KeySpan, a Brooklyn, N.Y., energy utility, had trouble paying its bills. The problem, however, was paper, not money: the company’s accounts-payable department was wallowing in paperwork, processing up to 300,000 invoices each year. It was mired in a five-day backlog and missing out on vendor discounts. “The process didn’t allow us to capture discounts as much as we wanted to or as much as our vendors wanted us to,” says Ken Daly, KeySpan’s vice president of financial and employee related services.
Under KeySpan’s old, paper-based system, workers usually couldn’t pay bills fast enough to qualify for discounts. “The vendor didn’t like it because they had to wait longer got their money than they wanted to and, as a finance person, I hated it because I lost that 2 percent discount,” Daly says.
But KeySpan is hardly the only company with A/P problems, and vendors have found a lucrative niche in trying to solve them. Electronic-payment specialists like Ariba, Harbor Payments, and Xign are promising to reinvent customers’ A/P operations by offering payment services that sit between enterprise A/P departments and their suppliers, eliminating paper-based invoices and streamlining the payments process.
For help in overhauling its A/P system, KeySpan turned to Pleasanton, Calif.-based Xign. By changing over to a new network system, KeySpan has boosted its A/P staff productivity by 33 percent over the past year, Daly. The company has also seen its average bill-payments window shrink from 45 days to under 10 days and its invoice backlog drop from five days to fewer than one day. The streamlining has opened the door to five times as many discounts, according to the finance exec.
Xign’s technology is compatible with major enterprise resource planning (ERP) systems, including Oracle, SAP, and PeopleSoft. “We sort of pick up where the ERP leaves off,” says George Fan, Xign’s vice president of marketing and supplier operations. The network automatically collects invoices and times payments to suppliers.
Using the promise of speedier payments as a lure—and making suppliers an offer they won’t be likely to refuse—Daly says he hasn’t had much trouble convincing suppliers to join Xign’s network. Some 750 KeySpan suppliers currently take part in the program. “After about one year, we’re probably between 75 and 80 percent of where we need to be,” Daly says. He expects to achieve close to 100 percent supplier participation within the next year. “We really don’t allow anyone to opt out,” he notes. “We’ll require everyone, over time, to move to the Xign platform.”
For many companies, A/P automation promises a way to cut both costs and productivity-draining paperwork. Like KeySpan, Kennametal, a Latrobe, Pa.-based maker of metal-cutting tools and mining and construction equipment, is now using A/P automation to gain better control over its payment processes and timing. The technology also provides bargaining power to help the company negotiate better trade terms and helps it make better use of discounts, says Dean Hoffman, Kennametal’s manager of customer and vendor support services.
To reach its A/P automation goals, Kennametal tapped Harbor Payments and its Invoice Harbor and Payment Harbor technologies. Harbor’s electronic invoice and payment-processing platforms enable Kennametal’s vendors to submit invoices via the Web, Electronic Data Interchange (EDI) files or fax. “No matter what media they’re submitting their invoices on, Harbor receives them and then converts them to a standard EDI 810,” Hoffman says. The information is fed directly, three times a day, into Kennametal’s SAP ERP system.
The SAP software is Kennametal’s payments system of record, recording and controlling how, when and where invoices are paid. When it’s time to make a payment, the invoice data is automatically incorporated into an EDI 820 remittance/payment advice that’s transmitted to Harbor. “They update the Web page to show those invoices as paid and then they strip off that file and submit it to our disbursement bank for [payment] distribution to our suppliers,” Hoffman says.
When Kennametal began using the A/P automation technology some three and a half years ago, about 95 percent of its U.S. vendors were submitting invoices on paper. Shortly after going live, the company began switching its domestic vendors to the new technology en masse. “We went with a Big Bang theory,” Hoffman says. “We converted 18,000 suppliers.”
Most vendors quickly agreed to work with the new system. But 211 suppliers, irked by what they viewed as a needlessly complex system, pushed back hard. “They didn’t call me, they didn’t call one of my people, they called the executive vice president of manufacturing, telling him they were going to shut their supplies off and shut their plants down,” Hoffman says.
The problem, Hoffman explains, is that many companies were unfamiliar with the technology and required a great deal of hand-holding, something Kennametal wasn’t prepared to supply. “The lesson learned was that you cannot provide your suppliers with enough support through the help desk,” Hoffman says. “If we had done that upfront, three-and-a-half years ago, [the transition] would have been a lot smoother.” Eventually, after some diplomatic cajoling, 209 of the vendors buried their hatchets and agreed to use the system. “The two that did not we no longer do business with,” Hoffman says.
With its U.S. vendors onboard, Kennametal is now using the system to qualify for virtually every available discount. That didn’t always happen in the old days, when the company relied on 11 separate external A/P processors. “Sometimes the payables processors wouldn’t get the invoices in until after the discount date,” Hoffman says. “Now, Harbor has 72 business hours to have our invoices processed, well within the 10 days that are granted to us in discount terms.”
The company’s next step will be to bring its global suppliers into the system in a phased deployment over the next few months. “We’re going to eventually manage, out of Latrobe, all the payable functions worldwide,” Hoffman says.