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June 27, 2011Ariba Knowledge NuggetThe Problem With Paper - Invoice AutomationMatching a purchase order (PO) to an invoice is a longstanding accounts payable (AP) best practicefor processing invoices and ensuring compliance. Yet most organizations also have some portion ofspend that does not involve POs, making effective processing of non-PO invoices crucial as well.By automating invoice processing, organizations can effectively implement a wide array of best-practice strategies that transform the efficiency of AP operations—enabling them to compress POand non-PO invoice processing from months or weeks to days or hours, eliminate exceptions thatrequire manual resolution, remove virtually all non-PO manual touch points, and expand the captureof early payment discounts to every invoice. Companies that continue to rely on paper-based methods face extensive challenges that make it difficult or impossible to process invoices effectively. As a result, they cant achieve substantial time and cost savings that can improve their bottom line. Regardless of invoice type, a major challenge facing many AP departments is coping with the rising volume of paper invoices. Companies that responded to PayStream Advisors’ 2010 Invoice Automation Benchmarking survey indicated that they receive more than three-quarters (77 percent) of their invoices via paper. Respondents also stated that the high volume of paper invoices was their single greatest source of pain in invoice management. It’s no surprise, then, that implementing e-invoicing was the top automation goal, cited by 40 percent of surveyparticipants. This is a big change from several years ago, when companies were still focused onimproving paper processes rather than eliminating paper at its source—their suppliers. Otherresearch documents the cost savings from getting rid of paper and automating invoice processing.According to a 2010 Hackett Group AP Performance study, a high correlation exists between e-invoice processing, low cost per invoice, and high on-time payment percentages. Organizations withthe highest percentage of e-invoice line items (80 percent) were reported to have a $2.14 cost perinvoice and 92 percent on-time payment percentage. Bottom quartile companies, with only twopercent of e-invoice line items, were shown to have a $5.22 cost per invoice and 85 percent on-timepayment performance.
June 27, 2011 Best Practice Tip Route receipt-matching problems to the PO owner or requester as a watcher to help clear the exception. Route non- PO invoices for approval tot he requester identified by the supplier on the invoice. Best Practice Tip Though business user approval is not typically required for PO invoices (since purchase approval was already obtained through the requisitioning process), consider adding a final approval step for high value PO and non-PO invoices over certain thresholds.Source: Hackett AP Performance Study, 2010Figure 1. Impact of e-invoice processing on processing cost, on-time payment performanceAs this data shows, eliminating paper invoices gives top performers a distinct advantage overcompanies still heavily dependent on paper. For example, a global equipment manufacturerdramatically reduced its operating costs on a global basis by transitioning to e-invoicing. Today, thecompany processes 90 percent of its global invoices electronically and has achieved an almost 100percent touchless process. The company is so efficient that it has been able to reallocate 75 percentof its global AP staff.Automating invoice processing can also reduce risk and enhance cash flow management. Forexample, one major media company used to have as much as $24 million in invoices on a person’sdesk, but wouldn’t know of the liability until the invoices were processed. Moving to e-invoicingprovided real-time visibility into these liabilities to greatly increase reliability in cash flow forecasting.The Challenge of Managing Non-PO InvoicesWhile automating the processing of invoices delivers many benefits, challenges may arise when itcomes to non-PO invoices. Non-PO invoices result when a supplier has provided goods or servicesto a buyer without receiving a purchase order. Because they lack an associated PO, these invoicesrequire far more work to process once they arrive at the buying organization, creating a host ofproblems along the way. • Difficulty identifying the purchaser. Deciding how to route non-PO invoices can be extremely challenging, especially since these invoices frequently fail to include information vital to routing. For example, non-PO invoices must typically undergo a review and approval process after receipt by the person who ordered or approved the purchase of the item or service. If the invoice does not include some reference to the customer, business unit, or department that placed the order—or if it includes the wrong name—then someone in AP must follow up and identify who needs to approve the invoice. This not only delays proper accrual of the liability, but also means the invoice could sit for weeks with no action taken—resulting in invoice status calls from the supplier or submission of a duplicate invoice and the chance of duplicate payment.
• Lengthy approval processes and slow cycle times. Once the purchaser has been identified, he or she must then verify, code, and approve the invoice, and hierar- chy approval rules must be applied to ensure compliance to financial controls. The need to have multiple people approve non-PO invoices can significantly lengthen the processing cycle. Non-PO invoices can also appear on blocked and hold reports because they exceed budgets or don’t match to an existing vendor, resulting in further exception-handling activity. Only after all these difficulties have been resolved can the invoice be entered into the ERP or financial system for payment, but even here a new vendor setup could be required. This delays pay- ment to suppliers and negatively impacts their cash flow while eliminating opportunities for the buying organiza- tion to capture early payment discounts. • Loss of valuable data. When an invoice has been fully approved, AP most often performs header-level data entry with account coding, which means the details of the purchase are stripped away and lost forever. This prevents the purchasing group from analyzing non-PO spending patterns in greater depth to drive more spend under management.The Advantages of PO-Based InvoicingFor PO-based invoices, approval to purchase the goods or services occurs before the purchase. This invoic-ing approach offer advantages over non-PO invoicing. • Faster, better matching to ensure invoice accuracy. Once the invoice is submitted, a three-way match can be made between the invoice, a purchase order, and a receipt for the goods or services (or similar document). This allows the buyer to ensure that the order was deliv- ered and invoiced correctly. If a signed contract exists, the PO can pull the contracted rate off an item master or match the order to the contract. If the match is successful, the buyer processes the invoice and makes payment. If the match is unsuccessful, the invoice goes through an exception resolution process, which usually involves the buyer’s purchasing department as well as the supplier. • Improved spend visibility. PO-based invoicing provides visibility into spending “as it happens.” Contrast this to non-PO invoicing, where companies may receive an invoice 15 days after an employee has made a purchase, and it may take another 20 days to get the invoice into the AP system. In this environment, there is about a 35-day window when a company may not know its liabilities for purchases (what’s “out there”) and whether these purchases exceed the budget. • Fewer errors due to pre-coding. Because PO-based invoices are pre-coded, they can be processed faster and more accurately than non-PO in- voices. Often, without good end user tools, a generic account code is applied to non-PO invoices, which compli- cates the data entry process and forces AP staff to manually add the correct account code later on—creating another potential source of invoice errors that require exception handling.Because of the operational shortcomings of non-PO invoices and lack of spend control over non-PO pur-chases, many companies are seeking ways to increase their volume of PO-based invoices. For example, alarge media company in the northeastern United States recently mandated that a PO must be issued for allpurchases valued at more than $3,000. The company will no longer approve non-PO purchases “after thefact,” because doing so creates the false impression that this spend is under control. This is another key tothe rising popularity of PO-based invoicing. By moving approval for purchases to the beginning of the proc-ess, PO-based invoicing gives companies greater control over the goods and services their employees are
The Ongoing Need for Non-PO InvoicesWhile non-PO invoices add complexity to the invoice approval process, few organizations will abandon themaltogether. In some cases, non-PO invoices are more practical, such as when field employees have goodworking relationships with vendors and need goods or services “on demand.” Moreover, companies mustsometimes procure services whose price or quantity cannot be estimated up front; the requester just knows“something needs to be done.” With maintenance expenses, for example, they may not know how much laboris involved or what parts will be required in a repair. Small dollar purchases offer another example, where theexpense of approving and issuing a purchase order can’t be justified. This is especially true if such purchasesare a one-time or occasional rather than recurring expense. In addition, companies with a decentralized orweak purchasing structure, or remote offices that place orders with local suppliers, tend to have a largerproportion of non-PO invoices. Because these invoices by definition lack pre-spend approval, the need tocontinue accepting them complicates the effort to manage spend and track outstanding liabilities.Using Automation to Effectively Manage Non-PO InvoicesSo how can an organization effectively process its non-PO invoices? One good rule is never to enter a non-PO invoice directly into your ERP system without first performing some kind of validation or having the invoicego through an approval workflow. Today, electronic workflow is part of many e-invoicing solutions, making iteasy for end users to code and approve invoices in tools like email or with a mobile device.When non-PO invoices represent alarge volume of spend, automationprovides an opportunity to capture thespend for analysis, streamlineaccruals, and eliminate manual touchpoints. The right automated solutioncan break down the non-PO invoiceprocessing problems, applytechnology and enforcementprocedures to improve controls andvisibility, and increase straight-throughprocessing rates.Another good practice is to requirevendors to enter the requesters email address on all non-PO invoices. An automated workflow solution candetect the email and route the invoice directly to the business unit that ordered the product or service. Non-PO invoices without an email address can be rejected and returned to the supplier. This approach helpssuppliers to quickly resolve the problem, avoiding further payment delays. The best automated solutions alsomake it possible to preserve line-level details on non-PO invoices, including commodity codes, soprocurement has visibility into vendors and spend details. In fact, some companies have justified e-invoicingprojects based on the ability to capture line-level data alone. By making procurement aware that a purchasemay be a good candidate for PO spend or that one-time vendors may be creating leakage in negotiatedpricing for a given commodity, organizations gain a strategic benefit. Next Week Part 2— Paper vs. eInvoicing