1. Bank of America Payables Optimization Series
Empowering a procure-to-pay process change leader: how to uncover the hidden costs,
and align and engage resources to achieve payables optimization in your organization
Series Overview
Is your company being squeezed between dwindling revenues and increasing expenses? In today’s
tough economy, it has never been so important for leaders to seek efficiencies and cost savings
in their organizations and to make better use of existing resources. A key focus is to examine
the unique and often-complex procure-to-pay process. Procure-to-pay processes warrant regular
analysis to identify sources of inefficiency and potential cost savings—and opportunities to
challenge traditional thinking.
Goal: Payables Optimization Part 2: Optimizing Payables
by Payment Method
Forward-looking companies are constantly analyzing
their payments practices and leveraging new ways to The volume of B2B payments has grown, and with it
drive down costs and improve processes. Solutions must the opportunity for corporations to achieve efficiency-
be strategic and broad-based, sufficiently championed driven cost savings from the procure-to-pay process.
and measured, and fit within an established business Enterprises in search of optimizing Accounts Payable
model and culture to be effected and sustained—and efficiency should consider integrating electronic
ultimately to impact the bottom line. processes (and as appropriate, evaluate payment types)
including ACH, commercial card and wire transfers into
Key components of a successful payables optimization
their payment toolbox. In addition, consider investing
effort include:
in spend analyses to segment vendors and suppliers in
ƒ Seeking and employing the right mix of payment order to determine optimal payment methods.
methods and processes that ultimately lead to
business process improvements Realizing Hard-Dollars from Payment Optimization
Automating the accounts payable function and making
ƒ Automating manual processes
the switch from manual to electronic processes across
ƒ Reducing processing times the procure-to-pay supply chain could result in true
hard-dollar savings, depending on an organization’s
ƒ Making more timely payments
optimization efforts:
ƒ Streamlining reporting
ƒ Payments optimization exclusively.
ƒ Automating the reconciliation process Aberdeen Group, a leading provider of research and
market intelligence, estimates cost savings from a
ƒ Performing spend analysis
fully automated payment process alone is $10.87 per
ƒ Enhancing compliance. payment. At this rate, a company making 100,000
ƒ Coordinating goals and work flows, income sheet payments annually could realize a $1.1 million savings
(expense reduction) and balance sheet (working by simply automating the targeted payments.
capital maximization) ƒ Optimization of PO submission and invoice processing.
ƒ Viewing payables optimization across the organization, Using comprehensive criteria set forth by the RPMG
and engaging resources enterprise-wide Research 2007 Purchasing Card Benchmark Survey,
enterprise wide savings could total $6.7 million in
combined savings across the entire procure-to-pay cycle
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2. by transitioning 100,000 transactions to purchasing card. Primary B2B Payment Method Used to Pay Other Suppliers
In addition to savings, there are other considerations (Percentage distribution)
revenues under revenues over
such as rebates (where applicable), lost or gained float, All respondants $1 Billion $1 Billion
data integration and supplier impacts. Practitioners checks 80% 87% 74%
view this as “fully loaded” savings which encompasses Ach credits 13 8 19
“process” savings as well as payment-only conversion. Wire transfers 4 3 5
Purchasing cards 1 1 2
Achieving the Right Mix of Payments Ach debits 2 2 1
All payment methods do have a place in today’s
source: 2007 Association for financial Professionals (AfP) survey
corporations. It is a matter of employing them
effectively and in accordance with a firm’s unique The Hidden Cost of Checks
business model and needs. Achieving the right The United States has reached the tipping point for check
balance can be accomplished by understanding use. However, checks remain the predominant method
a company’s payment patterns: of business payments – between 65% and 74% of all
ƒ cost components (internal and external) corporate payments are made by check.
ƒ risk versus reward tolerance The cost of paying by check can be twice as expensive
(relative to the value of the transactions) as paying by ACH, or three times greater than with a
purchasing card. In highly automated environments,
ƒ transaction complexity
the labor, equipment, material and fees associated with
ƒ data integration for decisioning check production costs alone total $10.84, and could be
as high as $11.33 in a minimally automated environment.
ƒ supplier frequency and card acceptance
The RPMG study places the all-in cost of the overall
ƒ accounting and control requirements
transaction process at just shy of $90.00. The “all-in”
ƒ convenience factors process includes requisition, approval, purchase order,
receiving, invoice, invoice approval and payment. In many
Best in class companies streamline their AP process
instances the cost of the process may exceed the value of
by prioritizing suppliers based upon the volume of
what is being purchased. Much of the savings is in “soft
transactions and spend, current process, supplier
dollar” costs. Notably, 68% of respondents in the RPMG
relationships, supplier capabilities, etc. These companies
Survey report “real reductions in manpower required to
then set out to transition those suppliers to the most
conduct the Purchasing and Accounts Payable activities.”
appropriate and cost effective electronic payment method.
A full 43% of 2007 Association for Financial Professionals
The charts below illustrate that a higher percentage of
(AFP) survey respondents expect their organization to
“major” (more strategic) large suppliers are targeted for
convert the majority of B2B payments to major suppliers
electronic payment, while a larger percentage of “other”
from checks to electronic payments in the next three
(smaller and less strategic) suppliers are paid via check.
years. However, most suppliers are not “major,” so for
Payment Method Used to Pay Major Suppliers these suppliers, card and check payments may be the
(mean distribution) payment method.
revenues under revenues over
All respondants $1 Billion $1 Billion transaction size total $ spent total # of transactions
checks 65% 71% 60% < $1,000 $15 million 30,000
Ach credits 18 13 22 $1,001 – 2,500 $25 million 2,000
Wire transfers 11 10 11 $2,501 – 5,000 $50 million 1,500
Purchasing cards 4 3 5 $5,001 – 10,000 $75 million 1,000
Ach debits 2 2 2 $10,000 + $100 million 500
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3. Justifying Check Usage Ease of use challenges may be a barrier to adoption
Checks still have a place in today’s payment environment. for some companies. Barriers to overcome with ACH
Checks may be the most effective alternative for low processes are vendor adoption, efficient delivery and
volume suppliers who do not accept card payment receipts, processing of remittance data, and banking
and for other suppliers who are unable or unwilling account data management. ACH must be set up on both
to participate in electronic payments. In some cases the paying and receiving sides of the transaction, such
the cost of producing checks can be reduced by outsourcing that the sender needs to know account and routing
check production to banks. numbers and the receiver needs to understand exactly
what is being paid, how much and to whom.
ACH payments do not incur a cost to the receiver (supplier)
A Spectrum of Payment Options
typical of card payments. Great progress is being made
There are many payments options available today. in migrating AP payments and remittance delivery from
You may want to consider the following as you seek checks to ACH, and this represents the majority of the
to understand the best “mix” for your unique model. conversion opportunity in terms of transactions and
dollars for most payers. For low risk transactions and
Wires Transfers relatively simple transactions, Purchasing Cards may
Wires may be the fastest means of moving large value represent the most cost effective alternative.
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transactions between accounts needing expedited or
Specialized reconciliation / conversion networks that help
immediate settlement. Wire transfers account for 14%
ensure the ACH payments are delivered in or converted
of business-to-business payments and are the preferred
to an acceptable format are available. These bank-managed
method of payments to international suppliers. Barriers
payment networks facilitate single file/single payer
to wire adoption are a lack of straight through processing
solutions and can help eliminate the need for users
and standardized remittance information for ease of
(and their IT departments) to coordinate with each
payment application. With the possible exception of
supplier. Instead, after a single setup, all subsequent
international payments, wire transfers are generally best
conversions / translations to accommodate supplier
for low volume or “one off ” needs where card payment
format needs are handled by the network. As an added
is not practical and ACH is not an option. All-in wire
benefit, the bank will reach out to enroll suppliers on
processing costs average $10.08. Survey data shows that
behalf of the user to convert more transactions sooner.
respondents who perceive wires to be “inconvenient”
send, on average, more checks. This suggests that
Purchasing Cards
making the wire transfer product more convenient would
With a mere eight percent of all B2B payments being
encourage companies to shift more readily from check
made via corporate or purchase cards, tremendous
to wire payments.
savings opportunities remain. While not all transactions
source: “the E-Payables Benchmark series, Electronic Payments and fraud Prevention.” Aberdeen Group,
June 2008. may be “cardable”, high performing organizations
conduct a robust review of their spend by transaction
ACH Payments volume, average dollar amounts, and number of invoices.
Automated Clearing House (ACH) payments comprise 13% Card payment benefits can include lower over all process
of all business-to-business payments. ACH payments are effort and cost, rewards or bank/issuer incentives,
most often used for repetitive payment services, such as discounts through improved reporting and information
direct debit for bill payment or credit for payroll. Although for supplier negotiation, fraud protection, and extension
more costly to the payor than card payment, ACH of working capital for 20 to 50 days. Corporate card use
payments offer a great alternative to check payments. represents the lowest cost payment type for business-to-
ACH payments are a lower overall cost alternative at business transactions.
$5.29 each for best in class companies and up to $7.21
per item for the less automated payors.
sources: (Business-to-Business Wire transfer Payments: customer Preferences and opportunities for financial institutions)
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