The e-Invoicing Network Approach
In the 21st century, when scientists have finally managed to clone human embryos and discover water on Mars, reconciling an invoice correctly should be child’s play. Sadly, this process remains fraught with problems in many organisations.
Due to the large volume received, many companies only reconcile about 10 per cent of their invoices. This means that 90 per cent of invoices are paid without the amount or details of the invoice being checked against the original purchase order (PO) or contract. This can add up to significant charging errors. You only have to look at the number of companies that have built a business helping other companies reclaim overcharged invoices – or the financial services company that conducted an audit of its operations and found it had been overcharged by $15m within one year – to see that this is a bigger problem than previously thought.
In the UK, the recent furore at the Department for Environment Food and Rural Affairs (Defra) about payments made to contractors during the foot and mouth crisis in 2001 shows how long it can take for disputes to be resolved once a transaction has been paid. It can be just as painful a delay on the supplier side, especially by those who claim to have submitted accurate invoices; a BBC report found that one contractual firm, which was owed £200,000, has gone into liquidation.
The process of sending and receiving an invoice does not require a degree in rocket science, but it does require some practical thinking if companies want to generate sustainable savings through invoice compliance. The traditional paper-based process is still favoured by some organisations, although many acknowledge that re-typing data and manual checking can build in a significant time lag, introduce errors, and dramatically increase labour costs. Invoice processing costs vary, with the average between £10 and £20 per invoice, although reports of £75 per invoice are common.
As a result, increasing numbers of companies prefer electronic invoicing (e-invoicing) for the cost savings it offers in automation and the reductions it brings in manual errors and overpayment. Another option favoured by some companies, particularly those that have outsourced other parts of their organisation, is to outsource the invoice process to a country where labour is cheaper. But there are several problems with both these methods.
Offshore outsourcing of invoices might reduce the labour bill, but it does not eliminate the task of checking that an invoice can be reconciled with the PO. In situations where a PO has not been generated – for example, if a company has a contract in place for cleaning services and charges are reconciled against this instead of a PO – in many cases, the original contract is not available so the invoice is never fully checked.
An electronic environment alleviates this problem, but it will not be the panacea that many in the industry have anticipated. There are a number of problems associated with moving to a fully electronic environment. The first major stumbling block is interoperability.
Each buying organisation needs to build links to each of its suppliers to enable the easy flow of electronic invoices. Larger suppliers have been sending invoices electronically for many years using EDI. Others prefer the latest electronic channel – the web – for sending invoices. But the challenge for both buyers and suppliers is maintaining the numerous links needed to support the different methods.
This can be both costly and time consuming – and of course each method typically supports a different standard, such as EDI, XML or CSV. Another issue for the buying organisation receiving invoices in any of these formats is being able to accept and convert every single version into a format that its internal systems understand.
Another hurdle e-invoicing needs to overcome is compliance. This is important for two reasons: it saves companies money if they are able to tie an invoice to a PO or contract, and it enables buyers to comply with regulations. In Europe, for example, legislation exists for electronic signatures, while on a global scale, Sarbanes-Oxley requires companies to prove they can track their processes.
Creating point-based connections is one (very costly) way of overcoming the compliance problem. A second is to use an online invoicing platform to send and receive invoices. An alternative is to use an e-invoicing network to simplify the supplier connectivity infrastructure and establish tighter relationships with suppliers.
An e-invoicing network would enable suppliers, not only to send invoices in any format they choose, but also to manage complete transactions – not just invoicing – from sourcing and ordering through to fulfilment and payment. It would support other invoicing platforms, so costs can still be reduced. A network would also support a range of different suppliers – from the large companies, who connect their order processing and invoicing systems directly to the network, through to the smaller suppliers, who are looking for simpler solutions. The latter suppliers can use a network to perform a ‘PO flip’, whereby a PO for the purchase is located and ‘flipped’ into an invoice with VAT and any other extras added. This dramatically reduces implementation costs for suppliers of this size.
While a network’s main advantage lies in reducing the cost of sending e-invoices, it also has other benefits for suppliers. For example, e-invoicing can speed up the time taken for a company to reconcile its invoices and provide suppliers with visibility into the process and status of each invoice issued. This speed can mean earlier payment, fewer lost invoices and a reduction in calls chasing up late payment. There are also economies of scale to be gained from connecting once to a larger group of buyers and new opportunities for increased revenue.
Meanwhile, buyers can also use e-invoicing to make significant savings. These can be achieved through negotiating early payment discounts. There are also hard cost savings to be made from reducing headcount, and supporting fewer links and standards. But perhaps one of the biggest savings comes from compliance, both internal and external, which helps remove the risk of overpayment or duplication of payments.
Fewer errors occur as invoice workflow is reinforced along strict approval lines from the moment an invoice is received, transported internally, reconciled and approved. This can transform a company’s approach to reconciliation and payments by moving to a ‘management by exception’ model, only dealing with those issues that require extra attention or strategic input.
Ultimately, e-invoicing networks can make the everyday process of sending and receiving an invoice a lot easier for many companies around the world.