TechnologyWeb-based/ElectronicOvercoming the Barriers to e-Invoicing

Overcoming the Barriers to e-Invoicing

Every year there are approximately 18 billion invoices issued in Europe. Most are printed on paper and moved between companies by post. Everybody knows the process is both error-prone and expensive, with the direct cost of processing a paper invoice estimated to be between €5 and €15. Moving to electronic invoicing can reduce costs by up to 90 per cent, increase transparency and improve business processes. Despite the obvious business benefits, however, electronic invoicing is still far from ubiquitous and the claims of analysts that “by 2004 some 35 per cent of companies will issue electronic invoices” is wide off the mark.

This article examines some of the potential barriers to the adoption of electronic invoicing and explores if and how they can be overcome.

Business Case

The biggest barrier to adoption of electronic invoices is the failure to make a sufficiently compelling business case to justify its inclusion as one of an organisation’s priority projects. This stems from a number of reasons:

  • Understated (in reality often unknown) cost base

Exactly how much does it cost a company to process a paper invoice? A lack of understanding over the true cost of paper invoice processing means a company will typically base its calculations on the lowest common denominator: the cost of its accounts payable staff (for example, 15 at €30,000 per annumper annum) divided by the number of invoices processed (150,000 at say €3 per invoice or €450,000). With electronic invoicing the new cost might be €150,000 delivering an annual saving of €300,000 which may not necessarily be enough to make the final cut of prioritised projects for that financial year.

However, at best this calculation is simplistic, at worst negligent. It ignores the other costs of paper invoice processing, such as:

  • invoice query handling (on average 20 per cent of all invoices received at €18 each);
  • prompt payment discounts missed;
  • late payment penalties applied;
  • management intervention;
  • the cost of maintaining a robust control environment; and
  • sub-optimal VAT recovery (up to 35 per cent of a company’s working capital tied up).

Suddenly, an average cost of €15 per paper invoice doesn’t seem quite so crazy. In this example, with the business benefits now starting with a €2m cost saving every year the project is a lot more compelling.

  • Supplier participation

To achieve the business benefits from electronic invoicing an organisation needs a critical mass of its supplier base engaged. If it cannot convince sufficient suppliers to send invoices electronically then there will be no return on investment. How can an organisation manage this risk?

The key here is to:

  1. Make it as simple as possible for the supplier base to participate. Remember, they are probably being asked to join multiple electronic invoicing schemes. They also have the familiar constraints, including limited IT resource, different levels of technical sophistication and, of course, budget restraints. Consider an interim scanning solution for the laggards.
  2. Tailor the message for each supplier – companies should not be afraid to point out the potential benefits to the supplier including assured delivery of the invoice, more timely payment and greater visibility over the invoicing process.
  3. Ensure the procurement function is on board and the requirement for electronic invoicing is included in all new supplier contracts.
  4. Build a refund mechanism into the contract with the electronic invoice partner if they fail to achieve agreed invoice volume milestones.
  • Business readiness

Unfortunately, it’s not quite as simple as being able to receive an invoice electronically and watch the savings roll-in. Some companies’ business processes are not yet ready for electronic invoicing. To maximise the benefits an organisation needs to consider centralising accounts payable, workflow, matching, and archiving requirements.

  • Turkeys voting for Christmas

In the business world, size matters but sometimes for the wrong reasons. The perception is: the bigger the department, the larger the budget, the more successful the director. Electronic invoicing is a proposition that will probably reduce headcount in the finance back office and reduce its budget.

Market Confusion

E-invoicing, electronic invoice presentment and payment, b2b electronic bill presentment and payment, web-bills – the list is endless, often used interchangeably with each new vendor or analyst pushing their own preferences. If an industry is not mature enough to agree on terminology, how can it expect potential customers to trust it?

There is also the multitude of models: supplier-centric, buyer-centric, self-billing and so on. Companies need to do some basic homework. They need to clearly identify the business issues that need to be addressed through electronic invoicing, ask the vendors how they comply with domestic and international VAT requirements, and consider the required system changes, etc. Is it really essential to have the latest online dispute management functionality or will a company more likely query unwelcome €6m invoices by the good old fashioned telephone?

Regulatory Issues

In Europe, VAT represents a significant proportion of government revenues. The invoice is a legal document for evidencing tax paid and reclaimed. It was clear the requirement to navigate the increasingly complex rules set by each EU member state was not helping the case for electronic invoicing, indeed in some countries electronic invoices were not even permitted.

To pave the way for electronic invoicing, Directive 2001/115/EC, the so-called ‘E-invoice Directive’ came into force across the EU in January 2004. This Directive created, among other things, the legal basis for electronic invoices, regulations on invoice storage and importantly established a standard data set to be contained in invoices.

However, the E-invoice Directive also gave member states the flexibility to interpret the legislation. Consequently, there are 25 different implementations. The result is differing requirements on data sets, retention periods and digital signatures. For example in the UK an invoice has to be retained for six years, in Germany 10 years. In France, digital certificates are required, in the UK they are not. Confusing isn’t it? Then there are still the specific accounting and commercial rules set by each state to which invoices must comply.

The good news is that organisations do not need to employ a team of VAT experts with a watching brief on invoices, nor do they need to wait for the EU to simplify invoicing matters further. Third party electronic invoice services take care of the VAT issues relating to invoices across different tax regimes, ensuring compliance within each national market.

Bank Inertia

Survey after survey points out that banks are the preferred provider for electronic invoicing services. A LogicaCMG sponsored survey for gtnews identified that corporates wanted information rich payment data AND were willing to pay for it. Yet the majority of banks are holding back, obsessing over a need for (bank defined) technical standards. No one will want Betamax if the rest of the world goes with VHS, so inevitably a lot of corporates are playing a waiting game.

The truth is there is no need for technology standards. Electronic invoice bureaux are able to translate between different formats. As long as a company has Internet access, it can send and receive invoices electronically. The one obvious area where the banks can act as a catalyst for electronic invoicing is through their adoption of new message standards such as the unique remittance identifier which closes the loop between a payment and the associated remittance and invoice documents.

Conclusion

There are no insurmountable barriers to the widespread adoption of electronic invoicing across the EU. The business case is compelling, technology proven and a workable legal framework is in place. In an era of ever-increasing pressure to deliver shareholder (and tax-payer) value, electronic invoicing will become as essential to the way organisations conduct business as e-mail, the postal service and credit cards. Indeed, ultimately it is likely there will be three to four global electronic invoice service providers and electronic invoicing will be a pre-requisite to trade, in much the same way as today’s merchants accept VISA, MasterCard, JCB and Amex.

Comments are closed.

Subscribe to get your daily business insights

Whitepapers & Resources

2021 Transaction Banking Services Survey
Banking

2021 Transaction Banking Services Survey

2y
CGI Transaction Banking Survey 2020

CGI Transaction Banking Survey 2020

4y
TIS Sanction Screening Survey Report
Payments

TIS Sanction Screening Survey Report

5y
Enhancing your strategic position: Digitalization in Treasury
Payments

Enhancing your strategic position: Digitalization in Treasury

5y
Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation

5y