Accounts Payable's Influence
People don't always think of Accounts Payable (AP) as a strategic department within a company. Like other important infrastructure functions, it is most obvious when it doesn't perform flawlessly. With an industry average 1.8 percent error rate, however, a company processing 10,000 invoices a month can disrupt the services provided by nearly 200 suppliers a month.
The main task of the AP department is to pay valid claims in an accurate and timely way. To do that, the AP staff must make sure that invoices are collected, routed, reviewed, approved and ultimately paid. And it must execute these tasks at the least total operational cost.
Purchasing departments expect that AP is consistent with their payment processing cycles. If a Purchasing manager cannot accurately predict how long it will take the company to pay an invoice, then negotiating early pay discount terms with suppliers is of no value. The Finance organization can leverage the company's credit to directly lower the costs of goods by increasing the discounts earned by early payments. For suppliers that fail to submit invoices electronically, many companies have increased their working capital by extending these payment cycles.
The conclusion is that Purchasing, Finance and company financial performance are affected by the performance of AP. Therefore, paying invoices must be predictable, timely and accurate.
The Problem is Paper
With thousands of suppliers sending thousands of invoices on a monthly basis, achieving the above goals can be a challenging task for even the best companies.
Most companies still process an overwhelming number of paper invoices. Teams of AP clerks manually enter invoices into an AP system — a time-consuming, error-prone process. Some companies choose to improve the process with scanning solutions including optical character recognition (OCR). These solutions have helped but require continuous maintenance due to inaccuracies.
Paper invoices also create friction among trading relationships. Because the paper process is inconsistent, supplier calls and e-mails to follow up on invoice status are commonplace. Many companies have tried to tackle the problem with a solution called electronic data interchange (EDI), which has been around for over 25 years.
EDI Is Embraced
For years, EDI solutions looked promising. The rallying cry was, "Invest in an EDI infrastructure and your paper problems will go away." EDI encompasses more than invoices, but the invoice has always been seen as the main priority. The idea was that businesses could integrate their systems with their suppliers' systems with a standardized data format and communication method. For businesses receiving thousands of monthly paper invoices this was so enticing that they invested whatever it took to get up and running.
What Worked? And What Didn't?
The results of EDI have been mixed. Most large companies have made the investment and reduced the amount of paper invoices. That's the good news. The bad news is that while the value was great for companies who jointly send and receive large volumes of documents, only a small percentage of suppliers saw the value in participating in EDI. The high costs of implementation and IT resources needed to roll out EDI were obstacles for the majority of suppliers. Further, maintaining an EDI solution requires ongoing service and maintenance. Today, it is common to see buyers with only a small percentage of suppliers connected via EDI and the majority still sending paper invoices.
Many companies have invested in EDI. And for the companies with whom they have connected, it works. They have the ability to take invoices in electronically. They have a workflow implemented that enables routing and approval. The problem is that not enough suppliers are willing to send EDI invoices to these companies. What benefits would these companies realize if the rest of their invoice volume was converted to EDI? To name a few:
- AP departments would not have nearly the paper burden they currently have and could process invoices in a timely, accurate manner;
- Supplier inquiries such as "when will I get paid?" would be eliminated;
- Purchasing departments could dictate favorable terms with suppliers;
- Finance departments would enjoy increased margins.
There are options for companies looking to extend their EDI investment to suppliers regardless of their size. For example, electronic invoicing communities connect suppliers and buyers through hosted solutions delivered via software as a service (SaaS). The hosted communities serve as an intermediary that converts whatever a supplier sends (in terms of invoice format) to whatever the buyer needs. ( Figure 1.) For example, if a supplier wants to submit an invoice in XML (a common data format) and the buyer company wants to receive EDI, the community will translate the data accordingly. Thus, a business can leverage its EDI investment by extending it to suppliers without actually requiring the supplier to submit EDI.
Not All Communities Are Alike
When researching electronic invoicing communities it is critical to look for important characteristics. Because supplier adoption is the key to extending your EDI investment (or any electronic invoicing project for that matter) the community must remove all barriers to supplier adoption.
A report issued in September 2008 from Forrester Research states: "One of the biggest challenges in the electronic invoicing presentment and payment (EIPP) market has been getting electronic invoice data from vendors that still primarily send out paper invoices."
Following are a few best practices to adhere to:
- Suppliers should not be forced to type invoices into a Web portal. Suppliers should have the option to submit invoices directly from their existing billing system;
- Suppliers should be able to connect to the community in minutes;
- Suppliers should not have to pay for implementation costs;
- Suppliers should be able to connect to the community without investing their own IT resources;
- The electronic invoicing community should provide supplier on-boarding and recruiting services so the buyer is not responsible for supplier participation.
By taking advantage of new technology and the evolution of electronic invoicing communities, companies can extend their EDI investments and realize previously unattainable success. Not all communities have the ability to fulfill the promise of reduced paper, so it is important to look for communities that maximize supplier participation by removing technical and financial barriers to supplier adoption.