Anecdotal information in the market abounds regarding the inefficiencies
associated with conducting financial processes in B-to-B (business-to-business) commerce. Aberdeen recently conducted
a survey of end-user enterprises and financial institutions, the results of which shed light on a number of issues:
how long financial processes really take, how businesses value various technologies for financial process automation,
and what the relative priorities are for investing in e-financial process automation. This InSight presents Aberdeen’s relevant data and analysis, including highlights of end-user survey findings;
the document helps educate end-users in making smarter technology buying decisions and helps technology providers
market their products more effectively.
The slowdown in the economy has brought to light many corporate inefficiencies related to the
movement of goods from suppliers to buyers. Our research indicates that excessive amounts of time are being spent
on conducting financial processes to enable and settle commerce, distracting companies from focusing on their core
business functions and goals.
Although enterprises are aware of the inefficiencies in their financial settlement
processes, the magnitude of such inefficiencies is not as obvious as the problems caused by inventory shortages
or write-downs. The results of Aberdeen’s end-user survey identify baseline metrics for elements of these financial
settlement processes and the difficulties in conducting sales and settlement functions.
Sales-Oriented Financial Processes
Aberdeen research indicates that the average sales cycle — from first touch with the customer
until goods are shipped and invoiced — is 78 days.
However, only 34% of the cycle is dedicated to conducting
negotiations with prospects and evaluating offers. The remaining 66% of the cycle is spent on functions such as
authenticating and performing due diligence on prospects and managing credit lines.
Slow and inefficient handling
of these sales-related financial functions costs organizations significant money, delays closure of sale, and prevents
customers from receiving products early.
Settlement Processes
The average settlement cycle — from receipt of invoice to payment — is 30 days. However, only
17% of the cycle time is spent on approving invoices for payment. The remaining 83% of the time is spent on mundane
functions that enable this key part of the cycle such as keying-in invoice data into accounts payable (AP) systems
and disputing discrepancies.
Such a long settlement cycle, coupled with mail float, prevents businesses from capturing Net-30
prompt-payment discounts. Because such discounts are typically 1% to 3% of the value of goods purchased, missing
them due to long settlement cycles can cost an organization more than it can gain by having the money in the bank.
Meanwhile, disputes bring additional costs, which on average occur with 9% of invoices. The most common dispute
reason is a mismatch on line items between invoices and purchase orders.
The Promise of FVCM
Can anything be done to resolve these and other common obstacles to frictionless trade? Aberdeen
Group is tracking an emerging group of vendors providing Financial Value Chain Management (FVCM) applications that
help streamline and automate various financial processes at different stages of the entire commerce cycle.
FVCM has the potential to deliver significant value to the enterprise; however, there is much
debate regarding which benefits are most important.
What Do Businesses Want from FVCM?
When Aberdeen asked respondents to rank specific improvements possible through FVCM solutions
— such as shortening sales cycles and reducing days sales outstanding (DSO) — we were pleasantly surprised by what
we learned. First and foremost, LOB (line of business) managers are looking for business process improvement.
Working
capital optimization was valued as the second most important benefit, and cost reduction was third. Cost reduction
will naturally occur as a result of more efficient processes, so businesses are wise to seek the cure for the disease,
not its symptoms.
Surprisingly, when asked about existing implementations and future plans for FVCM technologies,
many respondents believed they already had "e-enabled" financial applications for areas such as invoicing
and payment. However, not many products have been sold in the market yet.
Because the vast majority of respondents
did not identify the specific technology products implemented or cited back-office products, the conclusion is
clear: Most companies aren’t searching for new Internet-enabled products. They believe that their existing financial
systems provide the baseline capabilities they need.
Vendors in the FVCM market face a major challenge to demonstrate a clear value proposition that
delivers significant process improvement, cycle time reduction, and cost savings. This market is clearly still
in its formative stages.
The Most Popular Enterprise Solutions
Of the seven applications purchased most, four were general e-Business applications such as Customer
Relationship Management (CRM) and procurement applications. However, the top three spots were claimed by technologies
for accounts payable streamlining and payment, invoicing, and reconciliation.
Exchanges: Either Already or Never
In 2001, many general and finance-focused exchanges went six feet under, and others are likely
to follow. Hence, it comes as no surprise that few enterprises surveyed were currently engaged with financial exchanges,
and that the majority of respondents indicated that they either had no plans for or were not sure about future
participation in financial exchanges.
Despite the overall negative outlook, Aberdeen’s research shows that a number of marketplaces
and exchanges — both financial and nonfinancial — are making progress in growing transaction volume and ROI (return
on investment) for participants. However, their primary value is not simply about creating directories of participants
and products with a buy-button; their value lies in business process support.
Aberdeen research suggests that financial exchanges will survive only through a focus on integration
with enterprise applications and delivering on the key positioning tenets of improved business process, reduced
cycle times, and related cost savings.
Additionally, as enterprise software providers are starting to deliver Web
services infrastructure as part of their product offerings, many financial exchanges will need to rearchitect themselves
over the next few years to act as Web service plugs-ins for enterprise systems. Relationships with the leading
enterprise ERP (Enterprise Resource Planning), SCM (Supply Chain Management), and CRM software vendors will become
increasingly important as a distribution strategy.
Aberdeen Conclusions
The baseline data describing existing financial processes demonstrates significant opportunity
to automate and streamline financial stages of B-to-B relationships using emerging FVCM technologies.
Despite the numerous benefits Aberdeen sees for FVCM applications, 2002 will nevertheless be
a challenging year for the majority of FVCM providers. They will have to fight against the status quo. Success
will be achieved by those who can effectively demonstrate the real-world, near-term business process improvements
their solutions can bring, thus altering prospects’ perceptions and IT (Information Technology) budgets.
Andrei V. Arkhipov is Senior Research Associate in the e-Business & Enterprise Applications Group at Aberdeen Group in Boston. Aberdeen Group is a leading IT market analysis and
positioning services firm that helps Information Technology vendors
establish leadership in emerging markets. For more information, go to www.Aberdeen.com.