Enabling the Financial Supply and Demand Chain

Surveying the financial supply chain landscape, Alenka Grealish, manager for the Banking Group at analyst firm Celent Communications, sums up the current pace of adoption of e-payment technologies this way: "It's slow progress."

Grealish and other industry observers believe that the financial and physical supply and demand chains are inexorably moving toward convergence, driven by enterprises' need to automate the payments side of the business to remove such inefficiencies as the handling of paper checks, and by increasing interest among chief financial officers and corporate treasurers in improving cash-flow oversight and the efficiency of working capital, among other factors. However, in her January 2005 report, "Business-to-business Electronic Payments: Putting Wind in the Sails," the Celent analyst describes a "chicken-egg" scenario in which banks and technology providers are reluctant to roll out end-to-end e-payments solutions until they see more companies demanding such offerings, and vice versa.

As a result, checks continue to dominate B2B payments, although estimates of the extent of paper's dominance do vary. Checks still comprise more than 75 percent of the total volume of payments between enterprises at present, according to Grealish's report. Separately, in their report "B2B Spend Management Survey," based on an online survey conducted last year, MasterCard International and spend management solution provider Ariba reported that 80 percent of all B2B transactions are still being completed with paper checks. And Tom Glassanos, president and CEO of order-to-pay automation specialist Xign, has estimated that greater than 95 percent of business transactions in the U.S. market are still settled with paper invoices and paper checks today.

Paper is losing ground, however, as the different e-payment methods catch on with increasing numbers of businesses. For example, automated clearing house (ACH) settlements accounted for 17 percent of B2B payments by volume in 2003, according to Celent's estimate, based on data from the National Automated Clearing House Association (NACHA). In addition, Grealish says that the p-card continues to see increasing usage. "Since the MasterCard e-P3 effort has been integrated into the supply chain and offers rich remit detail, the p-card has room to grow and could extend its scope beyond the average $300 per transaction into higher values," she says, referring to MasterCard's program integrating the card company's settlement options into electronic invoice payment and presentment (EIPP) platforms to provide paperless electronic commerce, along with Level III data in its transaction reporting. Celent projects that purchasing cards, which currently account for about 7 percent of B2B payments by volume, will comprise 15 percent of payments by 2010.

The P-card Goes to School

Cristal Swain, for one, is prepared to push the limits of the p-card. In fact, Swain, director of materials management with the Adams 12 Five Star Schools district in Thornton, Colo., is attempting to equip an entire new school while paying for it entirely on the district's card.

The district set up the program through GE Corporate Payment Services five years ago as a way of reducing the amount of time that the purchasing department had to spend processing paper purchase orders (POs) and invoices. "As a department, we noticed that we weren't really adding a whole lot of value to the organization, because we'd spend so much time processing orders," Swain explains.

The district's MasterCard p-card program now has about 550 users and handles some 41,000 transactions annually, or about $17 million in purchases. Buyers can use the card to purchase just about anything that the district normally acquires — goods and services — and the district does not have any restrictions on buying items over or under a certain amount. To manage the program, the district uses GE's NetService, an online tool accessed through a Web browser that allows card program administrators to monitor spending activity, view Level II and III data for posted transactions, pay balances, dispute charges, and set credit limits and purchase controls, among other functions.

The program has reduced the number of paper invoices that the district's purchasing department has to process by about 85 percent, from 13,000 annually to 2,000. "Now we're working on getting good pricing contracts, actually being more contract administrators than PO-pushers," says Swain of the change in the purchasing staff's work since the p-card program came online.

The department also has been able to reduce its staff size by attrition over the years, although it has not laid anyone off. The additional granularity of the transaction data has been beneficial as well, and the purchasing department is using the data available through the solution both to analyze the district's spend and to negotiate better contracts, as well as to monitor compliance with contracts.

Winning Over the Naysayers

The district took a phased approach to implementing the card, intentionally selecting the roughly 50 percent of the schools' employees who were in favor of the program from the outset. "With the other 50 percent that were vocal in saying it was the worst thing in the world, we said, 'You're probably right, we're probably wrong, so show us where we're wrong.' And they found that we were actually right, that the program was great and it saved them a ton of time. So they really did the change management for us, because they were so vocal against it before and now they were praising it. That really sold it, and it just spread like wildfire in our organization."

Swain says that the district is now looking for ways to expand the p-card program to capture increasing numbers of transactions. For example, a few years ago the district decided to use the card to make all its fixtures, furnishings and equipment (FF&E) purchases — basically anything in a new school that isn't provided by a building contractor.

That effort was successful, capturing nearly 100 percent of the district's FF&E spend, which led Swain to believe that the district might be able to put the construction — and not just the equipping — of an entire new school on the card. The district is currently in negotiations with building contractors to do just that, whether for a high school presently under construction or for the one to three schools that the growing district anticipates building in years ahead. Swain says that suppliers have put up some resistance because of the transaction fee that they incur, but she believes that, in the end, the program can provide for payments to the suppliers in a short enough timeframe that the vendors will see value in accepting payment through the card.

e-Payables at Countrywide

Besides implementing purchasing cards, a variety of companies have been exploring other methods of automating more of their purchase-to-pay process, including by implementing solutions specifically targeting the incoming wave of paper invoices. One such pioneer in enabling the financial supply chain is, perhaps not surprisingly, Countrywide Financial Corp., a diversified financial services provider — and e-procurement early adopter — headquartered in Calabasas, Calif.

Countrywide made its first move toward an e-financial supply chain in 1999, when it implemented an electronic procurement solution, dubbed PNet eProcurement, from Red Bank, N.J.-based PurchasingNet Inc., along with the solution provider's invoice-matching module. Countrywide did a phased implementation that was first rolled out to some 25,000 employees, with about 98 percent of the company's annual spending on indirect goods and services going through the e-procurement solution. However, according to Brennan Powe, a senior systems analyst with Countrywide, by 2003 the company had begun to experience difficulties from the sheer number of paper invoices coming into the accounts payable department. "We had a team of 12 people that just worked on purchase order invoices, and that's all they did all day," says Powe, adding that this team was processing between 12,000 and 16,000 invoices on a monthly basis.

With that volume of invoices, the company found that it frequently was not able to take advantage of early payment discounts and, in fact, was averaging payment in 45 days. To bring that number down, Countrywide elected to implement a process to receive vendor invoices electronically. As an enabling tool, the company chose PurchasingNet's ePayables solution, which has been in a controlled release pending its expected official launch in May 2005. The solution allows a company to receive invoices electronically from suppliers and process those invoices — with a match against a purchase order generated in the e-procurement system, for example — before handing the invoices off to a back-end accounts payable system (such as the A/P module of an enterprise resource planning system) for payment.

Getting to Win/Win

The move toward e-payables at Countrywide began with meetings held in conjunction with the company's vendor quality improvement program (VQIP). During sessions with Countrywide's top suppliers by volume — which happen to be PC resellers — the company set forth the electronic formats in which Countrywide wanted to receive invoices, how often the resellers should post invoices and the technical details of how the process would work. After working out the kinks over the course of two months — including training the suppliers on what to do if the system rejected an invoice — Countrywide began adding additional vendors to the system at a rate of three or four a month. Within 10 months, the company had about two dozen vendors on the system, accounting for 85 percent of Countrywide's purchase order volume online, and by November 2004 the company was receiving about 90 percent of its PO invoices through the system.

While the project is still ongoing and Powe was unable to discuss the financial payback on the investment in the e-payables solution, he did note that Countrywide has been able to take greater advantage of early payment discounts that had previously been left on the table. In addition, the company has reduced the number of A/P staff processing PO invoices from 12 to three, shifting nine of the staff to work on processing non-PO invoices, which add up to perhaps three times the volume of PO invoices. Countrywide is now looking at using a PurchasingNet portal solution to handle the non-PO invoices as well, whether for suppliers like utilities or for smaller, "mom-and-pop" suppliers that send out invoices using QuickBooks or similar desktop applications. (The PurchasingNet solution allows smaller vendors to log into a portal and create and submit and invoice online.)

In the meantime, Powe says that the response from those suppliers already involved in the e-payables effort at Countrywide has been positive, particularly since they usually are seeing payments coming in faster and with greater accuracy. "It's a win-win, absolutely," Powe says of the company's enabled financial supply chain.

Sidebar: e-Invoicing — The Next Generation

There are several types of solutions available to the accounts payable executive looking to enable the company's financial supply chain, says Tim McEneny, president and CEO of PurchasingNet, a provider of e-procurement and e-payables solutions. "For somebody interested in electronic invoicing, there are several options, so it's a little confusing, and a lot of companies are going through an education process right now," he says.

McEneny points to three generations of invoice processing solutions. Under the first generation, a paper invoice comes into a company and a clerk keys the invoice into an accounts payable system. In the second generation, an invoice comes into a company and gets scanned, reducing some of the paper floating around the A/P department, but someone still has to rekey the data into the company's back-end system. Finally, there is the electronic receipt and processing of the invoice, completely paperless, with no scanning and no rekeying.

Some companies may prefer the scanning option at this time, McEneny says, because they can apply it to most of their invoices, as opposed to a full-fledged e-invoice solution, which might not be able to encompass every single invoice coming into a company — due, for example, to the technical inability of the company's smaller suppliers to provide an electronic invoice. But McEneny argues that these companies should at least consider moving to an electronic invoice processing solution based on the theory that capturing most of their invoices electronically will yield significant benefits. "There are always going to be some invoices that you'll have to key in, or some scanning or imaging that will have to take place," McEneny says, "but if you can take your top 20 or 50 suppliers and have them send or create invoices totally electronically, without paper or scanning, you can streamline 90 percent of the process."

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