Occidental Petroleum Corporation
Author: Tim Cummins
There is compelling data from a number of sources indicating the scale of invoicing error in business. In some cases, organizations are over-paying their suppliers by 5-7% - an amount that, if corrected, would transform their financial performance.
There's also another aspect of error and that is the cost associated with the extent and frequency of invoice rejection. As organizations introduce new systems, such as robotic process automation (RPA), they are starting to track the number of invoices that are wrong, not just in terms of the amount billed, but because of factors such as incomplete and missing information, incorrect coding or simply the wrong address. This too represents a cost which, for a large organization, can run into millions of dollars.
We have a problem
But there is a problem with much of the data on this topic and that's because too much is written from a procurement perspective, implying the fault always lies with the supplier and that increased accuracy would therefore somehow translate to yet more 'procurement savings'.
Why is that a problem? Well, for several reasons. Let's start by looking at two factors that challenge the issue of overpayment.
First, except in the public sector, buyers are also providers of goods and services. So unless they are absolutely lily white in their own sales invoicing, an increase in accuracy will often mean those 'savings' are likely to be matched by a corresponding reduction in the revenue they receive. This obviously isn't a bad thing, but it's important to recognize that there are two sides to this equation.
And second, there tends to be an assumption that invoicing error is always one way, always benefitting the supplier. Certainly there are examples of padding, even of gross and deliberate over-billing, and I have little doubt this sometimes occurs, especially in fields such as professional services where accurate tracking has traditionally been hard to achieve. Yet I know of many instances where suppliers undercharge. In fact, especially in more complex projects or services, IACCM data suggests a similar level of 5 – 7%, often because business units have no incentive to charge for 'extras' or to challenge additions to scope. They tend instead to put such items down to 'good will'. So this too points to the fact that greater rigor in invoice accuracy will lead to a probable reduction, if not elimination, in the amount of any savings.
2. The cost or errors
Moving on to the question of broader errors and invoice rejection, this again is often positioned as though the supplier is the culprit. Yet in reality, suppliers are of course victims. They have no interest in spending time reworking invoices or suffering from payment delays. Much of the evidence points back towards a high degree of customer incompetence or actions that deliberately generate 'errors', presumably to extend payment periods. For example, slow and bureaucratic contract and purchase order processes frequently mean suppliers are pressured to start work early, with assurances from the customer 'just send an invoice and you'll get paid'. When it comes to deliberate action (or inaction), invoicing procedures are often vague or ill-defined, including things like address data or submission methods missing. It isn't uncommon for the 'error' to actually be internal, with accounts payable rejecting payment because of mistakes within the purchasing business unit.
So what's the real problem …. and outcome?
Overall, it's fair to say that invoicing remains an untidy and costly activity. Streamlining, especially through shared billing systems perhaps powered by smart contracts, ought to save a lot of time and generate substantial reductions in operating costs. For many businesses, it will also have a net positive impact on cash flow. But if I had to guess the eventual balance when it comes to reduced spend versus increased revenue, I'd have to say the likelihood is that it will prove close to neutral.