Published: November 01, 2011
‘Purchase to pay’ is a phrase that has littered the trade press for a number of years now, referring to the series of processes that take place between the issue of a purchase order, through to receiving, approving and reconciling an invoice, and approving and making payment to the supplier. In many cases, companies have made significant progress in enhancing one or more of these elements by optimising and centralising processes, streamlining connectivity and rationalising bank relationships and accounts.
Increasingly too, companies are recognising that optimising these processes is not enough to achieve complete operational and financial efficiency, and are now seeking to integrate the purchase-to-pay cycle with order-to-cash, connecting payables and receivables in order to optimise liquidity and working capital as part of an integrated financial supply chain. At least, that’s the theory. This article looks at how far we’ve really gone in achieving an efficient purchase-to-pay cycle and where we are going from here.
In some respects, there would appear to be few business drivers for investing in payments processing. After all, the longer cash resides in a company’s bank accounts the better. In addition, a company’s survival is rarely going to depend on whether a supplier payment is made on time, whereas the same cannot be said for a collection. The reality, however, is that an efficient payment process can cut costs significantly, reduce the risk of costly errors or fraud, and protect the company’s reputation. When part of an efficient cash management structure, bank relationships and accounts can be rationalised and the liquidity and working capital management strategy enhanced. The more extensively that processes are integrated, from the point of a purchase order being raised, through to the reconciliation of the payment by the supplier, the more significant the advantages; however, there are a variety of challenges to contend with.
A typical first step towards optimising payments is concentrating payments into a centralised payment factory or shared service centre.
A typical first step towards optimising payments is concentrating payments into a centralised payment factory or shared service centre (SSC) to standardise processes and leverage a single technology platform. In many cases, these use a ‘payments on behalf of’ model so that external payments can be channelled through a single account, supported by an in-house bank for intercompany transfers and account posting. The most significant exception to this is Asia, as Victor Penna, Head of Regional Solutions & Advisory Team, Asia Pacific, J.P. Morgan Treasury Services outlines,
“As yet, we have not seen a significant trend towards a combined payments and in-house banking model in Asia, unlike Europe for example, but this is starting to change. One of the challenges that companies face in implementing ‘payment on behalf of’ arrangements is Asia’s diversity and the differing regulatory environments across the region.”
The payments factory/in-house banking model is by no means new, particularly amongst large multinationals, many of which centralised payments either in-country or regionally some years ago. However, as Willem Dokkum, Global Head of Sales, Payments and Cash Management, ING explains,
“We are seeing a clear increase in the number of companies that are implementing payment factories, not only amongst large corporates but medium-sized companies too. These companies are seeking to achieve enhanced efficiency and control over processes, and control and visibility over cash. Technology is a major enabler for these objectives, with a wide variety of treasury and payment systems available that can help companies achieve their goals in this area at a reasonable price.”
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Victor Penna, J.P. Morgan Treasury Services agrees; however, he notes that the trend for centralising payments and other financial processes amongst Asian multinationals differs from other regions in other ways too,
“The largest multinationals have set up payment factories and shared services centres over the years, and we are now seeing a similar trend amongst the next wave of companies. Typically, these companies start with payments as they are the easiest to centralise, but many are also seeking to centralise collections activities such as reconciliation. Asian multinationals that are globalising are also setting up SSCs, but the primary difference between these and their European and North American counterparts is that they are more likely to set up global rather than regional SSCs.”
In addition, he emphasises that in Asia, centralising the purchase-to-pay function goes beyond the concept of SSCs,
“A key trend is the rise of centralised trading centres in Asia. These purchase goods on behalf of the group and sell them on to group subsidiaries and distributors. In addition, they are taking on many of the functions of a SSC such as payables and receivables, and also some treasury activities relating to working capital and liquidity.”
Asian multinationals that are globalising are also setting up SSCs.
This trend is likely to result in a considerable change to the way that companies approach centralisation of financial processes, looking not simply at the way that financial processes can be enhanced, but how procurement, payables, working capital and liquidity management can be integrated to form a powerful and strategic entity for financial decision-making as well as processing.
As Asian corporations demonstrate the success of a centralised trading model, it is likely that we will see corporations in other regions seeking to leverage the same degree of integration in their purchasing and payment processing activities. However, companies in Asia are not unique in seeking greater integration. End-to-end integration is a priority for many companies, but for most countries, efforts are directed more towards post-purchase processes (i.e., after the purchase of goods has been committed, as opposed to linking procurement and payments decision-making) although some are trying to align procurement and treasury/finance more closely (see J.P. Morgan’s Guide to the Relationship between Treasury and Procurement, TMI Special Supplement, September 2011) In addition, as Willem Dokkum, ING, suggests,
“Many of our customers have expressed their intention to extend the scope of their SSC or payment factory beyond payments in order to leverage opportunities such as supply chain finance, eInvoicing and obtaining earlier visibility of purchase order data. In other words, true integration across the purchase to pay cycle is becoming a significant objective.”
Victor Penna, J.P.Morgan also illustrates that many companies seeking to expand the scope of their SSC are looking beyond payments,
“Amongst longer-established SSCs, some are looking to achieve the next level of efficiency, such as migrating to electronic payments from manual payment methods such as cheques as far as possible. Although most have outsourced cheque production, electronic payments are more cost effective. However, the majority of SSCs are focusing more on extending their activities into collections, and bringing the payment and collection functions closer to treasury. Their objectives are not simply to optimise processing but also to enhance liquidity management by integrating these areas more closely.”
Across all regions, the objective to achieve greater end-to-end integration is closely linked with efforts towards greater standardisation, As Victor Penna, J.P. Morgan discusses,
“An important change in purchase-to-pay processes is the trend towards embracing industry standards such as XML-based ISO 20022 and most new payments and connectivity projects now include a format standardisation component. Some are also considering SWIFT connectivity; however, while in other regions, the primary driver for corporates connecting to SWIFT is to support multi-banking and to diversify risk, these issues are less apparent in Asia where companies typically seek one regional banking partner for payments. Consequently, they are more likely to select a bank proprietary system, with more of a focus on extending these systems to support multi-bank statement retrieval.”
While integration is clearly important, the individual functions that comprise the purchase-to-pay cycle each need to be efficient. In some areas, such as payments transmission, including leveraging SWIFTNet as a single channel to make payments through different banks, companies have achieved a high degree of success. With standard formats such as ISO 20022 becoming more widespread, the opportunities for achieving more efficient integration and data exchange are becoming even greater.[[[PAGE]]]
However, it may not be as readily achievable to optimise every element in the purchase-to-pay cycle. eInvoicing has been feted as an essential element in an efficient purchase-to-pay cycle for a number of years, and indeed, the potential benefits are significant. The EU Commission, for example, has estimated that migrating to electronic invoicing across the Single Euro Payments Area (SEPA) would result in annual savings for businesses of around €64.5bn. However, this potential is unlikely to be realised until SEPA payment instruments have been widely adopted.
In the United States, according to Paystream Advisers, the average cost of invoice processing is $10.79 for large companies, increasing to $15.58 for smaller enterprises, so the scope for improvement is considerable. eInvoicing is potentially easiest to implement in the United States, with one currency and consistent rules about the information that is required on invoices; however, 84% of invoices are still paper-based (including those sent by email) according to the Paystream Invoice Automation Adoption Report, 2011. The same report indicates that less than 10% of companies are satisfied with this arrangement, with 21% planning an invoice automation project over the next six months, and a further 23% over the next twelve months. There are considerable barriers to eInvoicing. For example, migrating to electronic invoices may represent a significant change in business practices and culture, and the benefits need to be quantifiable and material for both payer and payee in order that both parties are willing to migrate. In many cases, supplier resistance is a major barrier to eInvoicing adoption. Secondly, as many companies still have multiple ERP systems in place, it can be difficult to achieve the required degree of integration, although rationalising ERP environments is now a priority for many companies.
Despite the aims of SEPA, there are significant differences in adoption levels across different parts of Europe. For example, according to Billentis’ eInvoicing/eBilling International Market Overview and Forecast, 2011, by Bruno Koch, the Nordics, Ireland and Switzerland are particularly strong in B2B (business to business) and B2G (business to government) payments, with 20-50% of invoices exchanged electronically. For B2C invoices, there is lower penetration, but countries such as Germany are focusing more on this area. It is likely that as payment and collection harmonisation across Europe increases as SEPA instruments are more widely adopted, systems rationalisation continues, and suppliers become more inclined towards eInvoicing over time, it is likely to increase in popularity. Between 2010 and 2011, for example, B2B eInvoicing increased by 36% and B2C invoicing by 32%.
In Asia too, eInvoicing has yet to gain widespread adoption as Victor Penna, J.P. Morgan describes,
“Initiatives such as eInvoicing have been adopted even more slowly in Asia than in other parts of the world. Asian corporations have not yet fully embraced the concept of a single ERP platform, and many of the functions to which this lends itself, such as eInvoicing and host-to-host connectivity are all relatively new. There are some exceptions, particularly the trading centres where eInvoicing is more likely to take root, but typically adoption has been low so far.”
For those companies, and countries, not leveraging eInvoicing extensively, if the invoicing process is expensive, labour-intensive and prone to error, subsequent parts of the purchase-to-pay process may be compromised and competitive objectives hindered. Therefore, when seeking to optimise the purchase-to-pay cycle, in addition to prioritising integration, there also needs to be a focus on ensuring that each individual element that comprises the purchase-to-pay cycle is as efficient as possible. This is not always easy, however, as a payment for one company is a collection for another, and companies receive as well as send invoices, so payment and collection initiatives need to be aligned closely to encourage collaboration, both within the organisation and beyond.
While eInvoicing continues to present challenges, using card programmes for corporate payments are increasingly proving an excellent way to optimise payment processes whilst also enhancing working capital objectives. We will not cover cards extensively in this article, having discussed it very recently in TMI. However, with a variety of different types of card payments, such as single use and virtual cards now available in addition to the more traditional plastic cards, there is a wide range of opportunities to optimise not only the payment process but the entire procure-to-pay cycle using cards. Furthermore, there are significant opportunities to build both regional and global card programmes that recognise the regulatory and cultural requirements in each country, whilst achieving considerable synergies, standardisation, control and visibility over information and payments. The use of cards is just one example of how newer payment solutions can help not simply to optimise elements of the traditional procure-to-pay processes, but to provide a more streamlined alternative. Looking ahead, we will see further development in alternative payment solutions, particularly in the B2C space, that support an efficient purchase-to-pay cycle. Mobile payments are one such development. Furthermore, the growth of online retailing also brings potential, including moving beyond the existing debit or credit card payment model. As Victor Penna, J.P. Morgan depicts,[[[PAGE]]]
“Another important trend in Asia that is likely to continue in the future is the development of the online space. In Asia, the increase in this space is primarily retail-focused as companies take advantage of the growing consumer markets. However, the traditional model of using cards to make purchases online is not always appropriate in Asia, where card adoption is less prevalent than in other regions. Part of this is a cultural difference, with a stronger savings culture than Europe and North America, and less appetite for personal credit. Consequently, clients are looking to major banks like J.P. Morgan to develop new models for selling online, including direct debiting of bank accounts, cash top-up of accounts with retailers, and cash payment on goods delivery, ensuring efficiency and convenience whilst retaining control and transparency.”
Banks are working to help support clients’ purchase-to-pay objectives and leverage innovative processes and techniques. As Willem Dokkum ING, says,
“We make sure that we understand our customers’ pan-European needs and translate them into viable solutions. We do this in a variety of ways, for example, by interacting with independent software suppliers and by engaging in innovative pilot projects across the financial supply chain.”
Victor Penna, J.P. Morgan continues,
“At J.P. Morgan, we are helping clients to optimise their entire end-to-end process for payments and collections. We have set up a specialist solutions advisory team to support clients in understanding their entire financial supply chain and developing solutions that optimise operational processes and financial flows. In the case of trading centres, this often represents a fundamental shift in purchase-to-pay processes, including payment netting and FX netting, as well as working capital and liquidity management, so we aim to facilitate this. In addition, an extension to purchase-to-pay processes in which we are heavily involved is to provide supply chain financing.”
Looking ahead, there is still considerable potential to optimise the purchase-to-pay cycle.
Looking ahead, there is still considerable potential to optimise the purchase-to-pay cycle, improving individual activities such as eInvoicing and payment processing, and increasing the degree of integration across the cycle. This includes integration across the business and beyond, as Willem Dokkum, ING suggests,
“We see that the next innovations in this space will be platforms that facilitate not only interaction within a company but also between two companies (buyer and supplier). Corporates are focusing more on data and the added value this can bring them. I expect that banks in the future will act more as data providers/facilitators.”
As integration between buyers and sellers increases, the payment and collection cycle inevitably become more closely aligned as one mirrors the other in each organisation. Furthermore, purchase-to-pay (payments) and order-to-cash (collections) are intrinsic parts of a company’s own financial supply chain, which when operating in tandem, allow strategic management of liquidity and working capital, which have become primary objectives for many corporations. Willem Dokkum, ING, explains that integration and standardisation will be key to this,
“While the financial supply chain was initially just a buzzword, corporates are now really looking deep into their underlying processes. To take this to the next level, corporates, banks and software providers need to work together towards greater standardisation: implementing the full ISO XML standard is likely to be an enabler.”
Victor Penna, J.P. Morgan concludes,
“Looking ahead, we see more of an emphasis on receivables management, with increasing uptake of automated collection and reconciliation. We also envisage that centralised trading centres will have a growing impact in Asia, at least as significant as the development of SSCs. Asian multinationals will continue to set up SSCs, but with an emphasis on global rather than regional centres.”
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