Managing Payables in a Networked Economy
Collaboration over business networks brings 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 accounts payable function. As a tactical organization 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.
Resolving invoice errors and exceptions is arguably the biggest challenge facing AP, and a major contributor to rising invoice processing costs. How much time is spent on invoice exceptions can serve as a barometer of AP productivity and your ability to compete in a networked economy.
With today’s business networks, business rules serve as a line of defense that detects errors and exceptions upon invoice receipt, without any business user intervention. 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.
New Potential for Collaboration
Business networks enable supplier self-service for viewing invoice and payment status that eliminates another low-value activity within AP – responding to the many 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.
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 organizations 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, organizations 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 $2 million-$3 million for every $1 billion of spend. Top performers also find that 20% to 25% of targeted suppliers typically participate in an early payment discount program. That’s another advantage of being actively engaged in the networked economy.
Building the Business Case
In building the business case for a network-centric payables operation, recognize that the operational cost savings from e-invoicing, which can be more than 60% lower than paper invoicing, is just a small part of the return on investment. 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 $10 million per billion in spend.
This blog post is taken from my feature article in GT News. In the longer article, you’ll learn about organizations that are improving business performance by applying best practices to their accounts payable operations. You’ll also find a list of key features and capabilities of a business network that can help you transform your own operations.
Current research can also help you understand the impact of business process improvement and technology trends on the accounts payable function. One that comes to mind is an informative report from Ardent Partners, E-Payables 2014: The Quest.