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Break the Paper Jam in B2B Payments by Steve Berez and Arpan Sheth

Electronic invoice and payment systems have been slow to catch on, even though they offer enormous promise for cost savings, speed, and transparency in business-to-business transactions. The technology has a lot going for it: It’s getting more robust all the time, and big financial services firms, including American Express and JPMorgan Chase, are partnering with payment software developers to host the systems. But paper still rules. Some 70% of U.S. business-to-business transactions involve paper invoices and checks. The annual cost of managing that exchange comes to some $116 billion, according to a Bain & Company estimate. What will it take to break the paper jam? First, companies need to fully understand the benefits of EIPP (electronic invoice presentment and payment), which allows vendors to send electronic bills to buyers and lets buyers reconcile invoices with purchase orders and authorize payment through a financial services provider’s online platform. EIPP can help cut accounts payable overhead by more than 50%, according to our analysis. In addition, invoices can be handled more quickly, and faster processing enables purchasers to negotiate discounts for prompt payment.

Second, purchasing companies need to be smart about getting vendors to sign on. Our research shows that the full benefits of EIPP generally don’t materialize until more than half of a purchaser’s invoices are being processed online, so it’s important to convert suppliers quickly. For some companies that means all in one stroke; for others it means a rapid phased conversion. Kennametal, a Pennsylvania-based global provider of engineered components and advanced tooling and materials, is for most of its 18,000 suppliers one of the biggest accounts. Because of that clout, it was able to convert them all at once. The team that managed the conversion showed the suppliers, with support from the company’s EIPP provider, how to minimize disruption. Once the system was working, Kennametal’s payment overhead fell by two-thirds, and processing costs plunged by 90%, to just nine cents per invoice. Memorial Sloan-Kettering Cancer Center, in New York, buys from big vendors of medical supplies for which there are no ready substitutes and from a wide variety of other providers of highly specialized services. Winning over its vendors required a deft touch and the coordination of a military campaign. Sloan-Kettering split the conversion into three phases, beginning in 2003. Looking for a fast initial success, it conducted a 90-day blitz to convert 50 vendors that provide mission-critical materials and supplies. In phase two it tackled vendors whose high-volume, paper-intensive transactions would translate into the biggest savings. In the final phase the conversion team focused on vendors whose technical medical services are often tailored to specific patient circumstances. Sloan-Kettering shortened the payment cycle for all its vendors but also stipulated that conversion to EIPP would be a requirement for contract renewal. Today it processes 877,000 payments a year – nearly twice as many as before EIPP was adopted – with no added staff. As more companies begin using EIPP, the supplier-purchaser interdependence that has slowed adoption of the technol-

ogy may provide its greatest boost, fulfilling at last the Internet’s promise of frictionless commerce. Steve Berez ([email protected]) is a Bain & Company partner based in Boston. Arpan Sheth ([email protected]), also a Bain partner, is based in New York. Both are members of the firm’s Financial Services and Information Technology Practices.

Reprint F0711D

STRATEGY

Strategic Insight in Three Circles by Joel E. Urbany and James H. Davis

Although most executives can recite the truism that a company must build a distinct competitive advantage in order to grow and be profitable over the long term, many have only the fuzziest idea what that really means. They’re confused by the esoteric language of strategy or they’ve gotten bogged down in the technical details of analytical tools. We often encounter these executives in our consulting work and in our classrooms. We tell them to draw three circles. Those circles, placed in the proper relationship to one another, provide a good visual representation of what strategy – both internal and external – means. Hundreds of leaders and future leaders have quickly absorbed strategy concepts by using this simple tool and have taken it back to their organizations, where it often becomes part of the decision-making process. Let’s assume that this exercise is being conducted by an executive team. The team should first think deeply about what customers value and why. For example, they might value speedy service because they want control of their own time or they have other business or family obligations. (Exploring deeper values can open managerial eyes and reveal new opportunities for value creation.) The first circle thus represents the team’s consensus view of everything the most important customers or customer segments want or need. (Other segments can be analyzed later.) continued on page 30

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Co

an mp

y’s offerings

Customers’ need

s

source of relationship building and growth opportunity. The third circle represents the team’s view of how customers perceive the offerings of the company’s competitors.

Co

mp

any’s

o ff e ri n g s A Our points of difference

F

The second circle represents the team’s view of how customers perceive the company’s offerings. The extent to which the two circles overlap indicates how well the company’s offerings are fulfilling customers’ needs. Even in very mature industries customers don’t articulate all their wants or problems in conversations with companies. They weren’t banging on Procter & Gamble’s door demanding invention of the Swiffer, whose category now contributes significantly to the company’s double-digit sales growth in home care products. Rather, the Swiffer emerged from P&G’s careful observation of the challenges of household cleaning. Customers’ unexpressed problems can often become a

UNWANTED MERCHANDISE

Improve Your Return on Returns Competitive pressures have forced many retailers and manufacturers to liberalize their returns policies in recent years and gladly accept for a refund just about anything customers regret having bought. Well, maybe not gladly. Most companies continue to view returns as a costly nuisance, and few have formal strategies for dealing with products that customers don’t want. But figuring out how to efficiently reuse returned items can increase profitability by reducing materials requirements: Every component reinserted in the forward supply chain is one unit fewer that must be procured or manufactured. And by reusing rather than disposing of units, a firm may be able to increase loyalty and attract new customers as it boosts its environmental image.

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C usto m ers’ ne e

B Points of parity

D

ds

E White space C Their points of difference

G Com

p e tit o r s ’ o ff e ri n g

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parity? For C: How can we counter our competitors’ advantages? The team should form hypotheses about the company’s competitive advantages and test them by asking customers. The process can yield surprising insights, such as how much opportunity for growth exists in the white space (E). Another insight might be what value the company or its competitors create that customers don’t need (D, F, or G). Zeneca Ag Products discovered that one of its most important distributors would be willing to do more business with the firm only if Zeneca eliminated the timeconsuming promotional programs that its managers thought were an essential part of their value proposition. But the biggest surprise is often that area A, envisioned as huge by the company, turns out to be minuscule in the eyes of the customer.

Each area within the circles is strategically important, but A, B, and C are critical to building competitive advantage. The team should ask questions about each. For A: How big and sustainable are our advantages? Are they based on distinctive capabilities? For B: Are we delivering effectively in the area of

Joel E. Urbany ([email protected]) and James H. Davis ([email protected]) are professors at the University of Notre Dame’s Mendoza College of Business in Indiana. For the full three-circle analysis, e-mail Joel Urbany. Reprint F0711E

Managing the flow of finished products back into the company can be an important profit driver, write Vaidyanathan Jayaraman and Yadong Luo, of the University of Miami School of Business Administration, in a recent issue of the Academy of Management Perspectives. Jayaraman and Luo say the evidence shows that a “reverse logistics” value chain strategy can strengthen a company’s competitiveness. The authors cite Estée Lauder’s strategic management of its returned goods

flow. In the first year after investing $1.3 million to build a system of scanners and other technologies, the company was able to sharply reduce the percentage of such goods that it dumped into landfills and also to save half a million dollars in labor costs. It has built a $250 million product line from returned cosmetics, selling them to seconds stores or to retailers in developing countries. Among the insights Jayaraman and Luo offer executives: First, in many industries, such as computers and

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