The Business Network Drives Transformation in A/P

Accounts payable automation is the next great opportunity to improve business performance through collaboration, writes J.P. Morgan's David Peraino

1237393541253 10326968
March 18, 2009 — Since "the network became the computer," breakthroughs in business collaboration have driven corporate productivity to new heights, offering competitive advantages along the way.

Take one example: the new drug submission process. The cost and time associated with the development of a new drug is staggering. It can take years of effort and a semi-truck load of documentation to the FDA to gain approval before a new drug can be marketed. By enabling a business network that connects researchers, project management and marketing teams, compliance officers and other key stakeholders, pharmaceutical companies have dramatically compressed the time it takes to conceive, develop, market and sell a drug.

This not only saves millions of dollars in development costs, but also gets products to market much faster. Pharmaceutical companies that manage their drug development and submission process the old fashioned way are at a distinct disadvantage. They face higher cost structures, a limited ability to react to windows of opportunity and a weakened market position.

New forms of collaboration have created billion-dollar businesses for some companies. The eBay phenomenon has led to the development of a whole cottage industry of home-based businesses, allowing anyone to find a market for personal belongings or household items. But can you imagine having to settle an eBay transaction with a paper check?

Too many businesses find themselves in that payment predicament — not by choice, but out of habit. We're now seeing many organizations kick that habit as the business case for accounts payable (A/P) automation becomes more broadly understood. In fact, A/P automation represents the next great opportunity to leverage collaboration in a way that transforms business performance.

For organizations looking to develop initiatives in this area, there is no better time to begin than now. To survive, much less thrive in today's business environment, organizations must drive efficiencies across all of their operations. Automation can help, enabling collaboration with suppliers that can dramatically improve business performance.

The Case for e-Payables

The business case starts with assessing the costs of paper payables. Often, organizations don't really know the true costs of paying their bills. Invoice processing costs range from less than a dollar to $5 per invoice or more, depending on the relative levels of manual versus electronic processing. Invoice exceptions, which can represent anywhere from a few percent to 15 percent or more of total invoices, drive up those costs by two or three times. Then there are the costs associated with processing a paper check — the paper stock, envelope and postage — and fraud risks.

Automating these processes lowers costs and risk, but there's more to the value proposition. Connecting buyers and suppliers over a secure settlement network unleashes new opportunities for collaboration. The ramifications are profound in terms of improvements in cash management for both buyers and suppliers.

If chief financial officers are asking to get more return on the technology investments that they have already made, they need look no further than the A/P function. A business network for A/P requires no overhaul of technology infrastructure. You simply extend your enterprise resource planning (ERP) or core accounting system.

Let's look at the opportunity that the business network presents.

It starts with collaboration between an A/P department and suppliers' accounts receivable (A/R) department. A/P organizations know what it's like to be disconnected: prolonged invoice processing cycles; invoice errors to correct; phone calls about payment status; and few opportunities to capture early payment discounts. The business network overcomes these obstacles. In addition, a network offering a shared supplier architecture adds more value — allowing buyers to transact immediately with suppliers that are currently participating on the network, with no enrollment effort.

Collaboration leads to process transparency. That's the value of a network for settling business transactions. There's no guesswork anymore; no black hole where invoices disappear. Your suppliers have a Web portal that takes all the mystery out of getting paid.

Eliminating paper brings multiple benefits, from a cost and environmental standpoint. If you were building an A/P system from scratch, would you base it on paper invoices and paper checks? Not likely.

Mining Hidden Profits

What's most remarkable about the business network for A/P is the ability to transform data entry clerks into business analysts and cash managers who can mine hidden profits in payable balances. These profits are the early payment discounts that your suppliers will offer and that are too often out of reach due to the time it takes to process and pay a paper invoice.

The business network extends the discount opportunity to new groups of suppliers that never offered them before. Equally important, the network creates completely new discount opportunities that don't exist in a paper-based world. These include "pro-rated discounts" that can be captured on a sliding scale, past the standard term date; and "dynamic discounts," where suppliers without discount terms can request early payment of an invoice for a discount that meets a buyer's acceptable hurdle rate.

With any business process, knowledge is power. A business network for A/P generates financial supply chain business intelligence that can be invaluable for applying best practices. Organizations can leverage these best practices to set process and working capital benchmarks and monitor results.

The on-demand or software-as-a-service (SaaS) delivery model is another essential characteristic of the business network for A/P, requiring no software to install and minimal IT resources for deployment. SaaS is gaining more attention in today's challenging business environment as the preferred approach to automating business processes due to the faster implementation timeline; ability to extend core technology infrastructure; and no maintenance costs. Elimination of software maintenance is a major advantage, as these often-mandatory charges — at 22 percent or more of the annual license fee — are the subject of much controversy today.

In addition to the technology, activating suppliers is essential for success. Organizations must turn to vendors with expertise in both areas to optimize their return on investment. This includes the ability to segment suppliers and spend to maximize discount leverage. Not all supplier categories have the same propensity for offering discounts. Knowing where to focus your efforts will dramatically impact the ROI.

As this analysis suggests, there's a great deal more to A/P than paying the bills. Organizations that leverage a business network to transform their payable operations enjoy a substantially lower cost structure that is serving them well in today's business environment. Now is the time for others to follow their lead.