Achieving Paperless invoice processing is an elusive goal for many accounts payable teams.

No one enjoys processing paper invoices, scanning them, doing data entry, and then following up with stakeholders to get them approved.

The time wasted in processing paper invoices can be used by A/P team to improve other important metrics like on-time payments and early payment discounts captured.

If your approach for the paperless invoice processing is to implement a scanning solution to scan every single invoice then you might be leaving a lot of efficiencies on the table.

The problem is that most companies approach paperless invoicing as an automation project.

The thought process is something like this

We are currently receiving a lot of paper invoices and since we are spending too much time in manual data entry and scanning, let’s find a solution that will allow us to automate the scanning and data capture process.

You probably would find a lot of articles on the internet which talks about why scanning solutions is the panacea to all your invoice processing problems.

So even though you automated the process, is the process efficient?

-> Is that helping in you reducing the invoice exception rate?

-> Is that an effective solution for matching the PO, Invoices, and receipts?

-> Is that helping you in getting the approvals faster?

We assume that for you the answer to a lot of these questions is No, otherwise, you won’t be reading this article!

The truth is that your dream of paperless invoice processing can only be fully achieved if you think through how to enable your current suppliers for paper invoice processing, sometimes also called e-invoicing.

Paperless invoices processing is one of the many things you can do to improve the productivity of the A/P team. In the Invoice process optimizer, we talk about 5 proven strategies to reduce the invoice processing time by up to 40%.
If you would like to see how ProcureDesk can help you reduce the invoice processing time by up to 40%, click here to schedule a free demo.

 

In this article, we will present a data-based approach to implementing a paperless invoice processing system. We call this Supplier Channel Fit. In short, this approach would help you implement a solution that is the right fit for your supplier base and help you with increasing the efficiency of your invoice approval process.

What are your goals for Paperless Invoice Processing?

Yes, we know it is obvious that you should have clearly defined goals for any automation initiative but you would be surprised to see how many companies don’t do this right.

It is obvious that the goal is to reduce the time spent on processing invoices but how do you measure it and what other productivity improvements it would drive for you and your team.

Let’s look at three KPI’s and how paperless invoice processing impacts them

1. Cost for processing an invoice

As the name suggests, it is the cost to process an invoice. The lower the cost the better it is.

There are a lot of benchmarks out there that pegs the cost anywhere between $2.45 to up to $21. We covered this in detail in our article on Invoice approval workflow.

Invoice Processing cost - Benchmarks

But at a very high level, this cost includes

  1. Cost to scan the invoice and enter the data in the system.
  2. Cost to identify the exceptions and route it to the right stakeholder.
  3. The cost of getting an invoice approved. It is the time cost of stakeholders who needs to approve the invoice before it can be paid.
  4. Any system costs. For example, if you are using a system for processing invoices then the cost of the system as well it’s support cost.

If you automate the process of capturing and processing invoices then the cost automatically goes down and that reduces your cost for processing the invoice.

Pro tip: When you are looking for a paperless invoice processing solution, you should think about how the solution would impact all the above-mentioned areas. That way you have a holistic solution.

2. On-time supplier payments

Whether you pay suppliers on time or not is sometimes a measure of cash flow and company policies. However, if cash flow is not an issue, then a good practice is to of course pay suppliers on time.

Many of your suppliers might be getting paid late because their invoices are stuck in the exception review process and they are not ready to be paid yet.

Exception Rate - Invoices

It could be a factor of errors on the invoice or you have a highly manual process to match the invoices with the purchase order.

If there is no purchase order process then you are probably relying on invoice approval from stakeholders for every single invoice.

Reduce the exceptions, the faster you can pay the vendors.

Pro tip: Automate the matching processing so that you are not spending time identifying discrepancies between PO and Invoice.

3. Early payment discounts

Capturing early payment discounts is one of the import KPI’s for world-class AP teams. You can only capture early payment discounts if your invoice approval workflow is highly efficient and you have drastically decreased the time spent on processing invoices.

Let’s say your vendor terms are 2%10 Net30. So to get a 2% discount, you have to process the invoice in under 9 days and then leave a day for settling the payment.

So if you reduce the cycle time, you can capture more early payment discounts.

Pro tip: Capturing early payment discounts is a factor of you first negotiating them with the vendor and then your ability to pay early i.e cashflow. Before setting up this KPI. talk to both purchasing and treasury to understand the feasibility of both.

Why only invoice scanning solutions are not effective?

The most common approach to paperless invoicing is to implement a scanning solution to scan the incoming invoices.

When the invoices are scanned, you might or might not have an OCR technology solution to further extract the data from the invoice.

Though OCR capability has come a long way, there is still an accuracy issue.

Here are some of the reasons scanning solution might not work for you

It doesn’t work in a remote environment

A scanning solution typically needs a high-quality scanner to increase the quality of the scan. When you are in an office environment, it makes sense but if you are working remote (like current situation) you might not have access to your scanner.

The process is not scalable when it comes to a remote environment. Also with a solution like this, you are restricted to have staff in the office. What if you need to hire remote employees or if you have shared survival teams in low-cost countries?

Accuracy of data highly varies

The accuracy of the invoice scanning solution varies based on the quality of the invoice. Sometimes it is greatly accurate and some times not so much.

Now you might say, it gives us 90% accuracy. That’s great but how do you know which 10% to check for accuracy.

In case your solution has an extensive AI algorithm, it might be able to spit up a confidence score and that could help you with identifying records that need review.

Exception management is still a challenge

Scanning and inputting the data is just the first step. But companies on average spend 2-3 hours on the invoice approval process. The reason companies take so much time in processing an invoice is that it is sent for approvals after it is scanned.

You can overcome that by implementing a purchase order process. There are two main benefits of implementing a purchase order process

  1. You get better cost control because everything is authorized for purchase or most of the items are pre-authorized. You could set up purchase order approvals so that all purchases are not routed for approval.
  2. Once you have the PO, you don’t need to route the invoice for approval. Instead, you can match the invoice with the PO and everything checks out, you can auto-approve the invoice for payment.

Finding your Supplier Channel Fit

So if scanning is not the one size fits all solution, what is? The short answer is there is no one single channel. For long answer read below 🙂

Let’s us explain

When it comes to efficiently process the invoices, the focus has been mostly on one channel – that is scan the invoices.

The fact is that there are other channels that can be used to receive invoices from suppliers and that depend upon the capability of the vendor/s.

Our recommendation is to use the most effective invoice process based on your supplier preferences and capabilities and that is what we call Supplier Channel Fit.

So what are the different channels through which you can receive invoices

Supplier - channel fit

Electronic Invoice receipt

Electronic invoice receipt as a channel refers to electronically transferring the invoicing document from the supplier to the buyer. In this case, there is no paper copy or for that matter electronic PDF copy of the invoice.

The metadata of the invoice which includes invoice #, amount, line details, etc. is sent electronically by the supplier.

This method is very efficient when you have an approved purchase order against which the supplier is issuing the invoice.

The biggest benefit of this approach is that the process is completely touchless. The invoices are transferred using an agreed-upon protocol between the buyer and supplier.

There are two most common protocols used for electronically transferring data.

EDI – EDI stands for Electronic Data Interchange. Buyer and supplier both need to implement this protocol to seamlessly exchange data.

cXML – cXML stands for (commerce eXtensible Markup Language) and it is a very common protocol used nowadays for exchanging invoice data as well as exchanging supplier data.

Any good AP automation tool would support both of these protocols so that you don’t have to spend additional resources to develop infrastructure for invoice data exchange.

Supplier portal

A supplier portal is primarily meant for supplier self-service. A supplier portal is used when suppliers don’t have the infrastructure to support electronic invoices.

In a supplier self-service model, a supplier login to a web portal where they can see open Purchase Orders (PO’s) and submit invoices against them. This process is also called PO flip or in other words, flipping a PO to an invoice and then attaching the invoice document.

This approach is highly effective because you get electronic invoices and your suppliers don’t have to spend a dime on implementing any IT infrastructure.

Email-based invoices

In this channel, suppliers send you invoices through email. Most AP departments set up a common email box, something on the lines of invoices@company.com.

You can then automate the process of reading the emails, downloading the attachment, and automatically creating the invoices in your invoicing system.

This method should be used if the vendors can’t do Electronic invoices or refuse to use the supplier portal. We will talk more about how to work with vendors for implementing a paperless invoicing process.

Embedded invoices (HTML)

These types of invoices are becoming common nowadays where the invoice is embedded in the body of the email instead of as an attachment to the email.

This is no different from Email invoices as most AP automation systems can easily read the email body and create invoices directly from that.

Good old mail

The least effective channel is receiving invoices through mail. It is least effective because there is a lot of work involved in receiving, opening, scanning the invoices, and then the data entry.

In some cases, it is not possible to go completely paperless. For example, some utilities still send you paper bills and would refuse to send you electronic invoices.

Hopefully, this would change with time but in your channel mix, this channel should not account for more than 5% of your invoices.

Supplier analysis to identify the optimum channel

Once we have identified all the channels you could use, the next step is to identify Supplier Channel Fit.

To find the most effective channel for each of your suppliers, follow the step by step approach

Identify the key vendors

When you are implementing a paperless invoicing process, avoid the mistake of tackling all suppliers at the same time. It is overwhelming and you probably would need additional resources to tackle 100% of your supplier base.

Instead, let’s use the Pareto principle to identify top suppliers we want to go after.

Here the decision is based on the volume and not on the total spend. For example, if you spend $1M with one vendor but only create 2 invoices in a year then automation is not going to drive a lot of benefits for you.

Let’s look at the volume to identify the key vendors

  1. First extract invoice history for the last 12 months from your accounting system. For example, if you use QuickBooks then you can use the export functionality to export all the bills.
  2. Get the count of invoices for each supplier.
  3. Sort the suppliers by count in the descending order.
  4. Add a column next to it so that you can calculate the cumulative total of the count % as compared to total invoices.
  5. Pick the suppliers that contribute to the first 80% of the invoices. For example, if you have 10,000 total invoices, then pick the suppliers from the top who contribute to 8000 invoices.
  6. It generally should follow the 80-20 rule, i.e the 80% of invoice count should be with 20% of your supplier base.
  7. Ignore the rest 80% of the supplier base for now. We will cover that later.

Survey vendors to know their preferences

The next step is to reach out to the vendors to understand their capabilities and preferences.

Keep a simple tracker with the supplier name and their preferred channel (see invoicing channels above).

It is helpful that the communication is effective. In most cases, you are probably reaching out to your sales contact who then will connect you to the Accounts Receivable contact.

We recommend that you draft a letter that you can then send to all your key suppliers. There are three key aspects of vendor communication.

  1. First, explain the rationale of the change. For example, you are working on increasing the efficiency of the Accounts Payables department and paperless invoicing is a key strategy for achieving your efficiency goals.
  2. Second, explain what is for them. For example – suppliers would be able to track invoice status and check whether the invoice is ready for payment or not.
  3. Third, provide them different options you are supporting for paperless invoicing and ask them to choose a preferred option.

Presenting an approach for the entire supplier base

You must be wondering what happens to the rest of the 80% of the supplier base. There are two things to consider here.

  1. The volume of these invoices are generally low, so even though these suppliers are not onboard on your paperless invoicing program, it would not add a lot to your workload.
  2. Some of these might be one-off vendors and might not be billing you consistently.

Having said that, we recommend the following strategy for these vendors.

Assuming these vendors send invoices through email, you could set up an autoresponder that will automatically let the vendor know that you are moving to a paperless invoicing process an what options they have available.

If the volume is low, it is probably not worthwhile for the supplier as well as your team to invest the effort in electronic invoices.

Instead, route these vendors to a supplier portal option where they can submit their own invoices against a purchase order.

ProcureDesk supplier portal is designed to make this process simple. The registration process is just one click so that it is easy to onboard the suppliers.

Supplier communication for better adoption

Do you know what is the typical adoption rate for e-invoicing?

As per Ardent partners, the adoption rate of e-invoices is around 24.9% which is much better than what it used to be

Manual vs E-invoicing

The key to better adoption of e-invoicing is the constant communication with the vendors to ensure that the rate keeps on increasing.

As we mentioned earlier, In the beginning, we recommend that you focus on the top 20% of the vendors who contribute to 80% of the volume.

However, the remaining 20% needs a staggered approach which requires constant communication.

The other challenge you see with small vendors is that their personnel keeps on changing and something is always lost in the handover process. The result – you guessed it, they go back to paper invoices.

On top of it, you will always have new vendors so you need to make sure that they are also onboarded to the e-invoicing process.

New vendor setup – Supplier onboarding

To ensure that the new vendors follow e-invoicing channels for submitting invoices, make sure that new supplier onboarding steps cover the process for submitting invoices.

There are a couple of ways this can be done

  1. You could add a clause in your contracts that the vendor must submit the invoice electronically. You can provide your preference based on the volume and anticipated spend.

For example, if you are only going to purchase twice a year from the new vendor, then it doesn’t make sense to spend time setting up EDI or any other electronic data exchange protocol.

Instead, you might be better off if they just go to a supplier portal and submit their invoices.

  1. You can add the e-invoicing instructions in the new supplier onboarding package. To remove any ambiguity, you could give the supplier options from the different channels they can choose. For example, you could say something like this…

If you are going to submit more than 100 invoices in a year, then our preferred method is EDI. Reach out to suppliers@company.com to start the onboarding process.

If your anticipated invoice volume is going to be less than 10 a year, we recommend that you submit your invoices using our supplier portal, it is free to join.

Click here [insert link] to register for the supplier portal

Ongoing supplier communication

For existing suppliers, it is possible that you probably won’t get 100% adoption on day one. That is why it is important to have an ongoing supplier communication plan.

Follow a three-strike rule for onboarding existing suppliers. Even after 3 reminders, if they aren’t on board to the new program, then you should follow the no PO, no pay policy.

To make sure you are constantly reminding vendors for on-boarding, set up a tracking system so that you can easily track who is onboarded and who is not.

If possible, just set up a flag in your supplier management system so it is easy to run reports and identify vendors who are not on-board yet.

Conclusion

Paperless invoice processing is not a pipe dream. If done right, you can easily achieve up to a 90% adoption rate for e-invoicing.

The key is to approach this scientifically by understanding different channels and matching those channels with your supplier preferences. We call this supplier-channel fit.

You can only achieve supplier channel fit if you think of paperless invoicing as a mix of channels and strategies rather than a single approach, for example – scanning solutions for invoices.

The first step to improvement is knowing your current status, so get started with your current invoice status and see how you are receiving the invoices across various channels. This will help you understand the vendor landscape and help you establish a roadmap for paperless invoice processing.

ProcureDesk Demo