PULP FRICTION: The Case for Paper-free P2P. Sponsored by: Pulp Friction: The Case for Paper-free P2P 1

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1 PULP FRICTION: The Case for Paper-free P2P Sponsored by: Pulp Friction: The Case for Paper-free P2P 1

2 Published April Copyright 2013 by The Institute of Financial Operations All rights reserved. Reproduction or transmission of this publication in any form without the express permission of the copyright holder is prohibited and is a violation of federal copyright law. The information contained herein has been diligently obtained from sources believed to be reliable and has been prepared with care. The Institute and the authors disclaim any and all warranties as to the accuracy and completeness of this information. The Institute and the authors, their directors, employees, or assistants can accept no liability for any damages or loss occasioned to any person, company, or entity due to errors or omissions in the information contained herein or in the interpretation thereof. The opinions expressed herein were developed from a global survey of users and the analyses may contain the opinions of the author and may change at any time without notice. This publication is designed to provide authoritative information at the time of publication in regard to the subject matter covered. It is not intended to offer accounting, legal, or other professional advice. If accounting, legal, or other professional advice is required, or if expert assistance is needed, the services of a competent professional person should be sought. This document or any part thereof may not be reproduced in any form without the express written permission of the publisher.

3 About the Institute The Institute of Financial Operations is a membership-based professional association serving the entire financial operations ecosystem, with a particular focus on the accounts payable and accounts receivable disciplines and the related fields of information management and data capture. The Institute grew out of the merger of four associations: International Accounts Payable Professionals (IAPP), International Accounts Receivable Professionals (IARP), the National Association of Purchasing and Payables (NAPP), and The Association for Work Process Improvement (TAWPI). Based in Orlando, Fla., with affiliates in the U.S., Canada, and the UK, The Institute serves as a global voice, chief advocate, recognized authority, acknowledged leader, and principal educator for people in financial operations. The Institute has a community of nearly 100,000, which includes 5,000 members, 17,000 customers, and an additional 75,000 financial operations professionals. The Institute s members have access to benefits and leading-edge resources such as the awardwinning Financial Ops magazine, a dynamic, content-rich website, educational and networking events, online educational offerings, certification and certificate programs, career resources, and volunteer opportunities. About the Sponsor U.S. Bank is uniquely positioned as a strategic partner because it views check, card and electronic payment spend holistically and recommends solutions based on enhancing the entire tiered payables process. U.S. Bank analyzes clients accounts payable data and supplier profiles to map a complete payment model to optimize cash flow, working capital and payables management. U.S. Bank s evaluation is based on the clients unique business needs, so its recommendations specifically address what changes organizations can make to achieve bottom line results. With the ongoing development of innovative and emerging technologies, U.S. Bank meets client needs today while anticipating what they might be tomorrow. Pulp Friction: The Case for Paper-free P2P 3

4 Executive Summary Most companies see an automated future just beyond the horizon. The majority of companies that responded to the U.S. Bank/Institute of Financial Operations (IFO) March 2013 Procure-to- Pay survey expect that in three years or less their organizations will make most of their payments to suppliers electronically (see Figure 1). Although more than half of buyers say they can make electronic payments today, most accounts payable (AP) departments still settle the majority of their invoices by paper check (see Figure 2). That suggests that the next three years will see a significant increase in demand for automated, real-time procure-to-pay systems. If your company is not already planning for this transition, it may be time to begin researching the solutions that are available, as well as the costs and benefits of adopting an electronic solution for both procurement and payables functions. Figure 1: Expectation for converting a majority of vendors to electronic payments Most companies currently paying suppliers by check say they plan to pay suppliers electronically within three years. Now already there Within 1 year Within 2 years Within 3 years In more than 3 years Don t know Pulp Friction: The Case for Paper-free P2P 4

5 Figure 2: Percentage of suppliers currently paid by each method More than half of supplier payments are made via paper checks. ACH Paper Check Commercial Card Wire Transfer Other This report will provide you with an overview of the advantages of automating the procure-topay (P2P) process, discuss the features you should expect in a P2P solution, and outline how to overcome internal objections to adoption within your organization. What Do These Solutions Do? Procure-to-pay systems integrate an organization s purchasing and AP departments, providing buying organizations with control and visibility over the entire life cycle of a transaction. That makes it simple to follow transactions from the time an item is ordered until the final payment is made. Companies that centralize their purchasing and AP functions can find automated P2P systems particularly valuable. Today, more than half (57 percent) of respondents report that their procurement function is fully centralized (Figure 3). More than three-quarters (82 percent) have centralized their payables function (Figure 4). Figure 3: Organizational structure of procurement function More than 88 percent of respondents have centralized or partially centralized procurement operations. Decentralized Partly Centralized Centralized Outsourced Pulp Friction: The Case for Paper-free P2P 5

6 Figure 4: Percentage of companies centralizing their payables function Nearly 95 percent of respondents have centralized or partially centralized accounts payable operations. Decentralized Partly Centralized Centralized Outsourced Centralizing your P2P functions is an important step toward getting the most out of any automated system. This allows a buying organization to follow each transaction and address the areas of the P2P process that create difficulties. Survey respondents from companies with decentralized or partly centralized procurement functions say these areas cause the most issues during the procurement process: Maintaining cost controls Achieving visibility into the P2P process Integrating AP into procurement Ensuring supplier contract compliance P2P software solutions can address these issues and significantly reduce or eliminate these organizational challenges. The best P2P solutions enable visibility and transparency for transactions throughout the P2P cycle. They offer user-friendly interfaces that enable both buyers and suppliers to review the process, ask questions, and make adjustments necessary to speed the process. Pulp Friction: The Case for Paper-free P2P 6

7 Integrating Procurement and AP The U.S. Bank/IFO Survey found that more than 74 percent of companies have not fully integrated their procurement and AP departments. What s more, 37 percent said those departments had no overlap at all (Figure 5). This certainly explains the lack of transparency in these organizations current P2P procedures. They also said the lack of communication between procurement and AP departments prevented smooth processing of purchase orders and invoices. Figure 5: Integration of procurement and AP functions Nearly three-quarters of respondents have not fully integrated their procurement and AP departments. Not at all, Not at all, they are they are completely completely... separate Common leadership, Common but separate functions leadership, with some shared but metrics separa... Shared Shared leadership, leadership, metrics, but emerging integration metrics, b... Completely integrated When these factors combine with the sheer volume of paper that needs to be processed invoices, checks, contracts, exceptions, and discrepancies it s not surprising that many separately operating departments complain about slow processing times and excess costs. P2P solutions that integrate AP and procurement can help even those organizations that have not formally integrated their departments. An interface that enables authorized users to follow transactions during every step of the process helps highlight invoices and POs that have been snagged by exceptions. These solutions deliver s and alerts to ensure that buyers are aware of any discrepancies and/or compliance issues, and they provide a mechanism that facilitates swift resolution with the supplier. Solutions that create a portal for suppliers give them the opportunity to respond to and resolve exceptions quickly, and then reissue invoices without the time-consuming process of printing and forwarding paper. Buyers can customize conditions that enable automatic approval of invoices that meet PO criteria, allowing for faster processing of invoices that have no exceptions. Companies that adopted automated P2P systems reported significant cost reductions across all departments in their supply chain. Pulp Friction: The Case for Paper-free P2P 7

8 Respondents report that the most widely used payables automation tool is e-payments, which automates settlement through ACH, wire transfer, or card-based payments (56 percent) (Figure 6). Figure 6: Payables automation adoption across the P2P cycle E-payments ranked first as the most used AP automation tool. Answered: 101 Skipped: 45 Front-end Front-end imaging / OCR: imaging / automates document and data capture OCR:... Workflow: automates invoice Workflow: approval automates routing, validation and processing invoice... einvoicing: einvoicing: automates automates the exchange the of invoices between buyers exchange and suppliers o... epayments: automates epayments: settlement through ACH, wire transfer automates or card-based settlement... payments Electronic Invoice Presentment Electronic and Payment (EIPP): automates end-to-end Invoice receipt, processing and payment Presentmen... of invoices None Supplier Integration The most significant challenge to successfully integrating a P2P automation system is giving suppliers incentive to participate. The best-in-class solution providers address this issue straight on. Their list of benefits to suppliers can include: No-cost access to the solution A user-friendly, customizable portal Free training to maximize the benefits of the software Fast resolution of exceptions and discrepancies Access to dynamic discounting opportunities The leaders in the field also support their systems with recruitment teams that reach out to suppliers to market the benefits directly. Suppliers appreciate that automated systems often lead to early payment of invoices, which improves their cash flow positioning. Although the majority of companies still pay a large portion of their suppliers by paper check, most companies expect to make many of their payments by ACH or other electronic transfer by Suppliers that want to start maximizing the benefits of electronic payments are joining P2P networks today. Pulp Friction: The Case for Paper-free P2P 8

9 Supplier integration is certainly moving in the right direction. According to survey results, 24 percent of organizations currently receive more than half of their invoices electronically from suppliers (Figure 7). Figure 7: Percent of invoices sent electronically by suppliers Almost one-fourth of organizations currently receive more than half of their invoices electronically from suppliers. None 1-10% 11-25% 26-50% More than 50% Don t know Top Three Reasons to Implement P2P Automation Although P2P automation has many benefits, the most significant ones cited by adopting organizations are: Cost reduction: P2P automation significantly reduces the amount of paper in the system and the amount of time it takes to process POs, invoices, and payments. This provides savings in the millions of dollars for large organizations that process billions of dollars of spend, as well as proportionate savings for organizations that spend less. Cost reduction was cited as one of the primary benefits of adopting P2P automation solutions by our responding companies (Figure 8). Faster approval cycles: This leads to a significant reduction in late-payment penalties and provides opportunities for dynamic discounting that can further reduce payment costs while providing attractive returns for buying organizations that take advantage of the discounts. It also improves relationships with suppliers, which can make it easier for organizations to strike more favorable agreements with their key vendors. Visibility across all transactions: The easier it is for organizations to view their transaction history, the easier it is to obtain accurate actionable data. Organizations can make betterinformed, real-time decisions about their business based on the timeliest data possible. Pulp Friction: The Case for Paper-free P2P 9

10 Figure 8: Reasons for implementing procurement automation Visibility of spend tops list of reasons for P2P automation. Rank Streamlined Streamlined requisition requisition and procurement processes and.. Reduced time-to-fill cycle times Optimization of supplier base Consolidated invoicing Improved control and security Availability Availability of of vendor performance performanc... metrics Cost control over maverick spend Lower production costs Better visibility Better and transparency visibility across procurement and... Fewer supplier inquiries Ranked on a scale of 1-3 where 1 is most important and 3 is least important. Pulp Friction: The Case for Paper-free P2P 10

11 The benefits of procurement automation tools have already won over many survey respondents, who report they are planning to implement a procurement tool during the next six to 18 months (Figure 9). Figure 9: Planned implementation for procurement automation tools Spend analysis and e-sourcing are the top automation tools that respondents plan to implement within the next 18 months. Spend Analysis esourcing Contract Management eprocurement Vendor Management Currently use Implement within 6 to 12 months Implement within 12 to 18 months No plans to implement Pulp Friction: The Case for Paper-free P2P 11

12 Reporting and Analysis Adopting a P2P software solution provides particularly strong benefits in the area of reporting and analysis. Once all transactions are in a database, buying organizations can analyze costs and benefits of their procurement practices at the touch of a button. Generally, three types of reports are available: Standard reports: Most discounting solutions provide a suite of standard reports bundled with their systems, which enable authorized users to perform searches and generate reports that provide visibility across transactions to buyers and suppliers. Custom reports: These solutions can generate ad hoc reports and save the queries as templates. They can also export data to report writing software solutions such as Crystal Reports. Business intelligence: Information gleaned from the procure-to-pay process can be used not only to comply with regulatory requirements but also to provide valuable data for strategic spend analysis. Latin America: Where Automated P2P Is Mandated U.S. companies that want to see what the future of P2P looks like can find it in Latin America. Government-mandated electronic invoicing is sweeping through that area of the world. Those governments are motivated by their need for money in this case, tax revenue lost to a massive underground economy. Already throughout Latin America, real-time, integrated, automated P2P solutions are required. Companies that can t or won t comply face stiff fines and sanctions including jail time. At this point, enough buyers and suppliers have already implemented P2P automation for us to make some inferences about how those systems would work if they were widely used in the U.S. Many companies in Latin America have found that once they moved beyond operational issues, the strategic and financial benefits of P2P automation far outweighed the challenges of implementation. For example, Coca-Cola in Latin America found that its P2P solution reduced invoice processing costs by more than 70 percent. Although the cost savings are significant from an operational perspective, the real game changers in Latin American automation solutions are the strategic benefits: Optimized cash flow Supply chain finance Risk-free double-digit returns on cash All three benefits stem from the ability to capitalize on early payment discounts a simple solution that can translate into an annualized risk-free return of 24 percent or more. All those benefits are also available to companies that implement P2P solutions in the U.S. Pulp Friction: The Case for Paper-free P2P 12

13 Obstacles to Implementation Why aren t more buying organizations implementing automation solutions? After all, most organizations expect to implement automation systems within three years. If P2P automation solutions reduce cost, increase visibility across transactions, speed up approval cycles, and provide opportunities for great returns on cash, you would think most companies would already be installing the software. Respondents reported several obstacles that have prevented the implementation of P2P automation, with the largest being the belief that their current processes work (36 percent) (Figure 10). Figure 10: Obstacles to P2P automation implementation Most respondents cite contentment with current processes or lack of budget. Lack of understanding Lack of of current understanding solutions of current... Do not expect ROI from automation Business Business process reengineering process is reengineer... too difficult No executive sponsorship Current processes work Lack of budget These objections can be very difficult to overcome. Organizations, particularly large buying organizations, can be very resistant to change, especially when they are convinced current procedures are working. AP and procurement leaders who want to take advantage of the opportunities offered by automated solutions will need to overcome internal objections to a new system by demonstrating the real benefits that other companies and competitors are reaping from implementing these solutions. Pulp Friction: The Case for Paper-free P2P 13

14 Overcoming Objections Companies that say they are content with their current systems may not have examined the cost benefits of implementing an automation system. These organizations may not understand both the monetary savings and the improvement in control and visibility that result from automation solutions. However, if these companies were asked a different question such as, Would you like to save millions of dollars on your processing costs for financial transactions? most would say, Yes! and probably examine their current procedures more closely to determine whether those systems are working as efficiently as possible. Lack of budget for new software and lack of an executive champion for the process can be addressed together. While most AP departments expect their budgets to remain flat next year, the savings that result from automation can be shown to pay for the solution in the long run. Once a company assigns a cost to the number of invoice discrepancies, slow approvals, and late or missed payments, it becomes easy to see the solution s value. Once the cost/benefit analysis is completed, it will be easier to find an executive to champion the project because of its benefits of long-term savings, cost control, and more detailed analysis. Besides providing significant reduction in processing costs, better visibility across all transactions, quicker approval cycles, and reduction in missing or lost invoices, P2P solutions enable buying organizations to take advantage of the great returns offered by dynamic discounting. All of the pain points that respondents reported (see Figure 11) can be addressed through the implementation of a P2P solution. Figure 11: Organizational pains caused by defective AP processes Automated software solutions alleviate and/or eliminate this pain. Prompt payment discounts Over payments or duplicate payments Lost or missing invoices Limited Limited visibility across invoice-to-pay visibility cycle across... Discrepancies /exceptions Invoice approval processing Rated on a scale of 1 to 5, where 1 is no pain and 5 is significant pain. Pulp Friction: The Case for Paper-free P2P 14

15 Dynamic Discounting A particular benefit of adopting an automated P2P solution is the opportunity for companies and suppliers to participate in dynamic discounting. In the best solutions, discount terms are customizable for buyers based on a wide variety of criteria. Early payment discounts can be offered for all suppliers, for a specific class of suppliers, and even per supplier or per invoice. They can be customized to provide a specific rate of return for the buyer, and they can change depending upon the day paid. The returns for a buyer s cash are significant. Even a traditional 2 percent, 10-day, net-30 discount yields a yearly annual percentage rate of 24 percent. Dynamic discounting offers the opportunity to achieve even better returns based on the multiple offers the system allows. Suppliers benefit because they have the opportunity through their custom portal to offer their own terms to buyers. The increased payment processing speed that the solution offers enables suppliers to reach their cash flow goals, and it provides a specific incentive for suppliers to adopt the system. Dynamic discounting opportunities can increase supplier acceptance of P2P solutions, which helps overcome a key objection from companies looking to implement these systems. This also enables buyers with free cash to reap double-digit returns without risk. Dynamic discounting also provides an opportunity for third-party financing for those companies that want to take advantage of the system but don t want to use their own cash. In that scenario, banks or other financial institutions offer financing terms to suppliers for approved invoices. The solutions transparency allows the banks to see which invoices are approved, as well as the discount terms available. Banks can then offer the supplier payment in advance at the discount terms and collect payment from the buyer. This creates another incentive for suppliers to participate in the solutions, because they are guaranteed cash payments, and it can be a win for all parties involved. Conclusion: The Future Is Now Most companies in the industry recognize that sooner rather than later the majority of their payments and POs will be processed via the Web and in the cloud. The successful experience of companies in Latin America, where P2P automation is mandatory, demonstrates the benefits of implementing these solutions. Opportunity is waiting for strategic thinkers capable of taking advantage of the cost savings and strategic cash management available to companies that implement P2P solutions. Methodology The findings in this report are based on the results of a March 2013 Procure-to-Pay survey by The Institute of Financial Operations (IFO) and U.S. Bank. Survey responses were gathered from 147 accounts payable, procurement and other finance professionals at U.S.-based enterprises in a variety of industries. Based on the number of respondents, the survey has a confidence level of plus or minus 5 percent. Pulp Friction: The Case for Paper-free P2P 15

16 FinancialOps.org