31 Jul Delivering real benefits in public sector with e-invoicing
Governments in many countries are considering how best to capitalize on the opportunities that electronic invoices present. Some countries like Brazil and Mexico have used the force of law to insist on the use of electronic invoices – other countries have mandated that suppliers to public sector use e-invoices. But some of the biggest economies in the world, notably Germany, the UK and the United States seem hesitant. Perhaps they don’t want to interfere too closely in commerce. Maybe it’s the fear of the bureaucracy of new legislation that puts them off. It could be lack of political will. But by providing no encouragement or leadership, these governments are depriving their economies of literally $billions in efficiency and liquidity and as a stakeholder in this, I’d like to propose a three point plan to persuade businesses to use electronic invoices.
The challenge is to persuade businesses, especially suppliers, that there is something in it for them. What role can government play in helping with this message? They could invest in a communication campaign to sell the benefits but without a sense of urgency, without a burning platform, businesses will continue to attend to their other priorities.
They could mandate it, if not across the board to force all business to use electronic invoices, just for invoices to public sector. Even this seems to be seen as heavy handed by some governments who prefer to avoid strict mandates and leave businesses free to choose how they send invoices.
But there’s another way that I think would work very well – especially in Europe and North America. It involves giving businesses who supply public sector three choices:
Choice 1 – Send invoices electronically and be paid on time
Choice 2 – Send paper invoices and be paid late
Choice 3 – Send electronic invoices and, if you give a rebate, be paid early
To those in private sector, these choices probably make some sense, especially the first 2. It’s another way of saying to suppliers “Send us invoices electronically or we’ll hold on to your money for an extra 30 days”. It’s a big stick approach, providing pain for non-compliance. Public sector people might be a bit nervous about extending payment terms as a penalty for paper but what’s more likely to raise an eyebrow in public sector is choice 3. But choice 3 has some real appeal but it may not be obvious why.
In the private sector, business won’t pay suppliers early unless there’s a reciprocal gesture like a discount. Why would they? If they pay early they reduce their DPO (Days Payables Outstanding) which can have a direct impact on their shareholder value. But in public sector the concept of DPO is alien. Public sector accounting is quite different than the accounting conventions in the private sector. The value of cash flow is not understood in the same way. Indeed, there are those in public sector who would say that suppliers should be paid as soon as possible. It’s as a way of supporting the local economy which is the role of government. But this is naive. To pay suppliers early without a reciprocal discount is simply giving tax payers money to private enterprise for free. There’s a better way to leverage the efficiencies that e-invoicing delivers that benefits everyone: suppliers to public sector, taxpayers as well as the wider economy.
Delivering real benefits in public sector with e-invoicing
Talking about delivering efficiencies is very different from delivering them. The efficiencies that electronic invoices deliver are based on time saved and the elimination of manual processes. These saving can easily get absorbed into other activities. It can be difficult to realize or measure the efficiencies delivered particularly in public sector where there are often special sensitivities about headcount reduction. This is where Choice 3 comes in.
Increasingly, businesses that have successfully deployed e-invoicing are realizing where the real prize is. Yes there are efficiency savings. Yes there is costs savings but the real benefit is not that you can get rid of a paper process – it’s that you put yourself in a position to pay much earlier and that position to pay early can be of enormous benefit to both the business and their suppliers.
Post credit crunch, headline interest rates may be zero but for small and medium sized businesses the cost of maintaining an overdraft is far from zero. Funding late payment by customers can cripple a business and this is why many will offer a discount for early payment. A 0.5% discount for payment 20 days early is a much cheaper way of funding working capital requirements than going to the bank. That sort of discount costs the supplier approximately 9% in APR terms – a fraction of the cost of factoring invoices for example.
This is where the opportunity lies for public sector. By using electronic invoices to process invoices more quickly, they can put themselves in a position to pay earlier. If they then offer early payment to suppliers, they can deliver a level of liquidity that the banks have failed to do. They can offer small and medium sized business in their communities low cost working capital finance in the form of early payment – and best of all, by taking a rebate or a discount in exchange they can make direct, tangible, measurable savings.
This kind of win-win is being enjoyed in many private sector supply chains. Large businesses are getting much higher return on their cash while supporting their supply chain partners by offering them cost effective working capital. All of this is done by simple exchanging discounts or rebates for early payment. Replicate those benefits in a public sector supply chain and you not only deliver efficiency, you not only deliver measurable savings – you could provide a powerful stimulus to a stalled economy.
Pete Loughlin can be found on twitter @peteloughlin