The Next Generation Financial Supply Chain

The chasm that exists between accounts payable and accounts receivable organizations can be a financial fog of limited information, manual processing and cumbersome exception management. But new approaches to the financial supply chain are showing that payment services networks may be the best way to reduce settlement delays and excess working capital requirements.

With Internet and supply chain initiatives transforming many business processes, did someone forget about corporate finance? Procurement and manufacturing functions are reaping the benefits of widely available supply chain solutions that help manage inventory and control corporate spend, yet the need to apply similar technology to the settlement end of the supply chain is largely unmet. Outmoded paper-based processes characterize the financial settlement landscape, in stark contrast to the information clarity and efficiency demanded of today's global business environment.


For example, despite corporate mandates for e-business, over 95 percent of business transactions in the United States are settled with paper invoices and checks. For each transaction, a paper invoice is printed and sent via mail with the goal that roughly 30 days later a payment will be received accompanied by sufficient remittance information to properly apply the cash. 


Consequently, what exists between accounts payable and accounts receivable organizations is a financial fog of limited information, manual processing and cumbersome exception management. On average the paper settlement cycle takes 40 to 75 days to complete, and up to 20 percent of transactions are burdened by costly exceptions or disputes. All participants in this financial supply chain, both buyers and sellers, incur the expense and friction of these inefficiencies.


Optimizing Global Working Capital


But there's more to financial supply chain optimization than elimination of paper and lower administrative costs. Modern enterprises should be working toward the goal of optimizing global working capital. This concept goes beyond better management of working capital. It means doing more with less working capital to the benefit of an entire supply chain.


To fully appreciate this goal, buyers and sellers must look beyond today's zero-sum approach to settlement and recognize that the costs of working capital apply holistically across trading relationships. For example, additional carrying costs for the supplier are not necessarily a benefit to the buyer. The win-win for all parties would be to adopt collaborative settlement systems that shorten the settlement cycle and eliminate excess working capital. 


The potential from optimizing the financial supply chain is larger than any one company's supply chain. According to Killen & Associates, settlement delays force Global 1000 companies to maintain hundreds of billions of dollars in excess working capital. Gartner Group estimates that administrative costs surrounding settlement run as high as $30 a transaction across roughly 40 billion U.S. B2B transactions each year.


New Approaches - The Payment Services Network


While financial supply chain automation offers substantial business benefits, businesses have been slow to adopt such first-generation electronic payment solutions as financial electronic data interchange (FEDI) and the Automated Clearing House (ACH) system. These solutions enable funds transfers with only rudimentary remittance information exchange, and neither solution is supply chain oriented. As a result, these systems are complex and costly for individual entities to set up and maintain. In addition, they do not offer forward-looking views into payment status information to accelerate settlement and minimize disputes.


Today, a new generation of collaborative settlement solutions is becoming available. Known as payment services networks, these solutions manage more systematically the information that results in the transfer of funds. These solutions apply modern information logistics to streamline processes and create better visibility into future cash flows. This visibility reduces settlement cycle time, creating an opportunity to eliminate excess working capital. Payment services networks also involve banks and other suppliers of credit, ultimately giving businesses a wider array of financing options at lower cost.


Payment services networks work by integrating accounts payable (A/P) and accounts receivable (A/R) processes to streamline financial settlement. They tap the information in standard accounting systems and originate the movement of money using common electronic means, such as ACH and wire. They incorporate secure authentication technology, such as digital signatures (PKI) and strong encryption. Most importantly, they allow both trading partners to exchange rich information in real-time and track pending and actual cash flows.


Payment services networks offer immediate benefits to buyers and suppliers.  For example, they can streamline payment processing and approval for buyers so that all available discounts can be properly captured. They enable more precise control of electronic payment issue and settlement dates, and systematically manage approval, signing and audit logistics. They reduce the processing costs of paper check printing and handling, and eliminate payment status phone inquiries by automatically giving suppliers the information needed to apply cash.


Suppliers also receive substantial benefits. For the first time, payment services networks allow advance views into pending payments, so suppliers can prioritize and better apply collection resources, ultimately reducing day sales outstanding (DSO). The solution helps eliminate paper and also reduces the fees for outsourced services, such as lockbox processing.


A key feature of a payment services network is a centralized published directory of all participating trading partners. The global directory ensures that any customer or supplier need only activate an account one time to efficiently settle with any other user of the network. This process simplifies the management of buyer and supplier information, so that set-up and maintenance costs across the supply chain are dramatically reduced.


A $100 Million Opportunity


The potential payback for initiatives in supply chain optimization is real and very significant. For example, a large organization disbursing 100,000 payments a month can project potential savings in excess of $100 million over a 3-year period. These savings will come from three sources:

·        Paper processing: Gartner Group estimates that total direct operational costs for paper-based invoices and checks runs $10 a transaction, half of which can be saved using electronic invoice and payment solutions.  

·        Exception management: Industry studies show that up to 20 percent of all invoices involve an exception item. More often than not, suppliers are not aware of the problem until a payment is due or received. Gartner Group estimates that better information can reduce average exception-processing costs from $20 to $10 per transaction. 

·        Working capital management: By capturing a greater percentage of available discounts, a disbursing organization can apply cash to drive substantial savings to the bottom line. Capturing 20 days of available discount across as little as 10 percent of payables can yield a half-point savings in total spend, net of the cost of capital.


Of course, actual savings from collaborative settlement will vary depending on several factors, including the volume of monthly disbursements, the amount of discounts available from prompt payment and the proportion and cost of exception items.  Nevertheless, the value of financial supply chain optimization is enormous when considering the cumulative value realized by all trading parties across an industry or trading segment that participate.


Road Map to Results - Sponsors Needed


Realizing benefits of financial supply chain automation need not be a painstakingly long process. Outsourced solutions exist that offer very short implementation cycles similar to that of payroll processing. For suppliers, activation is accomplished via a simple online registration that can be completed in a matter of minutes. Once activated, suppliers reap the benefits of the payment services network across all customers disbursing funds in this manner.


The fastest results come from buyer-sponsored activation. The best candidates are organizations that disburse high volumes across a wide supply chain. These include companies where first-generation EDI or ACH solutions have been deployed to less than 20 percent of trading partners after many years of effort and where accounts payable processes can be substantially improved. These organizations are also looking to strengthen supplier relationships and view collaborative information systems as a means to better customer and supplier service.


With a choice of new alternatives, corporations should move quickly to plan initiatives in this fashion: 


·        Plan and budget for invoice presentment and electronic payment solutions: Supply chain leaders should initiate internal projects to investigate emerging financial supply chain solutions. By investigating solutions now, proper budgets and IT resources can be in place for deployment over the next 12 months. 


·        Sponsor a payment services network pilot among top suppliers: Disbursement organizations should sponsor a pilot to their top trading partners. This is a low risk, high reward mechanism that initiates the important process of establishing information connectivity with valuable trading partners.  


·        Activate to receive electronic payments: The vast majority of organizations receive payments via paper check and lockbox services. It is now possible for suppliers to offer customers an electronic alternative via a payment services network. Supplier activation can be accomplished in a matter of minutes with virtually no change to existing processes. This is a simple, low-cost way to learn about these new solutions and directly assess their value. 

New Velocity for Business Commerce


Payment services networks may ultimately be the best way for the finance department to maximize global working capital. They give disbursing organizations better control of payment and settlement dates, and allow them to shorten payables cycles to capture all available supplier discounts. For suppliers, they help to reduce DSOs and improve management of exceptions and disputed items. With the potential to dramatically impact corporate earnings, the payment services network will become a valuable business solution for corporate finance.


Tom Glassanos is president and CEO of Xign Corp., a provider of financial applications and services that automate the settlement end of the supply chain.