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Beyond EDI How a Smart Invoice Network Reorders P2P to Drive Global e-invoicing and Collaboration with All Suppliers A Special Report from The Accounts Payable Network By Judy Bicking AP & Procure-to-Pay Consultant with The Accounts Payable Network Former Director, Johnson & Johnson s AP Shared Services Sponsored By: Presented By: 2100 RiverEdge Parkway, Suite 1010 Atlanta, GA 30328 770-984-1184 FAX: 770-984-1174 www.theaccountspayablenetwork.com

2013 Financial Operations Networks LLC Published by Financial Operations Networks LLC, Atlanta, Georgia. All rights reserved. No part of this publication may be used or reproduced in any manner or stored in any form whatsoever without written permission of the publisher. For information, contact Financial Operations Networks, 2100 RiverEdge Parkway, Suite 1010, Atlanta, GA 30328, 770-984-1184, www.finopsnet.com.

Table of Contents Accounts Payable Network Advisory Board... 4 Executive Summary... 5 Accounts Payable: A Back Office Operation... 7 P2P Involves Procurement and Accounts Payable... 10 The Smart Invoice Network: Value to Buyers and Suppliers... 13 Internal Controls and Compliance... 18 Achieving Competitive Advantage as a Networked Enterprise... 20 About The Accounts Payable Network... 21 About Judy Bicking... 22 About Ariba... 23 2013 Financial Operations Networks LLC 3

The Accounts Payable Network Advisory Board Steve Adams, CPA Director of Global Shared Services Implementations, McKinsey Vivian Baker, APM Accounts Payable Director, Financial Shared Services, The Coca-Cola Company Judy Bicking, APM Former Global Director, Accounts Payable European Project, Johnson & Johnson AP Best Practice Consultant and owner of Island Decor & More / Ship to Shore Home Decor Debbie Vander Bogart Senior Director, Finance General Manager, Shared Service Center, Levi Strauss & Company Larry Brang, CPA, APM Director, Commercial Services - Americas, Merck & Company, Inc. Tom Brewer, CPA Vice President, Shared Services, Michaels Stores Inc. Carlos Flecha, CPA, APM Former Director-Finance Shared Services, Wal-Mart Stores, Inc. Lynda Foertschbeck Executive V.P., IRSCompliance, Inc. David W. Hay Consultant, Former Director, Shared Services, Hewlett-Packard Company Frederick C. Litow, CTP, APM Head of Financial Administration - Atlanta, ING Thomas F. Nichols President, Process Management Improvement, Inc. and Former Director of Financial Operations for AT&T s Corporate Accounts Payable and Payroll Management Susan Tinkler-Muller Vice President, Accounting Services, MTV Networks 2013 Financial Operations Networks LLC 4

Executive Summary The current accounts payable (AP) process is backwards. The often-delayed arrival of a paper invoice triggers a chaotic series of events required to track down, verify and approve purchases already made. Accounts payable does not operate in a vacuum, and the push for electronic invoicing and process automation has highlighted the broader procure-to-pay (P2P) process to be addressed. But for most organizations, that process continues to be driven from the wrong end. Past and current efforts to find a solution through process automation have had only limited success automating parts without fixing the whole. The responsibility of accounts payable is to ensure payments are made accurately, within terms, taking advantage of cash discounts, and in compliance with all regulations and taxes. In many organizations, AP s reputation for meeting these obligations has been poor. Much of the fault, however, does not lie with AP. The outcomes for which AP is responsible depend on input that is beyond AP s control. Automation technology has offered hope for process improvement, so far with limited success. The first attempt, going back decades, was electronic data interchange (EDI). EDI has achieved traction for direct spend and in retail supply chains, but has not had much success reaching out to a broader audience. EDI is costly and IT-intensive for both the buyer and supplier, and could only be implemented by a small segment of the supplier population, mostly inventory-related. Another approach, imaging and automated workflow, is a bolt-on process that converts the paper invoice into an electronic document upon arrival, then routes it to various departments to gain approvals and confirmation of the three-way-match. The key issues still remain: receiving the invoice (the number one bottleneck to the AP process) and backing into the approvals and confirmation of the three-way-match. 2013 Financial Operations Networks LLC 5

Today, connecting Enterprise Resource Planning (ERP) and other back office systems to a smart invoice network brings order to a chaotic P2P process and fulfills the promises of EDI. Smart invoicing allows organizations to transact electronically with all their suppliers regardless of size, location or technical sophistication, providing real-time visibility into business transactions, automating all spend categories and improving compliance by driving approval prior to purchase. Smart invoicing also helps you achieve payments within negotiated terms, comply with laws and tax regulations, and allocate spend to proper general ledger accounts, ensuring that managers have control over budgets. 2013 Financial Operations Networks LLC 6

Accounts Payable: A Back Office Operation For accounts payable, invoice processing involves a lot of moving parts. At the most basic level, invoices are sorted into two groups: purchase order and non-purchase order. For many organizations, 100 percent of inventory and strategic materials spend typically have a preapproved purchase order and carefully documented receipt that allow invoices to be matched and paid on time. This portion of spend comes from a wellcontrolled group of suppliers that can take full advantage of electronic processes such as EDI or ERS (evaluated receipt settlement). However, EDI has not been a viable solution for indirect spend products and services that can account for 80 percent of AP invoice volume. This spend may not be tied to an upfront purchase order, and typically involves many mid-size to small-tier suppliers. Back office operation is an appropriate name for the processing of these invoices. Everything about it is backwards. The AP process usually begins with the arrival of a paper invoice or a phone call from the supplier inquiring about a past due invoice. This is where AP begins to put all the pieces together, first trying to figure out who bought the product, then requesting all the documentation necessary to ensure product receipt, payment approval, proper GL booking, and compliance with laws and tax regulations. AP usually takes the blame for late payments. The process is labor intensive and the cycle time can take weeks or months. In an attempt to gain control over the ad-hoc purchasing process, many AP departments implemented an imaging and workflow system. Imaging and workflow make the invoice visible by automating the mailroom, but AP still has to figure out who bought the product, and then electronically request all the documentation necessary to ensure product receipt, payment approval, proper GL booking and compliance with laws and tax regulations. From an AP cost perspective, the improvements have not had a real impact on invoice exceptions or inquiries, which is where 70 percent of AP costs reside. As a result, AP 2013 Financial Operations Networks LLC 7

still has no control over the process to meet their goal of on-time payments and be able to take full advantage of early payment discounts. To really improve the process, organizations must broaden their focus to include how goods and services are being purchased. In most companies, excluding inventory purchases, the person (requestor) who needs the goods and services is in control of what they buy, who they buy it from and at what price it is purchased. Once requestors receive the goods and service, they rarely remember to either forward the packing list to AP or enter the receipt into the company s enterprise system. Lack of receipt is the number one mismatch problem in the three-way match that causes late payments. The lengthy list of issues that arises in the backward process in which the invoice is the trigger includes: long cycle time for receiving the invoice, seeking approval and confirming receipt of goods; high costs in AP from handling exceptions and manual approvals; high costs in procurement from dealing with the invoices that AP pushes to them for exception management and error handling; missed discounts; failure to record liabilities in the correct accounting month; inability to project cash flow; uncontrolled spend, which leads to paying top dollar on purchases and inappropriate purchases discovered after the fact; duplicate payments due to the multiple copies of an invoice in circulation (as a result of delay) and distorted copies; over-spent budgets, improper coding of future invoices; late payments damaging supplier relations, leading to orders put on hold, inflated prices and terms moved to cash in advance or credit card; late payment generating duplicate invoices from suppliers, leading to duplicate payment, and inability to recover VAT (which requires the original invoice); 2013 Financial Operations Networks LLC 8

poor business unit satisfaction due to mundane and manual processing with AP; money tied up in company supply closets and back stock; the cost of handling, retrieving and storing paper. 2013 Financial Operations Networks LLC 9

P2P Involves Procurement and Accounts Payable The relationship between purchasing and accounts payable is often contentious due to the lack of alignment of goals or process. AP calls on purchasing to resolve invoice discrepancies against an invoice with a purchase order, or to create a purchase order (after-the-fact). Purchasing views AP as an annoyance that adds no value to purchasing s work, and a department that does not perform well. Managing discrepancies involves many hours of research from both AP and procurement attempting to put all the pieces together to resolve the mismatch. Statistics reflect that most of these discrepancies are low dollar, non-inventory purchases. They prevent both groups from focusing on more important tasks, which is why they tend to push the work aside until the supplier calls for payment. In a smart invoicing environment, however, resolving discrepancies can be achieved with business rules and supplier collaboration, eliminating unnecessary hours spent by AP and procurement. Purchasing has good reasons for wanting to align more closely with AP. Only AP captures data on all spend, including line-level detail of non-po invoices. Providing purchasing with access to this vital information would improve its ability to track total spend, develop an effective sourcing strategy for goods and services, and better manage supplier performance. In addition, tighter alignment with AP would eliminate the PO mismatches and other mundane activities that AP throws purchasing s way. When an invoice does not have an associated PO, other issues come into play. The non- PO invoice is controlled by the requisitioner, who is often paying top dollar, purchasing wherever and whatever they want. These purchases are not authorized until after-thefact, when it is too late to do anything about it. The process needs to be refocused on correctly aligning the requestor, buyer and accounts payable, which requires the current uncontrolled process to be completely turned around. The process cannot start with the invoice s arrival in AP. 2013 Financial Operations Networks LLC 10

In an effort to turn the process around, many companies have a policy that requires all invoices to be paid against a purchase order. This attempt, however, does not always change the behavior of the requestor, who may continue to make purchases without a PO. When the invoice reaches AP, the requestor will back into the PO, creating it from the invoice. This is a bad practice that must be curtailed; for example, by running reports that compare PO and invoice dates. PO Match Friction and Auto Validation Even PO spend does not guarantee a smooth process. PO invoices can have a variety of problems that require extra attention. Some examples include: Invoice is missing the PO number Unclear which line on the PO the invoice should be paid against PO line reference doesn t match the invoice line reference or fall within accepted tolerance (on price, quantity, unit of measure, or, tax) PO status is still pending PO has insufficient funds PO has incorrect vendor address Invoice has incorrect or missing code These mismatches and exceptions result in blocked invoices or invoices being put on hold until the problem is resolved. For many organizations, 20 percent or more of invoices contain some sort of exception, and these invoices can take a lot of time to resolve. In a study from The Accounts Payable Network (TAPN), the average resolution time for problem invoices was seven to ten days for 40 percent of companies and more than ten days for 20 percent. In addition to the burden on AP, blocked invoices also pose problems for suppliers. With no visibility into the invoice process, suppliers can t accurately forecast their receivables. Furthermore, the payment term clock isn t in sync between buyer and supplier. In many instances, the payment term date starts six or seven days later for a 2013 Financial Operations Networks LLC 11

buyer, due to the fact that it can take close to a week for a paper invoice to arrive in AP via regular mail. When invoices have errors, there are additional delays until a clean invoice can be submitted into workflow for approval and scheduled for payment. 2013 Financial Operations Networks LLC 12

The Smart Invoice Network: Value to Buyers and Suppliers The need to effectively address the processing requirements of PO and non-po invoices has led to the smart invoice network, which connects buyers with their suppliers to improve business commerce collaboration. With a smart invoice network, all invoices go through an automatic validation process upon receipt to determine whether they meet preset configurable business rules. Validated invoices sail through; invalid invoices are automatically returned to the vendor for correction, without AP having to get involved. This removes the friction from AP while providing suppliers with real-time visibility into invoice and payment status With PO invoices, validation can occur against the purchase order (price, quantity, items, terms), and tax tables to determine the proper tax liability. If an error is detected, the supplier is notified immediately so the invoice can be corrected and resubmitted. Once the invoice is validated, it is posted directly into the company s ERP or AP system to ensure that the invoice is aged to pay on time and capture discounts. A key to the effectiveness of smart invoicing is the ease with which organizations can connect to the network. With a simple adapter, organizations can extend any back office system an ERP system such as SAP, Oracle, or JDEdwards, an asset management system such as Maximo, or even a legacy accounting system to collaborate with suppliers across the P2P spectrum. The best smart invoice networks tightly integrate e-invoicing with related processes such as catalog, purchase order, and contract management. With this integrated capability, organizations can be assured that the invoices to be processed comply with preferred suppliers and negotiated pricing. Another driver of the growth of the smart invoice network for global commerce is the value to buyers and suppliers. For buyers, smart invoicing automates the processing of all spend. It contributes to lower processing costs (as much as 70 percent less than paper processing) and close to 100 percent touchless processing rates, while driving expansion of early payment discounts. 2013 Financial Operations Networks LLC 13

For suppliers, electronic transactions via a smart invoice network expedite invoice processing, especially for problem invoices. A supplier s accounts receivable staff can have 24/7 visibility to invoice history and pending payments on-line, which wasn t available with EDI. This self-service capability eliminates the need to call a customer s AP hot line (part of the AP headcount savings). Suppliers can view invoices before the invoice is past due and if there are any discrepancies, they can take action to resolve those errors prior to the due date and drive on-time payments to reduce their DSO. Most indirect or non-strategic MRO suppliers are small and could not afford to connect with their customers via EDI. Today s smart invoice networks go beyond EDI s basic electronic processing capabilities to promote buyer-supplier collaboration. By requiring only a PC and an Internet connection to participate, they ensure that no supplier gets left behind. Figure 1 The Smart Invoice Network: Collaboration with All Suppliers 2013 Financial Operations Networks LLC 14

New Tools for AP and Procurement In support of the smart invoice network, operating behind the scene, are tools that take work out of the process, apply business rules and controls, and eliminate errors. One very important part of this process is where the purchase will be booked in the general ledger (GL). A common practice used by managers, once they are overspent in a particular budget, is to manually code the invoice to another budget that still has money available. However, with smart invoicing, all coding decisions are made by the product commodity being purchased. The department code is automatically assigned based on the requestor s logon ID. Now the GL has timely and accurate information to forecast spend, create the financial reports, and companies can hold managers accountable for the accuracy of their budgets. With a request to purchase being made first, the budgets and financial reports also contain the dollars for committed spend. This prevents over spending and provides greater control of cash flow. Now the controller can manage the cash rather than trying to manage the debt, and there are no surprises. The purchase order is sent electronically to the suppliers that have been preapproved and accept orders via the smart invoice network. When the order is created from an online catalog, pricing discrepancies can be eliminated. The supplier now electronically returns an acknowledgment followed by the shipping notice, then an invoice via the smart invoice network. The invoice is received immediately into the AP process from the supplier. There are no more lost invoices (the number one bottleneck to the AP process), no duplicate copies of invoices, and virtually no duplicate payments. Being able to receive the invoice electronically, directly into AP, can reduce the invoice cycle time by weeks or months, which allows the invoices to be paid on time. Improving DPO will eliminate late fees, orders being held, hidden price increases, and lost discounts, thereby improving supplier relationships. 2013 Financial Operations Networks LLC 15

What about those one-time suppliers or occasional small dollar spend that doesn t warrant an electronic process? Invoice conversion services are compatible with today s smart invoice networks that can transform the paper invoices into an electronic format for processing. This eliminates the need to purchase and maintain a separate imaging and workflow system. Furthermore, as invoice volumes rise from this supplier group, they can be converted to an electronic process to reduce the volume of paper invoices over time. Dynamic Discounting: AP Drives Innovation in Cash Management A major objective of treasurers and other finance executives is to capture early payment discounts to increase earnings on short-term cash. According to an Accenture study, electronic invoicing drives up discount potential to between 0.3 and 1.0 percent of annual expenditures. On $1 billion in spend, that equates to between $3 million to $10 million in savings. With a paper-driven invoice process, paying an invoice in 10 days to qualify for a standard 2/10 Net 30 discount is almost impossible to achieve. The Aberdeen e-payables 2011 report confirms this, showing that the average company captures only 9 percent of available discounts. Without an efficient invoice process, corporate finance organizations can t make early payment discount expansion a business objective. Furthermore, if the invoice is the trigger for the payment process, it may not be possible to meet even the 30 day payment term. However, as buyers and suppliers collaborate over a smart invoice network, when an invoice is presented, it can be validated, automatically matched and passed through for payment in just days. Now buyers can take early payment discounts on all invoices that contain them and earn double-digit returns on their short-term cash. Smart invoicing also facilitates collaborative finance management through dynamic discounting. With this approach, discounts can be earned on any approved invoice, not just invoices with standard discount terms. Buyers can put together discount programs, 2013 Financial Operations Networks LLC 16

with defined hurdle rates, and present discount offers to targeted groups of suppliers through the network. Since suppliers have visibility into the status of these invoices, they can choose to accept discounts on any, or all, invoices. These discounts can be prorated on a sliding scale, with the discount rate gradually declining up to the invoice due date. On the flip side, suppliers can present discount offers to their customers on invoices that have been approved. Together, these dynamic discounting options offers suppliers more control over their cash flow. Suppliers DSO can now be easily monitored, controlled and improved. Smart invoicing drives early payment discount potential from less than two percent of spend to 20 percent of spend or higher. When combined with a payment terms strategies for maintaining or extending days payable outstanding (DPO), early payment discount programs become essential to optimizing working capital, while injecting liquidity into an organization s supply chain to reduce supply chain risk. 2013 Financial Operations Networks LLC 17

Internal Controls and Compliance A smart invoice network can also ensure adherence to government regulations such as privacy laws and Sarbanes-Oxley mandates by restricting data access, protecting the data and providing proper segregation of duties. By tracking all interactions with suppliers, from transmission of POs to invoice receipt and payment with remittance delivery, organizations have an audit trail that protects against fraud and ensures that they are following a SOX-compliant invoice and payment process. Protecting the Cash This is accomplished by having all suppliers preapproved, keeping fraudulent suppliers out of the system. Loss through paying too much for goods is limited with contract compliance. There is a major reduction of duplicate payments that results from validating and receiving the invoice immediately into the AP system. Procuring goods through an upfront, web-based system also eliminates unauthorized purchases and misappropriation of funds. Invoices are now tracked and aged within one to three days from date of invoice, opening the opportunity to take advantage of discounts offered by suppliers and eliminating late payment fees and penalties. Minimizing Waste The AP process touches every department in the company, which formerly spent endless hours searching for their invoices. A smart invoice network puts current and complete information at the fingertips of those who need it, when they need it. This greatly reduces the time researching past-due invoices and invoices needed to file tax returns or conduct budget reviews and spend analysis. Removing paper from the process also eliminates costly storage, not to mention the sheer cost of the paper. Information Rich From management s perspective, the greatest benefit of smart invoicing is that the process is rich with information. Every step in the P2P process can be tracked and reported. The ability to view up-to-the minute results on dashboards is just a click away, 2013 Financial Operations Networks LLC 18

allowing real time strategies to be executed for better cash management and improved productivity. Executives can analyze real-time information to make critical business decisions and properly forecast and manage their cash. 2013 Financial Operations Networks LLC 19

Achieving Competitive Advantage as a Networked Enterprise The smart invoice network transforms accounts payable into a strategic business function. No longer viewed as the group that pays the bills, AP becomes a key ally to corporate finance in helping to manage cash better. A smart invoice network drives a more efficient business operation from thought-ofneed through procuring the goods and services to on time payment, rather than from the back end of the process: the paper invoice. Today s smart invoice network moves approvals and supplier communications up front in the process, eliminating the challenges of responding to the many errors and discrepancies that plague PO and non-po invoices alike. A 75 percent reduction of AP headcount can be achieved by receiving invoice information through the network. Companies that have extended their ERP and back office systems to a smart invoice network are driving collaboration with all their suppliers, improving management of all their spend, and achieving 70 percent savings in operational costs and millions of additional cost savings from every billion dollars in spend from early payment discounts. This new capability is contributing to a major impact to the bottom line, and improving the accuracy of an organization s financial reports. 2013 Financial Operations Networks LLC 20

About The Accounts Payable Network The Accounts Payable Network (TAPN) is the complete resource for accounts payable, helping more than 50,000 accounting and finance executives at organizations worldwide meet their commitments to accounts payable business-process performance. TAPN provides in one easy-to-access, cost-effective, online location insights, analysis, guidance, advice and best practices for AP strategies, technologies, controls, compliance, people and processes. Members have unrestricted access to critical information guaranteed to help them make smart accounts payable business decisions. Focus areas include all AP functions, AP metrics and benchmarking; tax and regulatory compliance; proven solutions to real-world problems; AP automation; case studies; member Q&A networking forums and more than 250 downloadable, customizable AP policies, flowcharts, templates and internal-control checklists. TAPN s highly popular AP tools help compare technologies and AP solution providers, find new ways to streamline operations and enhance controls, and take advantage of extensive educational opportunities. Additional networking opportunities allow members to share problems and solutions with peers in the trenches through the public and private forums and discussion groups. The Accounts Payable Network is completely independent and is not owned by or affiliated with any industry supplier. For further information, please contact The Accounts Payable Network, 2100 RiverEdge Parkway, Suite 1010, Atlanta, GA 30328, 770-984-1184, www.theaccountspayablenetwork.com. 2013 Financial Operations Networks LLC 21

About Judy Bicking A 27-year Johnson & Johnson veteran, Judy Bicking led the U.S. Shared Services Center for 16 years. She helped design the center by benchmarking best practices across industries and matching those practices to a very decentralized environment. Her understanding of people, process and metrics were integral to the success of J&J s Shared Services Center, which supports 99+ businesses in the United States and Puerto Rico. In 2003 the Center processed 1.2 million invoices with 57 FTE s. Judy more recently served as Global Director to J&J s European operations in its design and implementation of an AP Shared Services Center in Europe. She retired from J&J two years ago to start her own retail business which now has expanded to three stores. Judy is an active member of the Advisory Board for The Accounts Payable & Accounts Receivable Network and is a frequent and often requested, conference speaker. 2013 Financial Operations Networks LLC 22

About Ariba Ariba, Inc. is the leading provider of collaborative business commerce solutions. Ariba combines industry-leading technology with the world s largest web-based trading community to help companies discover, connect, and collaborate with a global network of partners all in a cloud-based environment. Using the Ariba Commerce Cloud, businesses of all sizes can buy, manage cash, and sell more efficiently and effectively. More than 700,000 companies around the globe use the Ariba Commerce Cloud to simplify inter-enterprise commerce and enhance results. 2013 Financial Operations Networks LLC 23