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What CFOs and CPOs are Looking at to Transform Accounts Payable in 2018

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As companies set their strategic priorities for 2018, the push for digital transformation has taken hold. But while functions such as sales and marketing already have a firm foothold in the digital world, supply chain-related functions have had to wait their turn to revolutionize their tools and process.

This year, however, stands to be the one where procurement and accounts payable organizations shed their back office brand for a new, strategic approach. To find out just where CPOs and CFOs are focusing in 2018 as they lead their digital transformations, we sat down for a quick Q&A with Xavier Olivera, our in-house purchase-to-pay (P2P) expert, and David Gustin, executive editor of Trade Financing Matters, for a conversation spanning procurement-finance collaboration, common barriers to technology adoption and the future of early payment programs.

Spend Matters: What areas are CFOs and accounts payables organizations looking at as they plan strategic transformations?

David Gustin: First and foremost, the recent changes to the corporate tax code will have a major impact on strategic planning for all finance and procurement organizations. The obvious initial effect will be that rates will increase. That’s significant in and of itself: the top rate went from 35% to 21% now.

The second thing, and perhaps more important for early pay programs, is that the deductibility of interest expense is no longer what it once was, so organizations will need to change the way interest expense is managed. For companies that have balance sheets that are heavily debt ridden, that change will have a big impact on how their capital structures are going to work moving forward.

And then there’s the regulatory side. Finance organizations will also need to double-down on compliance and ensuring that they have collected the right information from their ecosystem, including suppliers — tax information, money laundering, things like that. These rules have been on the books, but now they’re being enforced. As a CFO or CPO, that’s something that could potentially threaten your business, including huge potential fines.

Xavier Olivera: On the procurement, finance and technology side, CFOs, CPOs and AP organizations will be looking, if they haven’t already done so, at how to digitize and automate their AP processes so that they are fully integrated with the purchasing processes, such as the approval of invoices, review of supplier data, PO matching and the like.

The idea is to direct efforts to have 100% automated processes, without errors and with exception handling — basically procuring with what is known as no-touch processes. This will allow organizations to decrease the time needed for approval processes and payment of invoices, eliminate overspend, and avoid tax, fraud and regulatory accounts payable risks. 

SM: What is the role that digital technologies will play in this transformation, and what are the ROI elements that organizations should look to measure through this transformation? 

DG: One of the roles that digital technologies can play is helping set up a tax and know your customer (KYC) strategy with your supplier base. Typically, when you look at ERP systems, their supplier master files weren’t built for this purpose, so you’re now asking legacy systems to do something that they weren’t built for — they can’t collect certain supplier documentation that’s necessary for businesses, such as a W-8 beneficiary form or checking them against OFAC and SDN lists. That’s one area where digital technologies can have a huge part to play in strategic transformations.

The other area in which you’ll see massive changes is the way banks and corporates integrate with each other. Before open banking standards, we had this rather old-fashioned way of obtaining and maintaining financial data from customers — scraping and uploading of various files, which all required companies to log on to multiple different accounts. With some of the new solutions out there, a lot of that hassle is going to go away, and digital technologies are going to have a major impact on the way that banks and corporates communicate with each other. And then there are third parties that can facilitate that communication and layer on additional value-added services, whether that’s in the payment space or lending space or somewhere else.

XO: Purchase-to-pay (P2P) technology is essential for organizations to obtain and maintain the AP and procurement benefits that companies are increasingly seeking as part of their broader digital transformations. Having automated and error-free P2P processes allows you to generate greater savings and make payments to suppliers faster and more accurately, but at the same time it allows you to carry out cash management tactics that optimize the use of working capital and improve cash flow.

Quantifying all of the above will allow companies to define their ROI. The exact KPIs to measure will depend on the goals and situations of individual companies, but the end results will surely be a comprehensive initiative for any organization.

SM: How are CPOs and procurement looking at these efforts by accounts payable? And how can procurement help? 

XO: Procurement has been digitizing and automating its purchasing processes all the way through the end of the P2P cycle, and I believe that for now this is the most important role that the CPOs can perform to support the objectives of AP and finance. Payee onboarding and communication is one areas that sits between traditional procurement and AP digitization efforts and should be addressed to achieve no-touch processing, ensure supplier compliance and eliminate payment errors.

SM: How are the needs and goals of mid-size companies different from Fortune 500 organizations?  

DG: There are a lot of differences here. First, most companies over a certain size — typically $500 million or $1 billion in revenue and higher— have some geographical complexity, and obviously the larger the corporation, the more complexity. Somebody like Coca-Cola may operate in 160 countries across the globe.

The other major difference is the legal entity complexity. You could have a manufacturing company that has 75 or 125 different legal entities across the globe, which creates lots of issues. These creates intra-company transactions, transfer pricing issues and more.

The big difference between these Fortune 500s and the middle market from an AP perspective is really the access to credit that the larger companies have. Large corporates don’t need their banks; they can access the capital markets on their own. At a middle-market company, that’s a different story — they don’t have that kind of access.

But even though these two classes of companies are different in these ways, there are also similarities. Even a $500 million company is going to have thousands — or even tens of thousands — of suppliers to pay. They still have a complex supplier ecosystem that still has the similar spend categories that a large corporation is going to have — they buy commodities, they deal with contract manufacturers, they buy all of the specialized services such as telecom and print.

For the mid-market firms, however, addressing these same challenges that large businesses face is more difficult. The smaller players in many cases are still using ERP systems — sometimes multiple instances, if there have been several acquisitions — to manage their AP processes. It’s more resource-intensive for mid-market firms to manage on-boarding, payments and the like for their thousands of suppliers, whereas a large corporate likely has an external, shared services organization that it relies on to manage this complexity.

SM: One frequent obstacle in any enterprise transformation is friction that hampers adoption of new policies and processes. What sources of friction should finance and procurement professionals focus on relieving, and how can technology solutions help in this regard?

XO: The main points of friction are primarily poor communication and disagreement about common objectives. Clear communication between both parties and agreeing on the objectives that a P2P solution can achieve is definitely a first step to resolving this.

Later, it would be good to agree on the scope that the P2P solution will have within the AP function. This could range from only the approval of an invoice or all the way through to supporting the processing of the payment with mechanisms of compliance, like assuring that the information of suppliers within the invoice, including banking information, is accurate — or even, in advanced cases, allowing for early payment and supply chain financing functions.

DG: The important thing to remember is that a company of any size has 30, 40, 50 or more different purchase-to-pay processes for all of its different subcategories. And if you look at it in a company’s AP and ERP systems, you have to go through a different approval and ordering process for each. Whether you’re buying through a contract manufacturer like Flextronics or purchasing some basic goods like drill bits or lubricant for a shop floor, all of that stuff has different ordering and approval and payment processes.

So, the question is how do you standardize that, how do you give it some kind of Amazon-like feel in today’s world? These are big issues, and I think these are some of the barriers and complexities in trying to adopt new technologies. This is true just as much for a $300 million company as it is going to be for someone like IBM — they all face the same challenges.

SM: Building off of that topic of barriers to adoption, one area that has received particular scrutiny in this regard is early payments. What is the current impact of early payments on AP organizations and their suppliers, and how can CFOs and CPOs encourage continued adoption?

DG: Up until about 2010, companies had very few options to pay their suppliers early. Basically, if you weren’t a large investment-grade company that could offer supply chain finance to what included basically your top-tier suppliers, your options were limited to either using p-cards or using some kind of prompt-payment discount solution.

But since 2010, you’ve had a lot of innovation coming into the market with new capabilities around early pay. We’ve seen companies now being offered more of a menu of options for paying their suppliers early, either supported by their banks or supported by purchase-to-pay vendors and their financial partners. Now there’s much more of a menu of opportunities for companies to pay their suppliers early.

The current state we’re in now, however, is still very segmented. There has been very limited supplier adoption; most of these network-type supplier programs have adoption rates around 5%, which is relatively low. Ten percent is considered best-in-class. Most supply chain finance programs are still targeted at the larger suppliers with larger spend.

To help encourage greater adoption of these programs, CPOs and CFOs should do more to make them easy and appealing to the suppliers, so they’re as close to the consumer world with “one-click money,” for example. Also make the offers compelling, not at credit card rates or higher. A lot of solutions, especially those that offer dynamic discounting or working capital auctions, tend to be cost prohibitive for suppliers other than those that really need access to cash. That’s now changing with some of the recent innovations that AP technology companies have brought to the market. 

XO: From a CPO perspective, an automated process that accelerates the approval process of invoices payments is critical. In addition, establishing good communication with suppliers in regards to the early payment benefits and process is the best way to start adoption. Normally this could be part of advertising efforts that procurement can develop within the P2P solution.

This article was written on behalf of Tipalti by the Spend Matters Brand Studio team and not by the Spend Matters editorial or analyst teams.

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