Friday 23 November, 2012

Evolution is a slow process. It’s what happens when something starts off one  way and ends up another – usually with only limited resemblance to how it started. Evolution is something that happens when you’re not looking – a bit like when a child comes down the stairs “kevin” style and you wonder – “when did that happen?”

Something similar is happening in accounts payable. Last week at the IAPP UK conference in Reading, the talk was of process, efficiency and cost savings, but look a little closer and there was a deeper theme running through.

There’s been so much talk of change in accounts payable over the years that sometimes it can sound a bit flat. If you’re an AP Manager working in the same AP department at the same desk you sat in three years ago. That “change” is likely to seem illusive So the disconnect between the rhetoric and the surface reality can be distracting from a very real shift in the industry and sentiment.

One of the reasons why change is so relevant in accounts payable is directly in relation to how the department can impact on the bottom line of their organisations – compounded by the enabling powers of technology within the vendor solutions. In fact, sometimes it can seem like it’s a case of “what came first, the problem or the solution”. That’s not to say that the issues don’t exist, but often the practitioners are playing catch up to what the technology providers are able to do – and what they can achieve.

Take supply chain finance for example. Not a new concept obviously – but what is relatively new are the solutions available to facilitate it, and the ability of accounts payable departments to take a dominant role. At the beginning of the year APN took a survey of around 125 finance professionals and asked if they were using dynamic discounting solutions – the answer – a resounding 1%. Does this mean it’s a solution unwanted, useless and with no place in accounts payble? No, it just means that people don’t know enough about it and don’t fully understand its relevance to their jobs and organisations.

So what is it? Dynamic discounting is early settlement discounting’s more attractive, edgy cousin - yes you still get savings – just turbo charged ones. Where dynamic discounting differs is in its application. If you take a solution such as the one offered by SAP Solution Partner, Taulia for example, it offers organisations the opportunity to capture discounts from their suppliers on a sliding scale, meaning that even when payment terms slip past the traditional timeframe, discounts (albeit at a lesser rate) can still be taken - helping organisations regain integrity with suppliers and giving them a better visibility and control of their working capital.

While paying suppliers early to improve your own cashflow seems counter-intuitive – and may cause some internal controversy – the figures certainly add up. Let’s assume that by offering to pay invoices in 10 days instead of 30, a company negotiates an average discount across its suppliers of 2%. That’s six times the interest earned by delaying payments. Furthermore, the return on capital would be 2% in 20 days, or over 36% annually. Even if the negotiated early-settlement discount was half of the above – just 1% — that’s an 18% annual return on capital, which is far higher than alternatives, such as delayed payment.

Still not convinced? With the increase in shared services and centralisation (and the improved metrics which can be harvested as a result) however - it’s likely that someone in your organisation soon will be. Even in those organisations which still operate in a more traditional way – the uptake will be helped in part by changes in that other growth industry – collaboration. Two, five, ten years ago it wasn’t that common to come across Heads of P2P – more likely to see Heads of AP, Heads of AR, Procurement, Treasury, Finance etc – all working in their separate trenches. These days it’s far more common to see organisations gathering metrics used in one area to find solutions for use in another – intentionally or otherwise, drawing the departments together.

Like Evolution, change in accounts payable is already here - it’s just that some of us haven’t noticed it yet.