Companies will only be able fully to automate the financial supply chain if they are prepared to integrate their business processes and systems. Collaborative business commerce, described in Figure 1, is the way forward, with companies working together to achieve their goals of controlling costs, increasing sales, minimizing risk, and optimizing liquidity and working capital management.
The pressures from the decline in customer demand around the world, increases in the price of raw materials and the lack of availability of credit are making it absolutely essential for senior management and corporate treasury to focus on automating the financial supply chain wherever possible. Established financial supply chain and working capital management technologies and services are being installed at unprecedented rates as companies attempt to maximize their cash flows, reduce their inventory and accounts receivables, extend their payment terms for the goods and services they purchase, and minimize debt. Banks and other financial service suppliers are attempting to meet the need for automation, launching new platforms and services and upgrading existing products and services. Companies use a combination of banks’ and suppliers’ services to put together the solutions they require. But this is unlikely to be enough. Companies are already having to collaborate to ensure the financial health of not only their own supply chains but those of their suppliers. Collaborative automation is fast becoming necessary for companies to survive in the current economic climate.
Automating the financial supply chain in SEPA
All the necessary pieces for automating the financial supply chains of companies operating in the Single Euro Payments Area (SEPA), a politically-led collaborative initiative, are slowly being put into place. The single currency is well established, SEPA Credit Transfers and Direct Debit payment systems for domestic and cross-border transfers will hopefully be fully operational by 2013, the ISO 20022 e-invoicing message standard has been published and in July 2010 the directive to harmonize VAT treatment of all invoices in Europe was approved. A green paper by the European Commission on the future of value added tax (VAT) collection, examining the possibility of VAT payments split between governments and merchants eliminating the process of VAT returns, has also been published.
The vision for the Digital Single Market, encompassing a single currency, SEPA payment systems, a single invoicing standard and a single VAT system throughout the region, offers real cost savings, particularly for smaller companies. Bo Harald, head of executive advisers at Tieto, a leading light in the e-invoicing business and guru to the European Commission, believes, "e-invoicing means better customer service and it will build the base for automating all administrative processes – potentially cutting the costs for SMEs in half and delivering substantial savings in the public sector. e-invoice exchange between e-invoicing providers will be a huge boost to single market efficiency. Also the split payment proposal for VAT collection will minimize fraud."
e-invoicing
In 2010 e-invoicing service providers around the world reported record demand, with some experiencing 10% growth in volumes per month. There are still some problems to be overcome for e-invoicing to become really widespread, including the fragmentation of the e-invoicing industry and the lack of willingness on the part of some suppliers to enrol in provider networks.
Consolidation of the e-invoicing service providers - for example, Ariba’s takeover of the Quadrem network in January 2011 - will doubtless solve some of the fragmentation problems. But there are and, for the foreseeable future at least, will probably continue to be hundreds of e-invoicing service providers (the European Commission estimates there are more than 400 in Europe alone) so the automated exchange of e-invoices that has begun, though volumes are growing very slowly, will need to proliferate for real penetration.
The biggest problem for service providers is supplier enrolment. It is relatively easy to enrol large companies on their networks. The problem is the failure of the hundreds and thousands of small companies, which supply goods and services to the large companies, to join. All the providers have web-based input enrolling services, the real difference seems to be in whether they have large customer service desks to chase and encourage companies to join. Stefan Foryszewski CEO at OB10 believes, "Supplier enrolment is critical for the success of any e-invoicing project. Service providers must have proven track records and the A/P and procurement teams must work together from day one."
Exploiting e-invoicing
Although considerable processing cost savings can be made from the use of e-invoicing (a paper invoice costs around €30 to process compared to €1 for an e-invoice), it also provides other benefits.
One is more visibility of receivables, enabling it to focus its efforts on collecting the payments for outstanding invoices. Another, with approval of e-invoices typically taking a mere two to four days compared to the 20 or more required for a paper invoice, is the opportunity for dynamic discounting.
A new service, Dynamic Discounting Optimizer from OB10, enables a supplier, whose e-invoice has been approved but is not yet due for payment, to opt to be paid early by simply selecting an earlier payment date and accepting the corresponding ‘discounted rate’ set by the buyer. Although the supplier is paid less, in times of scarce liquidity this can significantly improve the supplier’s cash flow. This is perhaps a good incentive for smaller companies to join e-invoicing networks.
Another recent development in dynamic discounting services is Pollenware‘s Collaborative Cash Flow Optimization (C2FO), which uses an on-demand auction platform to enable Global 1000 companies in the US and Europe to use short-term cash surpluses to pay some of their suppliers early. Pollenware uploads payables the buyer wants to offer for early payment on to the QuickPay supplier portal. Then, using its variable forward auction system, it invites the company’s suppliers to take part in a 30- to 45-minute auction. Participation is optional. Those suppliers taking part gather online at a set date and time and enter the percentage discount they are prepared to offer for early payment. The QuickPay system indicates to each supplier the risk of being out-bid and it has the opportunity to increase its original bid. The buyer is shown all the bids as both a percentage discount and an APR discount, based on the number of days the invoice will be paid early. If the bids are attractive the buyer can increase the amount of cash available for the auction. At the end of the designated time the buyer chooses which discounts to accept in return for early payment.
