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ANALYST INSIGHT

Five Steps for

Selecting the Right B2B Receivables Solution

Published: March 2015

Analyst(s):Scott Pezza, Principal Analyst

What You Need To Know

For successful enterprises, efficient and effective execution of invoicing and payment is a central part of their financial health. As that process unfolds, anything that serves to introduce delays or inaccuracy contributes to higher levels of Days Sales Outstanding, inflated labor costs, and lower customer satisfaction. As such, it is incredibly important to take a holistic view of process improvement, looking at all of the interrelated parts and functions, and understanding how they all come together to keep customers happy, costs down, and cash flowing in. This Insight will provide you with a framework for identifying your biggest areas of need, and deciding on solutions and partners to help you address them.

Step One: Determine the Scope of the Need

Because the topic of receivables is broader than simply invoices and

payments, Blue Hill recommends beginning with a look at the entire end-to-end Order-to-Cash process. As laid out in Figure 1, below, each stage brings with it new requirements that may be troubling your organization. For example, when making credit decisions, do your managers have a full view of a past customer’s payment performance on previous purchases? Do they also have access to objective, third-party credit and risk profiles that may flag issues not obvious from your past interactions? After invoices are distributed, do you have a clear way of differentiating genuine disputes from delays ripe for collections? When facilitating payments, are you providing customers with their preferred options? By walking through these items step-by-step and profiling your organization’s positives and negatives, you’ll have a good foundation from which to judge relative areas of importance, and help prioritize solutions and providers.

AT A GLANCE

Business Challenges

In a B2B environment, inaccurate invoice information, inefficient dispute processes, and poorly managed collections can all contribute to delays in receiving payments – and negatively impact your cash flow and broader financial health.

Solutions

Solutions that integrate order management with billing, efficiently distribute invoices across multiple delivery channels, facilitate payment in convenient and secure

environments, and help guide credit and collections activities can have a big impact.

Benefits

Reduced DSO, higher customer satisfaction, better visibility, lower operational costs.

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ANALYST INSIGHT

Figure 1: Pain Points in the Order-to-Cash Process

Source: Blue Hill Research, January 2015

Step Two: Connect the Process Pain with Financial Problems

Depending on your position in the organization, simply identifying a process-related deficiency is unlikely to make a persuasive argument for budget allocation. The next step is to understand how those process difficulties can ultimately impact the financial health of the enterprise. The table below provides a framework for understanding these interrelationships. It also provides some tips on what can be done to help alleviate the problems. As we progress further along in the process, those tips can translate into the types of functionality you look for in solutions under evaluation. For instance, if you’re receiving a high number of customer inquiries about invoice errors, that is going to result in delays as the customer ensures they have the correct information prior to effecting payment. In the meantime, your DSO grows and their happiness may very well plummet. Tracing the problem backwards, we would look at where the information contained in their invoice came from. Was it imported automatically from the order stage or re-entered by hand from a disconnected system? If it was imported, was it incorrectly altered in between, or did it enter your system incorrect from its initial entry? Asking these questions helps trace back to either a need for better solution integration or better quality controls within quotation and order management systems. That is only one example, of course. Based on the pains you identified in Step One, scan through Table 1 and pinpoint the impact and potential fixes for your situation.

Credit • Payment History • Credit Rating Order Management • Quote Conversion • Data Accuracy • Fulfillment Invoicing • Order Conversion • Electronic Invoicing • Outreach and Onboarding Dispute Resolution • Identifying Genuine Disputes • Information Sharing / Collaboration • Handling fulfillment issues (damaged goods, short shipments, etc.) Collections Management • Prioritization • Managing Outside Agencies Payment • Paper Check • Cards • ACH / EFT • Wires Cash Application • Remittance Advice • Matching • Split / Partial Payments • Multi-Invoice Payments

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ANALYST INSIGHT

Table 1: Finding Solutions to Common O2C Issues

Process Step

Issue

Result

Strategy

Credit  Payment delays

 Customer default

 Inflated DSO

 High write-offs / bad debt expense

 Use 3rd party credit information

 Provide credit department access to payment history

 Increase collaboration with Sales / Account Management

 Require full or partial prepayment

Order Management

 High returns

 Slow fulfillment

 Lower customer satisfaction

 More customer inquiries

 Delays in invoicing, leading to delays in payment

 Higher DIO

 Higher DSO

 Better integrate quotation and order systems

 Reduce manual hand-keying of information

Invoicing  High number of disputes

 Slow process of creating and sending invoices

 More customer inquiries

 Delayed payments

 Higher DSO

 Better integrate order and invoicing systems

 Introduce customer self-service portal

 Transition to electronic invoicing

Dispute Resolution

 Slow response time to inquiries

 Large amount of staff time required for both suppliers and customers

 Difficulty assembling / accessing relevant data

 Higher DSO

 Streamline customer communication channels

 Introduce customer self-service portal

 Provide customer service with access to information from credit, sales, order management, and invoicing

Collections Management

 Difficulty tracking process

 Increasingly delinquent accounts

 Duplicating effort when multiple reps contact same customer

 High write-offs / bad debt

 Centralize collections management in solution with task assignment

 Apply analytics-based prioritization to focus on best targets first

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ANALYST INSIGHT

Process Step

Issue

Result

Strategy

Payment  Lockbox fees

 Slow speed of paper checks

 High processing costs

 Higher DSO

 Less visibility into incoming cash flows

 Offer electronic payment options, standalone or via EIPP/EBPP

 Incentivize card or ACH/EFT payment

 Dedicate resources to outreach and onboarding Cash Application  Manual reconciliation  Inadequate / inaccurate remittance advice  Difficulty matching electronic payments

 More customer outreach for clarification

 Poor visibility into incoming cash flows and outstanding balances

 Unnecessary collections calls

 Improve integration / import of bank lockbox files

 Use electronic payment system tying payment(s) to invoice(s)

Step Three: Build Cross-Functional Support

The need to build a broad base of support for technology investments shouldn’t be viewed as a cliché. It’s absolutely fundamental for anyone who does not have sole authority to commit enterprise funds. The important part is not in communicating why it is important to you; it is in understanding how the difficulties you face contribute to shared problems that affect everyone involved. With that

understanding, you can articulate problems and frame the results in terms that are applicable to your audience. The order-to-cash process truly is a multi-function environment, from Finance and Sales to Supply Chain and Marketing. Table 2, below, provides a brief rundown for each of four major stakeholders in the O2C process: Finance, Sales, Marketing, and Technology. They all suffer from inefficiencies, all have different perspectives on what challenges those inefficiencies produce, and each has their own way of defining what “success” will be post-implementation. Use these tools as a starting point for articulating the why and what’s-in-it-for-me pieces of your ultimate recommendations. As your CMO will appreciate, understanding your target personas and providing messages that resonate with them is a big part of communicating value.

Table 2: Who Cares About Order-to-Cash Improvement?

Role

Core Message

Key Metrics

CFO We’re slow to get cash in the door and have poor visibility into when and how much is on the way. This impacts our ability to effectively plan operations and make the best use of our enterprise cash.

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ANALYST INSIGHT

Role

Core Message

Key Metrics

CSO We’re wasting time selling to customers who may never pay – leading to restatements and claw-backs. When we have to put them out to collections, we’ll only realize pennies on the dollar for each deal sold.

Sales Revenue

CMO We’re alienating our customers, hurting the brand. If we give them too many headaches, they’ll likely look elsewhere. That compounds the efforts Marketing needs to make to attract and retain good relationships.

New Customer Acquisition, Customer Retention, NPS, Complaint Volumes

CTO We’re managing multiple different systems now, and the data exchange is breaking down. That’s increasing IT support requirements and preventing your staff from helping with projects in more growth-oriented areas.

IT Labor Cost

Your Customer

You’re devoting a lot of staff time to managing physical invoices and getting on the phone with us to iron out inconsistencies. At times, those delays can lead to penalties or restrictions on future purchases.

AP Labor Cost, Late Payment Penalties Incurred, Credit Hold / Required Prepayments for Future Orders

Step Four: Select the Right Technology

Some of the difficulties profiled above can be addressed, at least to start, with changes to process, oversight, and policies. When those are not enough, you should begin to explore outside possibilities, whether through software or BPO services. Focusing on each of the above process steps in turn, the paragraphs below profile the type of solutions and functionalities available. This is when you can begin filling in your decision matrix: after identifying the problem areas of greatest importance, you can plot desired functionality on one axis, and companies capable of providing it on the other.

Credit. These solutions focus on providing you with a better understanding of your customer. They

range from individual credit scores to more advanced risk assessments. They include tools for integrating and analyzing both internal payment and external credit data. Some allow you to look at your customer base as a whole, performing a portfolio analysis to better understand how everything comes together.

Order Management. The focus here is on the solution’s ability to integrate with invoicing and payment

systems, rather than the functionality of the system itself. Some firms will utilize online catalogs through procurement sites; some will facilitate offline orders via phone with an interface for salespeople to provide quotes and formally process orders. Important pieces are whether those orders are populated

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ANALYST INSIGHT

from a common inventory master or hand-entered. When order information is stored, can it be accessed by separate invoicing solutions to enable automated entry of customer and line-item information?

Invoicing. This is the core of the Order-to-Cash process. ERP and financials applications contain basic

functionality for print, and often email-based invoices. Where third-party solutions differ is in providing customer self-service portals for invoice retrieval. Some broker communications between buyer and supplier to address inaccuracies without the need for a phone call. Others continue building by integrating payments functionality within that same interface. Some invoicing solutions also allow for multi-channel (paper, fax, email, EDI, network-based) invoices according to the customer’s taste. A key question to ask, for customers who receive multiple invoices per invoice period, is whether the solution supports batching. Receiving two invoices in a day may be acceptable, but fifty invoices in fifty separate envelopes or attachments can cause a great deal of headaches for clients.

Dispute Resolution. You will most often see this functionality included as part of another solution, be it

invoicing- or collection-centric. What you’re looking for is the ability for buyer and supplier to exchange messages and documents over a common system, which helps speed up resolution and provides a historical record of conversations. Some solutions will offer standard and/or customizable reason codes for tagging common error types (ex. “Incorrect line item price” or “Tax applied to non-taxable

transaction.”) While not fundamental to resolving individual problems, that type of notation can help either route issues to the appropriate party, or provide a good foundation for reporting and analytics after the fact.

Collections Management. These solutions are not traditionally built into invoicing applications. They

have two different goals: (1) to streamline the process of conducting collections activity, and (2) to make better decisions about collections strategy. The first can be thought of as a workforce management and task assignment system, ensuring that workloads are balanced and that multiple representatives are not contacting the same accounts at the same time. The second type takes the usual Days Past Due- or Outstanding Balance-based prioritization to another level by accounting for payment history and credit risk. This allows for tailoring collections activities based on risk profiles, for instance, by contacting historically delinquent accounts before they are past due and letting historically on-time accounts slip to 10 days before their first notification.

Payment. These solutions come in different varieties, from simple merchant services agreements to allow

credit card processing to multi-company online payment networks that facilitate payments across different channels, like EFT/ACH, wire, and credit cards together. Unlike software licenses, this is an area where transaction costs need to be top of mind. Customer convenience and data security should be at the head of the list as well. For credit card payments, the benefit of some of these solutions is that they can take the burden of PCI-DSS requirements off of your IT department by storing customer credit card details on their system versus it being stored (and protected) on yours. For other payment types, it is

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ANALYST INSIGHT

about providing those options preferred by your customers, eliminating one potential barrier (or impediment) to timely payment.

Cash Application. The act of applying cash is a task for your ERP or financials application. What you can

focus on is how exactly that will be done – manually or automatically. For automated (or at least assisted) application, you want a solution that prepares a properly formatted instruction file that can be imported into your system. Because that file will only be as good and complete as the data that feeds into it, be mindful of the potential options for multi-channel payment information export when evaluating payment solutions, as one of their big values is in providing that electronic information to lessen the burden downstream at the application stage.

Step Five: Find the Right Provider(s)

In Steps One through Four, you identified core issues, detailed their operational and financial impact, translated the problems into language relevant to specific stakeholders, and created a sketch of the types of functionality available. The next and final step is finding a software or service provider to help you get things up and running in your day-to-day operations. There are countless factors that we can discuss, but Blue Hill recommends that you strongly focus on three main decision drivers:

Breadth of solution. Thankfully, most of the solutions we’ve discussed come in one of two varieties:

either invoicing applications that can also include dispute resolution and payment, or packages that bring together credit, collections, and sometimes payment as well. For a large number of customers, a portal is a great way to have them come to you for invoicing and payment. For those buyers large enough to require you to interface with their chosen solution, you will not have the leverage to force them onto the system, and should look to solutions better able to integrate with the systems and networks

increasingly being used by large enterprises.

Ability to integrate. The keys here are certifications and reference customers. All of the big ERP

providers (SAP, Oracle, Microsoft, etc.) have certification programs for third-party application

developers. Absent a certification—or on top of it, to be safe—look for current clients using the same ERP or financials system(s) who are willing to discuss their integration experiences. So much of what is required for efficient receivables operations relies on timely and accurate data exchange and access, so this is of the utmost importance. In the absence of certifications and references, your best bet is a strong service-level agreement, willingness to collaborate in the testing process, and preferential pricing.

User experience and ease of use. Because these systems process a high volume of transactions, staff will

spend a lot of time using them. When everything is interconnected and information is being shared with multiple parties both inside and outside the organization, that usage increases even more. As such, it is important to find a solution with a clear and intuitive interface where necessary steps are readily

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ANALYST INSIGHT

to use, staff will find ways to circumvent it, lessening the quality and amount of data in the system, and making it more difficult to realize the benefits that the project envisioned.

Blue Hill Recommendations

If you are coming to this discussion with a blank slate, or if it is difficult to pick out one or two areas that are in greater need than the others, the steps outlined above may not provide enough actionable

recommendations to get the ball rolling. While every organization’s situation is unique, there are enough commonalities that we can have a good idea of where to start. For those struggling to decide on a starting point, we recommend that you:

 Begin with invoicing and payment. This is going to have a large impact on your day-to-day activities,

helping to better manage your customer interactions and provide you a solid base upon which to build. You can look for a broad solution that will enable not just invoicing, but payment and client self-service as well. At this point, you may have incorrect information being imported into the invoicing system, but you’ll be able to efficiently communicate with customers to resolve those disputes through the system. By helping them clear up discrepancies more quickly, and by making it as easy as possible for them to pay you via convenient channels, you’re positioning yourself to cut down payment times – and save your customers some labor costs as well.

 Integrate order management. Now that there is a strong invoicing solution in place, you need to ensure

that it is being populated with accurate information. The best way to do that (without needing to hire more staff to double-check every transaction) is to have your order management system directly

integrated with invoicing. That removes manual re-keying and helps ensure that you are not introducing new errors during the order-to-cash cycle.

 Refine with smarter credit and collections. With the first two items, you have accurate data flowing in

and accurate invoices flowing out. You’ve enabled customer payments via desirable channels and have given them a quick way to get in touch if any issues do happen to pop up. You have done everything in your power to help those that can pay to pay you on-time. You also have a centralized system tracking customer payment history and can use that, and potential third-party sources, to arm your credit department with everything they need to deny or restrict sales to high-risk customers. It’s always a balancing act, mitigating non-payment risk while not compromising potential sales revenue – but with the foundation laid, you’re in the best position possible to make that call.

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ANALYST INSIGHT

Conclusion

Improving receivables performance requires taking a look at the big picture, understanding who’s involved, where errors can crop up, and what can be done to address them. Finding solutions that help, and finding providers that can be trusted, will take some work. That said, following a clear plan to guide the selection process will put you in good stead for helping to lessen the problems for all involved. Nothing is guaranteed, but these practical steps are a good way to not only fix problems, but also to achieve important objectives, from reducing costs to shrinking DSO. And it all starts with a plan.

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Blue Hill Research is the only industry analyst firm with a success-based methodology. Based on the Path to Success, Blue Hill

Research provides unique and differentiated guidance to translate corporate technology investments into success for the three key stakeholders: the technologist, the financial buyer, and the line of business executive.

For further information or questions, please contact us:

ABOUT THE AUTHOR

Scott Pezza

Principal Analyst

Phone: +1 (617)624-3600

Fax : +1 (617)367-4210

Twitter: @BlueHillBoston

LinkedIn: www.linkedin.com/company/blue-hill-research

Contact Research: Research@bluehillresearch.com

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@scottpezza

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Scott Pezza is a Principal Analyst with Blue Hill Research, a Boston-based technology research and advisory firm. Scott’s research is dedicated to topics that are top-of-mind for the Office of the CFO, from working capital management and enterprise performance management to the day-to-day operations of accounts payable and receivable. His career spans the breadth of the physical and financial supply chain, from logistics to software-as-a-service technology to business research. He has spent the past seven years exploring how businesses tackle challenges, from warehousing and transportation to procurement, payments, and receivables management. He received his B.A. from Clark University, his J.D. from Boston University School of Law, and his M.B.A. from Boston University Graduate School of Management.