The Progress of e-Payment

So many companies pride themselves in the steps they've made toward automating their order cycles. However, many order cycles continue to be frustratingly punctuated with manual payment processes. But, that's about to change.

It should go without saying that every properly submitted and fulfilled order in the automated world requires a payment. However, even if all demand chain processes are done electronically, it does not follow that every payment is also automated. The TowerGroup, a provider of information technology research for the financial services industry, estimates that of the 15.4 billion bills delivered in the United States last year, only 1 percent went through the entire billing cycle  from presentment to payment  in an automated environment. It seems that payment, for many companies, still resides in the Stone Age.

In order to understand why many companies' billing cycles are stuck in the past, it helps to understand how complex payment processes can be. The best place to go for a close-up look is a large distributor. In the distribution environment, large, complex orders are being created moment by moment. With unusual fulfillment and distribution requirements, it's no wonder that the payment part of automation becomes an afterthought. In one example, an electronic components distributor's largest customer generates a purchase order from its materials resource planning (MRP) system for 100,000 SwitchCraft 11s 1/4 inch telephone jacks. Transmitted via electronic data interchange (EDI), the order information is immediately streamed into an order management system. This system then evaluates the 100,000-quantity order to determine whether or not it's within the commit window and the product inventory is available. With 100,000 jacks on hand and a requested ship date of today, the parts are secured for the customer's order.

The MRP-trigger, the first stage of the demand chain requirement, signals the beginning of this seemingly minor order management process. Cleanly and seamlessly, an automated inventory management system receives and pushes the order information into the warehouse management system. On the warehouse floor, the 100,000 jacks are gingerly plucked from their holding places and sent down a conveyor that moves the product to packing. While the jacks are at the packing stage, they are scanned to identify their destination, a packing slip is generated and their containers are labeled. So far, so good.

The next step is the manifest. Once the packaged telephone jacks are weighed and the proper coding via carrier is given, a manifest emerges. At this point the order ships. With inventory registering depletion while all other elements are equal, the order transitions through to the billing process where an invoice is automatically generated.

If processes continue to move forward in a technology-driven mode, the distributor can claim a true order-to-cash cycle. As it so happens in this example, the process does continue  when a physical invoice is sent out and put into the distributor's accounts receivable, journal entries are automatically made in the general ledger.

Finally, in a perfect world, the customer will get its product on time in the right quantity and quality, and the distributor will receive an electronic transfer of funds through its bank's lock box. Those funds are automatically applied to the open receivable, thus closing the transaction. We've just witnessed the settlement part of this supply chain process.

Sager Electronics, a mid-tier electronics component distributor, with the help of PeopleSoft, has created this perfect world described above. Headquartered in Hingham, Mass., Sager has 13 sales locations across the United States and a main distribution center in Middleborough. Since March 2000, with Peoplesoft's assistance, the company is live with an order-to-cash system. Whether Sager is helping a large customer obtain 100,000 1/4 inch telephone jacks or any other electronic component, the key for the company is to have a seamless process in the order-to-cash environment that creates gains in more than one area.

Says Shannon Freise, director of information technology for Sager Electronics: We've retained and improved efficiencies in our order management processes and now have much greater capabilities in our reporting and information access. As a result, the finance department loves the drill down of information. Our ROI is efficiency.

Real-world View

According to TowerGroup, after a period of sluggish growth, electronic bill presentment and payment (EBPP) is poised for accelerated expansion as more financial services institutions get into the game. As such institutions as Wells Fargo, Citigroup, First Union,

J.P. Morgan Chase and Bank of America now offer EBPP to both consumers and businesses, TowerGroup reports that commercial banks, credit unions and other financial institutions will either partner with non-bank competitors that have previously dominated both the business and consumer EBPP landscape, or they will be in direct competition with them.

TowerGroup also projects that roundtrip electronic bill volume (which means bills or invoices both delivered and paid electronically) will increase 9 percent by 2005. Gartner confirms this increase, indicating a similar growth rate by 2004.

Market-research firm Ovum is going by dollar figures: The company suggests that by 2005, e-payment transactions will exceed $2.2 trillion. But last year, this market was sluggish; there were signs in the financial services industry that banks, in particular, were hesitant to dive in.

The settlement side of the supply chain has, until recently, been largely ignored. However, you'd think the idea of automating payments on the buy and sell sides of e-commerce would have been obvious. There are plenty of options today to traditional payment methods  maybe too many. But, with any well thought out plan, it's a matter of finding what works best for your company's environment and then setting priorities accordingly. (Now, where have we heard that before?)

Who Gets the Bill?

Randi Purchia, former research director for AMR Research in the financial services practice and now with The Commonwealth Group, explains the business process roadblocks: The biggest challenge to integrating financial settlement with purchasing and procurement is the lack of common purpose and procedures across functional areas within enterprises. Accounts receivable and payable, treasury, procurement and the purchasing division units each continue to act like a silo with separate missions and incentives, Purchia explains. The new e-procurement and supply chain initiatives were pushed by those wanting to cut costs, but not necessarily by those concerned with more efficiently managing working capital. Outside of the enterprise, there is no one solution that fits all trading partners. The degree and kind of enablement appropriate in the payment area of the supply chain is highly variable and needs to be driven by the actual needs and wants of the small to large partners to the transaction.

As these issues are ironed out by traditional organizations, the market is also responding; payment does sit near the end of the commerce cycle, however, it's part and parcel of virtually every transaction. If an electronic payment takes place, it's generally through a financial institution, which can include automated clearinghouse technology (ACH) transactions, or a third-party provider of services.

With thousands of banks using ACH, the largest are now looking for the next step, testing other options. Purchia says the big financial services companies typically have the resources to experiment, try multiple approaches or, in the end, choose to do most of the payment solution development work in-house. J.P. Morgan Chase, for example, is working alone to provide B2B payment and settlement solutions to its business clients (see the sidebar Payment Players).

If banks aren't developing their own solutions, they're partnering with software and service providers. Says Purchia: Over the last 18 months, new providers, or current providers with new settlement solutions, were appearing daily. The solutions were put forth, but the market wasn't ready for them. Fundamentally, the cost of pushing adoption was too great. There's been a winnowing down of the number of initiatives being pushed. As a result, enterprise resource planning (ERP) and supply chain software suppliers, service providers, and financial institutions are increasingly combining forces, doing more joint development for better-integrated solutions and making selling efforts more effective. Providers can then resell and white label their services to bank customers, marketplaces and enterprises. If the predicted boom occurs in this area of the supply chain, such partnerships should produce some very successful results.

What's Really Driving Potential Growth?

Though analysts and others are predicting growth in the settlement arena of the supply chain, it's hard to tell what's signaling that potential growth. Purchia has some ideas, however.

In a recent survey conducted for AMR Research in the Financial Services Practice, participants indicated that they might switch banks if the kind of electronic financial services they want and need are not available, says Purchia. In contrast, last year's survey didn't show electronic payment options as being critical to client satisfaction. The research indicates that both financial institutions and providers will want to provide specific services in this area to keep and gain customers.

Purchia also points out that treasury and finance groups are putting more demands on financial institutions to provide better cash management services, motivating banks to ante up with additional electronic lock boxes, disbursements, and consolidated and information-rich payment solutions. And, of course, for companies that need more liquidity, improved credit and payment solutions can significantly improve cash-flow forecasting. Companies in today's economy want to speed up DSO [days outstanding] of receivables and have a better picture of the credit needs and timing of payments of their corporate customers. These needs, taken together, can make all supply chain trading partners eager to see improvements in this area, says Purchia. Right now it's hard to forecast working capital and when you're going to get paid by certain buyers. When you can know specifically the reliability, timing and method of payment, then you can manage liquidity and working capital more effectively. To some degree, greater visibility and reliability of payment information throughout a supply chain will eventually transform how companies operate.

As a result, initiatives are underway at leading financial institutions, like Wells Fargo, Chase and Citigroup to develop new credit analytics and payment workflow modules for the supply chain. These initiatives, often in concert with software and service providers, are aimed at embedding financial transaction processes into the entire supply chain. Several of the big banks, for example, are working to bring physical goods, billing and logistics information together seamlessly.

The financial institutions are working well with the software providers in this area and are often leading the charge, says Purchia. J.P. Morgan Chase and others, for example, will work closely with a leading supplier in a specific area to come up with concrete solutions.

The Physical Transfer of Value

Although the players are building strategy and developing products and services to satisfy the settlement aspects of the supply chain, there is much still to be done.

Says Purchia: Payment is the transfer of value. But this transfer is complex. It's only one step in a continuum that, from the buyer side, starts with a commitment to purchase and ends, from the seller side, with reconciling the cash to the buyer's account. Understanding this process will lead to a better appreciation of how it relates to the infrastructure of a company and how new e-payment and credit products will be sewn into the fabric of e-commerce.

Despite the fact that the buyer and seller may have met in a public or private electronic marketplace and transacted business in seconds or minutes, the documentation, financing and payment aspects of the sale continue to be mired in back-office paper processing. Purchia and others predict a multi-delivery, multi-solution, slow-but-steady migration of financial services to the e-enabled world at large.

In the meantime, Purchia suggests that companies investigate what's in the market by piloting test products and understanding what users and clients need. Companies should also ask questions like, Which e-payment functions are most important to my organization and my customers?; How important is accelerated cash flow to my organization?; and Can my company's current systems and those of my clients and suppliers support integration requirement?

As always, evaluate the cost of integration to internal systems, accounting procedures and applications. Finally, make sure you list every financial service requirement your company, your clients and suppliers need and make sure the software providers and financial institutions you're evaluating can meet those requirements.

For Freise, of Sager Electronics, the transition to order-to-cash management has been encouraging. I'm pleased with the initial results and, as with any process and technology improvement, I expect to see continued improvements, she says. When we first went live we didn't implement every bell and whistle. We're now in the process of adding the additional features. The idea is to continue building in benefits.

These continued benefits must come from a healthy partnership between financial institutions, software providers and key participants in a supply chain.