© 2012 Financial Operations Networks LLC AP’s Changing Role: From Tactical to Strategic; From Bill-Payer to Supporting Partner; From Cost Center to Working Capital Contributor

About Your Presenter David W. Hay AP & Procure-to-Pay Consultant David retired from a 40-year career spanning International Banking, Finance and Computer Services and Outsourcing. Most recently, David served as the Director of Shared Services Business Services Outsourcing, for Hewlett-Packard. He was formerly marketing manager for e-payments and financial services for Global eXchange Services (GXS), where he was responsible for the strategic direction and development of GXS's online invoicing and payment solutions for B2B e-commerce on a worldwide basis and has served on GE Capital's initiative to create a GE Center of Excellence for e-billing. David has worked with GE Capital, GE Medical Systems and GE Industrial Systems. As a member of key focus groups and task forces, he helped the GE businesses with their EDI and e-commerce initiatives. In his 24 years of GE experience, he held several key management positions in financial services, e-commerce and sales & marketing. A former international banker, David has more than 35 years of experience in the financial and e- commerce industries. David is a regular speaker at accounts payable and payment conferences.

Agenda Introduction Rise of the CFO Secrets of the Best Performing Companies Benefits of a Strategic Approach Summary

Introduction In many companies the role of AP has changed dramatically over the last few years. ―The economic downturn, government regulation, outsourcing, technology and uncertainty about the future have greatly increased the role of Finance and AP within corporations ―According to a recent study* the recent downturn has enhanced the finance function in 72% of companies with 12% claiming they were already highly influential *CFO Research and Expense Reduction Analysts

Key Concerns of the CFO That Impact AP About the economy ―Consumer demand ―Federal government policies ―Price pressure About their own companies ―Ability to maintain margins ―Ability to forecast results ―Working Capital Management ―And # 5 Managing IT Systems

Outsourcing Companies are moving from being vertically integrated to horizontal ―Cost of goods sold increased from 10% to up to 80% ―Resulting in a large increase in the number of suppliers and $ volume handled by AP ―Thanks to globalization many of the suppliers are offshore adding to the complexity Currency and credit issues, transportation and tax issues complicate AP

Technology ERPs, EDI, the internet and the World Wide Web have changed the way we do business at a greater pace than ever before ―Customers, internal operations and suppliers can all be linked globally in a seamless e-supply chain ―The contribution to the bottom line from productivity gains have outstripped sales gains for many companies Increasingly, the finance department is responsible for technology

Technology (Cont’d.) Since the introduction of ERP systems the CFO has gained in influence over IT ―In 42% of companies the CIO reports to the CFO ―This figure rises to 60% in companies with revenues between $50 and $250 million CFOs alone authorize 26% of all IT investments, CIOs alone only 5% Over the next six months IT budgets will stay flat or decrease for 60% of companies Source; CFO Magazine Dec 2011

Productivity According to the November 2011 issue of CFO Magazine, worker productivity has increased by more than 50% between 2009 and 2011 A recent study of CFOs, and other executives, by Deloitte asked “what are the top three reasons behind the rise in productivity at your company?” And the top reasons are :

Top Reasons for Productivity Rise

Regulation Sarbanes-Oxley Act ―Results in increased control over financial operations, corporations are required to document processes to assure compliance with sound business practices ―CFO (and CEO) has to “sign off” on accuracy of financial documents OFAC ―Companies are required to comply with all aspects of the Patriot Act with regard to who they do business with, i.e., vendors FCPA Foreign Corrupt Practices Act ―Applies to a companies to customers and vendors

View from the Top In an interview with CFO magazine, Mark Goodburn, Vice Chairman of KPMG, was asked about the impact of Sarbanes-Oxley, and he said, “Companies have shifted their focus to things like ‘[What] do we get if [we are] automated versus handling it manually?’”

So What Does This Mean for AP? To meet regulatory requirements CFO’s are demanding accurate, immediate access to financial information Complete transparency into the whole process Lower cost and increased productivity

Benefits of Automation Most companies automate to reduce costs through head count reduction and process improvement.

Productivity Gains in AP Process change and automation have had a major impact on the costs and productivity in AP.

Automations Effect on Costs Cost Cycle Time Cost Cycle Time Best in class$2.054$3.473 Median$5.4110$ Laggards$ $ Costs have come down greatly over the last few years

However Cycle times have not changed as much as cost for most companies The best-performing companies obtain costs per invoice in the range of $0.75 to $1.25 ―This is achieved through the complete automation of the process. Long cycle times mean only the best performers can obtain discounts There is still room for improvement

The Problem Many companies have automated only a few processes, such as e-invoicing Scanning is often still a back-end process The approval process is still manual with an image used instead of paper Little or no use of automated workflow or matching

Invoice by Type

Effect of Changes in Mail Delivery According to The Hackett Group proposed changes to the delivery time of first-class mail could cost a U.S. company with $10 Billion in revenue $100 million in working capital SMEs in particular will be effected as they have been slow to adopt e-invoicing and e-payments

Why do the best-performing companies achieve significantly better results?

Move from Tactical to Strategic AP and Purchasing work to improve the complete purchase to pay cycle Centralization of AP into a shared service environment PO distribution, front-end scanning, e-invoicing, workflow and payments integrated into a complete solution It is the combination of the automated solutions with process change that return the best results.

Secrets of the Top Performers Significantly higher use of POs ―AP and purchasing work together to improve process ―Invoices that match with a PO can be paid without further approvals required, reducing cycle time ―Reduced errors as buyer, vendor and AP are all working from the same information ―Use blanket POs or contracts for regular buys

Secrets of the Top Performers (Cont’d.) Utilize machine to machine e-invoicing ―Many methods available, EDI, XML, HTML and File Transfer Use a portal to allow small players to create invoices on line, or “flip” purchase orders Use workflow for internal matching and resolution Move to e-payments

Secrets of the Top Performers (Cont’d.) Workflow ―Removing people from the Process through the use of automated matching and approvals Add accounting codes to the invoice automatically One company study showed 50% error rates on invoices where buyer/requestor added the account info ―Use “negative approvals” where PO or receiving info is not available

Secrets of the Top Performers (Cont’d.) ―Set up rules for automatic approvals Set up blanket POs in the system Auto pay all routine invoices such as rent, utilities and indirect spend from trusted vendors that fall within $ limits —Audit after payment for compliance Auto pay all discount available invoices —Approve or audit after approval

Secrets of the Top Performers (Cont’d.) Use a portal to communicate with vendors ―Deliver POs ―Receive Invoices ―Distribute Remittance advices ―Handle Vendor Queries Eliminate phone calls and IVR

Secrets of the Top Performers (Cont’d.) ―Focus on the top 20% of suppliers They often generate 80% of the transactions They may be receiving e-POs and issuing e-invoices to other customers ―Aim for 100% PO issuance with this group Request PO line # on invoice —Allows for accurate line-item matching Why do some companies achieve significantly better results?

Secrets of the Top Performers (Cont’d.) Companies with the best cycle times can target discount capture Discounts ―2 /10 net 30 can return more than 35%. One major corporate estimated a $200 million addition to the bottom line from discounts Offer discounts as an alternative to extended terms. One company offered 1.5 / 15 or 60 days.

Early Payment Discount Capture Yields Lucrative Annualized Returns Day 0Day 10 Day 30 Example: Typical 2/10 Net 30 on $100 Invoice Option 1: Pay $100 on Day 30 $100 minus Interest = 5%/yr Interest 20 days $100 $2 Interest over 20 days implies Interest Rate of 37%/yr!!! Day 0Day 10 Option 2: Pay $98 on Day days $98 $98 + Interest = $100 Day 30

Automation Benefits Go Beyond Cost Automation allows for the data to be visible from the moment of entry ―Accruals can be accurately made ―Invoices can be tracked by AP, purchasing and vendors from entry through to payment The auditors of one failing UK company found 50,000 invoices that had not been entered or accrued ―Finance can accurately forecast cash requirements ―Management can track progress against goals

Better Vendor Pricing Spend analysis ―Allows for better pricing through volume discounts Companies are often buying the same product from the same vendors at different prices ―Reduce the number of vendors ―Supply Standardization For Example buying less expensive pens, paper etc. Lets look at an example

Benefit Example Our sample company has: ―Sales of $250 million ―Profit before tax $25 million ―Cost of goods purchased, 45% of revenue Many companies achieve a 10% reduction in price paid for goods and services. ―In this example if 10% reduction is on only 50% of spend the return to the bottom line is $5.6 million

Visibility Management has complete visibility into the process ―Accurate accruals can be made ―Cash requirements can be forecast ―Spend analysis van be obtained in real time ―Improved audit capabilities And above all performance to goals can be met

Digital Cockpits Can Be Simple … Accurate view of your key business metrics

Implementation of a Vendor Program Survey the vendors ―Large ones and utilities are often using EDI ―Vendors may be signed up with a network ―May be using Checkfree for EIP Work with your solution provider – they have “ramp teams” that will help bring vendors online. ―You must work closely with the “ramp team”

Negotiating with Vendors Remind vendors that ―They can cut six to eight days of processing time by moving to e-invoicing and e-payment ―E-invoicing reduces processing errors and delays ―E-payment/e-RA allows vendor to more accurately apply cash ―Vendors can benefit from faster payments through discounts

How Do We Negotiate Change? Price increase ―Negotiate the price change by saying “I can only increase price if you will help me reduce costs by moving to e- invoicing and e-payment (EIP)” New contract / New PO / New vendors ―Make e-invoicing and e-payment part of the contract Changes in payment terms ―If vendor wants % terms, only agree if EIP used ―One company’s terms are 1.5 net 15 or 60 days

Summary Automated $0.75- $1.50 invoice/payment Process time reduced to 1-3 days Trade discount capture possible Bottom line gains from improved vendor management and pricing Reduced error handling Paper Based $3 - $93.00 per invoice/payment day elapsed processing time Trade discount capture difficult 75% of all calls to AP status calls 80% of all calls from internal employees

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