Electronic invoicing, OCR, P-cards offer triple threat to red ink

Paper, and in particular the acceptance of paper invoices, is often the cause of high AP costs. As stated in the 2010 PayStream Advisors e-invoicing "Adoption Benchmarking Report," paper was identified as "…the enemy of efficiency in the accounts payable department." Therefore, accepting paper invoices is not the best way to initiate the approval and payment process.

When determining how to best reduce the acceptance of paper invoices, there are three primary options hospital groups should consider when looking to move away from paper. Electronic data interchange (EDI) is the electronic exchange of business data between two entities in an agreed upon standard format. Optical character recognition (OCR) is a software-based solution that extracts data from scanned paper documents. E-invoicing, which has been gaining momentum recently, involves bringing together large communities of buyers and suppliers via a shared platform or network to exchange invoices and other commercial documents.

Although each option has its merits, the ideal solution or configuration of solutions varies depending on the hospital group and the nature of their expenses. For instance, EDI is a terrific and time-tested solution for addressing the flow of invoices from high volume, strategic suppliers. The pitfalls of EDI are the costs for both a hospital group and its suppliers and the limited number of suppliers for which it can be cost-effectively applied. The costs and lack of scalability prohibit it from being widely accepted as an ideal solution.

OCR is an alternative that does not require supplier participation, but like EDI, does require costly investments in hardware and software. While OCR can deliver incremental savings to a hospital group and can be implemented to capture other types of documents, it is very unsuitable for invoice documents and its multiple line items. In addition, it does not eliminate the receipt of paper into a hospital group’s mailroom and the extent to which it truly eliminates manual data entry is unclear.

While OCR vendors tout very high recognition rates, i.e., the number of characters that can be captured, the far more meaningful metric is the first pass rate, or the number of complete invoices that can be processed without requiring human intervention. First pass rates usually fall within the fifty percent range, requiring significant manual intervention and limiting OCR’s value in eliminating costs.

E-invoicing is gaining momentum and is certainly worthy of consideration. Like EDI, it eliminates paper altogether, however, it scales to hundreds, if not thousands, of a hospital group’s suppliers. The true potential of e-invoicing is the power of the network. A small supplier on the West Coast can send invoices electronically to a customer on the East Coast without ever having to agree with the client on a mind-numbing array of technical protocols and formats to establish a proper electronic "handshake." No paper is involved and the manual intervention associated with exception handling in the OCR process is eliminated through multiple levels of validation which can be imposed by the network providers to ensure invoices are accurate.

Once automation is introduced on the front end, additional automation provides value on the tail end as well. One of the ways payment automation can be achieved is through procurement cards.

Procurement cards, or P-cards as they are more commonly referred to, have been around for more than 15 years. The introduction of P-cards has allowed companies to purchase relatively small ticket items in a way that allows for visibility in their accounting system without having to deal with the sometimes costly and time-consuming step of creating a purchase order.

The primary benefit of using P-cards in conjunction with an e-invoicing solution is to help drive cost reductions and gain efficiencies. In terms of cost reductions, a P-card allows a hospital group to purchase an item from a vendor and take possession immediately, knowing that the vendor will be paid relatively soon by the merchant through what is called "buyer-initiated payment" or BIP. The hospital group then has a certain number of days (or float) to reconcile, approve and pay the merchant for the P-card purchase. All this can be done at a very low cost, somewhere around $15 per transaction. By contrast, issuing a purchase order for the same transaction could cost well over $100 per transaction. Not a good return on investment when purchasing small ticket items.

Rather than being mutually exclusive, e-invoicing supplier networks and BIP are complementary. E-invoicing networks dramatically reduce cycle times to receive and approve invoices, thereby allowing companies to increase the amount that can be paid on the P-card. Because e-invoices are received immediately and the fully electronic process can cut 10 days or more out of the typical invoice cycle, it puts much more control in the hands of the buyer to pay when and however they want. Furthermore, an e-invoicing solution and P-card program allows hospital groups to take advantage of early pay discounts – a major source of incremental revenue for a growing number of AP departments.

If the P-card is used as a payment vehicle on the back end, with e-invoicing used on the front end, the card’s convenience and prompt payment benefits remain, but the limiting factors are negated. E-invoicing delivers the line item detail that most organizations want and need, and also gives them the chance to move the invoice through the approval process before finalizing payment. Moreover, the required integration between the two solutions is a non-issue because one naturally feeds information into the ERP and the other naturally receives data out of the ERP.

An example of an effective P-card program used in conjunction with an effective e-invoicing solution is Memorial Hermann Healthcare System, one of the premier hospital groups in the country and the largest hospital system in Texas with 14 facilities and more than 20,000 employees.

Memorial Hermann started the transition from paper to electronic invoices almost two years ago. As it began receiving more invoices electronically, Memorial Hermann was able to drive more of its spend into the American Express BIP process. Suppliers are more likely to accept credit card payments if the invoices are approved faster. Also, Memorial Hermann can more effectively aggregate its spending to meet the prescribed payment cycles of American Express. Memorial Hermann currently processes over half its available spend through the BIP process.

Memorial Hermann has seen a significant increase in electronic information weaving through its AP department, resulting in greater efficiency and better cash management. During the transition, Memorial Hermann’s supply chain group was able to clean up the hospital group’s Item Master, ensuring its hundreds of supplier contracts were current and up to date.

While many hospital groups focus on electronic health records and other ways to gain efficiency throughout their operation, introducing automation to accounts payable provides an opportunity to quickly achievable cost savings and a meaningful return on investment.