Duncan Jones, senior analyst at Forrester, gives a detailed account of why companies should embrace electronic invoicing.
A recent survey by the US Institute of Management and Administration found that the average administration cost per invoice is €30. Even more worrying, 70% of the AP managers surveyed did not know the figure for their own company. Yet companies that have implemented accounts payable electronic invoice presentment and payment (AP-EIPP) report huge savings and massive ROI. Finance directors with significant AP processing costs who haven’t yet done so should make it a priority to consider AP-EIPP and include it in their enterprise application strategies.
Humans are expensive and error-prone
Forrester Research has interviewed dozens of companies using AP-EIPP to find out what they have done and why. Our respondents cited three key issues driving the project’s business case. Prior manual processes, they told us, were:
Too slow to capture payment discounts and honour contracted payment terms.
One company had such a large backlog that many invoices were already overdue for payment before they were first touched by an AP clerk.
An expensive non-value-adding activity.
Our research aligns with the IOMA survey of cost per invoice ranging from €10 to €100.
The main cost driver is the number of invoices that cannot be successfully validated first time e.g. because they do not reference or have a different price to supporting purchase orders (POs).
Unreliable, often failing to spot invoice errors.
AP clerks may ignore price differences, wave through extra charges and even process duplicate invoices for a single service.
Prior AP improvement efforts had limited success
Many finance directors initiated projects that focused internally on AP, resulting in incomplete solutions that failed to address the underlying causes of invoice processing problems. Business process outsourcing (BPO) is an example – certainly there are savings from labour arbitrage and economies of scale, but its better to eliminate manual processes than merely make them slightly cheaper and faster.
Document management systems (DMS) are another superficially attractive option that look good on paper, if you’ll pardon the pun, but under-deliver in practice. Sellers of DMS, which combine scanning, optical character recognition (OCR) and work flow, sometimes convince FDs that all their problems can be solved by turning the paper into electronic images, but this isn’t true. DMS can’t parse sufficient data from the invoice image to drive automatic matching and approval, so they do little to reduce the problem invoices that cause all the work. They do, however, enable BPO and shared service centres to dump the discrepancy resolution effort back on the requisitioning departments and claim that as an efficiency gain.
AP-EIPP products automate the Invoice-to-Pay process
So why do so many companies still use people? Because until recently, the absence of document standards meant that human beings were essential to process unfamiliar invoice layouts and parse out vital information and key data into the AP system.
AP-EIPP products automate and streamline the Invoice-to- Pay (I2P) process in four stages: receiving electronic invoices (e-invoices) instead of paper, transforming it into a usable form, validating it with supporting records, and passing approved invoices through to payment (see Figure 1). Complete EIPP solutions, either from a single provider or assembled by a system integrator, will:
Enable suppliers to submit invoices electronically.
Ideally, e-invoicing solutions accept data direct from suppliers’ sales order processing systems, but they also provide websites for suppliers to manually input or upload invoices online. Solutions should include OCR for suppliers who cannot or will not support true e-invoicing.
Transform the data into a usable format and layout.
Without universal data standards, systems have to be trained to recognise each supplier’s file layout and work out what each bit of data represents from its position in the file or how it is labelled. For example, a supplier may send data in a tagged format such as XML, but the EIPP system has to learn that the field labelled ‘your reference’ is the same as what it calls ‘PO number.’ Advanced products also apply business rules to validate the invoice and correct simple mistakes.
Validate data, using supporting records and discrepancy approval work flows.
AP-EIPP products match invoices with POs goods received notes (GRNs) and other supporting records. They use business rules to wave through immaterial differences, such as small additional freight charges of low value, and route exceptions to the appropriate person for review and action.
Provide process monitoring and invoice status reports.
AP-EIPP products provide portals so that buyers’ AP- and suppliers’ AR-clerks can track invoice status and expedite as appropriate. Key performance indicator (KPI) reporting helps management prioritise action to reduce invoice discrepancies and increase straight through processing (STP). The best products include a ‘pay-me-now’ feature so suppliers can dynamically ask to get paid faster, either by the customer, in return for an early payment discount, or by a third party supply chain finance (SCF) provider.
Impressive results
After speaking to a number of companies that have implemented AP-EIPP, three key themes have consistently emerged. The consensus is that enterprises embarking on an EIPP project should:
Initiate a cross-functional I2P improvement program.
All top-level stakeholders must support the initiative or it may be seen as an IT-driven project, or a scheme by the finance department to pass its work to other departments.
Aim for 100% STP.
Project teams should consider every invoice category and envisage how human intervention could be minimised, if not eliminated. I advise clients to think in terms of ‘yes, if…’ instead of ‘no, because …’. Our best case studies found ways to cut manual steps for even the most intractable categories such as complex field services.
Focus on maximising supplier participation.
STP, discrepancy notification and access to SCF enable suppliers that e-invoice to get paid faster than those who stick to paper – which is especially important in today’s economy.
Finance directors should evaluate what AP-EIPP can do for them.
The AP-EIPP market is growing by nearly 30% per year. The potential benefits – lower administration costs, better visibility and reduced error rates – are clear. Now is a good time for FDs to learn more about the technology, and how it could help them streamline their I2P processes. A good way to start is by formalising the collection of KPIs such as administration cost per invoice, % of invoices supported by PO, and % matched first time without errors. This data can help FDs identify where there is the greatest scope for improvement – such as which expense categories cause most problems for the AP department and what would have to be done to achieve 100% STP? Above all, FDs should look for a complete solution and set the goal of getting most suppliers submitting invoices electronically, with the maximum possible straight through processing.
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