9 Trends that will Transform Purchase-to-Pay in 2015 An IOFM White Paper

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1 9 Trends that will Transform Purchase-to-Pay in 2015 An IOFM White Paper Executive Summary While the global economy is beginning to bounce back, organizations are still faced with a heightened pressure to improve their cash flow. As a result, during the next year, more accounts payable and procurement departments will turn to innovative invoicing and payment strategies, new financing options, social media and online collaboration tools, analytics, and a series of networks to improve financial management. In particular, electronic invoicing and payments will continue to experience growth in These trends will lead to enhanced visibility, streamlined business processes, greater collaboration, and increased responsiveness to internal users and trading partners. Below are the nine trends that will transform purchase-to-pay in Organizations should keep these trends front-of-mind as they look to maximize working capital and ensure their competitive position. 1. Don t expect paper invoices to disappear anytime soon. If 2014 is any indication, paper invoices have surprising staying power. On average, 56 percent of invoices are received as paper, TAPN s 2014 State of Accounts Payable benchmarking study found. That statistic is unchanged from TAPN s 2013 study. Worse, a median 60 percent of invoices are received as paper, TAPN reported. And none of these findings account for the average 35 percent of invoices that are received as PDFs via many of which are printed and manually processed because payers lack the technology required to process ed invoices straight-through. Electronic invoices account for an average of 22 percent of invoices received. The bottom line: While electronic invoicing adoption has increased, the potential is tremendous. In the interim, organizations will require strategies and tools for effectively managing paper invoices. 2. Accounts payable takes another step toward becoming a strategic function. Slowly but surely, accounts payable will continue its migration from a manual, paper-driven function, to an automated one that delivers value and analytics across the enterprise. Here are some examples of how accounts payable automation is becoming more widespread:

2 57 percent of organizations have implemented automated workflow. 62 percent of organizations have implemented purchasing cards. 52 percent of organizations have deployed some form of electronic invoicing, such as electronic data interchange (EDI), electronic invoice presentment and payment (EIPP) or extensible markup language (XML). While only 27 percent of organizations have implemented a vendor portal, the corporate push to improve cash flow and the implementation by governments around the world to create a supportive e-commerce infrastructure will further fuel the adoption of electronic invoicing. This year will see suppliers turning to portals with onboarding services to make invoicing faster and more accurate. Not surprisingly, organizations with high invoice volumes are leading the automation charge. Concerns about process improvement, paying invoices on time, managing time, and increasing productivity are driving accounts payable automation initiatives, TAPN s 2014 benchmarking study reported. The less automation an organization has in its accounts payable department, the more likely the organization is to be concerned about time management and productivity, TAPN found. Five years ago, paying invoices on time was the top concern of accounts payable, TAPN reported. TAPN research shows a direct correlation between level of automation and invoice processing costs. The average cost to process an invoice stands at $12.65, according to TAPN s 2014 benchmarking study. But organizations with a high level of automation report average invoice processing costs of $8.90. Conversely, organizations with a low level of automation report average invoice processing costs of $15.53, while organizations with no automation report average costs of $33.19 per invoice. Automation eliminates many of the manual tasks associated with processing invoices, including: Data entry of header and line-item information. Invoice routing, review and photocopying. Physical document storage and retrieval. Research of invoice and payment status to resolve supplier inquiries. Tight capital will remain a challenge in getting automation projects approved. Slightly more than half of the organizations that responded to TAPN s 2014 benchmarking survey indicated that it is very difficult or impossible to secure capital funding for accounts payable automation projects. Conversely,

3 42 percent of organizations said it is not too difficult to secure capital funding. 3. Electronic payment adoption will increase. In spite of compelling benefits (e.g. reduced costs, better tracking, fewer opportunities for fraud), electronic payments have experienced slow adoption, particularly among smaller companies. An average of 61 percent of disbursements (and a median of 69 percent of disbursements) are made via check, according to TAPN s 2014 benchmarking study. Similarly, an average of 57 percent of total spending is done via check (representing a median of 65 percent), TAPN reported in Payers blame check-centric legacy systems, supplier reluctance or inability to receive electronic payments, and high perceived costs as reasons for sluggish electronic payments adoption. But innovative electronic payment solutions for businesses are speeding up settlement by enabling immediate payment once an invoice is approved. This is driving adoption of electronic payments. Automated Clearing House (ACH), in particular, has gained traction as a result of lower deployment costs, cloud-based and software-as-a-service (SaaS) solutions offered by financial institutions and third-party providers, increasing supplier acceptance of ACH payments, and less incidence of fraud compared with checks. ACH is the second-most-frequent method of disbursement behind checks, according to TAPN. Commercial cards also have experienced tremendous growth over the past five years. Today, as many disbursements are made via commercial card accounts as by wire transfer. TAPN s 2014 benchmarking study found that the Professional, Scientific and Technical category is the industry group leader in use of commercial cards for disbursements, with an average 30 percent; the median use by those in the category is 18 percent. The average for other industries is at or below 10 percent. Both ACH and commercial cards will continue to grow in Centralization and coordination are becoming critical.

4 In 2015, more organizations will continue to centralize payables and better coordinate the function with other departments to improve visibility into financial data and improve decision-making. For starters, an average 64 percent of invoices come directly to accounts payable from suppliers, according to TAPN s 2014 study, with a median percentage of 80 going directly to accounts payable. Twenty-five percent of accounts payable departments now operate within a shared services center, according to TAPN s 2014 benchmarking study up from 15 percent five years ago. What s more, most accounts payable operations that are not part of a shared services center are centralized. In 2015, accounts payables departments will strive to increase collaboration across the company. Forty-one percent of respondents to TAPN s 2014 benchmarking study said their organizations accounts payable and purchasing departments already are wellcoordinated. Another 41 percent of respondents stated that there is some level of coordination between their organizations payables and purchasing departments, and 7 percent of respondents said payables is part of their organizations purchasing department. The level of coordination between accounts payable and procurement will increase in 2015 as finance executives dismantle the silos separating finance, procurement and treasury and adopt automation solutions, e-invoicing and open commerce networks to work smarter. 5. Accounts payable will move to the cloud. As in the consumer world, the cloud (or SaaS) is becoming standard for today s finance executives. More of them will rely on it in 2015 to cost-effectively manage their payables applications and resources and access them seamlessly anytime and from any device. Similarly, accounts payable departments will rely more heavily on social capabilities within business commerce networks in 2015 to communicate with trading partners and address issues in real time. With cloud-based solutions, processes such as invoice review and approval can move ahead efficiently and unimpeded regardless of travel schedules, enabling organizations to better manage and control their payables and realize early payment discounts and other business benefits.

5 While TAPN s 2014 benchmarking study found that most implementations of accounts payable solutions remain on premise, there are signs that cloud-based and SaaS solutions are catching on. Automated expense reimbursement solutions have the highest percentage of SaaS implementations, at 35 percent, according to TAPN. Web portals have the second-highest percentage of SaaS implementations. Conversely, automated workflow systems have the highest percentage of on premise implementations at 74 percent, followed by front-end imaging systems at 70 percent. Outsourcing is still relatively rare in accounts payable, but there are pockets of adoption. P-cards are the most commonly outsourced accounts payable automation tool, at 20 percent, followed closely by card programs for payment of invoices, and optical character recognition (OCR)/data extraction, both outsourced by 19 percent of organizations, TAPN found. Seventeen percent of respondents to TAPN s 2014 benchmarking study said their organizations outsource front-end document imaging. 6. Cash flow will still be king. Buyers and sellers will be focused like never before on the timing of payments in For buyers, paying invoices to terms continues to be the top key performance indicator (KPI) against which accounts payable departments are measured, according to an IOFM survey conducted in Responsibility for the timing of payments belongs to accounts payable in 61 percent of organizations, TAPN s 2014 benchmarking study reported. Beyond accounts payable, the timing of payments is most often the responsibility of a controller or governed by purchase orders or contract terms. Organizations surveyed by TAPN in 2014 pay an average of 83 percent of invoices on time, and a median of 90 percent of invoices on time. The average payment terms stand at 34 days, TAPN s 2014 benchmarking study found, with the median payment terms slightly lower at 30 days. Discounts for early payment are offered on an average of 14 percent of invoices, and a median of 10 percent of invoices. Organizations capture an average of 58 percent of discounts offered (and a median of 80 percent), TAPN found. Early payment can help open the lines of cash flow while reaping financial and reputational benefits. Surprisingly, only 20 percent of accounts payable

6 departments track days payable outstanding (DPO); DPO stands at an average of 30 days for those that track it. For sellers, cash flow will continue to be a constant concern for businesses of all sizes as buyers continue to hold onto their cash at all costs and extend payment terms to suppliers. These common practices create major cash flow pressure for trading partners, particularly small and midsize businesses, many of which are reluctant to take on debt. Traditional business-to-business factoring options are time-consuming, involve a high degree of risk and are costly for borrowers. This backdrop will drive growth of innovative financing models in These models remove suppliers dependency on buyers for cash flow, and radically transform the one-sided relationship that has favored the buyer into a mutually beneficial business-to-business commerce experience. 7. Reliance on analytics and reporting will increase. In 2015, organizations will continue to rely on analytics more heavily to drive business results. Analytics solutions are identifying procurement, spend and payment trends; optimizing processes and technology; and uncovering opportunities for accelerated payments and other strategies. In 2015, companies will rely even more heavily on analytics, working not only across their purchase-to-pay process but also across their whole network of buyers and suppliers to aid decision-making. The use of real-time analytics will help identify financial bottlenecks and opportunities for savings. By leveraging analytics, organizations are realizing improved order-to-cash conversion cycles, days sales outstanding (DSO) and DPO. Additionally, the insights into spend, cash flow and working capital enabled by automated analytics will propel a closer collaboration among internal departments, such as accounts payable, finance, procurement and treasury and extend to external trading partners. In a 2014 study by CFO Research conducted in collaboration with research and advisory firm KPMG, business analysis was cited as the top priority among CFOs for implementing technology initiatives. 8. Expect a greater focus on tax and regulatory compliance.

7 Accounts payable departments face significant tax and regulatory compliance challenges. Much of the compliance focus is around federal Form 1099/1042S payment information reporting, followed by state sales and use tax compliance. Organizations risk hefty fines and penalties for noncompliance. Yet many organizations are not fully compliant with federal and state tax reporting requirements. Three-quarters of organizations surveyed for TAPN s 2014 benchmarking study indicated that their accounts payable department is fully or partially compliant with 1099 payment information reporting. Fifteen percent of respondents said they were unsure of their organizations level of compliance. And that s the good news. TAPN found a lower level of compliance with state contractor reporting requirements. In addition, one quarter of respondents were unsure of their organizations level of compliance with state contractor reporting requirements potentially a reflection of the complexity of the requirements. One in four companies said contractor reporting was not applicable to their business. Sixty-three percent of organizations are in full compliance with unclaimed property reporting and escheatment requirements, while 9 percent claim to be partially compliant. Thirteen percent of organizations surveyed by TAPN said unclaimed property/escheatment regulations are not applicable to their business. 9. Requirements for knowledge workers will increase. As accounts payable migrates from a tactical back-office function to a strategic information-driven one, departments will increasingly require workers with a higher level of education and training. One-quarter of accounts payable departments surveyed by TAPN in 2014 indicated that the proficiency of their staff has greatly increased compared with five years ago. An additional 58 percent of accounts payable departments described the proficiency of their staff as increased. In fact, the percentage of accounts payable staff members who hold a bachelor s degree has doubled over the past five years, to 25 percent from 12 percent, TAPN s 2014 benchmarking study found. What s more, the percentage

8 Summary of accounts payable workers whose highest attained level of formal education is high school has decreased over the past five years to 34.5 percent from 56.6 percent, TAPN found. Nearly half of the accounts payable departments surveyed by TAPN indicated that they invest in certification programs for their staff. Some 38 percent of departments stated that they invest in staff training through tuition reimbursement for college courses. Only nine percent of accounts payable departments surveyed by TAPN indicated that they do not invest in training for their staff. In 2015, business-to-business commerce will become more agile and responsive as organizations increasingly rely on innovative, online and real-time invoicing and payment solutions to break down trading barriers and reduce the friction and costs of paper-based processes. The continued corporate focus on increasing cash flow will also drive the urgency to create a connected global economy. As a result, organizations must plan to deploy these solutions or risk being at a competitive disadvantage.