E-Payment Portal: When Time is Money

By Doug Bartholomew  |  Posted 2007-03-13

It's not every day that an organization can dir-ectly convert faster processing times into hard cash, but that's what Barbara Cassera is doing at Memorial Sloan-Kettering Cancer Center.

In 2003, Cassera, manager of financial systems at the $1.7 billion, New York-based nonprofit medical research and health-care institution, was looking for a better way to process the nearly half-million invoices it received annually from suppliers such as Staples and UPS. "Our accounts-payable department wanted more functionality and, at the same time, to collect some of the discounts that were available for guaranteeing our suppliers prompt payment," she says.

After checking around to see what the various e-payment software companies were offering, Cassera decided to go with Xign. The Pleasanton, Calif.-based hosted online payments service already had a base of about 15,000 suppliers of goods and services to large companies. Launched in June 2001, Xign provides a network that enables companies to issue purchase orders, receive invoices and make electronic payments to suppliers.

By moving to Xign, Sloan-Kettering boosted the percentage of invoices it processed electronically from roughly 60% in 2003 to about 85% in 2006. As a result, the organization is receiving $500,000 annually in supplier discounts.

In addition to the discounts, Sloan-Kettering has found that the time saved on the sheer volume of invoices processed electronically has enabled the accounts-payable department to reduce its full-time staff from six to four, saving about $120,000 annually. At the same time, the department is processing a higher total volume of invoices—716,000 in the first 10 months of 2006 versus 472,000 for all of 2003, the year it began using Xign.

But in 2003, the idea of prodding hundreds of major suppliers—from medical device manufacturers to aspirin distributors to law firms—to change the way they billed Sloan-Kettering for some $413 million worth of goods and services was anything but a gimme. "In 2003, we were not really sure that the suppliers would be willing to give up their banking information in an online environment," Cassera admits. "There was a cultural issue involved in that."

For instance, to participate in the Xign supplier network, suppliers must provide the payments service with the basic bank information needed to facilitate a standard bank automated clearinghouse (ACH) transaction. This includes their American Bankers Association (ABA) number, their bank account number, and which bank and location handles the account. This information is required for Xign to process electronic payments from Sloan-Kettering to its suppliers.

More large organizations are starting to use online payment vendors such as Xign, Ariba and Harbor Payments (recently acquired by American Express) to facilitate payment processing while enabling them to capture supplier-offered discounts. An online payment service acts as an intermediary between a company's accounts-payable department and the supplier, speeding the payment process while eliminating paper invoicing and most of the labor-intensive invoice-purchase order matching function.

In Sloan-Kettering's case, getting started with Xign took only 89 days, Cassera says. The organization didn't have to purchase any software or computers, but it did use its own technology staff to build interfaces so that Xign could connect with its enterprise resource planning system.

Sloan-Kettering was already a big user of electronic data interchange, a standard format for exchanging business information electronically, and elected to use standard EDI protocols for data transactions. In most cases, suppliers elect to sign onto Xign's payment network and simply "flip" the Sloan-Kettering purchase order, automatically converting the P.O. to an invoice and submitting it for approval by Sloan-Kettering.

On average, Sloan-Kettering's invoice approval cycle time is about six days. Payments are made through Xign's payment process, which uses a bank ACH to move funds from Sloan-Kettering's bank account to the supplier's account. Sloan-Kettering pays a per-transaction fee to Xign. According to Cassera, the cost per transaction is lower than what Sloan-Kettering was paying for its all-EDI-based transactions.

The information on Sloan-Kettering's purchase orders and invoices is stored by Xign as well as in the health-care institution's ERP system. Sloan-Kettering uses Infor's SmartStream financial application, an older system that years ago was part of the Dun & Bradstreet Software suite. Infor, headquartered in Atlanta, has recently acquired a number of mid-range ERP vendors.


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.

The Last Roadblock?

Although most of Sloan-Kettering's invoicing and payment processing is handled electronically, the organization's setup for compiling information on goods received still has a ways to go. Currently, this information comes either from a receiving clerk checking off the goods that have arrived and entering the data into a PC at Sloan-Kettering's receiving dock, or via an advance ship notice through an EDI transaction. "Obviously we'd like to reduce this kind of back-end roadblock to a fully electronic matching of all invoice-to-payment documents," Cassera says. To that end, her financial systems group has built and is starting to implement a new Web-based electronic receipt application for receiving-department employees.

The shift to Xign also brought in a bunch of suppliers that had eschewed EDI due to the cost. "Many suppliers with back-office operations that were not that efficient now were able to deal with us electronically," she points out. "We brought in a lot of smaller companies that we never would have gotten through EDI."

More suppliers, of course, are now getting paid on time. According to Cassera, on-time payments are way up, more than 95% today, versus just 15% before Sloan-Kettering started using Xign. The other 5%, she says, are invoices that require additional time for approval.

Instead of Sloan-Kettering cutting checks, most of the payments are handled through an automated clearinghouse. About 85% of invoices coming in to Sloan-Kettering are submitted electronically, most via Xign. The majority of the organization's 1,000 top suppliers use the online service to submit invoices and receive payments. "Our bigger suppliers are all doing Xign with us," Cassera says.

She admits that converting the remaining large suppliers may be more difficult. One reason is that some companies simply resist changing their processes and learning to use a new technology to bill their customers. "You have a lot of proprietary suppliers out there," Cassera says, referring to companies that provide a product or service that isn't easily replicated by someone else. "You can't tell someone who provides a specific patient-care item to take a hike."

Another reason some suppliers resist converting to electronic payments is that they don't want to share their banking information. "You are always going to have the one-off vendors who will not give you their banking information, and who still want a paper check," Cassera says. Nevertheless, she figures to get even more of Sloan-Kettering's supplier base on board over time: "Our goal is to get 90% of our invoices processed this way by the end of 2007."