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So you want to move to invoice automation – imaging, workflow, or even electronic invoicing. Problem is, your CFO, Controller, AP Manager, or IT staff hasn’t bought in. You’ve got a plan, but don’t have the buy-in to start.So what is the surefire way get your project approved?
PayStream has developed simple metric – PIQ (paper invoice quotient) – to analyze operations and simplify the way management thinks about AP. PIQ is a simple way to better communicate the opportunity to management. It is a score derived from a standardized survey to measure your organization’s level of dependency on paper in AP.
PIQ includes two different concepts: efficiency and effectiveness.For example, an efficiency metric would be determining that your cost is $6 per invoice to process. The effectiveness metric is how long it takes to process that invoice. Typically, AP will say that it takes 24 or 48 hours to process, or during rush times maybe a week. However, that’s only part of the story. You need to know how long the invoice takes from the viewpoint of the supplier or CFO.
PIQ tracking starts at the invoice date and ends on the day the corresponding voucher is approved in your accounting system. The PIQ is then calculated by taking the approval time divided into the percentage of electronic invoices. By weaving in these two concepts, PIQ makes it simple for you to demonstrate opportunity to your senior managers.
Metrics and Your PIQ
PayStream conducted an AP Benchmarking Survey in the Fall of 2009 and asked survey respondents questions that would serve as guideposts to help other AP departments benchmark their business. The number one response (65 percent) to the biggest opportunity inside of AP was process inefficiency. Everyone wants to provide AP services cheaper, better, and faster.
The second ranked opportunity (53 percent) was improved visibility, which is driven around discount management. In other words, there’s a frustration, especially among senior managers, about invoices floating around the organization and not being in the company’s ERP system.
We call this “invoice float” because the invoice is moving around the organization and may be sitting on someone’s desk, perhaps because the person is on vacation, investigating a discrepancy, or wants to post the invoice in Q4 rather than Q3.
Envisioning Your ROI
The first source of ROI is AP efficiency. Reducing processing costs and speeding up the process will account for anywhere from 25 to 35 percent of the opportunity. The remaining percentage comes from spend visibility; how money is being spent and the timing of that spend. The next piece is working capital authorization. Having better visibility to the spend can allow you to take advantage of paying some suppliers early in exchange for a discount.
Having a broad foundation to your business case means bringing in other business units and working with your counterparts—including Treasury, Procurement, and Finance.It’s vitally important to consider all of these elements together.One of our clients received approval for an AP project in the past, only to have the assistant controller reallocate the funds to another project. When we did an analysis, we found that the AP manager had only included about 24 percent of his business case. He missed a huge chunk of opportunity.
The one tip that we always like to suggest is that you should visualize your ROI model.The first thing you will notice is that there is some red, which means that it’s going to cost money before you start saving money. The first thing that the people reviewing your business case want to know is how much the project is going to cost. It’s important to show that you have a realistic plan and understand that it will go negative before positive.
The Four Truths
When it comes to AP automation, there are four truths you need to face and overcome to achieve success:
1. Phantom Pain. The people who make the decisions about AP automation don’t really understand the pain of suboptimal processes, because they aren’tinvolved in AP. That’s why you need to make it simple for the CFO, controller, or IT manager to understand your pain and business case.
2. The End of Meaningless Metrics. To convince the right people, you have to communicate in their language, not the language of AP. Present your facts, compare yourselves with others, and show the the dollar value of your proposal. Make them feel the pain of a competitor or other recognizable innovator that is meaningful to them. Everyone wants to be least as good as or better than the Joneses, including your managers.
3. Making the Case. When building a broad foundation, remember that it’s not just about AP efficiency. It’s also about servicing your suppliers and making it easier for them to do business with you.
4. Destination Blues. You need to paint a picture of your vision; where you’re trying to go with automation. The vision is not that you’re going to use OCR or set up an electronic invoice portal, but rather that you want to move to a touchless process in AP. Management can equate a touchless process with reduced costs and increased visibility into the number of invoices and accruals. The destination blues involves convincing the people who need to approve your efforts.They won’t necessarily understand the technology, so you need to simplify it for them.
2009 proved that one thing is clear about accounts payable — the future of AP rests with technology. Why?
Companies are looking to their operating departments to cut costs, and they see that with the right automation tools, AP can dramatically lower invoice processing costs, reduce erroneous payments, and capture more discounts. In our conversations with literally hundreds of controllers and AP managers in 2009, one theme rose above the rest: how can technology help us improve our finance operation?
Despite widespread and clear desire for improvement, confusion about automation options continues to plague finance managers.PayStream’s analysts believe the trick is sorting out the AP automation landscape.
What technology is available and which tools are the most effective?
How can AP best use these tools?
How do we get started?
1. Start with the correct data. Keying everything that comes in off of invoices would be a great start, but what if you have the wrong information on the invoice, or if the information was captured incorrectly at the point of entry?
For example, an invoice that comes in from an electronic portal may be incorrect. That’s why it’s important to get the proper information off of the invoices. For OCR, (what we are now correctly calling “intelligent document recognition” or IDR) getting the exact data you need is not that easy. But it is absolutely critical, because the next step—workflow routing and matching—requires the proper information in order to work correctly.
One common trap:the difference between header capture and line-item capture can mean the difference between a high-touch process and a touchless one.
2. All workflow is not the same. Workflow is an amorphous cloud and many project overruns are the result of not properly estimating what it’s going to take to change the business process.
What we found working with Phillip Morris and the Visiting Nurse Services of NY was that you need to go through a design process and figure out what you want the workflow system to do before you make a vendor or solution decision.
You can train the technology to do pretty much anything you want, so how do you want it to work?
Invoice approval routing is not the same as automated processing. For example, if invoices are being received at field offices and locations today, how are you going to manage routing once receipt is centralized at a PO Box controlled by AP?
While your staff knows internally where to route a specific supplier invoice for approval, this is usually based on the wealth of organizational knowledge. We call this collective understanding “tribal knowledge” which encompasses the 7-10 years average years of experience that your team members possess.
Once you centralize receipt, you will have to train your suppliers to put the person’s name or department name on the invoice so it can automatically be routed to the correct person. This is a business change that a lot of people don’t think about when moving to automation.
In order to succeed, AP needs to stop doing manual rework. Your team has become expert at working with imperfect data, and ePayables automation is not as forgiving. Capture, matching, and business logic requires powerful software. In summary, you need to design your business process around using the technology and automation in a way that makes sense for future digital AP, not for the way you are doing it today. (Click here to download PayStream’s report on imaging and workflow automation.)
3. Solid foundations are built on a well-designed business case. According to PayStream’s study of innovation in AP, the most successful business cases that make it over the hurdle when competing with other initiatives are those that are built on a broad business case foundation.
AP efficiency is only a third of the story.This means you need to get other individuals and business units inside of your company to buy into what you want to do.
The problem that many of us face is that AP is just one small (and frequently overlooked) business unit.For instance, other business units, many of whom have customers, might have a little more leverage when it comes to getting IT resources to help with projects or management buy-in when it comes to funding. Admittedly, AP is not the first in line when there’s a fight in the CFO suite about which projects they are going to spend money on.
The Case of the Lost Opportunity:
One of our clients (a large hospital) received approval for an AP ePayables project only to find out a short time later that the assistant controller decided to reallocate the funds to another project. When we did an analysis of the business case model, we found that the AP manager had only included about 24 percent of the actual residual benefit to automation. He missed a huge chunk of opportunity related to cash management and purchasing savings.
The first source of ROI is easy: AP efficiency.For example, reducing staff and speeding up the process will account for anywhere from 25 to 35 percent of the opportunity.
The remaining percentage comes from spend visibility—how money is being spent and the timing of that spend—which will help Procurement rationalize overall spend.
The next piece is working capital authorization. Having better visibility to the spend can allow you, for instance, to take advantage of paying some suppliers early in exchange for a discount. It’s similar to using a p-card to get a rebate from your bank. Paying your suppliers early in exchange for a 1½ or 2 percent discount is a quick way to make fast money for your automation efforts.
Having a broad foundation to your business case means bringing in other business units, and working with your counterparts, including Treasury, Procurement, and Finance. Even better: more stakeholders to push for your project.
Summary
In order to succeed in 2010, you need to paint a picture of your vision for the future of AP.Start with a picture of where you’re trying to go with your automation.
The vision is not that you’re going to use OCR/IDR or set up an electronic invoice portal, but rather that you want to move to a touchless process in AP.
Management can equate a touchless process with reduced labor costs and increased visibility into the number of invoices and accruals. The biggest hurdle involves convincing the people who need to approve your efforts, and they won’t necessarily understand the technology, so you need to simplify the future vision for them with simple goals and a visual map.
REPORT: Eight Building Blocks of Invoice Automation, Supply Chain Finance & Discount Management
AP Automation including Invoice Automation and Discount Management (IADM) initiatives need a framework to ensure that programs are approached on a strategic basis which bridges both the Supply Chain and Finance organizations. PayStream’s analysts have introduced such a framework to help enterprises implement integrated IADM and maximize benefits.
To achieve the long-term value of Invoice Automation & Discount Management (IADM), organizations need to adopt a strategy involving both Procurement and Finance and therefore initiatives should be approached at an enterprise level. So far, only a limited number of enterprises have stepped up to this challenge and are implementing what PayStream Advisors calls integrated IADM optimization. This number is steadily rising, as corporate enterprises begin to achieve benefits in their first attempts at IADM and realize what really needs to be done. Our most recent research survey that many enterprises are still implementing electronic invoicing or stand alone Discount Management or Supply Chain Finance programs, not truly integrated projects.
When companies focus on planning, as opposed to implementation, PayStream estimates that:
Nearly 30 percent of surveyed enterprises have plans that would fit the integrated IADM description.
Approximately 50 percent of those are planning a Level I approach (not integrated)
Less than 20 percent are planning an integrated approach which brings together buyer/supplier collaboration with electronic invoicing.
More than 15 percent are considering global initiatives to inject third party financing into their supply chains
Integrating Invoice Automation and Advanced Finance Tools such as Dynamic Discount Management or Supply Chain Finance is not easy. It requires a multi-disciplinary vision and leadership to drive a focus on unleashing working capital from the trade Invoice and receivables, otherwise it will remain fragmented. It involves difficult changes to processes, and external organization that can make implementation difficult. Organizational and cultural barriers exist between Supply Chain/Procurement and Finance managers making clear thinking on IADM difficult.
The technology support seems easy but it isn’t. Technology staff must grapple with the challenges of getting invoices approved faster, multichannel alignment, and systems integration. Even if the CFO accepts the need for enterprise-level IADM, the quarterly demands of procurement and working capital targets, especially in delicate economic conditions, make IADM one of the the most important challenge facing the finance organization, but not the most urgent for the CFO. This typically results in a focus on tactical quick wins until conditions are better.The main reason enterprises are not implementing integrated IADM is an inability to see the big picture and understand what is involved.
Just as a map helps you understand the context of your journey (the roads you need to navigate and alternative routes), so the PayStream IADM framework helps enterprises make decisions about the best route and objectives for their situation.
Following an analysis of several larger corporate enterprises, PayStream Advisors has created a IADM framework, or map, called “The Eight Building Blocks of Invoice Automation and Discount Management (see Figure 1) to help enterprises see the big picture, make their business cases and plan their implementation. The framework can be used for internal education and debate in developing the IADM vision and IADM strategies. It can then be the basis of an assessment of the enterprise’s current and required IADM capabilities, to help understand its current position and future strategy.
Using this framework, PayStream Advisors is currently profiling several enterprises that are great examples of IADM at work.
Core Topic
Supply Chain Financing: Optimizing Working Capital through the strategic use of financing and discounting in the supply chain
Key Issues
During the next five years, how will cash management strategies, processes and technologies evolve to enable enterprises to improve the use of working capital tied up in trade Invoice and receivables?
What is IADM, how will it evolve, and what drivers are emerging to force its adoption?
What is the senior finance executives in successful IADM initiatives?
Strategic Planning Assumptions
Through 2008, 90 percent of successful IADM initiatives will balance the needs of improved supplier relationships with working capital improvements Enterprises that have a wide differential between their and their suppliers cost of capital are twice as likely to achieve adopt IADM and Discount Management goals.PayStream’s Building Blocks research and report will be released at the September 10-12th PayStream Summit, in Orlando, FL. Those finance and supply chain managers whom desire the latest information, tools and techniques in Invoice Automation and Discount Management should reserve their delegate representation at the conference
Supply Chain Finance and Payables Discount Management (SCF/DM) initiatives need a framework to ensure that programs are approached on a strategic basis that bridges both the Supply Chain and Finance organizations. PayStream’s analysts are working on such a framework to help enterprises implement an “integrated” Supply Chain Program, and have created the Eight Building Blocks of SCF/DM framework to get our clients started. Just as a map helps you understand the context of your journey (the roads you need to navigate and alternative routes), so the SCF/DM framework helps enterprises make decisions about the best route and objectives for their situation.
To build on this theme, PayStream will host an educational conference “Supply Chain Finance - Discount Management Summit” in June 2008 to bring together supply chain and finance executives to explore the future opportunities in working capital. The theme of this year’s SCF conference is Uncovering Working Capital in your Supply Chain. PayStream has also created the Supply Chain Finance Excellence Awards to recognize those companies which show leadership in their working capital optimization programs.
SCF/DM is a business strategy that optimizes working capital and supply chain collaboration for both buyer and supplier relationships by seeking tailored payment terms for services and materials. As an example, a Paystream Client, a multi-national services company with over a billion in annual domestic spend approached us to help them define the opportunity for a FSC-DM program. With less than $400,000 in set up costs, our client will generate over a million dollars per year in hard dollars benefit from working capital improvement AND the project will turn a positive ROI in only 8 months. SCF/DM/DM includes both structured financing programs and early payment discounting for supply chain payments, fostering working capital centric processes.
SCF/DM programs enable:
Greater payables and receivables visibility
Increased access to payment scheduling
More effective supply chain interactions
Integration throughout all supply channels and back-office billing and invoice functions.
To achieve the long-term value of Supply Chain Finance and Payables Discount Management (SCF/DM), organizations must adopt a strategy that integrates both Procurement and Finance. Therefore initiatives should be approached at an enterprise level. Recent research shows that many enterprises are still implementing SCF or DM programs, but not truly integrated projects.
A cohesive and integrated vision starts with an overall Supply Chain Finance value proposition. The responsibility for creating the SCF/DM vision clearly lies in the CFO & Treasury Suite. The most fertile environment is one in which the chief finance officers understand what SCF/DM means and is receptive to new ideas and ways of working. The SCF/DM vision must be well-known and accepted throughout the enterprise and the supplier base. With this in mind, it is useful to have a meaningful, company-specific definition of Working Capital goals.
Following an analysis of several enterprises, PayStream Advisors has created a SCF/DM framework, or map, called “The Eight Building Blocks of SCF/DM” to help enterprises see the big picture, to make their business cases and to plan their implementation.
The framework can be used for internal education and debate in developing the SCF/DM vision and SCF/DM strategies. It can then be the basis of an assessment of the enterprise’s current and required SCF/DM capabilities, to help understand its current position and future strategy. Using this framework, PayStream Advisors is currently profiling several enterprises that are great examples of SCF/DM at work. The eight building blocks in the model are the fundamental components for effective integrated SCF/DM. Beneath each component are a variety of interlinked capabilities. A key feature of the framework is to emphasize the need to create a balance between the requirements of the company and the working capital.
Integrated SCF/DM is an enterprise-wide initiative, where the enterprise knows how it wants to manage working capital and supplier interactions and puts all relevant capabilities in place to achieve those goals.
A solid SCF/DM vision and strategy Supportive set of integrated initiatives in the areas of,
Supply chain and finance collaboration
Working capital compression goals
Invoice visibility processes
Automated payments
Supporting technology
Measurement & improvement metrics
The eight building blocks in the model are the fundamental components for effective integrated SCF/DM. A key feature of the framework is to emphasize the need to create a balance between the requirements of the supply chain and working capital – a task that is easier than many think.
Every Supply Chain executive can tell you that sourcing strategy, category depth of expertise, negotiation prowess, and procurement execution are the critical components of a highly effective supply management initiative. If everyone knows the basics, why do we still see such an amazing opportunity in eProcurement? It’s all about visibility (or lack thereof) of procurment processes.
Lack of access to spend metrics and controlled processes has been a big block for many Source to Settlle process improvement efforts. The opportunity for the supply chain organization is enormous — combined with payables automation, it’s very enticing. Moreover, spend data is also vital for other business strategies, such as budgeting and planning, inventory control, and product development.
Data visibility is critical for identifying hard-dollar savings opportunities and developing sourcing, budgeting, planning, and product strategies. Most importantly, it is critical because with it, overall Spend Visibility will provide an important foundation for advanced strategic working capital optimization. Likewise this sort of data and analysis leads to anentire change in corporate procurement culture, where procure-to-pay becomes part of an overall strategic view towards financial strength.
We’ve seen some very compelling ROI’s from recent initiatives at companies such as American Express (Noreen Dalton’s Presentation at IQPC Purchase to Pay in 2007 was very illustrative) and Reuters. These companies seem to have a renewed emphasis on the expense side of things and have drank the ‘control costs’ cool aid.
Here’s a neat thought:
“It takes at least $5 in new sales to equal the same impact as a $1 reduction in procurement or supply chain costs.”
The most common question we get from client organizations is “What technology makes the most sense for automating our operation?” But we think there is a better, more important question that is frequently left out. How should I justify the automation of our operation?
Going paperless requires corporate buy-in. And in order to get that buy-in, you’re going to have to develop a bulletproof business case. The first step is to accurately profile how you are doing with your existing process. Some call it current state analysis, others call it benchmarking. (more…)
Dynamic Payables Discounting is a process which allows buyers and sellers of commercial goods and services to dynamically change the payment terms — such as net 30 — to accelerated payment based on a sliding discount scale. Dynamic Payables Discounting is “Dynamic” in one or more ways.
Dynamic Payables Discounting:
Allows supplier to control payment timing
Discount amount is calculated dynamically based on the number of days remaining until the due date.
Discounts do not need to be negotiated in advance, rather can be taken dynamically as working capital needs dictate.
Trading parties can tap into an alternative source of working capital with the use of third party creditors whom pay early on behalf of the buyer.
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