e-invoicing in the UK public sector: a missed opportunity?

1 / 14 e-invoicing in the UK public sector: a missed opportunity? A white paper from OB10 Ltd, part of Tungsten Corporation Luke McKeever, CEO, OB10

2 / 14 Table of contents 1. Background on e-invoicing 4 2. Why the UK public sector is a slow adopter of e-invoicing: the challenges and barriers i. Direction and mind-set ii. Technology and implementation 7 3. Drivers for e-invoicing in the public sector 10 4. Annex i. Financial savings for the UK public sector ii. The OB10 e-invoicing service 12

3 / 14 Adoption of electronic invoicing (e-invoicing) in the UK public sector would save material sums of money and would make a real contribution to economic growth. This whitepaper has been organised into the following sections: 1. Background on e-invoicing including definitions and benefits 2. A discussion of why the UK public sector is a slow adopter 3. Drivers for e-invoicing in the public sector 4. Indicative savings available from conversion to e-invoicing The UK needs a centrally managed plan to accelerate the adoption of e-invoicing in the public and private sectors. Luke McKeever CEO, OB10 Ltd 020 7406 5534 Luke.McKeever@OB10.com

4 / 14 Background on e-invoicing What is e-invoicing? Electronic invoicing involves the complete removal of paper from the invoicing process. Invoices are delivered from suppliers computer systems directly into buyers systems. Even today, most invoices are created from an organisation s accounting system, printed and posted or e-mailed to customers who scan and/or re-key the data into their own computer systems. This is costly, time-consuming and perhaps, most importantly, error prone. It results in lost and misdirected invoices, excessive costs, late payments, frustrated accounts payable staff and even more frustrated suppliers. By connecting these processes electronically, e-invoicing helps buyers pay their invoices on time and gives suppliers both SMEs and large enterprises greater visibility of when they will be paid. To benefit from e-invoicing, suppliers send invoices directly from their billing systems or through an online portal into their customers accounting systems. With guarantees that their invoices have been delivered within minutes rather than days, they no longer need to call and check if invoices have been received. For buyers, e-invoicing removes paper documents from their invoice processes, substantially improves data quality and process costs, and dramatically reduces the number of calls from suppliers. Invoices can no longer get lost in the post or left on staff members desks waiting to be processed. Given the importance of VAT revenues accounted for through the invoicing process, it should be stressed that e-invoicing now enjoys equal treatment with paper invoices and there are a variety of manageable process steps to ensure full compliance with VAT regulations. For example, e-invoicing provides a safe and accessible method of e-archiving of completed transactions for statutory periods. e-invoicing can be implemented in a direct model, in which invoices are created by a supplier and delivered directly to buyers on a one-to-one basis. Given that this involves the management of many individual connections, it is more common to use the services of an e-invoicing platform or network. Such platforms or networks are capable of processing transactions for both suppliers and buyers and there are also facilities available for interoperability so that a trading party on one network can reach a trading party on another network. This is important in the context of public procurement to meet the requirements of the Single Market so suppliers in all Member States have access to contract opportunities throughout the EU. It is important to recognise that many forms of electronic invoicing are comparatively easy to implement and will deliver benefits immediately. The adoption of electronic

5 / 14 invoicing processes can be achieved with comparatively little or no up-front investment and there are many proven solutions offered by the networks. The solutions and services industry is already well seeded with world-class service providers operating in a competitive landscape. Benefits of e-invoicing in general and for the public sector in particular Broader adoption of e-invoicing will bring benefits to both the UK public sector and their suppliers. Benefits to buyers Eliminate manual data processing Reduce or eliminate data errors Enable compliance with regulations Improve purchase order or contract compliance Eliminate the processing of duplicate invoices and the duplicate processing of invoices Remove the need to archive paper invoices (the current retention period in UK is six years) Refocus staff on more valuable work Reduce invoice fraud Achieve more accurate, quicker reporting and audits Improve payment-on-time metrics or enable early payments Collate and store line-level invoice data to enable detailed analysis of spend variance Support corporate social responsibility programmes Benefits to suppliers No delivery or print costs Guaranteed, secure delivery Automatic validation of invoices ensures errors are corrected early Eliminate the potential for lost invoices More predictable payment Increase visibility of the payment process Make fewer phone calls chasing payment updates Improve days sales outstanding Greater access to early payment and improved cash flow Support corporate social responsibility programmes Further cost savings are achieved through more efficient workflows, general process improvement and administrative efficiencies at all levels. At a minimum, greater transparency is built into the procure-to-pay cycle and supply chains become more stable. The environmental benefits of electronic invoicing are also significant. The elimination of just 1 million paper invoices will save: 3,000,000 sheets of paper, which saves 360 trees Enough fuel to run the average car for 26,683 miles Sufficient energy to run the average home for 127 months 52 cubic metres of landfill space 1,271 pounds of air pollutants

6 / 14 The benefits to UK public sector buying organisations Just as in the private sector, the initial benefits take the form of direct cost reductions in back office-processing and call handling and invoice reconciliation. Looking beyond the direct savings, e-invoicing brings significant value by, for example, allowing organisations to refocus resources onto more productive or value-added work while protecting front-line services. Electronic trading systems will deliver greater transparency of spend and simpler financial reporting right across government. Once the pivotal e-invoice process has been established, it becomes an enabler for the implementation of full end-to-end e-procurement (from e-catalogues to ordering and payment). It is important to make a distinction between the complex internal change management required to adopt full e-procurement with the comparatively straightforward step of adopting electronic invoicing. This modular step creates the potential for the progressive adoption of e-procurement. Advantages to UK public sector suppliers and the economy as a whole Acceptance of e-invoices by government will make the public sector much easier to do business with. Suppliers will find that e-invoicing reduces costs and leads to quicker and more predictable payments. It also reduces the number of errors and the need to make frequent queries on the status of unpaid invoices. As e-invoicing procedures usually include a confirmation of invoice approval, suppliers may be able to take advantage of early payment or invoice discounting arrangements triggered through the e-invoicing process. This is of particular benefit to small-tomedium-sized businesses that often suffer most from late payment and cashmanagement issues. The adoption of e-invoicing in the public sector will create beneficial effects to the economy as a whole. The public sector can act as a catalyst and role model together with large enterprises that are already major e-invoicing adopters. The European Commission states that e-invoicing adoption continues to hover in the 4-15% range across the European economy. These figures can grow substantially through public-sector adoption, further action by the private sector and the resultant cross-fertilisation of activity. Electronic invoicing allows the capture of a minimum 60% saving per invoice over manual processes for a buying organisation (Aberdeen Group 2005; Billentis 2013). There is an annual savings potential of at least 2bn across the UK public sector based on conservative assumptions and there is the potential to significantly increase these benefits; some estimates have put this as high as 4bn-6bn per annum (see annex).

7 / 14 Why the UK public sector is a slow adopter of e-invoicing: the challenges and barriers The answer to this question is answered under two headings: direction and mind-set, and technology and implementation. 1. Direction and mind-set Policy leadership Historically there has been no central government voice to champion e-invoicing. For e-invoicing to find widespread adoption, it needs to become a public policy priority and be strongly advocated, if not mandated. Given a public sector culture of respecting top-down instruction the provision of policy guidance for all public bodies including central government departments, local authorities and arms-length bodies will be necessary to create momentum. No such policy exists today. There remains the need for sponsorship, ownership and championing by senior people, who are convinced of the business case and able to provide leadership both centrally and within each public body. Business case It is not wise to think of e-invoicing as merely a step in a procurement process. There is a strong business case for e-invoicing alone, which offers significant savings as lowhanging fruit. This distinction is not sufficiently recognised, particularly in the public sector. There has also been a mind-set of disbelief in the savings available and of the costbenefit equation despite a plethora of success stories in the private sector and other countries. However, the likes of Barclays, GSK, Kraft Foods, Unilever and IBM have all embraced e-invoicing for a reason. Supplier mandates and fees Until today, the public sector has resisted the concept of compelling or mandating supplier participation in e-invoicing despite this approach being highly effective in many other environments. A stronger message is needed towards suppliers. Some buying organisations believe that they have to provide services free of charge to suppliers and bear the entire cost of an e-invoicing programme. This is not the case as suppliers also benefit and are prepared to pay for the increased value as long as the pricing is fair. For small suppliers with low volumes of invoices, a free or highly concessionary cost structure is common so all suppliers have access to guaranteed delivery, accurate status information and payment on time.

8 / 14 Comfort with paper A comfort-zone exists around paper and paper-based processes that needs to be challenged. Few other business disciplines have resisted digitisation as long as the invoicing process. Staff reduction There has been a historic requirement or a perception that it is necessary to maintain or increase staffing levels in public sector bodies. e-invoicing enables significant staff reduction or the potential for re-deployment. Given current and ongoing deficitreduction targets, this should be no longer be an objection. Project and budget Implementation of e-invoicing requires a project organisation and budgets, which are often said to be unavailable despite the strong business case and the short pay-back period. e-invoicing projects merged into end-to-end procurement programmes One reason for the slow adoption of e-invoicing to date is the historical behaviour of merging e-invoicing into a much larger e-procurement transformation projects that can take years to roll out. Most successful e-invoicing programmes have de-coupled themselves from their group-wide procurement initiatives to gain the supplier adoption needed to quantify the programme as a success. 2. Technology and implementation Skills and lack of standardisation There have been issues of confidence and competence that have impeded implementation in public bodies. Project management skills are required to coordinate the buying organisation s technical work to integrate inbound data with its host accounting and enterprise resource planning (ERP) systems. These technical skills are often unavailable or expensively outsourced. In addition, the UK public sector has varied information technology and little uniformity across its processes. The consequences are that each implementation is different and it is therefore difficult to provide a one-stop shop for e-invoicing. Shared service centres As already recognised by the UK government, one way to meet these skills and standardisation issues is through the creation of shared service centres (SSC). They are often deployed alongside private sector partners, such as Arvato, Steria and Accenture, and use models that have a proven track record in both the private and public sectors. Technology is widely available to support such initiatives, which leads to uniformity, manageable environments and economies of scale and scope. The service provider networks that connect the supplier base and support the invoice flow then become much easier to integrate with. The Next Generation Shared Services Programme is a prime example of this as are similar groupings among local authorities and within the NHS-SBS. Within the policy

9 / 14 direction of SSC implementations, it is important to specifically identify e-invoicing as a priority once the centre is up and running. It is critical to require business process outsourcing partners to prioritise e-invoicing and make concrete plans for it rather than see it as just one of a long list of key programmes to deliver. Complexity Another reason for the lack of traction by public sector bodies has been the tendency described in section 2.1.7 to submerge an e-invoicing opportunity within ambitious end-to-end procurement-to-pay projects. Such projects often run into difficulties, especially as a result of the complexity of automating the pre-award and contracting stages of the process. As a result, the post-award (e-invoicing) stage rarely gets the proper focus. Such initiatives can be placed in the boil the ocean category. It is infinitely preferable to approach procure-to-pay projects in a modular way and start with the pivotal opportunity of e-invoicing for supplier connectivity and from there work upstream to procurement and downstream to automating supplier payments and discounts.

10 / 14 Drivers for e-invoicing in the public sector e-invoicing supports economic growth The adoption of e-invoicing will drive productivity and efficiency in the UK economy by allowing greater output of goods and services for lower factor inputs. Using e-invoicing to facilitate prompt and early payments could provide much-needed liquidity to many SME suppliers of large companies and the public sector. VAT collections and audits can be improved while also reducing fraud and errors. In the absence of widespread e-invoicing adoption in the UK, the digital and business services sector, a key sector for generating growth, would be denied an important home market advantage and perhaps allow overseas competitors to win global business and eventually penetrate the UK market when e-invoicing is adopted. Given the opportunity, the home market would nourish the important digital and business services sector and create export opportunities. UK private sector lessons learned: how small changes can drive growth Large private sector companies have led the way in championing e-invoicing adoption and driving supply chain efficiencies. Their procurement activities are very similar to those of public sector buyers. There is the potential to transfer knowledge and experience on both the e-invoicing process itself and the internal re-engineering. Process redesign is also exemplified in incremental steps, as e-invoicing leads to the automation of further supply chain processes. Valuable lessons have been learnt on the need to make e-invoicing mandatory for suppliers and give them a step-by-step approach to on-boarding. Major OB10 customers, such as GSK, Tesco, HP and the Department of Veterans Affairs have all mandated e-invoicing with their supply bases and the results are impressive. The virtuous circle of large corporations and governments working to the same agenda will enable rapid adoption. The impact on culture and organisation generates growth. The UK lags behind other countries both within the EU and beyond There are some excellent examples of UK and multinational companies leading the global movement towards e-invoicing. In this sense, the UK is certainly not lagging behind other countries. For enterprises as a whole, the UK may lag behind some countries but as e-invoicing is still relatively new it is difficult to make comparisons. For the public sector, the lack of central direction and policy drivers have resulted in the UK lagging behind many other countries such as the Nordics and global adopters, such as Brazil, Mexico, Korea and Turkey, where fiscally driven schemes launched by governments are generating rapid adoption.

11 / 14 It is fair to say that the UK has a large and complex economy, similar to France, Italy and Germany where adoption has also been slow. Smaller economies where projects are more manageable have led the way, but there are now signs of ramped-up activity in countries such as Germany, Spain and Italy. The UK public sector should champion e-invoicing for the wider economy by providing direction, promoting adoption and mandating its use. The public sector could generate a significant number of case studies to spread the message. The European Commission is supporting economic growth by driving the adoption of e-invoicing across European public procurement It is worth emphasising the strong policy and leadership role played in recent years by the European Commission including: Introducing the VAT Directive 2010/45/EC implementing equal treatment for paper and e-invoices, which is now transposed into legislation in the Member States Adopting e-invoicing in European Commission procurement Funding the PEPPOL initiative ( Pan-European Public Procurement On-Line) Improving processes for gathering EU-wide statistics on adoption Organising expert groups and the European Multi-Stakeholder Forum on e- Invoicing, in which the UK participates Currently proposing an EU Directive to create a common e-invoice standard and mandating support for e-invoicing based on the standard among all EU public bodies. This is supported by measures to automate end-to-end public procurement Support for the Single Market recognising that all Member States need to provide access to suppliers from other Member States to public procurement opportunities The EU is clearly providing policy direction and acting as a role model for Member State governments, who are capable of reaping the benefits already described above with concomitant benefits for the Single Market, the Digital Agenda and economic growth generally.

12 / 14 Annex: Financial savings for the public sector The following estimates show the value that e-invoicing can generate. The benefits to Europe In June 2013, in the preamble to the proposed directive on e-invoicing in public procurement, the European Commission estimated that the savings per invoice could be as much as 30-50. 1 In 2007, a report to the European Commission on the benefits of the Single Euro Payments Area (SEPA), estimated that Europe-wide cumulative benefits from e-invoicing over six years stood at 240bn (approximately 40bn per annum). 2 Denmark has already implemented public sector e-invoicing and has estimated a saving of 120m- 150m per annum. When scaled up for the UK, this is equal to 1.5bn per annum. Public sector gains The general view for public sector buyers is that there exists a savings potential from e-invoicing of up to 11 per invoice for buyers and around 6 for suppliers, which equates to at least a 60% 3 saving over the cost of processing a paper invoice and 10 minutes 4 of staff effort per invoice. The Billentis e-invoicing / e-billing report 2013 estimates a minimum UK public sector saving of 4,400m per annum. A report prepared this year by the UK National e-invoicing Forum estimates savings of 4-6bn for the UK public sector. A worked scenario for the UK The benefits from e-invoicing vary according to the supplier s profile, buyer s systems, and the potential for full integration with back-office systems and end-to-end workflow. The scenario below takes a conservative approach and demonstrates ways of further increasing the benefits. The total public sector procurement of goods and services in the UK is 230bn per annum. The average face value of a public sector invoice lies in the region of 2,000 (exact figures are not readily available but this a reasonable assumption based on OB10 experience). The savings benefit is based on a cost of 10 per invoice for the buyer and 5 to the supplier as estimated above. On this basis, with approximately 115 million invoices, total savings for buyers amount to 1.15bn, to which 575m can be added from total savings to suppliers. 1 European Commission press release, 26 June 2013 IP/13/608:e-Invoicing in public procurement 2 Capgemini Consulting, SEPA: potential benefits at stake, Researching the impact of SEPA on the payments market and its stakeholders, (2007) 3 Aberdeen Group (2005) and Billentis (2013) 4 OB10 customer input

13 / 14 It is then reasonable to add a figure for fraud reduction. The National Fraud Authority reports that the UK public sector suffers from fraud worth 1.4bn per annum. By applying a 15% reduction target as a result of improved invoicing, a further 210m savings potential is perhaps possible. We can then identify a total savings target of 1.93bn as a result of public sector adoption of e-invoicing. Further potential for savings will lie in the implementation of fully automated, end-toend e-procurement from notification through to contract, order, invoice and payment. Further benefits will also arise from the improvement in VAT revenue collection and the elimination of tax evasion, and from environmental benefits.

14 / 14 The OB10 e-invoicing service OB10, part of Tungsten Corporation, is a world leader in the automation of e-invoicing processing in excess of 100bn in annual spend on behalf of global corporations such as Kraft, Unilever, GSK, Pfizer, HP and Tesco. The company is also increasingly active in the public sector on both sides of the Atlantic with national and local government clients such as the NHS-SBS, US Department of Veterans Affairs and Imperial College. In October 2013, OB10 joined forces with Tungsten Corporation plc, to create the world s largest global trading platform that brings the benefits of spend analytics to our global Fortune 500 buyer customer base and an invoice discounting solution to suppliers. The OB10 service supports an any-to-any model that can handle any invoice standard, format, location or source system. The platform can be integrated with all accounting packages. OB10 undertakes supplier on-boarding on behalf of its clients and deploys significant multi-lingual resources to undertake this activity for buyers in 42 countries. The service enables customers to be compliant with applicable fiscal and legal requirements. Invoices are checked for completeness and compliance, and are digitally signed to guarantee authenticity and integrity (as defined in EU legislation). Suppliers are guaranteed delivery of invoices. Both suppliers and buyers have access to an online audit trail. Tungsten Corporation is now able to offer early payment facilities for suppliers that do not wish to wait until the contractual payment date. It has also deployed a spend analytics solution to help buyers understand the profile and pattern of their procurement activities, with a view to saving money. The extensive, proven range of specialised e-invoicing services including compliance, multi-lingual supplier enrolment, supplier payments, spend analytics, archiving and interoperability sets the Tungsten solution apart from its peer group. Companies that compete with Tungsten Corporation usually offer general e-business services, such as data transport or electronic data interchange (EDI). www.ob10.com