BACK END

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

28 Harvard Business Review

1657 Nov07_Forethought.indd 28

|

November 2007

|

hbr.org

10/5/07 7:16:57 PM