Electronic Invoicing: On the paper trail

E-invoicing isn't the sexiest area of e-business. But its capacity to help slash costs - for big and small businesses - could do wonders for its appeal.

Joyce Mason

Reduced costs and improved efficiencies have always been key motivators behind business investment in IT. Internet technologies in particular were heralded as ideal tools for both, for companies and individuals, regardless of traditional constraints such as size and geography. For a while, boards were happy to fund any project with an 'e' in front of it, but the current economic climate has made them more cautious, and rapid return on investment is the order of the day. Internet-based technologies now need to offer real business benefits, not just e-business ones.

For some organisations, this means a move away from big-bang systems such as e-procurement, towards tactical solutions that can offer more compelling ROI. One such initiative is electronic invoice delivery, or e-invoicing: the replacement or improvement of paperbased aspects of the payment cycle, particularly the accounts payable and accounts received functions. 'It shouldn't be just thought of as related to e-commerce but to improving the business,' says Duncan Brown, consulting director of IT services at Ovum. An invoice is one of the most important documents in business and commerce. It's also one of the most neglected.

More than 15bn invoices are processed manually each year in Europe and the US, and according to a study by the Gartner Group the average time taken to collect them is in excess of 40 days. According to estimates from PricewaterhouseCoopers the average processing cost of a paper invoice is 84p compared with 24p for an electronic invoice. Nonetheless, three times more businesses use the internet for ecommerce than for e-invoicing. This is a wasted opportunity. In addition to improving efficiency and speeding up the bill payment process, internet-based invoicing can also help reduce fraud.

'Electronic invoicing opens up a new dimension of opportunities for reducing overheads and increasing procedures for revenue assurance,' comments Steve Wright, marketing manager with Check-Free i-Solutions. These range from online customer self-care to the support of high-value customers' accounting and operational structures. The Gartner study found systems that enable customers to view and query invoice line items online that could reduce the cost of resolving a billing dispute by 50%.

This cannot be said of manual procedures. An invoice typically takes weeks to enter the buyer's accounting system. When it does eventually arrive in accounts payable, it is keyed-in manually. This is a time-consuming process prone to human error, and the consequent disputes can lead to all sorts of time-wasting complications, from failing trading relationships to VAT violations.

The legal rules governing invoicing vary considerably from one EU country to the next. Until harmonisation removes some of the pressure, a business that issues invoices in all 15 EU member states needs to understand and comply with 15 different sets of invoicing regulations. It's almost as important to understand the cost.

'Companies must consider the cost of people having to open, file, scan and retrieve invoices for VAT inspection,' says Alain Falys, chief executive of Open Business Exchange, an electronic invoicing service provider. OBE estimates the cost at between £6 and £20 for each paper invoice. 'So if a company receives 1m invoices a year, that's costing them between £6m and £20m a year,' adds Falys.

Fraud also contributes to costs, relieving the average company of 6% of turnover. According to figures from Tranmit plc, procurement fraud accounts for roughly half this sum. For a £200m company this is £6m. 'Conservatively assuming an e-payables program reduces fraud by just 10%, the saving would be £600,000,' comments Mary Kingman, business development director with Tranmit.

Fraud is often used as a blanket term for a range of problems, and not all of them result from dishonesty. Take overpayments and duplicate payments, for example. Both occur as a result of poor procedures, and discrepancies that aren't detected. It is not unusual for bills to be presented twice, and paid as many times: research from Tranmit found that one in 1,000 invoices is a duplication error. With an average transaction value of £500 and an average volume of 200,000 invoices a year, the average business is losing £100,000 a year. The bigger the company, the bigger the problem.

E-enabled SMEs

Although economies of scale make the automation process most appealing to very large organisations, e-invoicing can also benefit small firms. Ayrshire-based Glenammer Engineering Ltd is a UK supplier of laboratory test sieves. It's a family business employing two people, but it has a broad international client base. This includes Fisher Scientific, one of the UK's leading suppliers of laboratory products. The company works with over 3,000 suppliers, and each year it issues 500,000 invoices and receives about 85,000.

Holding all these invoices is timeconsuming and costly so Fisher Scientific decided to automate the process with electronic invoice delivery service OB10 from OBE. An agreement between OBE and Customs & Excise relieves OB10 users of the need to keep hard copies of invoices for up to six years. The department will now accept invoices stored electronically in the OB10 system as valid for VAT purposes. Because the invoices are stored by OBE in a central data warehouse, audits of the supplier and buyer tax accounting records can be carried out remotely, subject to the parties' approval.

All of the company's suppliers - big and small - were asked to use the new service and Glenammer was the first supplier to take up the offer. Although it only issues around 50 invoices every month, when Glenammer founder Allen Matthews received the invitation from he was quick to embrace the technology. He explains: 'As a small business it is crucial for us to be paid promptly, so we immediately welcomed the idea.' Glenammer now sends all its invoices to Fisher Scientific using OB10 and receives notification when they are successfully delivered. 'So we never worry about late payment,' says Matthews.

Fisher has also benefited. 'Receiving and processing a paperbased invoice is an inherently inefficient process,' says Paul Owen, service development manager at Fisher Scientific. 'We analysed many aspects of the business and found the accounts payable department to be a prime candidate for increased automation.' The company's internal research revealed that the cost per paper invoice received was approximately £3 - a cost that was reduced by 25% after six months of using the system.

Fisher Scientific, and other large suppliers with corporate systems, upload their invoice files directly from back-office accounts. 'This offered us a deceptively simple solution to what we regarded as a frustratingly difficult problem to solve,' says Owen, as the system integrated into Fisher's existing infrastructure with 'minimal disruption and cost'. Companies can also send invoices through a webbased interface. Small suppliers, such as Glenammer, can use a webbased invoice generator to prepare invoices online.

Because users don't need to install proprietary software, or make costly changes to infrastructure, investment is kept to a minimum and ROI is rapid. 'This has allowed us to significantly improve a previously unwieldy process without resorting to complex technical upgrades or capital expenditure,' Owen says.

Money talks

'ROI is always important,' says Frits Janssen, chief executive officer of the BuyIT Best Practice Network, 'but in times like this companies are particularly keen to prove it'.

The independent forum for IT purchasers and suppliers has produced a report to help companies do this. Measuring the Benefits defines the costs and benefits of e-procurement (www.buyitnet.org). OBE has also produced guidance on costs and cost savings (visit www.obexchange.com and look in the case study section at UK profitability).

The government is providing help and guidance, too. UK Online for Business, an industry and government partnership scheme led by the Department of Trade and Industry, has produced Supplying Electronically, a CD-Rom information resource designed to encourage SMEs into e-procurement. It includes information on electronic invoicing. (For details email info@ukonlineforbusiness.gov.uk or call 0845 715 2000).

The BuyIT guide outlines examples of the potential benefits of e-procurement, and warns of some of the pitfalls. But as it says: 'One of the great challenges of measuring ROI is to identify exactly what benefits the e-procurement tool brings to the organisation. Successful automation should bring a number of benefits including rapid cost savings,improved financial information-management and reporting, reduced frustration for staff (ie, less paper-chasing), timely payment of suppliers, with better relationships and improved negotiating power, measurement of supplier performance, and increased financial control. Many of these are traditionally seen as soft benefits.' And it addresses methods of measurement to make them tangible.

Prompt payment

Notwithstanding all of this, some benefits remain difficult to quantify. 'During negotiations the procurement manager can more credibly guarantee the supplier a level of prompt payment, which was not possible before,' and as Janssen says, 'a better price can be arranged as a result.' At Glenammer Engineering, Allen found another less tangible benefit: the happy customer.

'Submitting invoices online is simple and secure,' says Allen, 'but crucially it offers the added bonus of helping us keep one of our valued clients happy.' This comment tells us what's new and improved about internet-based einvoicing, and what's old and bad about it.

Long before the internet entered the commercial mainstream, einvoicing was around in its earlier incarnation - electronic data interchange, or EDI. Back in the 1970s, the implementations were complex and costly, so EDI was adopted by mostly large organisations. Smaller companies that adopted EDI tended to do so under pressure from their largest customers, and often at great expense.

Out with the old?

So it is with internet-based invoicing. Within six months of implementing a proprietary electronic invoicing system, General Electric had 'converted' 15,000 of its suppliers to it. But thanks to the internet, SMEs can keep the cost of compliance a minimum, and gain from the process.

As Wright concludes: 'Making the payment process a painless as possible just makes good business sense.'

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