Best Practice in Purchase-to-Pay - Part 1: Making Invoice Data Capture More Efficient
It is increasingly being recognized that the transition from manual and costly paper processes to more efficient and cost-effective electronic workflows and straight-through processing (STP) is a migration, rather than a ‘big bang’ initiative. Furthermore, different organizations will make this journey at different speeds. Any viable solution for streamlining invoice processing must allow for this evolutionary approach and must be able to handle both paper and electronic invoices (in multiple formats) in an efficient and timely manner.
By streamlining purchase-to-pay, a business can achieve both operational and strategic benefits. At an operational level, which should appeal to shared service centres and accounts payable (AP) managers, the benefits include:
At a strategic level, for treasurers and CFOs, streamlining purchase-to-pay enables a business to unlock significant value from the financial supply chain because it:
This collaborative approach to working capital management positions large corporates to partner with innovative banks to provide supply chain finance, delivering the following key benefits:
There is little doubt that the market is moving in this direction. This approach to optimising working capital management along the financial supply chain will in turn drive increased revenues and enhance shareholder value, which are ultimately key objectives of all commercial businesses. But in order to get to these strategic goals, a corporate must first streamline its invoice processing in order to accelerate the accurate approval of invoices.
A study by PayStream Advisors identified eight key pain points felt by corporates in the invoice receipt-to-pay cycle (see graph below). According to the survey, the top four pain points were imaging/data capture, matching, discrepancy resolution and approval processing; all of which can be eased through use of an effective purchase-to-pay capability. (In the four articles in this series, we will see how all these pain points can be addressed through the application of best practice.)
Compared to the impressive progress achieved in modernising the physical supply chain, through advanced logistics tracking, containerisation and efficient warehouse management, the financial supply chain has lagged far behind. Hackett REL Consultancy estimates that €500bn of unnecessary working capital is locked in the financial supply chains of Europe’s top 1,000 corporates, due to poor visibility of payables and receivables. One major reason for this inefficiency is the huge volume of paper in circulation. Gartner estimates that over 85% of the 27 billion invoices issued each year in the EU are still printed as paper and sent out in the post, while 90% of the 22 billion invoices in the US are also paper. This means that, in many organisations, processes in the purchase-to-pay cycle are costly and inefficient as invoices are lost, errors are made during data entry, and time is spent trying to answer queries from suppliers.
The fact is that in too many companies a great deal of time and money is still spent on re-keying inbound invoices and other documents into ERP systems. Sadly for some AP departments, STP still means ‘straight to printer’, as e-invoices are printed, circulated as paper and then re-keyed. Some large companies have re-located processing to low cost labour markets, such as India or China, where paper invoices are re-keyed into ERP systems more economically. Although the benefits of labour arbitrage have helped cut costs in the short term, some of these initiatives have already been hit by salary inflation and rapid staff turnover.
Recognising the continued use of paper invoices in even the most advanced economies, some large companies are adopting a more evolutionary approach to invoice management. Under this pragmatic model, inbound paper invoices are being scanned, validated, matched and then routed electronically for approval in an efficient and timely manner. Such a solution can of course be structured in-house, but there is also the option to outsource to a specialist provider.
Nowadays, with efficient systems for capturing paper invoices, as well as matching these against purchase orders/goods received notes (POs/GRNs) and resolving anomalies, processing times can be reduced from days to just a few hours. The services and solutions that stand out are those that successfully combine handling both paper and electronic invoices and other commercial documents.
Efficient invoice data capture capability should focus on adding value and reducing errors, paper and costs across a corporate’s AP function. They are particularly suited to supporting large corporate shared service centres (SSCs). However, their value is more than just invoice data capture, as they can quickly identify problem invoices and allow AP personnel to concentrate on exception management, while technology ensures that compliant invoices are processed quickly and efficiently.
A major barrier to adoption and a factor that hinders the growth of the e-invoicing market is getting suppliers onboard, since each supplier has its own processes and formats that it already uses in its one-to-many relationship with customers. While there are some notable exceptions, it is generally very hard for a buyer to impose on all its suppliers a single format electronic invoice. Persuading suppliers to adopt the same invoice format as the payer can be a costly and time-consuming exercise and its success will often depend on the power of the buyer over the supplier base. However, for an experienced invoice data capture capability, getting suppliers onboard can be as simple as asking them to redirect their invoices (in any format, whether paper, pdf, e-invoice etc) to the service provider who will take care of converting paper documents into electronic images, then capturing and normalising the data to suit the requirements of the payer. And for those suppliers unwilling to redirect their invoices to a new PO Box, the payer can simply bulk up incoming post and courier these mail bags to their service provider.
Corporate users quickly see the return on their investment and reduced costs, due to the transactional fee model. The benefits of an efficient invoice data capture capability fall into three broad categories which reflect the main problem areas that AP departments experience today: compliance, improved processes and reduced costs.
With the advent of Sarbanes-Oxley and the 8th EU Directive on Company Law, AP departments are under increased pressure to ensure that controls, audit and segregation of duties are enforced. An invoice data capture capability underpins this compliance by formalising processes and providing visibility of AP activity down to individual transaction and line item level.
With an efficient invoice data capture structure in place, paper is removed from AP. Once the post is opened in a controlled environment, paper documents are scanned using advanced scanning technologies to create images, enabling users to view images of all invoices over the web. The significant advantage of this simple step is that users are able to work 100% electronically from day one. This cuts the risk of paper invoices being lost and makes access to valuable information much easier. Imaging or scanning is a good place to start business process improvement. It is simple to implement and suppliers continue with their existing processes and submit invoices in the usual way. With scanning, you do not need to impose new rules and formats on your suppliers, yet the error rate, speed of approval and visibility of the AP process are all vastly improved.
The second step is data capture, which is extracting data from the images. Optical character recognition (OCR) technology is used to extract data from the images of invoices to line item level. There are various types of OCR.
Freeform learning OCR is the most sophisticated and delivers a high degree of data recognition. Freeform learning can identify words and fields wherever they are located on a document and even on poorly printed pages. This minimises the amount of keying regarding anomalies that may need to be resolved manually (exception management). Once amended manually, freeform learning OCR remembers the modification next time. A proven way to enhance data recognition is to use multiple OCR engines and virtual engines, all with voting rights. This minimises manual keying requirements and ensure the fastest possible turnaround times.
Meanwhile, any incoming electronic invoices received in a variety of formats, such as pdf, CSV flat file, XML, can also be mapped into a suitable normalised electronic format of invoice, to suit the payer’s invoice management system or ERP. All incoming invoices should be compared to the payer’s business rules to ensure they are acceptable, for example, checking they are addressed to the correct legal entity or that local VAT rules are satisfied. If an invoice fails these tests, the supplier can be advised of the reasons for rejection so they can re-submit. Importantly, all disputed/rejected invoices should be captured in the invoice system, enabling optimised VAT accrual management, with significant working capital benefits.
In combining paper and electronic invoice processing in this way, an efficient invoice data capture capability can cut the cost of an AP department enormously, with savings ranging between 50-80%. It can cost between £5 and £20 to process a paper invoice, and even up to £50 where an invoice is disputed, while an efficient automated invoice service can handle this process for about £1, at the same time as reducing processing times down from days or even weeks to a few hours. Research by Benchmarking agencies shows that a good, non-automated AP department will process around 8,500 invoices a year per full time equivalent (FTE) in the AP department. With an efficient invoice management capability an AP department can expect to process in excess of 45,000 invoices per FTE per year.
With the advent of the single euro payments area (SEPA), a valuable benefit of an efficient invoice data capture structure is to capture international bank account numbers (IBANS) and SWIFT bank identifier codes (BICS) direct from supplier invoices, paper or electronic. As all businesses trading internationally should know by now, there is an EU law, known as Regulation 2560/2001, which requires that euro payments within the EU up to a value of €50,000 should cost no more than domestic payments, provided they are properly formatted. To qualify for these lower bank charges, a corporate’s payment instructions to its bank must include the beneficiary’s IBAN and BIC in order to facilitate STP through the banking system. An efficient scanning and OCR solution can capture this vital information off invoices and update the vendor database, in order to ensure compliance with the new law and obtain lower bank charges.
Failure to include BICS and IBANS on euro payments up to €50,000 means the beneficiary bank receiving such payment instructions is entitled to apply penalty charges which remitting banks may decide to charge back to their customers or alternatively absorb the non-STP penalty fee themselves. From January 2007, failure to include an IBAN and BIC in a payment instruction will be even more serious, since the beneficiary bank will be entitled to reject/return the payment and will be able to deduct a penalty charge from the payment.
This efficient invoice data capture model solves the current problem of the general lack of widely adopted industry standards in the financial supply chain, since it can draw together and normalise data received in any standard and format, paper or electronic. This capability may even prove a valuable aid for major initiatives such as TWIST (see the TWIST website). This not-for-profit industry group, backed by major corporates and banks, is delivering non-proprietary XML-based standards for the financial supply chain and transaction processing. TWIST seeks to develop practical standards that allow market participants to communicate with each other efficiently. However, for those suppliers reluctant to adopt their systems to this new standard, there could be value in using an invoice data capture solution to process paper invoices, POs and GRNs and other commercial documents as a front-end capture point for transactions which would then be reformatted into TWIST standards for subsequent processing. This approach may yet prove to be a practical way of increasing the volumes of transactions being processed using this new standard, resulting in improved STP and cost savings.
An efficient invoice data capture capability resolves the problems surrounding:
The benefits of using an outsourced invoice data capture service can be summarised as follows:
1. Increased process efficiency
2. Reduced costs
3. Improved visibility and compliance
4. Easy implementation
The first article of this series on improving efficiency in purchase-to-pay has focused on efficient invoice data capture. Corporates adopting this approach have highlighted the great value of improving the visibility of these processes across the enterprise. The next article of this series will offer advice on the processing of invoices once they have been converted into data, covering the invoice approval workflow and query resolution process. It will also look at achieving best practice in purchasing management.
This four-part article series offers practical advice on achieving a tangible return on each step of the migration to improved efficiency in purchase-to-pay and optimized working capital management. It will cover the following topics: