Bain’s Brains | Break the paper jam in B2B payments3 min read . Updated: 02 Dec 2007, 10:34 PM IST
Bain’s Brains | Break the paper jam in B2B payments
Bain’s Brains | Break the paper jam in B2B payments
Electronic invoice presentment and payment (EIPP) systems have been slowto catch on, even though they offer the enormous promises of cost savings, speed, and transparency in business-to-business (B2B) transactions.
The technology has a lot going for it: It’s getting more robust all the time, and big financial services firms including American Express Co., which has an expanding presence in India, and JP Morgan Chase & Co. are partnering with payment software developers to host the systems.
But paper still rules the corporate world. Some 70% of business-to-business transactions, by volume, involve paper invoices and cheques. The annual cost of managing that exchange comes to some $116 billion (approx. Rs4,600 trillion), according to a Bain & Co. estimate.
What will it take to break this expensive paper jam? First, widespread awareness of the benefits of EIPP. The systems allow vendors to send bills electronically to buyers; the buyers reconcile each invoice with the purchase order and authorize payment through a financial-service provider’s online platform. EIPP can help cut accounts payable costs by more than 50%, according to our analysis.
In addition, invoices can be handled more quickly, and faster processing enables the purchaser to negotiate discounts for prompt payment and reduce overhead costs in the approval process.
For Indian companies and multinationals in India looking to cut overheads in a fast-growing economy, moving to EIPP for global transactions can be an attractive proposition.
Second, purchasing companies need to be smart about getting vendors to join. Our research shows that the full benefits of EIPP generally don’t materialize until more than half of a purchasing firm’s invoices are processed online, so it’s important to convert suppliers quickly to the system. For some companies, that means taking the “big bang" approach. For others, it means moving rapidly through a phased conversion.
Kennametal, a US-based global provider of engineered components and advanced tooling and materials is, in most cases, one of its suppliers’ biggest accounts. Because of that clout, it aimed to convert its 18,000 suppliers at once. But the Kennametal team that managed the 2005 conversion of suppliers to its North American business nonetheless offered plenty of help for suppliers. With support from its EIPP provider, Kennametal showed vendors how disruption could be minimized. Once the system was working, Kennametal’s payment overhead fell by two-thirds, and processing costs plunged 90% to just 9 cents per invoice.
Memorial Sloan- Kettering Cancer Center, the renowned New York research and treatment centre, buys from big vendors of medical supplies for which there are no ready substitutes, and it purchases highly specialized services from a wide variety of other providers. Winning over its vendors required a deft touch and the coordination of a military campaign.
Beginning in 2003, the cancer centre split the conversion into three phases. Looking for a fast initial success, it began with a 90-day blitz to convert 50 vendors who provided mission-critical materials and supplies.
In phase II, the cancer centre tackled the paper-intensive transactions where high volumes translated into the biggest potential savings. In the final phase, the team focused on technical medical services vendors whose services are often tailored to specific patient circumstances.
The centre shortened the payment cycle but also stipulated that conversion to EIPP would be a requirement for contract renewal. Today, it processes 877,000 payments per year—nearly twice as many since EIPP was adopted—with no additional headcount.
As more companies begin using EIPP, the supplier-purchaser interdependence that had slowed adoption of the technology may provide its greatest boost, fulfilling—at last—the Internet’s promise of “frictionless commerce".
Some companies are already realizing that promise. With decades of experience as a leading provider of payment solutions to businesses, American Express has developed expertise in payment management.
In late 2006, it launched the S2S—a suite of “source to settle" solutions to help companies streamline all aspects of the electronic procurement process. To support this business expansion, it acquired Harbor Payments, a leading provider of electronic invoicing and payment technology.
American Express, by combining its knowledge of procurement with a state-of-the-art technology platform, offers corporate clients and their suppliers the ability to eliminate paper processing and reduce costs.
With these expanded capabilities, American Express says it can handle everything from sourcing goods to invoicing to paying bills online.
As most companies still generate paper invoices and pay bills by cheque, the scope for firms seeking to expand their business efficiently by offering electronic solutions is huge. The moment is theirs to seize.
Steve Berez is a Bain & Co. partner based in Boston. Vivek Gambhir is a partner in New Delhi. Arpan Sheth, also a Bain partner, is based in New York. All are members of the firm’s technology practice.
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