the fly using the tool, which provides better insight into how the location is performing against the established budget.

The company also has better compliance on variable spend categories. “People are also more familiar with what’s running through their budgets, and that knowledge is useful in budget planning,” Kirton says. “Previously, we’d have profit & loss reviews, and they didn’t even know what some of the items were. Now they see them coming through for approval, and they can look at them easily.”