1. June 27, 2011
Ariba Knowledge Nugget
The Problem With Paper - Invoice Automation
Matching a purchase order (PO) to an invoice is a longstanding accounts payable (AP) best practice
for processing invoices and ensuring compliance. Yet most organizations also have some portion of
spend that does not involve POs, making effective processing of non-PO invoices crucial as well.
By automating invoice processing, organizations can effectively implement a wide array of best-
practice strategies that transform the efficiency of AP operations—enabling them to compress PO
and non-PO invoice processing from months or weeks to days or hours, eliminate exceptions that
require manual resolution, remove virtually all non-PO manual touch points, and expand the capture
of early payment discounts to every invoice.
Companies that continue to rely on paper-based methods
face extensive challenges that make it difficult or impossible
to process invoices effectively. As a result, they can't achieve
substantial time and cost savings that can improve their
bottom line.
Regardless of invoice type, a major challenge facing many
AP departments is coping with the rising volume of paper
invoices. Companies that responded to PayStream Advisors’
2010 Invoice Automation Benchmarking survey indicated that
they receive more than three-quarters (77 percent) of their
invoices via paper. Respondents also stated that the high
volume of paper invoices was their single greatest source of
pain in invoice management.
It’s no surprise, then, that implementing e-invoicing was the
top automation goal, cited by 40 percent of survey
participants. This is a big change from several years ago, when companies were still focused on
improving paper processes rather than eliminating paper at its source—their suppliers. Other
research documents the cost savings from getting rid of paper and automating invoice processing.
According to a 2010 Hackett Group AP Performance study, a high correlation exists between e-
invoice processing, low cost per invoice, and high on-time payment percentages. Organizations with
the highest percentage of e-invoice line items (80 percent) were reported to have a $2.14 cost per
invoice and 92 percent on-time payment percentage. Bottom quartile companies, with only two
percent of e-invoice line items, were shown to have a $5.22 cost per invoice and 85 percent on-time
payment performance.

2. June 27, 2011
Best Practice Tip
Route receipt-matching
problems to the PO owner or
requester as a watcher to help
clear the exception. Route non-
PO invoices for approval tot he
requester identified by the
supplier on the invoice.
Best Practice Tip
Though business user approval is
not typically required for PO
invoices (since purchase approval
was already obtained through the
requisitioning process), consider
adding a final approval step for
high value PO and non-PO
invoices over certain thresholds.
Source: Hackett AP Performance Study, 2010
Figure 1. Impact of e-invoice processing on processing cost, on-time payment performance
As this data shows, eliminating paper invoices gives top performers a distinct advantage over
companies still heavily dependent on paper. For example, a global equipment manufacturer
dramatically reduced its operating costs on a global basis by transitioning to e-invoicing. Today, the
company processes 90 percent of its global invoices electronically and has achieved an almost 100
percent touchless process. The company is so efficient that it has been able to reallocate 75 percent
of its global AP staff.
Automating invoice processing can also reduce risk and enhance cash flow management. For
example, one major media company used to have as much as $24 million in invoices on a person’s
desk, but wouldn’t know of the liability until the invoices were processed. Moving to e-invoicing
provided real-time visibility into these liabilities to greatly increase reliability in cash flow forecasting.
The Challenge of Managing Non-PO Invoices
While automating the processing of invoices delivers many benefits, challenges may arise when it
comes to non-PO invoices. Non-PO invoices result when a supplier has provided goods or services
to a buyer without receiving a purchase order. Because they lack an associated PO, these invoices
require far more work to process once they arrive at the buying organization, creating a host of
problems along the way.
• Difficulty identifying the purchaser.
Deciding how to route non-PO invoices can be extremely challenging, especially since these invoices frequently
fail to include information vital to routing. For example, non-PO invoices must typically undergo a review and
approval process after receipt by the person who ordered or approved the purchase of the item or service. If the
invoice does not include some reference to the customer, business unit, or department that placed the order—or
if it includes the wrong name—then someone in AP must follow up and identify who needs to approve the
invoice. This not only delays proper accrual of the liability, but also means the invoice could sit for weeks with no
action taken—resulting in invoice status calls from the supplier or submission of a duplicate invoice and the
chance of duplicate payment.

3. • Lengthy approval processes and slow cycle times.
Once the purchaser has been identified, he or she must then verify, code, and approve the invoice, and hierar-
chy approval rules must be applied to ensure compliance to financial controls. The need to have multiple people
approve non-PO invoices can significantly lengthen the processing cycle. Non-PO invoices can also appear on
blocked and hold reports because they exceed budgets or don’t match to an existing vendor, resulting in further
exception-handling activity. Only after all these difficulties have been resolved can the invoice be entered into
the ERP or financial system for payment, but even here a new vendor setup could be required. This delays pay-
ment to suppliers and negatively impacts their cash flow while eliminating opportunities for the buying organiza-
tion to capture early payment discounts.
• Loss of valuable data.
When an invoice has been fully approved, AP most often performs header-level data entry with account coding,
which means the details of the purchase are stripped away and lost forever. This prevents the purchasing group
from analyzing non-PO spending patterns in greater depth to drive more spend under management.
The Advantages of PO-Based Invoicing
For PO-based invoices, approval to purchase the goods or services occurs before the purchase. This invoic-
ing approach offer advantages over non-PO invoicing.
• Faster, better matching to ensure invoice accuracy.
Once the invoice is submitted, a three-way match can be made between the invoice, a purchase order, and a
receipt for the goods or services (or similar document). This allows the buyer to ensure that the order was deliv-
ered and invoiced correctly. If a signed contract exists, the PO can pull the contracted rate off an item master or
match the order to the contract. If the match is successful, the buyer processes the invoice and makes payment.
If the match is unsuccessful, the invoice goes through an exception resolution process, which usually involves
the buyer’s purchasing department as well as the supplier.
• Improved spend visibility.
PO-based invoicing provides visibility into spending “as it happens.” Contrast this to non-PO invoicing, where
companies may receive an invoice 15 days after an employee has made a purchase, and it may take another 20
days to get the invoice into the AP system. In this environment, there is about a 35-day window when a company
may not know its liabilities for purchases (what’s “out there”) and whether these purchases exceed the budget.
• Fewer errors due to pre-coding.
Because PO-based invoices are pre-coded, they can be processed faster and more accurately than non-PO in-
voices. Often, without good end user tools, a generic account code is applied to non-PO invoices, which compli-
cates the data entry process and forces AP staff to manually add the correct account code later on—creating
another potential source of invoice errors that require exception handling.
Because of the operational shortcomings of non-PO invoices and lack of spend control over non-PO pur-
chases, many companies are seeking ways to increase their volume of PO-based invoices. For example, a
large media company in the northeastern United States recently mandated that a PO must be issued for all
purchases valued at more than $3,000. The company will no longer approve non-PO purchases “after the
fact,” because doing so creates the false impression that this spend is under control. This is another key to
the rising popularity of PO-based invoicing. By moving approval for purchases to the beginning of the proc-
ess, PO-based invoicing gives companies greater control over the goods and services their employees are

4. The Ongoing Need for Non-PO Invoices
While non-PO invoices add complexity to the invoice approval process, few organizations will abandon them
altogether. In some cases, non-PO invoices are more practical, such as when field employees have good
working relationships with vendors and need goods or services “on demand.” Moreover, companies must
sometimes procure services whose price or quantity cannot be estimated up front; the requester just knows
“something needs to be done.” With maintenance expenses, for example, they may not know how much labor
is involved or what parts will be required in a repair. Small dollar purchases offer another example, where the
expense of approving and issuing a purchase order can’t be justified. This is especially true if such purchases
are a one-time or occasional rather than recurring expense. In addition, companies with a decentralized or
weak purchasing structure, or remote offices that place orders with local suppliers, tend to have a larger
proportion of non-PO invoices. Because these invoices by definition lack pre-spend approval, the need to
continue accepting them complicates the effort to manage spend and track outstanding liabilities.
Using Automation to Effectively Manage Non-PO Invoices
So how can an organization effectively process its non-PO invoices? One good rule is never to enter a non-
PO invoice directly into your ERP system without first performing some kind of validation or having the invoice
go through an approval workflow. Today, electronic workflow is part of many e-invoicing solutions, making it
easy for end users to code and approve invoices in tools like email or with a mobile device.
When non-PO invoices represent a
large volume of spend, automation
provides an opportunity to capture the
spend for analysis, streamline
accruals, and eliminate manual touch
points. The right automated solution
can break down the non-PO invoice
processing problems, apply
technology and enforcement
procedures to improve controls and
visibility, and increase straight-through
processing rates.
Another good practice is to require
vendors to enter the requester's email address on all non-PO invoices. An automated workflow solution can
detect the email and route the invoice directly to the business unit that ordered the product or service. Non-
PO invoices without an email address can be rejected and returned to the supplier. This approach helps
suppliers to quickly resolve the problem, avoiding further payment delays. The best automated solutions also
make it possible to preserve line-level details on non-PO invoices, including commodity codes, so
procurement has visibility into vendors and spend details. In fact, some companies have justified e-invoicing
projects based on the ability to capture line-level data alone. By making procurement aware that a purchase
may be a good candidate for PO spend or that one-time vendors may be creating leakage in negotiated
pricing for a given commodity, organizations gain a strategic benefit.
Next Week Part 2— Paper vs. eInvoicing