Paper Or Ether?

While manufacturers have embraced e-procurement, they have resisted using Internet technology to make payments to supply-chain partners. But that could change as more companies cut costs via "e-payments."

Those checks your company sends out every month to pay suppliers may soon be going the way of the Model T.

That's because the traditional accounts payable process, which, ever since anyone in corporate America can remember, has entailed paper purchase orders, invoices, frequent errors and the ultimate cutting of checks, is going in the shop for a complete redesign. What's beginning to emerge is an electronic process that is faster, more accurate and can potentially save manufacturers money when they pay for raw materials, parts, components and services.

Surprisingly, despite all the talk and hoopla in the late 1990s over the new world of electronic commerce, many of the tried and true, old ways of doing business continue to be de rigeur. Hey, if it works, why mess with it, right?

Nowhere is that more true than for accounts payable.

"Accounts payable clerks may use imaging systems to turn paper invoices into images, but most invoices and payments are still paper-based," says George Fan, vice president of marketing at Xign Corp., a Pleasanton, Calif., company that helps businesses pay bills electronically via its own hosted online payments network, with about 17,000 suppliers participating. The company has handled business-to-business electronic payments totaling $43 billion.

According to an estimate by Visa USA, some $14.5 trillion changes hands between companies each year. Of that total, only about one-fifth is paid electronically, with the rest being paid via millions of paper checks. "The majority of companies today see the paper payments process as highly inefficient," says Brian Triplett, vice president at Visa USA Commercial Solutions.

The typical manufacturer's accounts payable setup, from receipt of invoice to payment, takes an average of 42 days, Fan says. By contrast, companies that have converted to electronic invoicing and payments have cut the entire process to two days. What's more, the cost of manually handling, checking, and processing a paper invoice and cutting a paper check runs anywhere from $8 to $12 dollars, mostly for labor.

But all that's changing as manufacturers are moving to get out of the business of printing, cutting and mailing checks to their thousands of suppliers. "Electronic invoicing and payment didn't take off a few years ago as much as e-procurement, but now we're definitely seeing an acceleration of adoption by big companies," Fan says.

One reason for the sudden interest is that the old paper-based process of paying suppliers, while workable, offered all kinds of opportunities for errors -- hence the reason so many large companies maintain an accounts payable staff with dozens of people. Their job is to reconcile the purchase order with the invoice, sort out ones that could be questionable or may have been duplicates or ones that were already paid, make sure everything looks OK, and then green light a check. Even so, mistakes are made.

Now, some companies and their suppliers are starting to get with the electronic program as a means to save both time and money. "The whole process of submitting invoices and cutting checks is manually intensive," says Sonya Zook, finance manager and controller for the Shared Service Center at Armstrong World Industries, a manufacturer of flooring and ceiling products. "The biggest driver for our company to change this process was our CEO, who said we should be doing more electronic payments."

Armstrong is using Xign's Order to Pay e-payments system, including both the invoicing and the payments processes. The fact that Xign offers the system over the Web on a hosted basis meant that the Lancaster, Pa., flooring and ceiling products maker didn't have to go out and purchase and install software and then try to coax its vendor community to buy the same system.

"Because they host the application, minimal resources were needed on our part, and we didn't have to reconfigure our ERP system to accommodate it," adds Zook. "Xign also gets the vendor's banking information and maintains it, so it's easier for us." Armstrong pays an annual subscriber fee -- based on size of company, amount of spend and transaction volume -- to use the Xign network

For Armstrong, the results have made the change worthwhile. "We streamlined our costs, reducing the number of people in accounts payable by eight," Zook says. "Our invoice approval process became faster, because now any errors that would have occurred are caught by the vendor at their end even before the invoice gets to us. That way," she says, "the supplier or vendor will deal with the issue instead of our accounts payable people spending time on it." Armstrong still has one employee who prints some checks for first-time vendors, some very small companies, and for a few critical suppliers who have resisted making the changeover.

Another feature of the Xign system that Armstrong's Zook says is a time-saver for her staff is its supplier self-service capability. The company's vendors can check online to see the status of their invoices and payments. Says Zook, "That eliminates a telephone call to us, making our AP clerks more productive because they don't have to deal with these telephone interruptions."

Using bank account information from both the supplier and the manufacturer, Xign's payment system debits one and credits the other, using a bank automated clearing house system. On behalf of Armstrong, Xign has signed up more than 700 vendors that deal with the flooring/ceiling products manufacturer, including about 200 that were added in 2004. The company expects to sign on another 500 vendors in 2005.

Of course, one-time vendors who are not signed up can still bill the company the old way via paper invoice, but Armstrong is tougher on its regular vendors. The manufacturer requires any new vendors that are likely to do a dozen or more transactions a year to connect with Xign for both electronic invoicing and payment. For smaller vendors and some larger companies' purchases of small items, Xign's network is integrated with MasterCard's Corporate Purchasing Card.

One of the benefits that Xign and some other electronic payments vendors boast when pitching their systems to manufacturers is the increased leverage and opportunity they afford for companies to extract pricing discounts as a result of faster payment. Some suppliers, in fact, offer more favorable terms to buyers such as a 2% to 3% discount for payments received within 10 days or less of invoice. At Armstrong, though, the company has yet to take advantage of this. "We haven't gone after vendors to change their terms," Zook says.

Price discount or no, the operational savings may be sufficient for most companies to make the switch pay off. Other companies using the Xign service are Bristol-Myers Squibb, Pacific Gas & Electric, Payless ShoeSource, Sony Music USA, Southern Company, Sprint, T-Mobile, and The Williams Companies.

While many companies are using any of various e-payments systems available, many more are still depending on paper invoicing and check payment. Why? "Supplier adoption is a problem," Fan asserts. "There is a certain level of trust required between the buyer and the supplier for this to work."

For instance, the buyer or manufacturer has to convince the supplier to share bank account information, as well as to stop using paper invoices and to start using the new electronic method of accepting payment for parts and services. "Getting suppliers to adopt a new system is one of the reasons" for the limited use of e-payments among manufacturers, Fan says.

Of the suppliers that Xign approaches, usually 80% sign up to use the service. "The supplier must trust the buyer that he is going to do the right thing," adds Fan. "But if they are only getting paid in 60 to 70 days, they may not have the level of trust built up to adopt something new."

Then, too, some suppliers may have felt burned by manufacturers who adopted e-procurement systems and proceeded to use online reverse auctions and other new technologies to hammer down prices. Fan says that in one recent survey, less than 30 percent of suppliers signed up for buyers' catalog initiatives of manufacturers. "Suppliers feel they are not getting much out of it," he adds. "I think buyers got a bit of a black eye there."

Another hurdle restricting adoption of e-payments is simple cash management strategy: many manufacturers typically stretch out the payment process to conserve cash, paying only at the 11th hour. The idea, of course, is that you get to keep the money and put it to work earning for you as long as possible. "In the traditional world of the paper check, you determine when you are going to pay," says Triplett, of Visa Commercial Solutions, which offers a competing e-payments service called Visa Commerce.

With today's Lilliputian interest rates, though, that practice may not be so sound, at least from an investment standpoint. "If you stretch payables, what you get on short-term cash today is about 1 to 2% per year, and if you divide that by 12, you are getting maybe 20 basis points (hundredths of a percentage point)," Fan says. He believes manufacturers could do better financially by paying swiftly -- say, in a couple of days via e-payments -- and negotiating a 1% to 3% discount on pricing from the vendor in exchange. By his calculations, "If you accelerate payment within 20 days to get a 2% discount, spread over 360 days that means you can make 36% on your money."

For a large manufacturer, the possibility of negotiating a half a percent discount on a total spend of $1 billion to $2 billion can yield a savings of $5 million annually. And many smaller vendors that big companies use may be so eager for quick cash flow that they will be open to larger discounts. Payless ShoeSource, for instance, has been able to negotiate a discount of up to 3% from some vendors for paying them within five days.

Yet another potential benefit of an e-invoicing and e-payments service such as Xign is its ability to ferret out mistakes in the invoicing process at the vendor, before they ever hit the manufacturer's AP department. "Xign performs validation in realtime on the invoice to make sure it doesn't exceed a certain preset level or to eliminate the chance of a duplicate invoice," Fan says. That way, it's never submitted to the buyer.

E-invoicing's built-in error-prevention feature forces the supplier to submit a clean invoice. Using the traditional paper process, on average, one out of eight invoices contains an error of some kind that someone -- usually an accounts payable staffer for the buyer -- will have to identify, investigate and reconcile. Companies using the system, both buyers and suppliers, get full visibility of the history of a transaction, along with a set workflow process to manage payment disputes that may arise.

"The idea is to attach e-remittance data so you can do automated reconciliation" when there is a question about an invoice," says Visa's Triplett. Similar to Xign's system, VisaCommerce enables suppliers to check the status of invoices and payments online, without having to call the manufacturer's accounts payable department.

Vendors can electronically initiate an invoice, while manufacturers do the same to initiate a payment, at the same time controlling the terms, i.e., the number of days to payment. Buyers also can look at invoices that may contain some kind of exception, and drill down to check these on a line-by-line basis. "The goal is to let machines do the work sending the information, and let the people deal with the exceptions," Triplett explains.

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