The Basics of E-Invoicing - Is it Right for You?
People’s understanding of a true e-invoicing solution differs. Some feel that scanning and archiving are the first steps and, assuming that the data can be downloaded directly into their financial systems, this is a good definition. Some believe that emailing invoices to customers (or receiving emailed invoices from their suppliers) is an electronic solution, while others hope that flipping a purchase order or e-catalogues will cover the majority of their needs.
Whatever the size of your company, its industry or location, it is important that you know what is available on the market. You also need to know if your e-invoicing software will grow with you without causing pain and expense, and whether it can be developed to meet your needs. Can it genuinely help take away or reduce the paper bottleneck?
I believe that in choosing an e-invoicing product, companies need to be very aware of how it will affect their customers and suppliers. Will it cost them more money, will it increase rather than decrease their resource costs, and how will they benefit from using it? If you are going to give them the option to trade electronically, make sure you allow them to make an informed decision.
In my conversations with buyers and suppliers, I have often heard phrases such as:
Many perceive the Internet to be free and therefore conclude that anything electronic should also be free. They forget that, at home or at work, the Internet is a paid-for service and the faster you want it and the greater the storage, the more expensive it becomes.
It is important to find the right customers and suppliers and building strong and lasting relationships with them, but all too often buyers and suppliers reject the e-invoicing request because it does not fit with the way they work. They should not ignore the value it can add to those relationships.
There have been many statistics given on how much it costs to send and process invoices. It generally costs approximately £1.20 to print and send an invoice to your customers, which does not include the data entry, which happens however it is sent.
The costs of processing paper invoices are high, especially if you add in the cost of invoices that are held under query. The average data entry operator processes 50 to 150 invoices per day. It is not unusual to for 10% to 30% to have queries. It is estimated that every invoice received costs up to £2.50 in data entry costs with a total processing cost £5-£15 per invoice.
Buyers can definitely reduce costs depending on the number of invoices they process, their methods, the number of people handling that processing, and the pricing model of the solution they purchase. Please look carefully at the pricing plan and what you are being asked to buy.
My recommendation would always be to look for a pay for usage model (a small fee per transaction) with no upfront fees, set up costs or capital outlay, and with supplier recruitment included. The buyer’s only expense to go live should be the purchase of a scanner (see below) and time. Buyers can save up to 70% of their processing costs. The maximum savings can only be achieved with the buy-in from the suppliers who are sending those invoices (see supplier recruitment below). James Burberry, VAT director at PWC, estimates companies can save up to 4% of net profit a year from e-invoicing.
Suppliers can also save money by using the pay for usage model. They can send their invoices, for less than the cost of a postage stamp and know it has arrived at its destination. With some solutions, suppliers can also track the progress of their invoices from arrival to payment saving time identifying queries and assisting in cash-flow management.
Some solutions on the market today can provide instant savings, but must offer integrated scanning and optical character recognition (OCR). This way, paper invoices will no longer need to be re-keyed (although quick verification of some invoices will be required). This part of the solution can be used for all suppliers while the recruitment process takes place and in future for those suppliers who for some reason do not join, for example ad hoc suppliers. Greater efficiencies can be achieved with additional functions such as the following:
It is important to either make sure that your financial systems can offer the ability to handle the above itself or that your solutions provider has the ability to build workflow to meet your needs linking effectively with your financial systems. Some providers will not charge upfront fees for developing workflow but include this in your transaction fees or charge a small additional monthly fee.
More countries are taking a serious approach to e-invoicing and are allowing businesses to operate this method more effectively. Bruno Koch of Billentis, a Switzerland-based electronic payments consultancy, provided a European market overview in February 2007, which makes interesting reading. Being able to send and receive documents via the Internet makes it easy to communicate with many countries at the same time. Please make sure that your solution will allow for multi-language and multi-currency operation and is compliant with HMRC and foreign tax regulation if trading outside the UK.
As a buyer, you would probably like all of your suppliers to join your chosen network to allow you the greatest efficiencies and cost savings. This will probably not happen but is not a problem if you have opted for an integrated scanning/OCR solution. You do however want as many of your regular suppliers as possible to join. Some companies will make it mandatory, others will hope the amount of business and strength of relations will prevail.
Either way, work with a solution provider who will run forums with you and your suppliers and/or provide a comprehensive information pack and communication with them, to allow them to make an informed decision.
While most solution providers offer levels of security that comply with HMRC and industry standards, a key general area of concern is that digital certificates should be used whenever physical invoices are e-mailed, in order to authenticate the sender. In practice, however, this is often overlooked by companies. Also, it is important to consider the differences between hub-based solutions (which are externally hosted exchanges providing ‘outside-the-firewall’ integration) and local applications or ERP-based modules which require the implementation and maintenance of software onsite. In addition, not only do hub-based solutions offer the benefit of continuous improvement for the greater good of the community as a whole, but of course by their very nature, provide the ability (particularly for suppliers) to transact with multiple trading partners with a single interface.
Most companies continue to look for ways to increase efficiency and cut costs. When urgent cost reduction is needed most opt for what they see as the quickest options: employee training and personal development, marketing, T&E, general administration or a blanket headcount reduction programme. Many companies I have spoken with see e-invoicing as a ‘nice to have’ process improvement instead of a serious contender to some of the above.
Some solution providers have implementation tools for the SME accounts packages providing almost instantaneous connection to that network. The right provider can implement large financial and ERP systems in three to four months if the customer is prepared to put in the time and know their processing requirements.
The new hub-based e-invoicing solutions can be a serious contender to or partner with EDI. Whereas EDI is traditionally the preserve of large corporates and is normally too expensive for small businesses, the new solutions are more flexible, with some catering for all at a fraction of the cost. With EDI you require an individual connection so that trade can occur between two trading partners. More often, suppliers providing goods or services to two or more competing buyers within an industry will be required to set up separate links incurring additional costs and resource.
Having the ability to send a document in any format to a hub which is translated into the buyer’s designed format is simple and cost effective. There is also no need for suppliers to have specific systems in place which require continual updating and maintenance.
I would encourage large corporates to analyse their EDI costs against the current, more flexible e-invoicing options and, even though they may have incurred a large initial outlay, evaluate the savings over the next five to 10 years. Many corporates who are running EDI for their stock suppliers are still using paper based systems for their expense/overhead suppliers. Some of these companies are looking at running a hub based e-invoicing solution in parallel to overcome this.
Hub-based systems send and receive information via the Internet, which is good news as they will not be short-lived solutions. It also means that as Internet technology develops, solutions will naturally develop with it.
Like the mobile telephone scenario, the success depends on momentum and volume usage. Over the last six to 12 months more companies have stated that they will be evaluating these solutions, many looking to start projects shortly.
We should also not forget the government’s e-procurement directives for the public sector of which e-invoicing is a large part. Thousands of suppliers around the country will have exposure to these solutions and given the right one will be able to receive purchase orders and send invoices to many of the organisations they trade with.
As seen in the photocopier market (especially with colour), the greater momentum and volume usage there is, the cheaper they become. That does not mean that companies should wait, as it will take time for usage to be at that point.
We should not forget that there will be a number of solutions on the market and at some point, those providers will need to talk to each other and agree roaming charges. Some discussions on this took place in December 2005 when the market was still very young. Further discussions and agreements will need to take place and be ongoing.