04 Jan 2013 e-invoicing and interoperability – a Purchasing Insight point of view

Jason Busch at Spend Matters recently used an expression “drinking the Kool-Aid” when referring to the unquestioning beliefs of software vendors’ marketing people. I didn’t even know what Kool-Aid was but I knew what he meant. It’s what I call believing your own bullshit and we see so much of this whenever the topic of e-invoicing and interoperability crops up. Despite the fiercely opposed arguments, there is something very consistent about the views expressed on interoperability. They are all very biased.

I’m not 100% objective myself – I have my own personal likes and dislikes based on over 15 years’ experience in this market and I don’t pretend to be the most informed but nevertheless, I will attempt to filter out the crap that reverberates around this debate and share my point of view on e-invoicing and interoperability.

This piece was inspired by the European Commission consultation on public procurement and much of the discussion has a distinct European flavor. That is not to say however that it does not translate globally. It is the third in a short series which started with the case for and the case against interoperability.

Interoperability and the mobile phone network analogy – what can it tell us?

This analogy is often used to explain what interoperability is all about. Some claim it’s not appropriate because it doesn’t capture the true nature of the e-invoicing market but I would say it is a very good analogy for a whole variety of reasons that often get missed.

Most of the time, people use the phone network model to explain the “common sense” of interoperability. How absurd it would be if I couldn’t call someone on the Orange network from my AT&T phone. Quite, but this is a naïve view that assumes that the customer is king. If I have a huge telephone network and you have a small network, why on earth would I interoperate with you? I’ve invested million in building my network and I will only interoperate with a peer of similar size. It is commercial common sense. Charles Bryant, a consultant to OB10 and vice chair of EESPA uses another useful analogy, the ATM network. The only way you can have an effective, interoperable ATM network is to establish a set of commercial relationships that compensate the banks according to how much they bring to the table in terms of infrastructure and how much they are going to take off the table.

e-invoicing networks are closely analogous to telephone networks and ATM networks in this respect. The service providers are of different sizes and all bring different things to the table. But there is a fundamental difference. Banks and Telcos bring infrastructure to the table – physical hardware built into expensive real estate – cables and copper under the road. The “infrastructure” of the e-invoicing ecosystem is the internet – it’s free! The infrastructure investment as an obstacle to interoperation simply doesn’t apply to the e-invoicing interoperability debate.

This is not a flippant point. Yes of course, the large networks have built value in terms of IP, customers and some infrastructure but we’re not in the EDI days of private networks anymore and while there are some real commercial challenges to be overcome, which I come on to later, the “infrastructure” argument and the use of comparisons with markets where there is considerable infrastructure investment is wearing a little thin.

Compliance

Compliance and interoperability within a single country is no issue.  Within a single country there is a single set of rules to be applied but trade internationally and the situation changes. This is a real and genuine obstacle to interoperability. However, as the rules in the EU become simplified in order that e-invoices are treated no differently from paper, compliance becomes easier and this issue is increasingly becoming a historic problem.

Interoperability – Yes or No?

Should e-invoicing interoperability be encouraged or mandated? Yes. The arguments against either don’t stack up effectively or are becoming less important. But the very real commercial obstacles that exist today still need to be overcome.

Just as the very large telephone network is not commercially incentivized to freely interoperate with the small telephone network, so the large networks are put at a commercial disadvantage if they are required to freely interoperate with smaller networks and they are entitled to protect their commercial interests.

But what is pragmatic protection of commercial interests to one person is anti-competitive behavior to another and there needs to be some independent arbitration in order to ensure that the commercial arrangements within an interoperating market balance the interests of service providers, their customers and the wider economy. That means regulation.

Regulation is sometimes seen as a dirty word and it does come at a cost but if businesses and economies are to enjoy the benefit of the lower cost base of a truly networked economy, the European Union needs to grab the bull by the horns and make change happen.

What’s wrong with e-invoicing?

There’s lots wrong with the e-invoicing landscape. The “double bubble” charging mechanism that extracted revenue from buyers as well as suppliers has given the e-invoicing a bad name and the lack of interoperability makes no sense to suppliers. Whether it is as a result of these factors or others, the fact that the market penetration is, after more than a decade only 15% says something needs fixing.

Should government intervene? A government that thinks it OK to stand back and allow the market to dictate the growth of the digital economy is a government that has abdicated responsibility. The wide adoption of e-invoicing will create an efficient, lower cost agile economy that will be in better shape to pull itself out of recession. The EU should remove the obstacles to wider adoption by mandating the use of electronic invoicing for public procurement and take a lead in removing obstacle to adoption by creating a regulated, interoperable e-invoice environment.

Pete Loughlin can be found on twitter @peteloughlin