The Estimation of Real-Time ROI for Automated Payments Systems
For trading companies, one of the most attractive areas for IT investment right now is the introduction of online payment systems. The replacement of costly and error-prone paper documents with efficient electronics systems can trigger a wide array of profitable benefits.
Putting payments online should be a no-brainer, yet many well-managed companies are hesitant to spend on IT so early in the present economic recovery. If you are in a finance or IT department that wants to introduce electronic payments, you may be required to make a cast-iron case for the extra revenue generated by such a system.
The expression ‘real-time ROI’ has been coined to describe the desire of management to know from day-to-day exactly what return the company is getting from an investment. But ideally, you want to know the ROI of an electronic payments system before you invest in it.
Firstly, let us clarify what we mean by an online payments system. There are plenty of partial solutions, such as the ones offered by some banks that replace letters of credit with electronic versions, invoice presentment systems that automate half the process and expensive custom-made solutions using EDI (electronic document interchange) or ERP interfaces with trading partners. But the most profitable solutions are likely to be the state-of-the-art systems that put your transactions and trade finance completely online. Such payments systems enable buyers and suppliers to negotiate trade deals online using the purchase order as the contract, then use that same data to create all the documents needed to complete trade transactions.
The best modern electronic payments systems are really a means of automating the financial supply chain, and they ideally have three layers: first, a connectivity platform, preferably the economical Internet that provides for transmission of documents, emails and phone calls. This system should incorporate workflow management, and an alert or event management system to flag exceptions and eliminate all of the paper in the procure-to-pay process. Once the paper is eliminated from the process, the second layer can be added, transaction processing. This includes automated payment decisions and schedules, plus discrepancy management and auto reconciliation. The third layer comprises financial services, such as global money movement, payment protection and credit for buyers or suppliers.
Supposing that you want to evaluate an online payments system by getting the vendor to estimate the ROI in advance, how can you protect yourself against surprises? Below are a few guidelines from past experience:
1. Firstly, pick a payments system that is fairly easy to install and has low upfront costs.
Complex IT systems with large computers, dedicated networks and extensive customized software have longer implementation and pay-back cycles. For example, early MRP systems took so long to implement, that some companies gave up before they completed implementation. Similarly, EDI using private networks can be so expensive that small trade partners might just refuse to adopt it. The trend is towards inexpensive, standard systems using the Internet, which can be set up within weeks. With these systems, you really can estimate ROI and leverage your previous investments in technology.
2. Get your vendor to quote a fee for online transactions related to the size of the transaction, on a pay-as-you-go basis. This will enable a clear cost comparison to be made with manual transactions, including bank fees for L/Cs. Process automation and error reduction enabled by online payments can typically save the average company $500,000 to $900,000.
Consider your bank fees for making payments by wiring money and compare them with those available through the online system.
3. Review the number of staff you use for trade document handling and determine how you can limit your labor costs in the long term by going electronic. Check your shipping department to see how many people are preparing bills of lading, customs declarations or insurance. See how much of your accounts payable staff time is spent matching purchase orders to invoices or pushing piles of paper documents for letters of credit and then struggling with the surprising level of discrepancies that arise. The cost of handling paper cuts the profits from every trade transaction.
4. Make sure your online system can provide predictable transaction dates, which can reduce the overall price of trade credit for both buyers and suppliers. Supply chain finance can also free up credit lines and eliminate bank fees for trade finance. In addition, a company that procures $1 billion of goods could expect to receive about $1.5 million as its share of reduced overall credit costs created by Supply Chain Financing.
Determine the cost of credit used for your trade transactions. This cost will be changed in two ways by an online system:
The hardest part of estimating costs is the uncertainty about how many of your suppliers, or customers, will agree to use the system. There may be a case for approaching your trade partners and calculating the likely ROI of an online payment system as a joint exercise to investigate the value of financial supply chain automation.
When you have laid the groundwork for estimating the benefits of an electronic payments system, you should ask your system vendor to actually do the donkey work and calculate the likely ROI which can often be done with an accuracy of ±20 percent.
Lastly, audit the payment system costs each year, to ensure that you realize the projected savings. If your system falls short, you have an ongoing opportunity to find out what went wrong and hopefully, tighten it up.
Since electronic payments systems have low upfront costs, very good ROI performance and low risks, it is very easy for users to persuade their trade partners to adopt online payments systems, with incentives such as:
The adoption of online payment systems is likely to accelerate rapidly, becoming a global norm. The trend is being facilitated by worldwide governments, who are pressurizing traders to make online customs declarations, because the amount of paper documents needed for global trading scares even the bureaucrats. Many government have also accepted Public Key Infrastructure as a legal alternative to signed paper contracts
On the other hand, efficient electronic payments requires Internet access, and although this is as common as a phone line in industrialized countries, it will continue to be a hurdle in some developing countries for a few more years. One problem with online trading achieved through EDI systems is the variations in trade terminology that need to be agreed before computer-to-computer EDI transactions can be carried out. In the short term, EDI partners have to agree the exact meaning of terms used in their messaging systems. In the longer term, there is a strong movement for standardized trade terms.