16 Dec 2014 Local Government embraces SME friendly e-invoicing
Today, another post from Richard Manson from CloudTrade
The limited use of SMEs by local government has for many years been flagged as a problem. There are 4.8m SMEs in the UK, making up around 50% of the private sector with an annual turnover of £3 trillion. Yet SMEs are often discouraged from public sector deals due to the bureaucracy that comes with working with them and the associated costs which can price SMEs out of this market space.
In a bid to increase the use of SMEs, UK government and the European parliament have introduced initiatives to make it easier for SMEs to do business with the public sector. Yet the success of these has been limited. Initiatives have mainly focused on the use of technology and frameworks to reduce the barriers SMEs face in doing business in the public sector. Although a step in the right direction, the myriad of frameworks and poor adoption rates within government has hindered success.
E-invoicing is a service that plays to the SME agenda. It reduces costs while increasing visibility and controls for the supplier – themes that resonate politically in challenging times. It also provides the supplier with comfort that paper invoices can no longer get lost in the post or around the office, and removes the possibility for data entry errors.
With e-invoicing, data is taken automatically from the electronic file and posted straight to the receivers accounting package ready for approval and payment. This automation enables payments to be made more efficiently, a key for SMEs – a lack of access to credit, and often reduced working capital, means late payments can bring an otherwise healthy business to its knees.
The Federation of Small Businesses reports that 97% of local authorities say they will pay within 30 days. Yet, only 62% do. Archaic accounts payable processes is a key factor in this.
And the benefits of e-invoicing isn’t just for the SMEs, e-invoicing will bring back office efficiencies and improve front line services for government organisations; not to be sniffed at during this ‘age of austerity’ we hear so much about. Plus, the reduction in fraud these systems bring, saving further costs. In fact, the UK e-invoicing Forum has calculated the end-to-end cost savings for the UK public sector, inclusive of procurement, invoicing, fraud reduction and supply chain finance is between £4-£6 billion per year.
So it’s a win-win, isn’t it? E-invoicing will enable SMEs to do business with local government, and will allow local authorities to improve processes and reduce costs.
Yet, the uptake of e-invoicing with SMEs doing business with government organisations has been limited.
One reason commonly cited is that SMEs are unwilling to adopt new technology. Somehow they are adverse to change. This conjures up images of companies drawing up their invoices with a quill and paper, but surely a sector with a turnover of £3 trillion cannot be that unsavvy. I just don’t buy it. In fact, SME’s massive adoption of PDF invoicing is an example of how if the technology is there – free and easy to use – SMEs will readily accept and utilise it to its fullest.
The reason SMEs have not always adopted the local government e-invoice initiatives is that they often require them to provide their invoices in another format, usually XML or EDI, and SMEs do not usually have the in-house skills or technology at hand to do this. So it means financial outlay is required (plus time spent making the changes, and often duplicating invoices if the supplier is being asked to use a 3rd party invoice portal). And the cherry on this rather unappetising cake, is that local authorities have been known to charge businesses to use the e-invoicing system. So it is these things which discourages SMEs – something that was supposed to make it easier for them to do business has just become another barrier.
And yet, we have all these PDF invoices from SMEs. If only there was a way to harness the data directly from these PDFs and pop it straight in to the accounting or ERP system used at the local authority.
Hang on a minute, there is!
With CloudTrade, suppliers can simply email their PDF invoice. No technological change is required. When a PDF is created by a supplier’s billing application, in almost all cases it will be a text PDF and will ‘carry’ the invoice data within it – much like an EDI or XML file carries data. CloudTrade maps the data (no OCR) from the PDF file to a structure that can be uploaded into the relevant system at the local authority. There is no charge imposed upon suppliers to do this, and with no technology changes required or time spent recreating duplicate invoices, all barriers to adoption are removed.
For an e-invoicing solution to be a success you need high onboarding rates – no point in having brilliant technology in place if no one is using it. In some countries, onboarding rates have been achieved by mandating the use of e-invoicing (Denmark, Mexico, Finland, to name but a few). In this carrot/stick scenario, mandating is a huge stick. But we believe a nice juicy carrot can do just as well.
Without mandating and thereby effectively forcing suppliers to use e-invoicing, high ‘voluntary’ onboarding rates can be achieved by:
- Make it free for suppliers to use
- Don’t ask suppliers to make any technology changes
- Don’t make suppliers raise their invoice in their own accounting package and then do it again in a 3rd party portal
Local authorities in the UK are starting to realise the benefit of this approach. At CloudTrade, we have seen a huge increase in government bodies taking on this approach and the success they have with the solution is astonishing (almost 40 local authorities and other public sector organisations in the last 3 years have started using CloudTrade to provide e-invoicing services). With no technological upheaval, process improvements are made overnight and back office costs associated with invoice processing diminish. The savings the technology brings means the system is very quickly self-funding – there is no need to charge suppliers to cover your costs. And trading relations are improved as suppliers can be paid more quickly and with no need to keep chasing on invoices that keep getting lost along the way.
When done in the right way, e-invoicing can indeed be a key to getting SMEs doing business with local authorities. For too long we have heard about how technology changes will improve the situation, but with few results, finally the situation is changing. Watch this space!