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Pay Early, Get Cash

By Doug Bartholomew  |  Posted 2007-03-13 Print this article Print

Memorial Sloan-Kettering Cancer Center's shift to a hosted online payment service reaps $500,000 in annual early-payment discounts from suppliers who now get paid faster.


Pay Early, Get Cash Back

Automating accounts-payable this way saves purchasers and suppliers both time and expense. Much of the savings comes from eliminating the processing of paper invoices—a time-consuming, step-by-step process of matching purchase orders with invoices and checking that shipments or services were received—and then cutting and mailing a check. For decades, nearly every large company employed staffs of dozens of accounts-payable clerks to do the work.

One reason this laborious, paper-based process lasted into this century is that many companies typically used it to their advantage, holding off on paying suppliers for up to 60 or 70 days from receipt of the invoice, and sometimes longer. This practice was viewed by many in business as simply good cash management, the idea being that companies could earn money by investing the funds for as many days as possible before having to pay.

At Sloan-Kettering, for instance, the typical payment time for manually processed invoices was about 70 days, according to Cassera. "Some payments were made significantly over that time," she says. No wonder, then, that many suppliers could easily be convinced to yield a percentage point or two on their prices if, in exchange, they could be assured that an electronic payment would be made swiftly and no later than a particular date agreed upon by both parties.

Today, with the Internet and numerous online payment options, all that has changed. For one thing, Sloan-Kettering's average cycle time from receipt of invoice to payment has been cut from 70 days to about 20 days.

But the biggest change—the giant carrot for companies looking to automate payables—comes in the form of suppliers offering discounts, sometimes a fraction of a percent, but often as much as 2%, for companies that pay within 10 days. About 28% of Sloan-Kettering's suppliers offer early-payment discounts, and some 42% of the invoices the cancer center receives are discountable--meaning that if they are paid by the agreed-upon date, the price will be reduced. This year, Cassera figures that Sloan-Kettering's accounts-payable operation will generate more than $500,000 in discounts from suppliers.

"Xign brings into play these early-payment discounts, which enable companies automating their invoicing this way to make money off that reduced purchase price," says Pierre Mitchell, director of the procurement advisory service at The Hackett Group, a research firm in Atlanta. "We had a couple of clients that, although they couldn't fund their payables automation project on operational efficiencies alone, were able to fund it on the basis of early-payment discounts."

A typical discounted pricing arrangement is what accounts-payable managers call "2%-10-net 30." This means the vendor agrees to give a 2% reduction for invoices paid in 10 days that are due in 30 days. "This is an interesting concept that we are able to pursue as a result of the Xign process," Cassera says.

While 2% may not sound like a lot of savings, for large organizations such as Sloan-Kettering, which last year had a total spend of about $600 million, the cost reductions quickly add up to significant savings.

Participating suppliers to Sloan-Kettering using the Xign network have the flexibility to select their payment date, with the discount calculated accordingly. "They click on the invoice and select a date, and based on the date it will calculate the discount," she explains. "They have the opportunity to select the payment data on an as-needed basis. This is particularly appealing to suppliers that want to generate cash at quarter-end or year-end."

For some larger suppliers, the cash management benefits outweigh the cost of the discounts. "At the point of invoicing, the suppliers are able to see the actual due dates for the check," Cassera says. "From a cash flow perspective for the larger suppliers, this can be very important."

In 2002, before moving to Xign, the cancer research institution had already automated roughly half of its payables, with 53% of invoices being transmitted via EDI arrangements with its dozen largest suppliers. Nonetheless, with a total of about 10,000 vendors, including scores of mom-and-pop contractors, there was a huge number of paper invoices.

"Although we had been using EDI since the beginning of the 1990s, the number of suppliers using EDI was not growing," Cassera says. "Our suppliers simply didn't want to invest in the EDI environment."

Paper invoices required that an accounts-payable clerk had to enter the invoice information into the cancer center's ERP system, check that the data was valid and, where necessary, deal with any disputes or discrepancies. Today, using the Xign network, the supplier can check the status of a payment and see that, for instance, the system rejected the invoice because the amount was different than on the purchase order.

"Simply placing the burden of resolving an invoice discrepancy onto the supplier is a tremendous cost savings" in employee time, Cassera says. Xign matches suppliers' invoices against Sloan-Kettering's purchase orders, catching about 22% of invoices that contain errors and kicking them back to the supplier with a mismatch notification explaining what caused the rejection. The other erroneous invoices require a manual resolution, which is handled by Sloan-Kettering's accounts-payable staff of four—two fewer than the 9,000-employee medical research organization had before using Xign.

Doug Bartholomew is a career journalist who has covered information technology for more than 15 years. A former senior editor at IndustryWeek and InformationWeek, his freelance features have appeared in New York magazine and the Los Angeles Times Magazine. He has a B.S. in Journalism from Northwestern University.
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