What Can XML Do for Your Business?

In November 2005, gtnews conducted a survey on automation of accounts receivable reconciliation and XML (extensible markup language) standards. A total of 361 responses were received comprising 145 corporate respondents. This article discusses the findings of the survey with comment from corporates and key industry players.

The ability to achieve end-to-end straight through processing (STP) across the supply chain is the ultimate goal for all corporates, regardless of their size, location or industry sector. This is particularly true in accounts receivable where effective reconciliation has direct repercussions on a corporate’s cash flow, service to their clients and business. Insufficient data is at the heart of problems preventing end-to-end STP and automated reconciliation of receivables. XML can address this deficiency and, as adoption and awareness increases, every corporate should ask itself how they can use XML to achieve end-to-end STP across the supply chain.

Deficiencies in Accounts Receivable Reconciliation

Sixty-four per cent of corporate survey respondents listed insufficient data as the number one trouble spot in accounts receivable reconciliation. Indeed, Paul Burstein, managing director, operation services strategic initiatives at GE, describes insufficient data in the accounts receivable process as a “killer”. He explains, for example, that data is not currently received or sent in a standardized electronic format and that the use of free text in fields prevents automation.

“To be able to use data effectively is the most important factor in the accounts receivable reconciliation process,” asserts Leonard Schwartz, corporate director for SWIFTNet MA-CUG (member administered closed user group) and FileAct, global transaction delivery at ABN AMRO. “The biggest challenge that corporates face in achieving end-to-end STP is getting, and using effectively, the data that will give them the reconciliation efficiency that they want within the order-to-purchase cycle.”

Carlo Palmers, head of payments standards development at SWIFT, adds that the limitations of local ACH (automated clearing house) systems, particularly in the EU, also contribute to the problem of insufficient data. “Banking applications and clearing systems have limited space for remittance information and therefore the beneficiary gets insufficient information to reconcile properly,” he says. Each EU country has its own low value and high value clearing systems with associated formats and rules, therefore the amount of data corporates can submit with the payment varies by country.

The introduction of the Single Euro Payments Area (SEPA) is likely to decrease these differences within the eurozone. For instance, Arthur Brieske, head of global ACH and db-worldPAS, global transaction banking – cash management at Deutsche Bank believes that the implementation of SEPA will drive change within the ACH systems in Europe. “The EPC [European Payments Council] banks have built in a dedicated field for the ordering customer reference on the accounts payable side and also a beneficiary reference (140 characters) as the base standard for accounts receivable,” he explains.

Main Accounts Receivable Reconciliation Problems
Poll Responses (%)
Total (361)
Corporates (145)
Banks (93)
Consultants (41)
Financial technology vendors (38)
Others (44)
High cost of manual effort required to complete reconciliation
59%
61%
56%
61%
79%
41%
Insufficient data content to accomplish reconciliation efficiently
58%
64%
59%
49%
45%
55%
Poor integration of reconciliation process with rest of the order-purchase cycle
42%
38%
47%
54%
45%
36%
Cost/effort supporting multiple methods of data exchange with banking partners
39%
36%
45%
41%
34%
34%
High risk of manual processes required for reconciliation
34%
37%
26%
29%
34%
48%
Long unpredictable payments and reconciliation cycles
26%
31%
17%
32%
18%
30%
Implications for purchase to pay process resulting from SEPA in Europe
9%
6%
10%
7%
11%
14%

XML’s Business Value

Clearly, corporates need to overcome the problem of insufficient data in order to achieve end-to-end STP and therefore automation of accounts receivable reconciliation. This is a problem that XML standards can address, among others across the financial supply chain. For example, on the issue of EU ACH limitations, ABN AMRO’s Schwartz says that the group of banks working on the harmonisation of XML payment messages (discussed below) looked at the practical capability of 73 different clearing systems to carry additional data, as well as format. “We wanted to identify not just what the message format needed but also what could actually pass through these clearing systems from a practical point of view. This effort marks a new level in trying to achieve real STP,” he says.

XML’s business value to corporates cannot be underestimated. ABN AMRO’s Schwartz suggests several ways in which using new XML standards can generate business value. “First and foremost,” he observes, “using these new messages will help to unlock funds and make better use of working capital opportunities that are currently not possible as a result of inefficiencies in the reconciliation process. XML also presents a range of secondary opportunities. It is easier to reuse the content in these messages (customer payments and remittances) across different platforms. The tools are there and the cost of managing the technology is lower than legacy environments have allowed.”

XML Adoption: Driving Forces

The benefits of XML are not a proposition for the future; they can be achieved and implemented today. Sixty-five per cent of the survey respondents have implemented or are planning to implement an XML standard in the next five years: 25 per cent of respondents will be implementing one of the standards in the next year, 27 per cent are likely to implement within the next five years, 4 per cent have already implemented an XML standard and 9 per cent are currently implementing a standard. Among the 29 per cent of respondents that have already implemented an XML standard or have plans to implement in the next year, 40 per cent are corporates.

The survey results are positive evidence of XML take-up within the industry. This is particularly encouraging considering the fact that as a standard, XML is still young in its lifecycle. The harmonization work on XML standards, the introduction of SEPA, the initiatives to embed XML within ERP systems and the limitations of EDI (electronic data interchange) are all factors driving towards further widespread adoption and visibility of XML.

Embedding XML in ERP systems

David Blair, group treasurer at Nokia, points out that most of the major ERP systems do support XML, which means that corporates do not need to custom-build solutions. “In these cases, corporates may need to upgrade to the latest ERP versions to get the desired XML functionality,” he explains. The problem today is that many multinational corporates run three-to-five year old versions of ERP systems because of the potential operational risk involved in upgrading them.

Addressing this point, ABN AMRO’s Schwartz believes the move by ERPs to embed XML into their systems and core business applications will encourage progress. “The survey results highlight the importance of embedding the process [of automating accounts receivable reconciliation] through XML standards in core business applications, such as ERPs and treasury workstations, to achieve critical mass,” he says. He suggests that SAP and Oracle will lead development on XML through treasury workstations by making it part of mainstream efforts to upgrade ERPs.

Elie Lasker, senior business manager at SWIFT, agrees: “Close co-operation with the software vendor community is important. For example, SWIFT is working with ERP, treasury workstation and enterprise application integration vendors to help them integrate the new ISO 20022 standards.” He also suggests that the financial industry can help progress on automation through the development, promotion and use of standards. A good example, he points out, is the RosettaNet Payment Milestone Program and ISO standards developed for credit and debit transfers.

Impact of SEPA

SEPA is also likely to be a milestone in the use and implementation of XML standards. “SEPA will have an equal effect on accounts payable and accounts receivable as all SEPA countries will have to replace their standards and ACHs and adopt new formats and networks,” explains Raffi Basmadjian, deputy treasurer at France Telecom. He believes SEPA will be an accelerator for the adoption of new technologies and more universal formats, such as XML, and it will allow more information to be transmitted through the payment systems. In fact, according to ABN AMRO’s Schwartz, on an end-to-end basis, the EPC is going down the XML road in its requirements for implementation of SEPA.

Basmadjian adds, “An ISO XML bank account statement and XML direct debit will be available before this summer”. He suggests that if the industry does have all of these XML standards available, endorsed by the ISO, the banking community and technology vendors, there is no doubt that XML will be implemented widely.

Harmonization of XML standards

The harmonization work around XML standards focuses on ISO 20022 universal financial industry message scheme (UNIFI), an international standard published in 2004. ISO provides a common way of using XML and proposes a uniform business modelling methodology. SWIFT XML is now equivalent to ISO 20022 and RosettaNet payment messages also use the ISO standard. While IFX, TWIST and OAGi XML standards do not use the ISO schema, they are importing the same schema as used in the ISO standard within their own wrapper. “The actual instruction content of these standards is exactly the same as ISO with an appropriate ‘header’ if any of the standards are used for other purposes in the company,” explains Schwartz. “This is a significant step forward in reducing the proliferation of standards.”

Six per cent of the survey respondents confirmed ISO 20022 as their preferred XML standard – add this to the figures for those respondents that chose SWIFT XML and RosettaNet – this increases the figure of those potentially following the ISO route to 40 per cent. In addition, as IFX, OAGi and TWIST have joined the harmonisation effort, the content within their payment messages will be exactly the same as ISO 20022 payment messages. ABN AMRO’s Schwartz also highlights the fact that there is serious discussion within the industry about hosting an ISO pilot between banks and their customers through SWIFT in 2006. “I am confident that this pilot will emerge this year and a number of people expect this to happen in Q4 this year,” he says.

Which XML standard are respondents planning to implement/investigate? % of respondents
No preference between standards
33%
ISO 20022, SWIFT XML or RosettaNet
40%
TWIST
3%
IFX
1%
OAGi
1%
None of the above
23%

The survey results reveal a definite trend towards adoption of the ISO 20022 standard, which will certainly help reduce existing confusion. 23 per cent of the survey respondents revealed they were currently confused about XML because of the proliferation of XML standards. “The success of the harmonised standard in the long-run will depend on its ability to adapt to what industry discovers through implementation,” says Schwartz. He argues that it is important to create good practice without each industry interpreting the payment standard differently and advocates interoperability as the key to progress.

Limitations of EDI

Eighty-five per cent of the survey respondents said that current EDI systems and standards were insufficient in aiding the reconciliation process – an indication, therefore, that XML is well placed to supersede EDI. “EDI is accommodated in most bank systems because there are many customers still using it but mapping across applications and the lack of clarity across legacy formats makes the task of getting a reconciliation number across the clearing system a daunting task,” says ABN AMRO’s Schwartz.

Nokia’s Blair adds that EDI is much more expensive to operate than XML and that it will be increasingly hard to support in the future without enough EDI standardization to provide a truly widespread and generic solution. He does point out, however, that EDI systems are capable of carrying enough information to enable automatic reconciliation if companies take the time to make the necessary agreements with all their counterparties.

EDI and XML is likely to co-exist in the near future though, according to Deutsche Bank’s Brieske. XML is expected to eventually overtake EDI because it is easier for corporates to use across their entire supply chain. He suggests that corporates will maintain existing EDI between large trading partners and move to XML between smaller trading partners and banks, particularly as ERP and treasury workstation providers adopt it.

Hurdles Facing XML Adoption

Though there is momentum towards further adoption of XML and automation of accounts receivable reconciliation, there are also industry barriers that need to be addressed in order to accelerate progress. Concerns about investment and an unclear technology roadmap are key stumbling blocks at the moment.

Investment and ROI hurdles

Thirty-five per cent of corporate survey respondents said high existing investments in ERP, accounting and/or treasury systems is an obstacle because it makes it harder to re-invest in new technology. In fact, 28 per cent of corporates said that the investment in new technology would be hard to achieve. “The number one hurdle affecting progress is related to cost – investment and return on investment [ROI],” affirms ABN AMRO’s Schwartz. “Corporates are cautious about investment because these projects are understandably expensive and there is the need for clarity about the ERP/business application and technology roadmaps for implementing new standards.”

Indeed, 33 per cent of corporate respondents believe the roadmap for new technology in account reconciliation is not clear and therefore 23 per cent of corporates are uncertain about the ROI or the appropriate investment to make. Momentum among corporates towards automation will improve as a result of a better-defined technology roadmap; this will be cemented by the implementation of these solutions by leading corporates.

Banks’ role in XML adoption

Investment and ROI is not just an issue for corporates. Banks are reluctant to invest in solutions or technology that corporates are not ready or willing to use for another few years. In fact, one quarter of the survey’s bank respondents admitted that slow progress on automation of the reconciliation process was due to banks being unwilling to invest in new technology. In addition, 30 per cent of all survey respondents claimed that the current use of bank proprietary payment systems is affecting progress on automation.

“Most often, differences in data population requirements relate to the legacy systems banks have,” explains ABN AMRO’s Schwartz. “There are also challenges in gaining common connectivity and security implementation. Banks often develop connectivity and security using a small set of standard software available in the market but there are differences in their implementation of this set of software. These variations are at the heart of each organization’s interpretation of how to be most secure and their regulatory, compliance and fiduciary responsibilities.” He does highlight, however, protocols, such as corporate access to SWIFTNet and the Internet Engineering Task Force’s (IETF) AS2, that are intended to standardise the connectivity experience.

SWIFT’s Lasker makes the point that connectivity has long been considered to belong to the competitive space and has therefore led banks to build their own proprietary solutions. “This situation is changing as an increasing number of banks offer their services over SWIFTNet MA-CUG to their corporate customers, particularly for application-to-application based services,” he says. “Corporates want to exchange the information directly from their treasury management system or ERP.” He adds that with standardized SWIFTNet access and ISO 20022, the industry is well on its way to achieving this.

Why is the automation of the accounts receivable process slow?
Poll Responses (%)
Total (361)
Corporates (145)
Banks (93)
Consultants (41)
Financial technology vendors (38)
Others (44)
Roadmap for new technology is not clear
33%
33%
30%
37%
34%
36%
High existing investments in ERP, accounting or treasury systems
32%
35%
34%
27%
21%
30%
Bank proprietary payment systems much in use
30%
24%
32%
46%
50%
16%
Investments in new technology are hard to achieve
29%
28%
32%
27%
24%
32%
Banks not willing to invest in new technology
23%
18%
25%
29%
32%
20%
Confusion due to proliferation of new standards that could be used
22%
23%
18%
22%
18%
27%
The ROI on appropriate investment is unclear
21%
23%
20%
22%
21%
18%
ERP vendors passive to absorb new standards and appropriate technology in their products
19%
19%
13%
29%
26%
18%
ACHs passive in adopting new standards and technology
16%
12%
23%
17%
21%
9%
Current (EDI) systems and standards sufficient in aiding reconciliation process
15%
19%
11%
2%
16%
20%
Unclear what standard SEPA will adopt
12%
14%
8%
10%
13%
11%
Uncertain impact SEPA on the purchase to pay process in Europe
9%
9%
8%
17%
16%
2%
Manual reconciliation is better
7%
8%
5%
7%
5%
11%
New EDIFACT installations continuing
1%
1%
1%
2%
3%
0%

Conclusion

The fact that 65 per cent of the survey respondents have implemented or have plans to implement an XML standard in the next five years is a good indication that there is XML acceptance within the industry. More industry education and awareness about XML is needed though in order to drive through progress on automation. This is reflected in the survey results where one in four respondents said they want to learn more about the implementation costs and ROI of XML while 60 per cent want to know more about the readiness/plans that banks have in the adoption of XML, and also the readiness of ERP/treasury systems to integrate XML.

“The results of the survey are exciting – when viewed altogether they give a very clear picture of what banks need to do as providers of transaction services,” says ABN AMRO’s Schwartz. “They confirm that solving core business problems is at the heart of the receivables challenge. Second, they confirm the interest in ISO XML as a route to assist in solving this problem.”

The requirements to prove the business case and cope with cost are paramount factors in the ability to use new XML formats. Embedding XML into ERPs and treasury workstations can reduce the cost to a company of using these formats. At the same time, it is clear that industry needs both the software vendors and banks to establish a roadmap for implementing these standards in such a way that companies can make confident decisions and benefit from them.

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