A New Era

The payment process has morphed from a mundane, back-office activity to a driver of new business potential. Innovative payables technologies that extend existing financial system infrastructures promise to change the way that corporate finance views the payables function. What results is a dramatic improvement in working capital management and business performance.

With nearly 75% of business-to-business payments still in check form, finance and treasury departments are increasingly driven to implement electronic payment solutions that extend existing ERP systems and link seamlessly to the general ledger. The effort is usually driven by an initiative to improve productivity and payables efficiency; yet even greater rewards come from a dramatic expansion in early payment discounts that improve working capital leverage. Furthermore, these discounts can be earned without the need to reduce days payable outstanding (DPO).

A primary area of focus is the procure-to-pay process. Corporate cash management and treasury professionals already use purchasing card programs to manage spend and information to generate financial rebates. But new applications and innovative payment solutions offer even greater potential and value to the enterprise through increased efficiencies and lower costs.

Holistic approach

Moving from paper to electronic payables is not an isolated activity. Rather, it involves a holistic assessment of the procure-to-pay process with key stakeholders from procurement, accounts payable, treasury, corporate finance, and even information technology. Each stakeholder faces unique challenges due to the gap that exists between the enterprise supply chain and financial operations. Procurement faces the challenges of strained buyer/supplier relationships, poor process control and lost opportunities to reduce cost. Accounts Payable handles an excessive volume of paper invoices and wastes time with data entry, resolving invoice errors and responding to supplier inquiries, perpetuating a process susceptible to waste and fraud. Finance and Treasury face the challenges of optimizing working capital and returns on cash, effectively managing DPO, poor controls and fragmentary data. Finally, IT faces limited resources and manpower to solve non-core issues.

Expanding purchasing card reach into accounts payable settlement is a logical next step, leveraging existing payables systems and quickly impacting working capital. Card-based settlement solutions enable organizations to move more AP spend from paper checks to electronic payments. The preferred approach employs payment-specific accounts for greater control and automated matching to streamline the reconciliation process. Organizations can maximize control and reduce fraud as each account number is linked to a specific payment and is secured throughout the process.

A card-based settlement solution leverages existing ERP and financial systems without placing additional burdens upon IT. With it, invoice settlement turns into an automated, electronic process that lowers cost and generates additional rebates. And by deferring payment with a card-based settlement, organizations can extend DPO and improve working capital, while suppliers realize improved cash flow and greater efficiency. Equally important, organizations are better able to forecast cash needs, since both the buyer and supplier have access to the same invoices and payment status information.

The promise of the supplier network

A supplier network for automating order-to-pay operations presents another opportunity for payables transformation. This next-generation network automates the delivery of purchase orders to suppliers, captures invoices electronically from suppliers, delivers settlement and remittance information, and provides new opportunities for improving trading partner collaboration. Business settlement networks today feature tens of thousands of shared suppliers that are available to transact electronically with any buyers on the network.

A supplier network allows buyers to leverage automation to improve the way they receive, validate, route and approve invoices, and make and post payments. Payers can establish user roles and manage the approval process through robust workflow. Buyers continue to control the timing and settlement of payments via ACH and corporate purchasing card networks instead of paper checks.

Beyond operational improvement, the supplier network fosters a dynamic and collaborative working capital environment for buyers and suppliers. Buyers have the ability to set hurdle rates and tailor discount programs for specific supplier categories, while suppliers can identify those receivables they are willing to discount in exchange for faster payment (sometimes known as a “PayMeNow” discount). And those discounts go far beyond standard term discounts. With a supplier network, discounts can be prorated on a sliding scale up to the invoice due date. This dynamic discount mechanism unleashes new discount potential that goes far beyond traditional discounting.

These innovative approaches to business settlement transform the accounts payable function into a strategic profit center. From simply keying in data from paper invoices and responding to supplier inquiries, accounts payable professionals thrive as business analysts who constantly mine profit opportunities from cash outflows. Forward-thinking organizations understand the transformative nature of automation and the resulting benefits: improved buyer/supplier relations; opportunities to expand early payment discount capture; streamlined processes; ability to extend investment in ERP or accounting systems; real-time data access; better accounting controls; and improvements in working capital. Partnering with a financial service provider that offers a suite of solutions across the procure-to-pay spectrum and provides expert advice on maximizing program returns presents other advantages that can’t be overlooked.

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Case study: implementing an integrated payment solution

The ServiceMaster Company has grown from a research laboratory founded in 1927 to a global organization. ServiceMaster serves residential and commercial customers through a network of more than 5000 company-owned location and franchise licenses, and its many brand names include Terminix, TruGreen, ServiceMaster Clean and Merry Maids.

ServiceMaster had successfully implemented a series of payment solutions designed to increase efficiencies, streamline processes and reduce paperwork while providing greater controls over its payments to suppliers and subcontractors. Among the solutions implemented by ServiceMaster were a JPMorgan Purchasing Card solution, which eliminated high volume, low-dollar invoices; JPMorgan Single Account Technology, which enabled the company to issue limited-use account numbers to make secure payments on approved claims and put greater controls in place; and the establishment of an e-procurement system.

With these key building blocks in place, ServiceMaster sought to achieve further cost reductions and automation in accounts payable by implementing an order-to-pay initiative to reduce hard-copy invoices, paper checks, and the exceptions and lead times to suppliers.

ServiceMaster worked with JPMorgan’s Expansion Services, a unit within the Commercial Card division, to identify areas where ServiceMaster could expand its existing purchasing card and single account technology programs, as well as develop an order-to-pay solution. Together, the company and JPMorgan analyzed the company’s current suppliers, targeting and contacting selected suppliers to join a settlement network and take advantage of unidentified and missed discount opportunities. Key to the effort was educating the supplier base to understand how the program would benefit them and how they could use the settlement network to receive payments quickly and easily. The company and JPMorgan employed best practices in supplier targeting and recruitment, which is key to a successful deployment. Supplier uptake was very strong, with about 80 percent of those targeted signing up for the network.

ServiceMaster has successfully negotiated discount terms or extended net terms with more than 65 percent of those enrolled in the settlement program, thus improving the company’s working capital. Prior to implementing its order-to-pay solution, ServiceMaster missed early payment discounts because of a very manual, paper intensive process. With JPMorgan’s Order-to-Pay, the company can process and pay invoices in just a few days to realize significant cost savings from these discounts.

Frank Dombroski is managing director of JPMorgan Commercial Card Solutions. He is responsible for overseeing the design, development and marketing of solutions that streamline corporate purchasing and payment processes. His expertise spans both domestic and international programs. Prior to joining JPMorgan, Dombroski served as President and CEO of two emerging technology companies that provided enterprise-wide technology and process automation solutions for the airline and corporate travel industries.