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Hold the paper! Strategies for automating vendor payments.

As a distinctly American musical form, jazz epitomizes the expression of infinite variations from a unified theme. The ability to extrapolate from a common theme is equally relevant to American government, where, despite shared challenges, no two government entities are alike, and no one solution fits all nuanced circumstances. Within the overarching theme of e-government--or transformation to a paperless environment-vendor payments have remained a challenge for government at all levels. This article presents strategies and best practices for automating vendor payments for increased benefit.

SHARED CHALLENGES

Despite the intention to increase electronic payments, both public and private sectors still pay suppliers primarily by check. The obstacles to automating vendor payments--gaining vendor acceptance, managing and safeguarding vendor data, dealing with limited allowance for remittance information, to name a few--are well known.

Ironically, as your government migrates from paper to electronic payments, you risk further fragmenting operational processes and offsetting potential benefits, because additional solutions require you to support multiple payment infrastructures. Your government may have implemented direct deposit and purchasing cards (p-cards). Each requires a different platform with the requisite security, controls, and fraud deterrents. But no one program achieves the critical mass to fully eliminate paper.

The challenge of migrating from paper to electronic is not unique to government. But resource constraints and issues of accountability and public perception compound the issues. Despite the benefits of going electronic, elected officials, constituents, and staff may not support e-government initiatives. As a result, some government entities may take a short-term cost focus, but full automation is a long-term path.

WORKING WITH YOUR BANK

How can governments increase electronic payments without additional cost or resource allocation? Given resource constraints, it is critical to find a strong financial-services provider that will work with you collaboratively rather than as simply another vendor processing transactions. The right banking services provider should help enable your e-government strategy for vendor payments by bringing the following attributes to the relationship:

* Understand how your organization works and how the challenges apply to your unique context

* Help you assess the full range of alternatives and their implications

* Bring dedicated resources and expertise to fully implement the solution

* Maintain an ongoing focus on program optimization to improve results

In our experience, many governments determine payment method based on a transaction's dollar value. Wire is preferred for high-value, time-sensitive payments requiring same-day issuance and receipt. Small-dollar, higher-volume items are ideal for a p-card application. Governments generally target the payments in between for migration to Automated Clearing House (ACH). Entities differ in how they evaluate the dollar threshold for each payment method. But despite differences in approach, the shared objective is to achieve the optimal mix of electronic payment alternatives to take full advantage of the benefits of automation.

WEB-BASED VENDOR PAYMENT SOLUTIONS

Vendor management remains a hurdle to increasing ACH payments. Limited resources exacerbate the challenge of soliciting vendor acceptance and collecting, safeguarding, and maintaining vendor bank-account information. Beyond privacy

and security concerns, managing vendor data is time-consuming and difficult, given that vendors may not notify government of changes. Unlike checks, which will still reach a vendor by forwarded mail, incorrect banking details will result in a returned ACH payment, which in turn can escalate into a procurement issue. Many vendors are either unable to accept remittance data electronically or require customization of payment formats to align with their system's requirements.

A few banks are addressing these vendor-payment challenges by combining ACH payments with Web-based access to remittance information. Conceptually the solution works like a direct-deposit program for vendors with online transmission of the remittance data. Participating vendors can be any size, from large corporations to small businesses and single operators. Likewise, payment value can be any size. (See examples of participating vendors in State of Mississippi case study.)

ACHIEVING WIDESPREAD VENDOR ACCEPTANCE

In our experience, a successful program should convert 40 to 60 percent of checks to ACH, whereas typical ACH adoption is approximately only 5 percent. The most important factor in achieving this level of success is the ability to engage your banking provider as a strategic consultant.

We recommend the following best practices when evaluating a Web-based vendor-payables solution as part of a comprehensive payments strategy:

Expect your bank to make adoption easy for you and your vendors. Look for a bank with proven adoption experience that dedicates resources to achieve a high vendor-participation rate. The bank should work with your vendors to format remittance information for easy acceptance. While vendor concentration varies among government entities, the 80/20 rule generally applies; that is, 80 percent of payments go to 20 percent of vendors. Your bank should help you target the top 20 percent of your vendors for enrollment.

The solution should be easily adoptable by your vendors. Electronic Data Interchange (EDI) was the banking industry's early answer to remittance information, but it requires both parties to accept EDI formats, and this requires costly programming for accounts payable and accounts receivable systems. By contrast, a Web-based vendors-payable solution should only require Internet access. The solution should allow unlimited remittance information. This requires a banking services provider that is willing to work with your vendors to format data to their specifications.

Look for a solution that provides a bank-neutral processing environment. Your vendors should be able to participate in the solution while still maintaining their current banking relationships. This helps to reduce disruption to your organization's relationships with its existing vendors.

Choose a bank that focuses on your continued success. Your bank should recognize that vendor management is an evolving process. Beyond initial implementation, your banking provider should be committed to continued solution optimization. This means dedicating bank resources on an ongoing basis for increased vendor participation and accurate vendor data.

Make sure reporting satisfies information-privacy requirements. Many state and local governments have a centralized finance department that sends a consolidated payments file on behalf of multiple agencies. For reporting purposes, your bank should be able to parse a data file so that each agency has access limited to the relevant information while centralized finance can see comprehensive reporting across all agencies. Conceptually, the agencies have the same experience as your vendors, with each agency having access to a separate online account for viewing information.

Your bank should address privacy requirements for external reporting as well. As a best practice the solution should deliver information to vendors in HIPAA-compliant (Health Insurance Portability and Accountability Act) format.

Look for strengthened security and controls over a traditional ACE transaction. Traditional ACH payments require the payer to store vendor data and transmit a payment file with that data to its bank. By contrast, a Web-based solution creates a closed electronic network of vendors in which both parties know each other. With a closed network the payer neither stores nor transmits any vendor payment or banking details to its bank. The bank maintains vendor details, and the vendor remits payments to an electronic address. This is designed to enhance payment security for both the vendor and the bank.

A Web-based approach strengthens control by allowing multiple online approvals. The solution's portability supports business-continuity and disaster-recovery planning.

Expect seamless integration with your existing ERP system. Many state and local governments invest heavily in their ERP systems. It is important that a solution integrates seamlessly into your ERP system's existing functionality. Implementation should require minimal work for your organization. It should not require you to purchase additional software packages or modules.

Extend the solution to further reduce check payments. A successful electronic payments adoption rate means that the remaining check payments become a nuisance. This is especially the case if your organization has optimized its p-card program in parallel to increasing ACH payments. In our experience, as electronic payments to vendors grow, clients increasingly want to outsource all of their payment initiation.

Your bank of choice should have the capability to include check outsourcing as part of an integrated solution for the remaining payment volume. Check outsourcing helps improve control, mitigates risk of fraud and lost checks, eliminates storage costs, and increases productivity.

If you are still paying your employees by check for travel reimbursement, look for a solution that includes a module for employee reimbursements. The bank should be able to store bank information for employees, reimburse travel expenses by direct deposit, and alert employees by secure e-mail.

OPTIMIZING YOUR P-CARD PROGRAM

Maximizing utilization is key to increasing a p-card program's benefits. But often governments never really move beyond the pilot stage following initial implementation. As a result, there is not enough incremental per-item benefit to warrant the program's fixed cost. You might be issuing checks for payments that you could migrate to card if you had the resources to focus on growing your program. Another limitation on program potential is the standard use of p-cards only for those purchases that do not require asset tagging--office supplies, computer-related purchase, MRO, and the like.

Beyond traditional purchase categories, how can you enhance your p-card strategy to increase its effectiveness as an electronic payment alternative? Visa and MasterCard are developing two programs--vendor analysis and strategic payment options--aimed at transforming p-card into a strategic payment method with broader vendor acceptance. Again, successful implementation of these programs requires working in close communication with your bank. The bank must have a strong account-management function with dedicated staff and a rigorous project-management discipline.

The objective of a strategic payments program is to identify a set

of vendors for migration to card payments. Strategic payments can include capital projects, construction (electrical, concrete), employee travel, and high-dollar items.

Under this program the bank creates ghost cards for selected vendors, which are predefined card numbers for items not traditionally paid by purchasing card. For example, not only can you use your p-card for smaller-dollar purchases, but you can also use it for larger-dollar purchases for which you are using a competitive bidding process. The agency issues a purchase order to the selected vendor, and the accounting system tags the purchased item as a fixed asset. The employee keys the invoice at the time of card payment rather than issuing a check.

Look to your bank for value-added support in implementing this program. Your bank can perform an analysis of your current vendors to assess the potential benefit. First the bank reviews whether it has ever processed card transactions for that vendor before. Next it determines the vendor's average transaction size. For example, you may have 5,000 vendors of which 200 are accepting card payments today for payment amounts within the range of what you currently pay them by check. Of the remaining 4,800 vendors, 500 accept cards, but for smaller amounts than the checks you write today. The remaining vendors don't accept card payments due to the nature of their business.

The next step is for you to negotiate with your vendors to accept card payments. Vendors may resist accepting payment for larger purchases due to the interchange rates. MasterCard and Visa have large-ticket programs that allow vendors to reduce fee size. Vendors must sign up with Visa and/or MasterCard to qualify. If you want to initiate a strategic-payments pilot with a smaller subset of vendors, consider enlisting your bank to contact potential participants on your behalf.

Back-end automation is a significant best practice for increasing productivity and efficiency. But many organizations don't take the last step of allowing cardholders or their proxies to perform reconciliation. A lack of back-end automation limits program growth. In a manual environment, typically staff sends their paperwork to the accounting area, where someone keys information into the ERP system. The finance department cannot take on more work, since accounts payable is handling as much manual processing as possible. If you are still performing data entry, then you are not realizing the full savings associated with a card program.

Your bank should provide a system that cardholders can use to reconcile their bills and assign general-ledger codes to eliminate re-keying by your accounting group. Obstacles tend to include a lack of IT resources for system programming and the fear of job loss associated with reduced resource requirements. But in our experience, as budgets grow and transaction volumes increase, back-end automation frees existing staff to handle more work within existing resource constraints. Structuring your card program to take advantage of a rebate or vendor discounts can provide the necessary funding for IT focus.

ACHIEVING E-GOVERNMENT TRANSFORMATION

As a best practice, your organization should structure its contracts with standard language that allows the broadest range of payment options--check, ACH, EFT, EDI, or card--with the choice of payment method in your hands. Ideally your bank will support optimization for both your p-card and ACH payments and work with you to help you determine the best strategy for attaining the highest percentage of electronic payments based on your overall payment mix.

Like most transformative efforts, increasing electronic payments to vendors is an evolving process and a collaborative effort. But it is an objective that is within your reach.

CASE STUDY

State of Mississippi Increases Electronic Payments

The State of Mississippi's Department of Finance and Administration (DFA) has overall management responsibility for the state's $11.2 billion in annual disbursements to more than 30,000 business and government payees.

Operating as the central disbursement authority for more than 125 state agencies, DFA wanted to reduce the amount of paper--mainly checks and remittance documents--involved in the disbursement process. Additionally, the DFA's platform for electronic funds transfer did not adequately support the amount or complexity of payment-related remittance information. DFA wanted a streamlined electronic process that would satisfy the following objectives:

* Maintain existing vendor relationships without disruption

* Allow state payees of all sizes to accept electronic payments without changing their bank accounts or internal processes

* Maintain the state's existing bank relationships in Mississippi

* Initiate electronic payments from the existing accounting system without significant technology investment or system changes

* Solicit electronic-payment acceptance without dedicating resources to the process

* Implement quickly and inexpensively

* Facilitate compliance with HIPAA requirements

The Solution

DFA worked with its bank to establish electronic disbursements combined with a Web-based access to associated electronic remittance information. DFA and its bank implemented the solution in just eight weeks without any disruption to the ongoing operations of DFA or the other agencies.

Vendors representing more than 45 percent of the State of Mississippi's annual disbursement dollars and 34 percent of its payment transactions participate in the program. The solution lowered disbursement costs, virtually eliminated the inefficient EFT process, increased efficiency for inter-agency remittance processing, and resulted in significant paper reduction.

The state continues to grow the program with ongoing vendor solicitation and enrollment. Today more than 3,842 payees receive electronic payments using this solution.

Participating Vendors

Examples of vendors that keep the state's vehicle fleet in motion include:

Green Fleet Moving Service, Quitman, Mississippi

* Small service provider--29 payments in 2004 totaled more than $300,000

* Has a PC, browser, and Internet connection

* Desired faster payments and direct deposit

Auto Trim Designs, Pearl, Mississippi

* Small service provider--41 transactions in 2004 totaled $9,000

* Desired faster access to money

Fuelman of Mississippi, Birmingham, Alabama

* Large fuel vendor--2,625 payments exceeded $10 million

* Wanted a more efficient collection process; receives large amount of remittance detail

RELATED ARTICLE: Optimizing purchasing card utilization.

BEST PRACTICES

Work to facilitate increased card usage at every point in the payment process, from vendor acceptance and agency participation to employee usage and management support. Here are some best practices for promoting program growth:

* Negotiate to include purchasing card as a payment option in your contracts.

* Mandate card usage for certain purchasing categories up to a specified dollar amount.

* Put cards in the hands of those staff members who are doing the purchasing. Review the controls that are in place to help you get comfortable with not restricting issuance to managers or making a card so restrictive as to limit its usage.

* Train managers in addition to cardholders and program administrators. Managers need to understand their responsibilities (e.g., approval process, statement review).

* Consider using p-cards for employee travel, where code permits, especially for small cities and counties that don't want to maintain a separate card program.

* Share your rebate with the end users--agencies, cities, and counties--as an incentive to encourage program participation. A critical mass of participation builds scale and leverages your buying power when negotiating the most advantageous vendor contracts.

JOHN COX, AAP, CTP, is a senior vice president in the Global Treasury Services Division at Bank of America. In his industry strategy role, his focus is the development of treasury strategies and solutions for the public sector.
COPYRIGHT 2005 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2005 Gale, Cengage Learning. All rights reserved.

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Author:Cox, John
Publication:Government Finance Review
Geographic Code:1USA
Date:Oct 1, 2005
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Previous Article:Cash management technology in state and local government: results of a GFOA/JPMorgan Chase survey.
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