In the digital age, organizations as a whole and procurement departments in particular swim in data. It is everywhere, spread across an alphabet soup of internal and external systems – some connected, some not; some refined, some not; some structured, some not. It wasn’t always this way. Twenty-five years ago, the procurement function was manual, paper-based, and transaction-oriented. “Data” was but a character on Star Trek: The Next Generation. All of that has changed in the past 15 years, following the dot.com bubble and the wave of digitization, connectivity, and automation that has swept over the world. Now, “Big Data” permeates and drives the digital world, and it will only get more intense from here.
There is a Big Data “crisis” sweeping organizations and procurement teams today. But with the right people, processes, technologies, and ultimately the right attitude, this “crisis” can be an opportunity for Chief Procurement Officers (CPOs) and their teams to transform operations and deliver more value to the enterprise. Technologies exist today that allow procurement to not only manage Big Data up and down the source-to-settle value chain, but also leverage it for greater value.
This series explores further each of the eight sub processes of the source-to-settle process to illustrate just how Big Data can be managed and leveraged to make procurement’s life easier and extract the most value out of the data residing inside and outside of the enterprise. Next up, ePayments.
What is ePayments?
As a refresher, Ardent Partners uses the term “ePayables” as an umbrella term to describe any type of technology that automates some or all of the accounts payable (AP) process. In the Ardent Partners ePayables framework, there are three basic steps of the AP process (from the buyer’s perspective): receive, process, and pay. The previous article in this series (click to read) discussed Big Data for “eInvoicing,” which are solutions that automate the first part of the process – the paper invoice or the electronic information that is sent from the supplier to the buyer. Today’s article – the last in this series – focuses on the third part of the process, the payment side (“ePayments”), which executes the transfer of funds from the buyer to the supplier.
The Big Data Management Opportunity for AP
For many organizations, there are opportunities to extract hidden value in their AP data. Most organizations today are not thinking strategically about how they pay their suppliers – like what is the method, platform, and timing of that payment? There can be valid reasons why, like a lack of resources or bandwidth to take a step back and ask the hard questions. Also, lack of usable solutions has been a problem until the past few years. Nonetheless, there are potentially large opportunities residing within AP data.
Here’s what I mean: For many enterprises, total supplier spend as a percentage of revenue is greater than 50%. IF supplier/vendor payments are simply processed without any consideration of strategy and cash impact, that is a missed opportunity… Even at lower percentages, it is a missed opportunity for an enterprise to fail to scrutinize those payments from a cash management perspective. At worst, it is a dereliction of duty, particularly for the treasury department, whose responsibility includes ensuring liquidity (cash availability) and getting the highest return of cash on hand (working capital optimization). If AP leaders are not examining how and when they pay their suppliers, they could be missing significant opportunities to better manage enterprise cash and payments. Fortunately, there are better ways to do this.
Beginning to understand how to roll up B2B payments for a more efficient payment structure is a start. There may be a way to extend the timing on some payments, which means AP could generate more interest (on working capital) to pay down debt or fund operations. Conversely, there may be reasons why an organization pays sooner. Some suppliers offer early payment discount terms where paying now versus 60 days from now will give the organization an additional discount. If AP/treasury is sitting on the money that is generating low interest, they could better off paying early to get a discount that yields a better return than other cash uses.
How ePayments Manage (and Leverage) Big Data
When AP cuts paper checks versus electronic payments, it is harder to gain visibility into the finer points of their payments, like terms and conditions and due dates. As a result, they are not as able to take advantage of potential savings opportunities. But, if they can pay their invoices electronically, they are going to be better able to identify ways in which they can better manage their cash and structure their payments. Moreover, connecting ePayment and spend analysis solutions allows procurement and AP practitioners to examine their spend “end-to-end” – on the upstream purchasing side and the downstream payments side. Procurement and finance teams can analyze the spend to find efficiencies in how AP pays and on what platform they pay, so that the cost to make the payment is lower. And from a cash management perspective, AP can start to get smarter on when they make those payments.
Although it may seem like issuing B2B payment remittance is a basic and straightforward process with little room for improvement, let alone ways to save money on it, there’s gold in them thar hills. Enterprises that spend millions or billions of dollars on goods and services, direct or indirect, have the potential to save with better payment strategies including both early-payment discounts and the extension of payment terms. Traditional paper checks limit the ability to identify and optimize these types of opportunities. While ePayment solutions provide AP, procurement, and treasury with the visibility and tools needed to identify and capture these savings opportunities.