Everything you need to know about the source-to-pay (S2P) process

The most effective sourcing and procurement teams follow a repeatable process covering all purchasing aspects, from vendor identification to payment.

This process, known as the source-to-pay process, helps reduce the likelihood of human error, improves compliance with internal purchasing policies, and protects companies against risks associated with doing business with a third party.

While each organization may follow a slightly different workflow, owing to their specific needs and approval policies, most businesses broadly align with a seven-step source-to-pay process.

Learn the seven most important steps to include in your source-to-pay process, and discover three S2P best practices to reduce risk and increase efficiency.  

What is source-to-pay (S2P)?

Source-to-pay (commonly abbreviated as S2P) is a process that covers all aspects of sourcing and procurement, from identifying new vendors to receiving goods or services and paying invoices.

The S2P process includes the following steps:

• Identifying needs and setting vendor expectations
• Determining which providers may be suitable for the given requirement
• Vetting a list of potentially suitable suppliers
• A decision-making process to identify the ideal vendor
• Contract negotiation and approval
• Creating purchase order processes
• Processing purchase requisitions and orders
• Receiving goods and services
• Approving delivery and paying invoices

The source-to-pay process is the domain of the purchasing department, though you may delegate specific aspects of the process to different teams.

If, for example, sourcing and procurement are considered separate activities in your organization — each owned by different teams — then both teams may collaborate on the S2P process.

For instance, the sourcing team identifies, vets, and chooses suppliers before handing over ownership of the source-to-pay process to the procurement team.

Source-to-pay versus procure-to-pay

Procure to pay (P2P) is another commonly used term in the purchasing industry. While it shares similarities with the source-to-pay process, the two are not synonyms.

The S2P process is more expansive, covering all aspects of the sourcing process, including

• Market research
• Potential vendor identification
• Supplier vetting
• Negotiation of long-term SaaS contracts

The P2P process begins after this. It typically starts with a purchase requisition form and proceeds through the rest of the procurement process—approval workflows, receipt of goods and services, invoice approval and payment, etc.

So, the procure-to-pay process is a part of the source-to-pay process, with S2P being a more comprehensive approach.

Seven steps in the S2P process

1. Define strategic sourcing goals

The first step in the source-to-pay process is clearly defining your organizational needs related to a purchase.

For instance, your business needs to buy a new project management platform.

Consider these questions to gain a more detailed understanding of sourcing requirements:

• Who will use this software tool?
• What features are a must-have?
• Which features are a nice-to-have?
• How does this software platform need to integrate with existing tools?
• What are we looking to achieve by onboarding this tool? What benefits will we see?
• How are we handling project management now? How will this purchase improve that process?

This process should be collaborative, where the sourcing team consults directly with key stakeholders (those department leaders overseeing the new software platform).

2. Identify potential vendors

Initiate a market research process with your sourcing needs identified and agreed upon.

Your goal here is to gain a broad understanding of the state of the market—which vendors exist, what features and benefits they offer, high-level pricing, and so on—and to create a short list of suitable suppliers.

For example, you may have identified that the new project management tool you’re looking to purchase must be able to integrate natively with QuickBooks, the account software package you use to manage payroll and contractor remuneration.

Any PM platforms that don’t integrate with QuickBooks can be eliminated from your list.

3. Vet suitable suppliers

Supplier vetting is a critical process for improving vendor risk management and helping you narrow down your list of potential service providers.

Dr. Carter, director of DPSS Consultants, offers a helpful model for vetting potential vendors known as the 10 Cs of Supplier Evaluation:

1. Competency - Do they have the skill level required to meet your needs?
2. Capacity - Can the supply meet your needs in terms of volume?
3. Commitment - How does the supplier meet quality standards?
4. Control - What control does the vendor have over their policies and processes?
5. Cash - What is the financial stability of the vendor’s company?
6. Cost - What are the anticipated costs for the procurement?
7. Consistency - Does the supplier have a solid history of meeting supply requirements?
8. Culture - Does the vendor fit well with your company’s values?
9. Clean - What level of commitment to sustainable practices does the vendor promise?
10. Communication - How will the supplier maintain contact with you?

4. Choose your ideal vendor

Based on your assessment and prioritization of the above—some facets may be more important than others—determine which vendor seems most suitable for your organizational needs.

Respond to your chosen vendor to let them know you want to proceed.

5. Negotiate and approve the contract

At this point, you should already have a base-level idea of what pricing will look like, but this is your opportunity to negotiate the exact price of your purchase.

This stage can also include negotiating finer points in your agreement, such as delivery timeframes and service level expectations like software uptime promises.

Learn more about negotiating software contracts in our guide: The actual costs of not negotiating on software contracts.

6. Follow internal procurement processes

Now that you have a formal agreement, your team can order goods or services from that vendor as needed.

The best practice is to have your team members follow a specific procurement process, like the one outlined in this article: Your expert guide to procurement: Processes, types, and stages.

7. Pay invoices and receive goods

The final stage of the source-to-pay process is receipt of the goods or services you’ve procured and payment of any associated invoices.

In the cases of purchasing physical goods, you’ll likely have someone on your team run through a quality control process before signing off on the receipt of the goods and approving the invoice with accounts payable.

In software purchasing, invoices are less commonly transactional. These are handled monthly, quarterly, or annually depending on subscription terms.

SaaS buying is best when you implement an invoice management process. Learn how in our guide: How to streamline your vendor invoice management.

Source-to-pay best practices

Use price benchmarking to establish a competitive advantage

Price benchmarking is a feature offered by the best procurement solutions. It draws on a data set of previous purchases to help you understand how much you should pay for a product or service.

When you use price benchmarking data as part of your source-to-pay process, you’re more prepared to negotiate better pricing agreements, reducing your overall purchasing costs and lifting your return on investment.

Implement a supplier management strategy

The best procurement teams recognize that a healthy and well-managed relationship with each vendor is more profitable in the long run. These relationships help you keep supply chains running smoothly and allow you to implement procedures to prevent risks as you identify them.

To be effective, develop a dedicated supplier performance management framework that includes regular vendor relationship review meetings and a centralized procurement system for performance monitoring.

Use process automation to speed up the source-to-pay process

One issue with many source-to-pay processes is that they are slow and cumbersome.

Of course, you must follow approval workflows, identify risks, and put plans in place to mitigate them. But you also need to balance this requirement with the need for speed.

The faster your S2P process moves, the sooner you’ll be up and running with that new vendor and reaping the benefits of that new relationship.

Automate business processes to speed up aspects of the source-to-pay process, such as:

• Internal approvals
• Invoice processing
• Contract renewal negotiations

Learn more about process automation and optimization here: Business automation basics + five ways companies drive growth.

Manage your source-to-pay process with Vendr

A great source-to-pay process is essential for minimizing supply chain risk, maximizing value from each supplier, and speeding up aspects of the procurement process, such as payment processing.

Take your S2P process to the next level with Vendr, the procurement software platform that manages  SaaS purchasing across the entire contract lifecycle.

Benefit from all of this and more in a single platform:

• Real-time spend analysis for an at-a-glance view into where you’re investing the most money
• Contract management functionality in improving compliance and driving renewal processes
• A cost savings dashboard to visualize the impact of your spend management initiatives on the bottom line
• Automated approval workflows to drive efficiency and lower invoice processing costs
• Support from an expert team of SaaS buyers to help you find the best software for your business needs

Find out how much you overspend on SaaS with our free cost-savings analysis.