eradicating invoice exceptions...exception handling is affecting organizations. the results are...

Eradicating Invoice Exceptions: The Path to Straight-Through Processing

e-Book

2

Foreword

We’ve created this simple e-book to provide you with useful tips and tools for eliminating invoice exceptions.

Having been involved in purchase-to-pay (P2P) optimization at several large, global organizations, we know that one of the biggest sources of waste in many payables functions is the volume of invoices that cannot be automatically approved for payment because they do not match the purchase order.

The ironic part is that so many companies are obsessive about quality: anything that affects either the production process or product quality is measured to the nth degree. But, when it came to the P2P process, it is often a far cry from six sigma.

Doubtless, within Accounts Payable (AP) many companies have very tight performance metrics and aren’t necessarily that far behind when benchmarked against corporate peers. But if we look at P2P holistically – in terms of the end-to-end process, which includes Procurement, Treasury, Operations and suppliers – most businesses have some work to do.

Misalignment between these internal groups manifests itself in a number of forms, but it can be most starkly apparent in the number of blocked or failed invoices, those that required manual rework before they could be approved for payment. How do otherwise successful businesses find themselves at the tail end of a process that supported over a million units (invoices), where the defect rate might be as high as35%? Anything close to these rates on a manufacturing line would have been unacceptable, but, since so few companies have comprehensive visibility or control over the P2P process, it is commonly tolerated. Yet change appears to be manifesting itself. The catalyst has been the emergence of technologies that enable a level of process and functional integration that was unimaginable a decade ago. Armed with these tools, companies are now realizing the tremendous value that can be gained.

But the tools themselves do not bring about the necessary business transformation. Technology vendors often talk about straight-through processing (STP) as if it will magically appear by simply buying their software. The technology is the easy part. To effect meaningful change, companies must also undergo significant cultural changes.

In this e-book, we will explore both the tools and process changes necessary to achieve true straight-through processing.

© 2016 Tungsten Corporation plc. No part of this publication may be reproduced, stored in a retrieval system or transmitted by any means, electronic or mechanical, without prior written permission of Tungsten Corporation plc.

Contents

4 The scope of the problem

6 The end game: straight-through processing defined

9 Raising the bar: putting STP into perspective

11 Tools

14 Cultural and process changes

19 The light at the end of the tunnel

3© 2016 Tungsten Corporation plc. No part of this publication may be reproduced, stored in a retrieval system or transmitted by any means, electronic or mechanical, without prior written permission of Tungsten Corporation plc.


The scope of the problem 1

Tungsten Network recently conducted a survey with

sharedservicelink.com to determine the extent to which invoice-

exception handling is affecting organizations. The results are clear:

this is a problem shared by organizations of all sizes and industries.

The scope of the problem

KEY FINDINGS • 31% of PO invoices result in an exception requiring manual

rework before they can be approved for payment.

• The top-three consequences of invoice exceptions are: - Late payment - Increased operating costs - Unhappy suppliers

• Exeptions result in: - 32% of late payments

-36% of supplier phone calls

• The average company in the survey, with between 250-500K invoices,requires 160,000 man hours (equivalent to 79 FTEs) to resolve exceptions

• PO exceptions are one of the biggest sources of friction between A/P and Procurement (75% of resondents agree)

• The top-three causes of exceptions are: - Price/quantity discrepancy - No valid PO on invoice - Goods not received

• Despite invoice exceptions being a big problem, only 43% of respondents maintain formal tracking

Exceptions result in:

32% of late payments

36% of supplier phone calls

W e are looking to maximize straight through processing which is very important from an accounts payable perspective and eliminate or reduce the number of fallouts.

Jef f Fiorini, Manager of P2P Process Transformation, H P

5

1



The end game:straight-throughprocessing defined

2

For most companies the end game for invoice processing and exception handling is captured in the notion of straight-through processing. Since this often means different things to different people, it is worthwhile offering a definition.

Below, we have listed three ways to describe straight-through processing. Read through them and think about which one best represents your interpretation.

1. STRAIGHT THROUGH TO AP: Your AP system automatically receives and captures supplier invoice data, and links to the image in the archive. The system ideally captures the invoice at the moment it is created by the supplier’s billing system to eliminate postage time. It also supplements the data with key information, which is traditionally provided by the AP data-entry team, such as tax codes, miscellaneous-charge codes, PO-line-item numbering, and non-PO-invoice approval routing.

2. STRAIGHT THROUGH TO EXCEPTION HANDLING: Invoices that cannot be automatically approved are routed for exception handling through a workflow process that notifies buyers when invoices do not match the purchase order or notifies the end user when a non-PO invoice comes in that requires the user’s approval. The system knows to route the invoices to the appropriate person without human intervention.

3. STRAIGHT THROUGH TO PAYMENT: Invoices are matched, approved and posted for payment without manual intervention.

So, how do you define straight-through processing?

We recently polled attendees during a webinar on this very point. First, we walked everyone through these definitions and then asked which one was most closely aligned to their vision of STP.

The end game: straight-through processing defined

7

Before discussing the technologies, process transformation and change management required to eradicate exceptions, let’s take a step back and consider what we’re working towards. By picturing our desired destination we can plot the road map that will most likely lead us to our vision.

2


The end game: straight-through processing defined

It was clear that invoice-processing nirvana was straight through to payment (option 3), where an invoice is received and passed through to payment without any human intervention. Since this should be every organization’s goal it reflects our interpretation of STP in this e-book.

To accomplish straight-through processing you need an automated process for delivering invoices into your AP system, and, in many cases, a workflow solution to deal with the inevitable exceptions.

Ultimately, the focus should be on eliminating the causes of these failures in the first place. As management guru Peter Drucker said, “There is nothing more inefficient than trying to do efficiently that which should not have been done in the first place”.

8

Whatdoesstraight-throughprocessingmeantoyou?

StraightthroughtoAP

Straightthroughtoexcep1on

Straightthroughtopayment



Raising the bar: putting straight-through processing into perspective

3

Nevertheless, the world has changed and we now have technical capabilities that, with a few logical exceptions, make 100% STP highly achievable. There is no reason that the P2P process – which cuts across large cross sections of every organization – should not be held to the same standards as a manufacturing line or a customer service operation, where defect rates between 20-40% would simply not be tolerated.

Viewing the problem in this context challenges the organization to reset its expectations and approach the problem with a greater sense of urgency. What was viewed as a cost starts to appear more like waste: a waste of time, money and effort.

Raising the bar: putting straight-through processing into perspective

10

For many of us who have been around the P2P process for years, there is a tendency to resign ourselves to believing that invoice exceptions are simply part of doing business. And if you work in a large, geographically dispersed organization with a highly complex supply chain and fragmented supplier base, managing this whole process is very difficult.



Tools 4

OPTICAL CHARACTER RECOGNITION (OCR) OCR attempts to read the information on an invoice and create a data file that can be ingested by your AP system. For many companies, OCR represents an improvement over their current process, but in the context of invoice exceptions and STP it raises its own issues.

1. OCR does not remove paper from the process. Invoices still arrive at the mail room and have to be sorted and scanned

2. Many OCR vendors cite their recognition rates (the accuracy rate for the total number of characters on an invoice), but far more relevant is the first-pass rate (the percentage of invoices that can be received automatically by the AP system without manual correction). You still need people to validate invoices that the system rejects, which can be as high as 10-20%

3. OCR only addresses the first step in the STP continuum (straight through to AP); it doesn’t do anything to root out exceptions from occurring in the first place, which for the average company affects about a third of their PO-backed invoices

THIRD-PARTY SCANNING AND DATA ENTRY SERVICESThere are a number of service providers that scan and enter invoice data right into your AP system or provide you with a data file that can be imported into your AP system. In this case, the value proposition is similar to OCR with two key differences: • The economics might be different with an ongoing service fee

versus a one-time capital expense • These services do not require members of your staff to manually

correct invoices that cannot be delivered into your AP system. Similar to OCR however, these services generally do not stop exceptions from occurring in the first place, which, as I said, affects about a third of a company’s PO-backed invoices.

12

There are many technologies that help automate the P2P process, but only a couple that address the causes of invoice exceptions that in turn prevent straight-through processing. I’m sure you are familiar with them, so I offer only a brief description to make sure we are talking about the same thing. I discuss their relative merits according to whether they address the STP symptoms or offer a cure.

The tools and technology available for straight-through processing


Accounts Payable workflowAP workflow routes PO invoices with exceptions for resolution and non-PO invoices for approval and expense coding. AP workflow is an essential technology that brings tremendous advantages, particularly for sending the inevitable exceptions to the right place for approval. But in terms of addressing the root cause of invoice exceptions it has limited value, and, for all intents and purposes, it simply manages the problem.

e- Procuremente-Procurement solutions allow companies to host supplier catalogs for employees to make purchases online. They help organizations achieve STP by enabling them to maintain and update the latest supplier pricing, send orders electronically, and have suppliers flip those orders into an invoice. The main limitation of e-Procurement solutions is that they are often only used for consumables and Maintenance, Repair and Operations, while the vast majority of transactions in most companies sit outside of the normal scope for an e-Procurement system.

e-InvoicingMany companies have recognized the folly of receiving and working with paper invoices. The best e-Invoicing solutions often have the intelligence to map the data cleanly into an AP system and feature up-front, supplier-facing validation rules to root out exceptions. These solutions usually have portals where suppliers can view the status of their invoices, update their account information and make online inquiries about disputed invoices.

The main limitation of e-Invoicing solutions is that they require effort to enroll suppliers, however for companies willing to make that commitment of effort, these solutions are uniquely suited for addressing the root cause of most exceptions across a broad range of commodity classes and help companies get on the road to 100% STP.

The tools and technology available for straight-through processing



Cultural and process changes

5


15

As I mentioned at the start, technology is only part of the solution. Companies must also make cultural and procedural changes to make a meaningful difference. I have listed some of the most important steps required for dramatic improvement.

#1: MEASURE ITWe all know that you can’t manage what you don’t measure. Surprisingly, 57% of the companies in our survey say that they do not maintain key performance indicators (KPIs) to measure, STP rates, ie, invoices that are not blocked or require additional re-work before they can be approved for payment. STP rates should be on everyone’s short list of KPIs.

#2: CONDUCT A ROOT-CAUSE ANALYSIS. Many companies report on blocked or failed invoices, together with the corresponding reason codes, but they seldom examine their exceptions on a case-by-case basis to understand why they are occurring and how to eliminate them at source. For instance, your invoices may be failing because of a price discrepancy. By looking at specific examples, you are more likely to get to the bottom of the problem: was the item ordered from a catalog? Was the pricing updated correctly? Was the supplier or procurement at fault? If Procurement instructs AP to reject invoices, it is usually a supplier-related problem. However if Procurement adjusts the PO to match the invoice, then it is probably a Procurement issue that can be addressed through training or a change to the standard procedures. This type of interrogation will help you understand the magnitude of your exception issues and prioritize your efforts. There are countless reasons behind invoice exceptions; the key is to direct efforts on the areas that will have the greatest impact.

5



16

#3: HOLD BUSINESS PEOPLE ACCOUNTABLEIf you are in a shared service center, you may feel like you have limited influence over the business, or rather your customers. An effective way to encourage the right behavior is to publish KPIs by business unit and/or individual buyer.

At one of my former companies, we included exception rates by business unit in the monthly KPIs reviewed by the CFO and the business unit controllers. This bred a healthy measure of competition and positive change. Since your costs – and those you pass onto your internal customers – are greatly impacted by your customers’ activity, first-pass rates should be transparent to educate staff and motivate the right behavior.

#4: CHANGE BEHAVIOR IN PURCHASINGIn many organizations, there is limited alignment between Accounts Payable and Procurement. If you don’t already, I highly recommend meeting regularly with Procurement to communicate priorities and establish objectives annually. In these sessions, it is very important to communicate the impact that Procurement’s activities have on Accounts Payable, and, if appropriate, set mutual goals.

Many of the issues related to invoice exceptions can be addressed by clearly documenting the process and ensuring internal staff are adequately trained. If both departments have clear and tangible goals and there is buy-in at a senior level, great progress can be made in a very short period of time.

#5: DEVELOP SUPPLIER SCORECARDSOne of the hot buttons in Procurement today is the concept of total cost of ownership. Negotiations are no longer just about price, but about the total cost of doing business with a supplier. For many suppliers, transactional efficiency is a major cost driver, and they should share accountability for the process. Standards can be built into the contract cycle and reporting can be created to show compliance to it.



17

#6: CONSIDER CHANGING YOUR INVOICING REQUIREMENTSIs it time to reconsider changing the requirements you place on suppliers for submitting an invoice? For instance, do you reject invoices that do not include a valid PO number? Do you make e-Invoicing a requirement for working with your company? This is often where people throw up their hands and say, “we can’t do that, but once people in the organization start to see the downstream costs and have shared objectives for eliminating exceptions, they will start to become more open-minded to new ways of addressing the problem. I’m aware of one company that required a valid PO number on every invoice submitted electronically and it increased its STP rates by 50%. This is a relatively simple change that can have dramatic results.

#7: ADJUST YOUR TOLERANCES LEVELSAdjusting tolerance levels will obviously have a direct impact on match rates. I will go out on a limb and say that just about every organization should adjust its tolerance levels every xx months/years. As with every control procedure, there is a trade-off between cost and risk, and tolerances need to be revisited periodically to ensure you have the right balance. To determine the right tolerance level, analyze the transactions at the margin of your current tolerance levels to determine the trade-off between efficiency and control. You will likely be able to achieve a meaningful reduction in blocked invoices, without a commensurate increase in compliance risk.

#8: MANAGE THE TIMING OF GOODS RECEIPTS In our exception survey, the number-three-top cause for invoice failures was goods not received. This can be the result of two things: 1. End users not properly entering the receipt when the goods

are received (or service rendered), 2. The invoice beats the shipment.

In either case, the invoice is probably valid, so you want to delay reporting or taking any premature action. I would recommend waiting seven days before the payment is due before reporting exceptions and triggering additional research.



18

# 9: BLANKET AND SERVICE ORDERS: IMPLEMENT ACTIVE AND TACIT APPROVAL For service or blanket PO invoices, consider active and tacit approval. In this case, all invoices are routed to the appropriate approver. Those above a certain threshold (ie those that start at $1,000 and are judged to be appropriate for your company size and risk tolerance) require a confirmation of receipt before they can be paid (active) while those below the threshold are paid automatically unless the approver instructs you otherwise (tacit).

#10: IMPLEMENT P2P AUTOMATIONS SOLUTIONSIn this chapter, we reviewed the various technologies that can help companies achieve straight-through processing and drive out exceptions from the P2P process. These technologies don’t eliminate the need for the changes described above, however they make it a lot easier to implement and enforce them.

^ ` q f s b

q ^̀ fq



The light at the end of the tunnel

6

The light at the end of the tunnel

Hopefully the information in this e-book has been helpful and offered some new insight. Taking a proactive approach to rooting out exceptions and achieving straight-through processing requires a great deal of effort, however it yields tremendous dividends. It delivers benefits both locally by eliminating unnecessary costs and also more broadly by optimizing the whole P2P process.

STP is simply the end result when companies implement an automated process for ensuring internal compliance. Instead of directing countless man hours to apply controls after an invoice has been received, wouldn’t it be better to systematically enforce the rules before the fact and enable an end-to-end transaction in an automated fashion? So much effort is spent on dealing with the defects in the process that it distracts the organization from truly value-added activities. Once companies set their sights on achieving straight through processing, it shifts the focus away from purely transactional activities to a data-driven-analysis approach. It’s only then that companies can truly begin to optimize the billions of dollars they spend across their diverse and far-reaching supplier bases.


TUNGSTEN CORPORATION aims to be the world’s most trusted business transaction network by using data intelligently to strengthen the global supply chain.

Tungsten Network is a secure e-invoicing platform that brings businesses and suppliers closer together with unique technology that revolutionizes invoice processing, maximizes efficiency, and improves cash flow management. The netork also provides users with real-time spend analysis through Tungsten Network Analytics, and offers access to Tungsten Early Payment, a form of alternative finance for businesses.

Tungsten Network serves 56% of Fortune 500 and 67% of the FTSE 100.

EuropeGlobal Headquarters, Pountney Hill House, Laurence Pountney Hill, London, EC4R 0BL, UK Tel: +44 (0)870 165 7420 Email: [email protected] to find us: London

USA HQ1040 Crown Pointe Parkway, Suite 350 Atlanta, Georgia 30338, USA Tel: +1 (0) 770 698 1420Email: [email protected]

21

About Tungsten Network

© 2016 Tungsten Corporation plc. No part of this publication may be reproduced, stored in a retrieval system or transmitted by any means, electronic or mechanical, without prior written permission of Tungsten Corporation plc. Version 2 July 2016

eradicating invoice exceptions...exception handling is affecting organizations. the results are...

Documents