Managing Payables in a Networked Economy

Collaboration over a business network is bringing buyers and sellers together like never before. We’ve seen this in our personal lives with networks such as Amazon and eBay, and now networks are serving a similar role for business-to-business (B2B) commerce.

This presents a tremendous opportunity for the AP function. As a tactical organisation charged with paying the bills, the role of AP has been largely defined by data entry, resolving invoice errors and responding to supplier inquiries about payment status. As business networks eliminate much of these activities, they empower AP with new responsibilities – turning data entry clerks into business analysts that help procurement enforce compliance and support treasury efforts to manage cash better.

The Network Rules

Resolving invoice errors and exceptions is arguably the biggest challenge facing AP, and a major contributor to rising invoice processing costs. How much time treasury spends in AP managing invoice exceptions can serve as a barometer of how efficient the company’s AP operations are and its ability to compete in a networked economy.

With today’s business networks, business rules serve as a line of defence that detects errors and exceptions upon invoice receipt, without any business user intervention. Any problem invoices are automatically rejected and returned to suppliers for correction and re-submission. This eliminates invoice processing delays that can take weeks to resolve, and helps focus supplier efforts to submit correct invoices the first time, every time.

Freed from the responsibility of resolving invoice errors, AP staff is available for higher value activities such as moving suppliers off paper to an electronic invoice submission process, enforcing contract compliance, performing root cause analysis of recurring invoice errors, identifying early payment discount opportunities, or driving check-to-automated clearing house (ACH) payment initiatives.

The ability to enforce compliance to company policies, preferred vendors, and negotiated prices is typically outside the scope of AP. However, a business network that can support the matching of invoices against purchase orders, contracts, and service entry sheets allows AP to play a vital role in enforcing compliance and managing spend.

The return on investment (RoI) from this capability alone can dwarf any costs associated with a business network. According to research data from the Hackett Group, organizations considered ‘laggards’ in their ability to enforce contracts have contract leakage of US$18.8m for every billion dollars of spend.

For a large organisation managing US$6bn in spend, that comes to nearly US$113m in contract leakage. Even the ‘leaders,’ the group reports, experience contract leakage to the tune of US$4.8m for every billion dollars in spend. A business network that can automatically match invoices to contracts helps prevent this contract leakage, minimising AP and procurement involvement in the process.

New Potential for Collaboration

Business networks also enable supplier self-service for viewing invoice and payment status that eliminates another low-value activity within AP – responding to numerous phone calls about payment status. Some supplier portals also offer this capability but these typically require separate connections for each customer, which increases the cost and complexity. A true business network provides single sign-on for all customers.

In addition, some business networks extend visibility and collaboration across a broad range of documents relating to a transaction, including purchase orders (POs), order confirmations and advance ship notices, along with invoices. This capability provides significantly greater value than an e-invoice only network.

As an example, consider the case of a leading refinery and chemicals company suffering a recurring problem with a large supplier over invoice-PO match errors. Each blamed the other as responsible. Once the company and the supplier began transacting over a business network, the bottlenecks became clear (they were supplier issues), the problems were solved and the result was touchless invoice processing. What’s more, the supplier embraced the new, collaborative process. It saved them time and lowered their billing costs, so much so that the firm now offers lower prices for orders that flow through this e-commerce channel.

For the buyer customer, the benefits went beyond the efficiency improvement. The collaborative process freed up two hours per day of each buyer’s time spent fixing problem invoices, allowing these buyers to focus on more value-added tasks. When one considers the positive impact on business performance across 15 plant locations, there are evidently substantial benefits that don’t always appear on the business case. In this example, the improved process allowed the company to achieve a three-year operational improvement goal in less than five months.

New Ways to Manage Cash

In today’s low interest rate environment, the double-digit, risk-free cash returns from early payment discounts are attracting attention. For organisations with healthy cash balances, no other short-term investment can compare.

With the ability of AP to process electronic invoices over a business network in a few days, organisations can capture virtually all of these discounts. There’s also a new form of ‘dynamic discounts’ that expands early payment discount opportunities. Whereas traditional discounts such as 2% 10 net 30 are static – on day 11, no discount exists, so there is no incentive to pay before day 30 – dynamic discount opportunities continue on a sliding discount scale up to the due date of the invoice.

According to Ariba customer results, cost savings from these discounts on average come to US$2m-$3m million for every US$1bn of spend. The best performers also find that 20% to 25% of targeted suppliers typically participate in an early payment discount programme.

If your treasury group is unaware of this opportunity, you should initiate the discussion. This may involve clearing up any misperception that early payment discounts involve a tradeoff: a negative impact on days payable outstanding (DPO). That’s no longer the case. Organisations with an inefficient invoice process that pay invoices upon receipt often have DPO metrics below industry averages. This presents an opportunity to combine payment terms standardization with an early payment discount program—expanding discounts while also maintaining or extending DPO. Furthermore, your treasury group still controls the rate of return from these discounts and the amount of cash to apply to the programme.

Building the Business Case

If streamlining invoice processing and procure-to-pay (P2P) operations remain low priorities for your organisation, it’s likely that key stakeholders don’t understand the true cost of a business transaction. They may not be aware of the volume of problems invoices requiring rework, or the dramatic impact of contract leakage on business results.

In building the business case, recognise that the 60%-80% cost savings from e-invoicing is just a small part of the RoI. Even greater savings come from expanding early payment discounts, freeing up working capital and preventing contract leakage. According to P2P industry studies and Ariba customer results, savings from all these areas are conservatively estimated to be US$10m per billion in spend.


Ariba managing payables

As you embrace a business network to manage your payables, you’ll experience a transformation in AP. There’s more time allocated for business analysis, and less time devoted to data entry. This elevates the role of AP from a cost centre to profit centre, where AP gets recognised for making valuable contributions to bottom line results.

What to Look for in a Business Network:

By driving new forms of trading partner collaboration, business networks enable organisations to buy, sell, and manage their cash in ways that can’t be matched when transactions are handled manually on paper. As you consider a business network to transform your payable operations, make sure that the provider you are considering offers these key features and capabilities.

  • Supports the exchange and management of key transaction documents such as purchase orders, change orders, order confirmations and advance ship notices along with the invoice
  • Creates orders from catalogues to eliminate exceptions and enforce compliance.
  • Automatically matches invoices to purchase orders, contracts and service entry sheets without business user intervention.
  • Validates line-level invoice data upon submission, with business rules that monitor correct PO numbers, price and quantity tolerances, application of correct tax rates, non-PO invoices, country-specific regulations, and more.
  • Supports or provides native integration to enterprise resource planning (ERP) and back office systems to drive easy supplier adoption.
  • Delivers value to suppliers through self-service account management, full visibility into order-invoice-payment status, lower transaction processing costs, and more.
  • Supports the conversion of paper invoices to an electronic format and consolidates processing of these invoices over the network.
  • Offers an e-commerce channel where suppliers can grow their business – from new and existing customers – and where buyers can find new sources of supply.
  • Features an experienced supplier enablement team with years of experience in helping global suppliers transition to e-invoicing.
  • Provides ‘closed-loop’ source-to-settle capabilities over the network, where on-demand applications for sourcing, spend analysis, contract management, and catalogue management are tightly integrated with the P2P automation process.



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