Emerging Strategies and Best-in-Class Performance in B2B ... · content including its ideas,...

Andrew Bartolini, Chief Research Officer Ardent Partners December, 2014

Emerging Strategies and Best-in-Class Performance in

B2B Payments Underwritten, in part, by

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Strategies and Performance in B2B Payments

©2014 Ardent Partners, Ltd. www.ardentpartners.com

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REPORT SPONSORSHIP

This independent research effort was sponsored by several companies, including the one named below. Sponsoring companies have had no measurable influence on the content and research in this report; Ardent Partners alone determined the research approach taken and the report’s final content including its ideas, strategies, case studies, and recommendations. The contents of this research report are the exclusive property of Ardent Partners. Please direct any comments or questions regarding this report and/or our research sponsorship policy to Ardent Partners’ Chief Research Officer, Andrew Bartolini at [email protected] and 617.752.1620.

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REPORT OVERVIEW This independent research report seeks to present a comprehensive, industry-wide view into what is happening in the world of B2B payments today by drawing on the experience, performance, and perspective of more than 200 accounts payable (AP), finance, and other business professionals. The report is organized into the following chapters:

Chapter One – The State of ePayments: This chapter looks at the continuing evolution of B2B payment methods and provides readers with a “state of the market” insight into the world of electronic payments including their benefits of usage and barriers to adoption.

Chapter Two – The Next Level: This chapter examines ePayments in the context of the larger accounts payable process and highlights the associated solutions that can help drive AP to the next level of performance.

Chapter Three – Strategies for Success: This chapter provides B2B payment and AP benchmark statistics and a profile of Best-in-Class performers and their distinguishing characteristics and strategies as well as a series of recommended strategies and approaches for finance and accounts payable leaders and their departments who would like to improve their operations and their results.




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TABLE OF CONTENTS

CHAPTER ONE – THE STATE OF EPAYMENTS ................................................................................ 4

ePayments Rising .......................................................................................................................................................... 4

Does it Pay to ePay? ..................................................................................................................................................... 6

The ePayments Revolution Evolution ................................................................................................................... 7

ePayments 2014: Where Perception is Reality ................................................................................................... 9

CHAPTER TWO – THE NEXT LEVEL ............................................................................................... 11 ePayments 2014 to 2016 ......................................................................................................................................... 12

Beyond Payments ...................................................................................................................................................... 12

ePayments Technology Landscape ..................................................................................................................... 13

CHAPTER THREE: BEST-IN-CLASS PERFORMANCE & STRATEGIES FOR SUCCESS .................... 16 Payment Metrics that Matter ................................................................................................................................. 16

Best-in-Class Performance in B2B Payments .................................................................................................... 18

Strategies for Success ............................................................................................................................................... 21

APPENDIX ...................................................................................................................................... 24 ABOUT ARDENT PARTNERS .................................................................................................................................... 24

ABOUT THE AUTHOR ................................................................................................................................................ 24

RESEARCH METHODOLOGY ......................................................................................................... 25 REPORT DEMOGRAPHICS ........................................................................................................................................ 25




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Ardent Partners research over the past five years has shown that the use of electronic payments (ePayments) in the B2B market is on the rise, having captured the attention of finance and AP leaders around the globe. Paper checks, while still prevalent, are in retreat from ePayment methods such as ACH, payment networks, commercial cards, and wire transfers that can all reduce costs while also improving the level of visibility and accuracy in the vendor payment process. More enterprises today are targeting their payment processes for effectiveness and efficiency improvements as part of a larger AP or P2P transformation program. And, they are doing so against a backdrop of emerging technologies, platforms, and strategies. This convergence of corporate focus with novel industry and technology advances shows that ePayments are not only rising in usage, they are also rising in prominence and business impact. This report presents a comprehensive, industry-wide view into what is happening in the world of B2B payments and captures the experience, performance, perspective, and intentions of more than 200 accounts payable and finance executives. The report also includes benchmarks, analysis, and recommendations that finance leaders can use to better understand the “State of ePayments” today, gain insight into best practices, benchmark their performance against the Best-in-Class, and ultimately improve their operations and performance.

CHAPTER ONE – THE STATE OF EPAYMENTS

“Highly innovative and relevant payment capabilities are causing seismic changes in consumer behavior and creating equally disruptive opportunities for business.” – Howard Schultz, CEO Starbucks

ePayments Rising

The duties of the Chief Financial Officer (CFO) continue to expand, now straddling the traditional areas of financial stewardship and the more progressive areas of strategic and business leadership, including direct responsibility and oversight of operations. This significant, role-based expansion is well underway and is perhaps, best-evidenced by the “CEO-in-Waiting” status that many CFOs now hold. But an ascendancy to the top role is not simply thrust upon a CFO; it must be earned. To gain standing in the public and private markets, CFOs must be able to shape and communicate the enterprise’s strategic vision and clearly link it to overall performance numbers and results. For them to establish trust and credibility with line of business executives as both an operational and strategic leader, it is critical for the ’CFO’s own unit, the finance department, to be a well-oiled machine that drives value and supports key business objectives.




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Figure 1: B2B Payment Formats

©Ardent Partners - 2014

58% 42% Electronic

Manual

Over the last two decades, a majority of CFOs have focused on playing a more active and more visible role with external constituents including investors, media, and analysts. More quietly, they also began working more aggressively to improve their enterprise’s financial operations by revamping and transforming

the people, processes, and technologies currently in place and instituting greater rigor around all aspects of the finance department. And, as time progressed, this broad-based financial transformation that began with a focus on the “front-facing” parts of the department like treasury and the corporate finance team has extended into the traditional “back-office” areas of finance including internal audit and accounts payable (AP).

For AP departments, one direct result of these transformation efforts is that finance leaders have intensified their focus on payments which has in turn, driven the volume of ePayments to approach nearly 60% of all B2B payments made today (Figure 1). By using ePayments more frequently, finance leaders are increasingly exposed to the potential gains and overall value that can be driven from increased ePayments including lower payment processing costs, improved payment accuracy, and the ability to link supplier payment processes to broader cash management strategies. Nonetheless, many enterprises miss a significant opportunity to capture and share supplier payment intelligence that could enhance the overall health and efficiency of the enterprise and improve supplier relationships, and as a result, ultimately fail to drive optimal value from their AP operation. And, while the performance of Best-in-Class AP departments (see Chapter 3 for more details), has shown that that an AP operation can evolve from its administrative and back-office roots into a more progressive and valued business function, many more AP departments still struggle to rise to a basic level of competence when it comes to paying their suppliers. Consider that:

• The top payments challenge for AP departments (42%) in 2014 is that their payment approvals take too long

• It costs the typical AP organization nearly $8 to schedule and make a single supplier payment

• It takes the average AP department more than 12 days to process an invoice which is why 58% of all AP departments fail to capture any early payment discounts from their suppliers

• 77% of AP groups state that there is little to no linkage across their procure-to-pay (P2P) process, leaving the average supplier payments team as a siloed operation disconnected and largely unaware of the suppler transactions and communications that preceded them.

• 68% of all enterprises report that they have no tools, programs, or processes in place to help optimize working capital

86% of all enterprises predict that a majority of their suppliers will be paid

electronically by 2016.




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Comparisons are often made between the evolution of consumer commerce technologies and the promise of technologies used to support B2B commerce. The comparisons are valid and the promise is real. For example, less than a decade ago, many consumers were hesitant to share card and banking information online while making an online purchase without a credit card was all but impossible. Today, consumers can utilize variety of payment technologies or services to transfer cash and make purchases without the use of a credit card or the need to expose any personal account information... and they can do so from anywhere in the world using almost any smart device. And, the speed, convenience, cost, and security gains seen by consumers in this market continues to advance aggressively each year. While the realm of B2B ePayments has certainly evolved in recent years, it continues to lag the consumer market by considerable degree and the current market for this technology remains in its early stages. Nonetheless, the various benefits of ePayments (the aforementioned "promise") are primed to take the modern scope of financial operations to the “next level” if both surely and slowly. Automating B2B payments, the "last mile" of the P2P process, can create an interconnected, automated world that provides financial prowess and deep intelligence turning B2B payments into a strategic business process.

Does it Pay to ePay?

In recent years, there have been many advances in the world of accounts payable and financial operations management that have benefitted those that adopted new technologies, methods, and strategies into their overall programs and processes. And while adopting a new ePayment solution can represent a fundamental shift in the way businesses have historically paid their suppliers (namely, via check), by replacing age-old, paper-based methods with automated solutions, AP groups can gain speed, accuracy, efficiency, and visibility from the change.

Specifically, participants in this ePayments Rising study report that adopting an ePayment solution can drive a series of financial and efficiency-related benefits (see Figure 2). The benefit most frequently identified by these respondents (51%) is the level of cost savings achieved by moving from paper checks to electronic payment methods, such as ACH, wire transfer, commercial cards, and business networks. In fact, Ardent Partners research on B2B payments has found that the cost to process any form of ePayment –- whether wire transfer, ACH, or card – can be as much as 75% less than the cost of a paper check.

As detailed in Figure 2 below, the speed and efficiency processing gains from ePayments cited by 45% of the survey respondents present AP and finance teams with better opportunities to take advantage of early payment discounts. These discounts are generally harder to capture when groups are paying their supplies with paper-based checks since this manual method is slower and the timing of settlement is less assured. ePayments also offer a much higher level of accuracy as to the actual amounts being paid (a benefit noted by 23% of all participants), thereby reducing the number of late payments, overpayments, duplicate payments, errors, and discrepancies. Finally, by eliminating any staff involvement in the payment process and driving more automated and automatic payment processing (seen at 20% of all enterprises), AP departments are able to reallocate resources to more strategic tasks.




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Figure 2: The Top Benefits of ePayments for AP Departments

The benefits of ePayments extend beyond the walls of the AP department by improving visibility into the payment process for all internal and external stakeholders. ePayments provide much more detail as to the status of the payment (has the payment been scheduled? when will it be made? etc.) for suppliers and internal constituents and this detail is more accurate, current, and easier to access than what is found with the generally poor reporting and tracking of paper checks. For suppliers, the benefit of visibility allows for greater assurance of payment receipt and better cash management. Likewise, the data provided by ePayments can be gathered, analyzed, and shared with internal teams like treasury. This valuable information can enable more accurate forecasts of cash flow and improve an enterprise’s ability to implement more sophisticated cash management strategies. With the right information in hand, treasury can be more flexible in making decisions to pay invoices early, take more discounts, or extend payment terms by utilizing third-party financing instruments that may be combined to promote the most optimal use of working capital.

The ePayments Revolution Evolution

The truth is that business process transformations are rarely an overnight success and enterprise-level initiatives, in particular, take time, perseverance, and commitment in order to advance and succeed. With 71% of all enterprises now fully capable of paying a supplier electronically, the industry has made a strong commitment to move away from checks. But, while ePayments usage may be approaching a tipping point, the hard truth is that even though enterprises may desire to make a big switch from paper, there are a series of barriers that sometimes stand between the approaches of the past and the efficiencies of the future.

While most technological advancements made in the modern business world are one-sided (a user/team leverages technology to primarily improve their own results or capabilities), the realm of ePayments is different since the successful use of this technology requires that both buyers and sellers possess the ability to transmit and receive electronic payments. While some enterprises actively utilize ACH (or similar platforms globally), business/payment networks, wire transfer, and/or commercial cards to pay their suppliers, many suppliers are not willing or are not able to receive an electronic payment. The result is a more costly supplier transaction for the buyer and an increase in

20%

23%

45%

51%

Straight-through processing of payments

Increased accuracy and control of payment delivery

More efficient and streamlined processing

Cost savings

© Ardent Partners - 2014




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payment delays and errors as well as higher supplier dissatisfaction caused by the limited remittance information provided and an almost complete lack of visibility into the status of payments.

But the need for an effective and enabled buyer-seller relationship to exist in order for ePayments to work effectively is a double-edged sword. The collaborative “win-win” benefits are not always apparent to suppliers. The main barriers to ePayments adoption (see Figure 3 below) exist largely because of the buying organization is unable to convince their trading partners to commit to an ePayments program; this challenge is a direct barrier to adoption for 21% of all AP groups but it is also the indirect cause for several of the other hurdles listed below:

• An effective buyer-seller relationship that relies on ePayments dictates that both sides have the resources and the technology to support a free flow of currency and remittance information. Forty-four percent (44%) of enterprises report that their suppliers are unable to participate in an ePayments program due to a lack of the appropriate technical or functional capabilities to support the initiative.

• A lack of integration between ePayments and other transaction systems is the next largest hurdle noted by twenty-six percent (26%) of all enterprises. One of the efficiency gains from ePayments is the elimination of manual tasks like payment scheduling. A lack of integration between systems mutes some of the benefits.

• Next, twenty-three percent (23%) of AP organizations note that they are unable to convince their suppliers to enroll in an ePayments program.

• With a series of high-profile corporate system breaches that have exposed the financial and personal information of millions of individuals to online hackers, the inability or reticence of some enterprises (21%) to obtain, manage and protect supplier banking info is another hurdle as well.

Figure 3: Top Barriers to ePayment Adoption in 2014

In sum, the primary issues hindering ePayment adoption are linked to technology and suppliers. The good news is that Ardent Partners has seen movement on both fronts in recent years. In

20%

20%

21%

23%

26%

44%

Costs borne by the supplier

Shortage of IT resources for implementation

Obtaining/maintaining supplier banking info

Difficult to convince suppliers to accept ePayments

Lack of integration between ePayments and other systems

Supplier don't posses the capabilities to participate





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general, system integration continues to improve while the specific ePayment marketplace has seen significant innovation in the last eighteen months that have improved usability, security, and integrations. Nonetheless, supplier resistance to ePayment programs will continue to be a primary hurdle to broader usage of ePayments, so AP departments and their enablement teams must continually refine their approaches and stay abreast of the market so they can share and communicate the advances and gains made in this space. If nothing else, regular reminders that receiving automated payments can provide efficiency gains and improve visibility into payment status should be sent to suppliers.

ePayments 2014: Where Perception is Reality

While there is still work to do in communicating the value of ePayments to the different internal and external stakeholders, the arrival of the 21st century brought with it a new and evolving business mindset. Fourteen years later, there continues to be a growing perception that process automation is the desired end-state for most standardized business functions. As outlined in Figure 4, AP and finance leaders have a very positive view of electronic payments.

An overwhelming majority (90%) of enterprises believe that electronic payment methods not only drive down payment-processing costs, but are also more efficient and offer a level of control that paper-based approaches do not. A similar majority takes the view that paper checks as a payment method will decline in the years ahead. These two perceptions, coupled with the widely held belief that the majority of suppliers will be paid electronically show that although there are internal and external barriers to adopting ePayments as a standard practice, the majority of businesses across the globe believe that ePayments are rising and will continue to do so in the coming years.

Figure 4: ePayments Perceptions (Respondents who “Strongly Agree” or “Agree”)

The realm of electronic payments presents a valuable new area of attack for AP and P2P professionals. And, while the acceleration and adoption of this technology was steady over the past decade, it appears that the interest in ePayments is picking up with more executives focused on taking their business transformation to the “next level.” The state of ePayments is strong and getting stronger.

78%

86%

88%

90%

Electronic payments create more visibility and enable superior analytics

The majority of suppliers will be paid electronically

The percentage of payments made via check will decline

Electronic payments are less costly, more efficient and offer increased control





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An ePayments Primer Enterprises are actively moving in a new direction as they begin to rely on electronic payment methods to handle their supplier payments. This market research report has unveiled a series of strategies and solutions that companies can leverage to enhance their B2B payment capabilities and processes. Enterprises currently turning to ePayments leverage a series of methods for electronic settlement, including:

• Regional payment initiatives, and systems like Automated Clearing House (ACH) in the United States and Single Euro Payments Area (SEPA) in the European Union utilize payment networks and common standards to support the processing of large-batch payments to trading partners within a defined region. The main benefits of these electronic payment channels typically revolve around their speed and low costs, which makes them an attractive approach for ePayments. Limitations to these platforms can include constraints as to the level of detail available in the remittance advice.

• Wire transfer is the middle network between buyers, sellers, and banks for transmitting funds. Wire transfer involves the transmission (via a secure system) of payment information and unique codes to transfer funds. Like ACH, remittance information is not robust. Wire transfer processes are considered very secure, as each end of the transfer (buyer and seller) must have a proven identity in order to execute the payment. However, the fees associated with the wire transfer process, depending on the financial institutions involved (as well as international aspects), are more costly.

• Commercial cards which include P-cards, corporate cards, single use cards, virtual cards, etc., present an “ease-of-use” benefit to the payment process and allow for a variety of specific uses like replacing petty cash or targeted for specific spend categories or suppliers. Commercial cards are often supported with a robust program that can provide analytical information and spend intelligence that can be funneled into spend analysis efforts. Costs of commercial card usage generally fall to the suppliers who pay an established percentage of their sale (the “interchange” fee), while buying organizations can use their cards to generate rebates paid by card issuers after crossing various spend thresholds.

• Payment networks (and some business networks) can connect multiple buyers to multiple sellers on a standard platform (the network) and facilitate automated payments that generally includes more detailed remittance data than delivered in other payment methods. These networks represent the future of the procure-to-pay process by presenting a fully-automated, two-way portal for buyers and suppliers to facilitate transactions, communication, and collaboration. There are different business or revenue models that are employed by networks today. Some networks charge fees for network access that are either direct charges for the network or bundled in with the cost of using "on-ramp" applications to the network. Others take a volume-based approach to fees, charging buyers and/or suppliers based upon the number of transactions or dollar value of transactions processed over the network. Still others charge no formal fees for network participation and usage.




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CHAPTER TWO – THE NEXT LEVEL

“Let’s go invent tomorrow instead of worrying about what happened yesterday.” – Steve Jobs

Despite the fact that a paper-based AP process is generally more error-prone and time-consuming than an automated one, manually-processed paper checks still comprise a high percentage of the overall B2B payments made in the market today. As a result, too many AP departments remain challenged with higher levels of duplicate and late payments, numerous overpayments, and a number of other unnecessary inefficiencies. The good news is a majority of AP leaders appear poised to take control of their department’s destiny so that it can play a more strategic role within the financial operations of their enterprise. The B2B payment process for an enterprise is part of a larger and more complex series of processes that occur within the AP function of an enterprise. Ardent Partners models the entire AP process in its “ePayables Framework” which organizes the AP process into three major phases:

1. Receive – How the enterprise receives invoices. 2. Process – How the enterprise validates and approves the invoices. 3. Pay – How the enterprise schedules and makes payments.

The first two phases of the AP process (“Receive” and “Process”) include the methods and platforms that suppliers use to submit invoices and the tools and processes that the AP (or buying) organization uses to receive, validate, match, approve, and process the invoice information before scheduling the payment. Of course, there are many other steps across these two phases that can differ from one enterprise to the next, often depending on the maturity level of the operation and the degree of automation in place.

The ‘Pay’ Phase

Once an invoice is validated, matched, and approved, the final step is the scheduling and execution of the vendor payment. In the current business world, the final phase of the ePayables Framework when executed with automated and streamlined efficiencies, can drive process value. It is during the “Pay” phase of the process that AP can work closely with treasury and finance to develop more sophisticated payment strategies and implement processes to optimize working capital. This can be of immense value to the enterprise. As AP groups begin or expand the automation of their processes and gain (and share) real-time access to invoice and payment data, they are in a better position to influence and support the cash management strategies that treasury and finance wish to implement, enabling AP groups to begin taking their performance to the “next level.”

Over the last decade, globalization has been a big driver for businesses to conduct more electronic transactions. Supply chains have rapidly evolved and expanded globally with trading partners that




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Figure 6: Payment Methods Expected to Increase in Usage by 2016


36%

39%

55%

75%

Wire transfers

B2B/payment network

Card payments

ACH

are highly dependent on each other. Speed to market and the need for more flexible supply chains, coupled with distance between trading partners, have necessitated a much higher level of connectivity between buyers and suppliers. This has led to the development of the highly dynamic and flexible electronic payment solutions that are available today.

ePayments 2014 to 2016 Ardent Partners expects the migration from paper checks to electronic payments such as ACH, commercial card products, payment networks, and wire transfers is going to continue, if not accelerate, over the next two years. Checks are costly, inefficient, more prone to fraud, and offer very limited visibility into payment data, and finance and business leaders in all regions of the world are realizing this. In fact, 86% of all enterprises predict that a majority of their suppliers will be paid electronically by 2016. Beyond that, Figure 6 shows the percentage of all AP and finance professionals who believe that each of the different electronic payment methods will see an increase in usage by their enterprise over the next two years.

Beyond Payments

The scope of modern financial operations is one that is forced to juggle a variety of critical issues that plague every role in the unit, from AP staffer to Chief Financial Officer. The rise of electronic payment methods represents not only a new and progressive means of improving one key function within AP operations, but also a valuable opportunity to address other core areas that currently sap resources and time away from more strategic financial management activities.

Figure 7: Concerns in Current-Day Financial Operations

Resources • Limited budgets constrain

headcount • Need to reduce non-core

manual tasks (such as processing checks)

• Challenges with vendor compliance present potential risk issues (i.e., gathering W9s)

Systems • Disparate systems that don't

"talk" to each other • Failure to capture rich

remittance information/ data

• Lack of automated links across the payment process

• Managing supplier information without a centralized system creates numerous payment challenges

Collaboration • Lack of communication

between procurement and finance

• Gap in data required for spend analysis

• AP is overloaded with projects





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As shown in Figure 7 (above), the current challenges that infect even the top-performing finance functions range across a series of key areas. The very nature of ePayments is one that can address many of these core problems. For example:

• Nearly every finance function is faced with Resource constraints, caused by tight operating budgets and often, a large set of manual, menial tasks (such as processing checks for payment and manually accepting invoices from suppliers). Electronic payments present a convenient option for improving the allocation of resources by eliminating manual payment processing and scheduling activities and providing an automated assessment of compliance concerns.

• The surge in business process automation over the last decade has increased the importance of the linkage and integration of different Systems. It has also increased IT complexity. The emergence of B2B payments as a strategic business process will begin to close the longstanding disconnect between the invoice process and the payment process and the systems that underpin them.

• Collaboration has been a challenge for many a finance function over the last decade. Manual methods of payment are rife with inefficiencies and drain staff time; with an already-full plate of financial projects, there is little time for strategic, value-added activities. Electronic payments present an opportunity to cultivate an environment (via enhanced spend and cash data) in which buyers' accounts payable and suppliers' accounts receivable departments can better collaborate fostering an atmosphere that can reduce transactional or tactical friction so that trading partners can focus on the business, delivery, strategic, and/or value-generating elements of the relationship.

ePayments Technology Landscape

AP is under increasing pressure to become a more strategic component of the enterprise’s financial operations. To do so, it must be better positioned to impact and support working capital optimization strategies and it must be able to attain visibility so that it can better understand and share expected liabilities with treasury or finance leaders.

The very foundation of electronic payments and their ability to impact cash management is not just supported by the main methods that were discussed in the “Primer” at the end of Chapter One; the following technologies represent automated means that facilitate the payment process and drive additional strategic value to enterprises, helping them attain the “next level” of success in financial operations.

Business (or Payment) Networks

Ardent defines a “business network” as a web-based platform that enables interconnected buyers and sellers to trade, communicate, and collaborate with each other. Payment networks are a subset of business networks and specialize in automating and facilitating the invoice and payment




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process between trading partners. The success of cloud-based technology and the desire for enterprises to transact, communicate, and collaborate digitally (rather than manually) have contributed to the growth of these networks with more AP and P2P leaders using them. Since enterprises of all sizes will continue to develop more complex webs of interdependent supplier and partner relationships (to ensure greater competiveness and results, better product development and customer satisfaction, and faster and more concrete innovation), Ardent expects the business network marketplace and those in it to continue to grow.

Business networks represent automation in two key areas: 1) simple, connected information-sharing (i.e., remittance data) between buyers and sellers, and, 2) direct, electronic links between enterprises that facilitate and speed transactions like purchase orders and invoices as well as communication, collaboration, and third-party services in support of the partner relationship.

Dynamic Discounting

Early payment discounts or accelerated payments serve a specific purpose for the buyer and the supplier. For the buyer, the main objective is to lower the cost of goods and/or to earn a return on available cash. For the supplier, it is to access cash when it is needed (which is not necessarily all the time). Ardent Partners research has found that the perception of early payment discounts is certainly evolving with its associated technologies and solutions:

• Nearly 50% of enterprises believe that dynamic discounting technology (described below) is an ideal means of capturing early payment discounts.

• 45% of organizations state that capturing early payment discounts is a priority within their financial operations management.

Dynamic discounting is the name for both the process and the technology platforms that allow buyers and sellers to dynamically alter the standard terms of payment. Dynamic discounting solutions allow AP departments to set rules to make discount offers based on certain requirements or allow suppliers to negotiate a discount based upon payment timing. The more mature solutions in the space allow AP/finance teams to change their offers in a “dynamic” or real-time manner, allowing them to incorporate their often fast-changing cash positions and needs into their analysis and offers. While dynamic discounting solutions are typically sold to buying organizations, the returns on investment in these solutions will be directly linked to their internal usage and the level of supplier participation.

Supply Chain Finance (SCF)

Supply chain finance (SCF) is another method of capturing early payment discounts, except in this case, third-party funds are used to allow a supplier to sell an invoice to a bank or other financial institution at a discount as soon as it is approved by the buyer. This allows the buyer to

68% of all enterprises report that they have no tools,

programs, or processes in place to help optimize working

capital




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pay later and the supplier to secure its money earlier. Instead of relying on the creditworthiness of the supplier, the financial institution relies on payment from the buyer, often a less risky entity than the supplier. SCF is an innovative way for enterprises to help their supply chains access credit and improve cash-flow at a lower cost than might be otherwise available in the credit market. SCF becomes an increasingly important source of credit to suppliers when banks tighten lending standards due to increased pressure from regulators or changes in underwriting/lending standards over the arc of a business cycle.

The Value of Better, “Deeper” Remittance Information For suppliers on the receiving end of electronic payments, there is often an unheralded attribute of the payment process: the value and depth (or lack thereof) of remittance information. When a payment is received, it is incumbent on accounts receivable (AR) staffs to accurately (and quickly) reconcile that payment with orders, contracts, and general financial information. Remittance information answers a series of key questions, including who the payment is from, what they are paying for, understanding if the correct amount was paid, etc. Manual miscoding can significantly alter this important financial information.

The rise of ePayments is causing a change in the perception of remittance information such that:

• 95% of all enterprises believe that submitting remittance information together with the electronic payment is valuable to suppliers.

• 91% of all enterprises believe that structured and standardized remittance information is valuable to both buyers and suppliers, and;

• Nearly 90% of all enterprises believe that remittance information that automatically links back to POs and invoices would be valuable.

Many of the barriers to the adoption of ePayments typically involves supplier involvement and acceptance of these electronic methods, processes, and platforms. For some suppliers, there is confusion around the effectiveness of ePayments in transmitting remittance information with payments and how detailed and useful that information is or can be. Deeper remittance information is an area that can improve one key aspect to any organization, whether it is on the buying or selling end: visibility into cash.

Nearly 60% of the finance and AP leaders in this market research survey believe that better and deeper remittance information is the top “solution” to solving the supplier-as-barrier issue that plagues adoption of electronic payments. As more and more enterprises attempt to gain every intelligence advantage they can, the rise in ePayments adoption will surely continue and be linked to the need and desire to get to the “next level” of financial aptitude.




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CHAPTER THREE: BEST-IN-CLASS PERFORMANCE & STRATEGIES FOR SUCCESS

“You can’t manage what you can’t measure.” – Peter Drucker

The first part of this chapter, centered on B2B payment and AP performance, will help readers accomplish the following:

1. Benchmark their B2B payment and AP performance to industry averages and understand how they are performing relative to the average AP department in the marketplace.

2. Understand the operational and performance metrics that define Best-in-Class performance levels for B2B payment operations.

3. Understand the people, process, and technology levers that Best-in-Class B2B payment operations use to outperform the market.

4. Understand which metrics AP leaders should use to measure their department’s performance.

Payment Metrics that Matter

Establishing and measuring relevant metrics allows an organization to understand its current performance so that it can chart the most practical, impactful, and strategic course to rise in the future. Simply, if a group is unclear on where it stands today, it cannot begin to make lasting enhancements that improve tomorrow’s performance. Tracking metrics enables continuous improvement programs to take hold and provides organizations with a better opportunity to set proper goals and objectives and “course correct” when achieving them is in doubt. AP, finance, and P2P groups can use the metrics presented in Table 1 (next page) to understand the performance of the average AP operation in the market today and benchmark their performance against these measures.

A key theme of this report has been the automation of B2B payments and the removal of paper checks from the vendor payment process, but with more than 40% of all B2B payments made manually, it is no surprise that the average fully-loaded cost to process a payment approaches $8 ($7.91 see Table 1), although this cost has trended downward over the last few years. The typical components of included in this cost include fully-loaded staff expense plus overhead, transaction and banking fees systems, printing/mail/postage/courier, amortization of capitalized expenses, and any third-party services. The impact of manual inefficiencies can also be seen in other metrics, including the cost and time to process an invoice. The time to process an invoice is of particular importance in cash management decisions because if the time to process an invoice takes longer than the window available to earn a payment discount, an opportunity to save money is lost. A large part of being able to efficiently process an invoice (besides the ability for straight-through processing) is having the ability to automatically route invoices to the appropriate reviewers and enable them to quickly and easily review an invoice by providing easy access to relevant data (e.g.,




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vendor master data). Also, providing users some level of visibility into the process ensures that they complete their tasks in a timely fashion.

Table 1: The AP Benchmarks – Market Averages

Metrics Average Cost to approve/schedule/make a single payment $7.91 % of ePayments 58.1% % of Suppliers Accepting ePayments 50.5% Cost to process a single invoice $14.59 Invoices Processed per FTE (per month) 2,211 Invoice Processing Cycle Time 12.1 days

Invoice Exception Rate 16.4% Straight-through Processing (% of invoices) 30.0% % of Suppliers Participating in Discounting Program 9.9%

© Ardent Partners – 2014

Mind the Measurement Gap

While more AP departments are succeeding in their quest for relevance, value, and impact, performance measurement is one area that continues to present steep challenges for many AP teams. Across the key metrics captured in this study, up to 21.4% of all AP departments lack the ability to track key performance metrics. For an industry that has struggled for years to gain executive awareness, engagement, and investment, this comes as no surprise. However, the fact that up to 18.6% of all AP departments have chosen not to measure and thus, not understand how they are performing in key areas is both surprising and unfortunate.

In recent years, many AP groups have taken positive strides forward; many have even gained significant momentum. But, this metrics or knowledge gap indicates that the transformation driven by many AP, P2P, and finance professionals as it relates to payment processing may not be nearly as broad-based as once thought. These gaps are caused by, among other things, a failure borne of limited systems and poor processes, but above all else, it is a failure of leadership that allows a situation like this.

Attempting to improve operations without understanding the current state baseline (caused by an inability to capture key operational and performance metrics) is like starting a trip to an unknown destination when you are already lost – if you do not know where you are going, any road will take you there. Enterprise functions must be smarter than that. As such, any AP groups struggling in this area should pay special notice to the AP “metrics that matter” above and use them as a “GPS” guide to Best-in-Class performance.




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Best-in-Class Performance in B2B Payments

Ardent Partners defines Best-in-Class performance in this research effort as the 20% of enterprises with the lowest average payment processing costs. This means that enterprises with a cost per payment of less than $3 are operating at a Best-in-Class level according to Ardent Partners. Top-performing enterprises have taken their AP operations to the next level by leveraging technology to streamline their B2B payment processes, make it more efficient, and enable more strategic activities to be carried out. These leading AP operations are able to add significant value and intelligence to the greater enterprise and aid their internal partners’ performance and objectives. This group presents very clearly that an AP operation can move itself out from its administrative and back-office roots into the more strategic quarters of progressive and valued business functions.

Table 2 (below) highlights the B2B payment performance comparison between Best-in-Class organizations and all other enterprises (other 80% of aggregate performers). Ardent utilizes this comparison to portray a vivid picture of how top-performing organizations built their superior B2B payment processing programs.

Table 2: Ardent Partners’ 2014 Best-in-Class Framework for B2B Payments

Metrics Best-in-Class All Others Cost to approve/schedule/make a single payment $2.84 $18.32 % of Suppliers Accepting ePayments 62% 46% % of Suppliers Participating in Discounting Program 10.3% 9.6% Straight-through Processing (% of invoices) 50.3% 12.3%

©Ardent Partners – 2014

Of critical importance, as detailed in the table above, is that Best-in-Class enterprises actively experience a single payment-processing cost (fully-loaded cost, including AP staff time, managerial overhead, facilities, printing, mailing, stopped/void/returned checks, IT support, etc.) that is nearly $16.00 lower than that of all other companies. For the cost of a single payment by the all others group, top-performing enterprises process nearly 6.5 payments. In addition to this striking performance advantage, Best-in-Class enterprises have also enabled 35% more suppliers to receive electronic payments than all other organizations. These companies also process invoices straight-through at a much higher clip than their peers.

Best-in-Class Levers to Success Best-in-Class enterprises are heralded for their top-tier level of performance within the greater AP arena, including lower payment-processing costs than their peers and an ability to enable more of their suppliers to receive electronic payments. Behind this wall of Best-in-Class performance are systematic capabilities, competencies, and solutions which are all crucial levers to success.




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As detailed in Figure 8, the Best-in-Class financial management program is founded on core payment-related capabilities that help them improve payment processing, drive early payment discounts, and provide intelligence to their executive team.

Figure 8: Core Payment-Related Capabilities, Best-in-Class vs. All Others

The following capabilities actively assist Best-in-Class companies in their pursuit of the “next level” of financial and operational prowess:

• It is no surprise that the simple ability to make electronic payments (90%) is a key contributor to the success of these organizations. Best-in-Class enterprises are aware of the value and visibility of ePayments, and have embraced these methods as the standard way of settlement.

• By processing invoices in a “straight-through” manner that does not include human touch-points or intervention in the slightest, Best-in-Class enterprises can easily process, match, and pay invoices in a timely and effective manner, thus speeding up the Pay phase of the ePayables Framework.

• Rich remittance information is one key to unlocking a central mystery in the ePayments world: “How do we convince our suppliers to engage and evolve?” That deep, multi-layered remittance data is a key factor in enabling suppliers to receive ePayments, as this intelligence is vital to their A/R core.

11%

13%

35%

21%

40%

66%

17%

21%

40%

42%

53%

90%

Web-based self-service supplier portal

Supply chain finance program

Ability to efficiently capture early payment discounts

Ability to process invoices straight-through

Ability to provide rich remittance information to suppliers

Ability to make electronic payments

Best-in-Class

All Others





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The Role of “Next-Level” Solutions

A deep financial management program founded on core payment capabilities is not the only cure for ePayables woes; Best-in-Class organizations actively leverage a series of solutions and technologies that link key payment processes, provide rich and robust information to executives, support integration with networked suppliers, and ultimately drive financial value:

• Best-in-Class companies are 71% more likely than all other companies to utilize a business or payment network to facilitate simple, electronic payments via an interconnected system between buyers and sellers. (A deeper discussion of business networks is included at the end of this chapter.)

• Best-in-Class enterprises are 62% more likely than all others to leverage dynamic discounting platforms and programs, which allow them to transform dynamically altered payment terms into true discounts.

• Best-in-Class companies are 50% more likely than all other enterprises to utilize supply chain finance solutions, which support credit access and superior cash flow.

Why it Pays to Pay Electronically

Automation within the P2P process has been a driver of enterprise performance for many years and continues to do so, however, it is only over the last few years that there has been a significant uptick in automation initiatives that include B2B payments. ePayments are an essential component of the P2P process and enterprises are increasingly thinking about this process in a holistic manner. ePayments offer a higher level of efficiency, visibility, accuracy and collaboration, not only throughout an enterprise, but to its extended supply chain. Some of the key reasons why ePayments make great business sense include:

• Lower processing costs and increased efficiency – The cost to process any form of ePayment whether wire transfer, ACH, or card is significantly less than a check. Paper checks are time consuming and tedious to process and they involve various costs such as printing, mailing, lost checks, etc. Payment automation increases efficiency as the number of payments processed per FTE (“full time employee”) can be considerably higher. Additionally, the speed in which electronic payments can be processed presents greater opportunities to take advantage of early payment discounts that may not be accessible with the more lengthy process of a manual check payment.

• Higher level of accuracy – ePayments offer a much higher level of accuracy as to the actual dollar amounts being paid, thereby reducing the number of late payments, overpayments, duplicate payments, errors and discrepancies. ePayments also offer greater precision as to the timing of the actual payment, giving both buyers and suppliers a better idea of cash inflows and outflows. For example, paying via ACH or wire transfer involves a standard timeframe by which the payment is delivered; while if paying via card, suppliers are paid immediately and the buying organization pays on a regular billing cycle.




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• Improved visibility for all stakeholders – Automation introduces a much higher level of visibility into the AP process, and into the payment process specifically. ePayments provide much more detail as to the status of the payment (if it has been scheduled, when it will be made, etc.), better capabilities around reporting, and frequently improved access to vital payment data. Once armed with the right level of visibility into payment data and processes, AP is in better a position to collaborate with the treasury department and support their cash management strategies.

• Better cash management – Automation and the data that can be gathered, analyzed and shared improves an organization’s visibility into cash positions. This valuable information can enable more accurate forecasts of cash flows and can improve an enterprise’s ability to implement more sophisticated cash management strategies. With the right information and an ability to execute B2B payments with precision, treasury can be more flexible in making decisions to pay invoices early, take more discounts, or extend payment terms by utilizing third-party financing instruments (e.g., trade finance), which results in the most optimal use of working capital.

• Suppliers benefit too – ePayments, particularly those that can provide rich remittance information, can ease the accounts receivable ("AR") reconciliation process and drive efficiencies across the order-to-cash cycle. While some paper payments can in fact, include remittance information, the information must be manually captured and entered into the appropriate system. Straight-through reconciliation enabled by ePayments helps AR to reconcile cash receipts while the visibility of payment status enabled by ePayments helps treasury forecast cash flow.

Strategies for Success The modern financial management executive sits at a crossroads with an opportunity to embrace change and make it the catalyst in transforming payment operations. The world of ePayments is rising, and the enterprises that understand their benefits will be the ones most likely to extend strategic value beyond their payment processes. The following recommendations will assist companies in generating a “culture of change” in which ePayments become the standard and strategic means used to pay suppliers:

• Learn and share the true value of ePayments – For most organizations, sending out checks for payment is and has been the standard means of payment for generations. This is about to change and in the next three years, B2B payments will become a strategic business process within the enterprise. Financial executives must change the culture within their enterprises by helping peers and stakeholders understand the benefits of ePayments, which cross far beyond mere cost savings driven by process improvements. Visibility, intelligence, and speed are all




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extremely attractive attributes within the ePayables world and positively impacting cash management is extremely attractive everywhere.

• The “Next Level” of financial operations is not simply a goal, it is the future state – Achieving access to the “Next Level” of financial operations is not a pipe dream or simple enterprise goal; it’s an actual “state of being” that encompasses all financial operations, processes, and capabilities. The move to ePayments represents the initial shift to this future state, with attributes such as deeper intelligence, improved buyer-seller relationships, and an internal, streamlined invoice- and payment-processing network as its key benefits.

• Remittance is the key to the supplier’s heart – The main barriers to ePayment adoption involve supplier reluctance. While education is the first great step in moving to an electronic payment platform, suppliers will need to be sold on why the move is worth the effort – deep, robust remittance information is the proverbial financial carrot. Any supplier that cites visibility as a main priority will crave remittance data that provides a deeper level of financial intelligence.

• Discounts, discounts, discounts – Access to and enablement of dynamic discounts is a key benefit to the new world of payables. However, there is no simple one-two punch that can help transform a sullen financial management practice that has not historically taken advantage of early payment discounts. Enterprises beginning this journey into the discount arena must devote the necessary resources to understanding the intricacies of such an endeavor and the best means for setting up a complex, real-time network of early payment and dynamic discounts with key suppliers.

• Business/payment networks represent the technological equivalent of the “Next Level” – The contemporary enterprise doesn’t just seek the cost-cutting ways of ePayments and related technologies; business networks are an ideal means of reaching that “Next Level” of financial operations performance and impact due to their electronic connections to suppliers, as well as the level of deep intelligence (including rich remittance data) that is shared between buyers and sellers. These networks are not just emerging platforms, they enable a desired future state in which interconnected relationships between trading partners are the gold standard of financial management.

Conclusion The convergence of more usable, accessible, and affordable AP automation solutions, and the increasing intolerance of inefficiency, is driving significant investment in AP transformation initiatives. The added value resulting from improved B2B payments has become too significant to ignore, especially considering the impact on reduced operational costs, improved working capital management, and overall visibility around financial liabilities. To become more strategic, an AP operation must experience a transformation similar to those that have already occurred within many procurement organizations. An AP transformation has many facets, but technology is one critical element. And, when it comes to B2B payments, if an AP group is looking to be more




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strategic and add more value as a business function, the migration away from checks towards electronic forms of payment is a necessity.

Business/Payment Networks: Supporting the “Next Level” of Financial Operations The contemporary scope of business-to-business affairs involves an intricate web of processes that must be effectively supported with the right tools and systems to drive financial value, understand the implications of business relationships, and cultivate a sense of collaboration between key trading partners. With the added pressure of “strategic” and “value-add” financial activity presenting new challenges to the modern enterprise, business and payment networks are stout solutions that are rapidly shifting the way that businesses work (and communicate) with each other, becoming the technologies most likely to assist organizations in reaching the “next level” of financial operations.

Built upon the premise of efficient supplier connectivity, payment and business networks have surmounted many of the age-old technical business challenges to present a fully-automated means of communication, invoicing, payment, and data sharing. Ardent Partners defines the modern business network as a web-based platform that enables interconnected buyers and sellers to trade, communicate, and collaborate with each other in an entirely automated fashion.

While business networks are changing the face of procurement, what do these solutions offer in the finance game? Business/payment networks address a variety of issues for finance executives, including:

• Facilitate electronic invoices as a means of cutting out or reducing paper.

• Streamline supplier transactions.

• Provide an automated, real-time means of payment between trading partners.

• Eliminate time-consuming inquiries on both the buyer and supplier sides.

• Support treasury-led programs with visibility into both payments and cash flow.

• Provide rich remittance advice to suppliers

• Link to "advanced" payment solutions such as dynamic discounting and supply chain finance, and;

• Enhance the depth of spend, cash, and financial data, which can ultimately be combined into true business intelligence that can be leveraged across the greater enterprise.




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APPENDIX

ABOUT ARDENT PARTNERS

Ardent Partners is a Boston-based research and advisory firm focused on defining and advancing the accounts payable, procurement, and supply management strategies, processes, and technologies that drive business value and accelerate organizational transformation within the enterprise. Founded by Andrew Bartolini, Ardent also publishes the CPO Rising and Payables Place websites. Register for access to Ardent Partners research at ardentpartners.com/newsletter-registration/.

ABOUT THE AUTHOR

Andrew Bartolini, Chief Research Officer, Ardent Partners

Andrew Bartolini is a globally-recognized expert in accounts payable, sourcing, procurement, and supply management. Andrew focuses his research and efforts on helping enterprises develop and execute strategies to achieve operational excellence within their finance and procurement departments. Andrew is also the publisher of Payables Place, the leading global source for ePayables news, research, and analysis (www.payablesplace.com).

Advisor to corporate executives and leading solution providers alike, Andrew is a sought-after presenter, having lectured and presented more than 170 times in seven different countries. Over the past decade, Andrew has benchmarked thousands of enterprises across all facets of their accounts payable, sourcing, procurement, and supply management operations and his research is currently part of the Supply Chain/Management curriculum at several US universities. He actively covers the technology marketplace as well as trends in sourcing, procurement, supply management, and accounts payable and has been published or quoted in leading business publications including The Wall Street Journal, Business Week, Investor’s Business Daily, Forbes, and Fortune, as well as the major trade publications focused on accounts payable and supply management.

Prior to becoming an industry analyst, Andrew developed, packaged, deployed, and used supply management solutions on behalf of enterprises in the Global 2000 while working for Ariba and Commerce One. Additionally, his experience in strategic sourcing (where he managed sourcing projects totaling more than $500 million in aggregate client spend), business process transformation, and software implementation provides a ‘real-world’ context for his research and writing.

Andrew has been named a “Pro to Know” by Supply and Demand Chain Executive three times and holds a B.A. in Economics from The College of the Holy Cross and an M.B.A in Finance from Indiana University. He welcomes your comments at [email protected] or 617.752.1620.


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RESEARCH METHODOLOGY

Ardent follows a rigorous research process born from years of market research experience conducted in the accounts payable (“AP”) market. The research in this report represents the web-based survey responses of over 200 business professionals and includes interviews from several accounts payable and finance executives. These participants shared their strategies and intentions, as well as their operational and performance results to help us define Best-in-Class B2B payment performance and understand what levers the leading groups use to obtain their advantage. This primary research effort is based upon the survey responses, interviews, and the experience and analysis of the report author. Complete respondent demographics are included below.

To purchase reprints of this report, please email [email protected]. For more information on this and similar topics, please visit the research library at www.ardentpartners.com.

REPORT DEMOGRAPHICS

The research in this report is drawn from respondents representing the following demographics:

• Job Function: 56% accounts payable; 17% finance/treasury; 16% procurement; 10% IT, 4% other

• Job Role: 17% VP-level or higher; 28% director-level; 39% manager-level; 16% other

• Company Revenue: 54% Large (revenue > $1 billion); 24% Mid-market (revenue between $250 million and $1 billion); 22% Small (revenue < $250 million)

• Region: 65% North America; 22% EMEA; 11% Asia-Pacific; 2% South America

• Industry: More than 25 distinct industries are represented. Public Sector, Health Care, Financial Services, Education, and Manufacturing are the largest industries in the survey pool; no industry represents more than 15% of the overall survey respondents.

Industry Standard “Fine Print:” The information contained herein has been obtained from sources believed to be reliable. Ardent Partners, Ltd. disclaims all warranties as to the accuracy, completeness, or adequacy of such information. Ardent Partners, Ltd. shall have no liability for errors, omissions, or inadequacies in the information contained herein or for interpretations thereof. The contents expressed herein represent Ardent Partners’ best analysis at the time and are subject to change without notice.

© 2014 Ardent Partners, Ltd. All rights reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. Solution providers and consultancies should take special note that Ardent Partners reserves the right to seek legal remedies including injunctions, impoundment, destruction, damages, and fees for any copyright infringement (which includes but is not limited to usage in company collateral, presentations, and websites) in accordance with the laws of the Commonwealth of Massachusetts and the United States.




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