Aberdeen InSight: The Promise Of Financial Value Chain Management
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.
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.
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.