Even when the company uses a well-thought-out, overarching payments strategy, challenges stemming from stakeholder silos may keep the initiative from gaining traction. Operational demands often preclude managers from taking a step back and thinking holistically about interconnected activities throughout the organization and how each team fits into their common strategic business objectives. Optimization of treasury, payments, and procurement requires an in-depth, highly personalized analysis of the company's financial strategy, goals, and processes. It's usually up to the corporate treasurer to start that conversation.

Achieving A/P Alignment

Implementing the right payments strategy can positively impact a business in ways that extend well beyond the process efficiencies and hard-dollar savings realized by shifting to more cost-effective transaction types. Employing methods that allow for more favorable payment terms can improve working capital for both the company and its vendors, but such initiatives often have a limited scope. Unless there's an overt effort to drive change at the corporate level, functional areas may make only iterative improvements, with gains restricted to the confines of the function's operational focus. For example, when it comes to reconciling invoices and issuing checks, accounts payable (A/P) performance is generally gauged based on the department's ability to maintain control while streamlining processes. Although the objective may be to reduce costs by processing payments faster and more efficiently, the organization as a whole would benefit if A/P could unlock more working capital to reinvest in the business.

Thus, to improve the payments process, managers—both in payments and in other areas—need to review the entire value chain. They should strategically select payment types (e.g., EFT, ACH, procurement cards) that work best for their organization in both the short term and the long term, and selections of payment methods need to be made consistently with each supplier on a case-by-case basis.

Many businesses, of course, already utilize electronic payments instead of checks. E-payments are often the most efficient choice, but that doesn't mean businesses using them have evaluated the organization-wide, end-to-end impact. For example, most payments professionals realize that ACH payments reduce paper check costs and fraud risk; however, in moving to e-payments, they may miss opportunities to improve working capital management through early-payment discounts. Finding such opportunities requires treasury, purchasing, and accounts payable professionals to break out of their silos and understand the perspectives of all stakeholders affected by payments decisions.

While undertaking a broad shift in payments processes and strategy may seem daunting at face value, implementation can be fast and easy, with almost immediate significant results, if the company develops a road map for prioritized migration of vendors from one payment type to another. The trick is to make sure that the road map is validated across all affected stakeholders and that decisions are preceded by development of a tangible business case based on detailed, fact-based discovery.

Building the Business Case for Change

One encouraging fact is that companies have a wealth of talented employees, with a wide range of expertise and experiences, across their treasury, payments, and procurement teams. The organization overall will benefit if someone can bring together those minds to think about how their collaboration could drive meaningful value. The corporate treasurer is in an excellent position to do so.

The first step in developing a comprehensive, companywide payments strategy is to bring together a cross-functional team of employees and managers who would not normally meet to discuss the end-to-end payment process—particularly, payments, procurement, and treasury managers who have an intimate familiarity with their own team's processes and objectives. By uniting people who wouldn't normally collaborate, treasurers can gain a fresh perspective based on the specific expertise of functional-area experts to foster unprecedented levels of organizational learning and alignment.

For example, a procurement professional may focus on establishing payment terms, establishing a pattern of paying quickly, and laying the groundwork for an early-payment discount with a high-volume supplier. However, if the vendor is not strategically important to the buyer or is hesitant to the idea of an early-payment discount, the alternative of paying later and unlocking working capital may resonate with treasury. That is why, like with all well-formed corporate strategies, payments strategy requires inclusion of all key functional stakeholders, not just one.

Organizations with a decentralized buying or A/P environment often present a plethora of opportunities for improving payment processes through standardization. For example, one buying/accounts payable group may have "due upon receipt" terms with a supplier, whereas another group within the company may have an early-payment discount in place—e.g., 1.5 percent/20 net 45. If the corporate A/P or treasury team does not have comprehensive optics into the organization's total spend, divergent terms may impact the extent to which the company can realize early-payment discounts. Or, conversely, the lack of visibility may prevent the organization from taking full advantage of working capital improvements available by paying later.

When the corporate treasurer pulls together a cross-functional team to address payments strategy, the conversation should aim to shift participants' focus from operational excellence in their individual functions to a broader, organization-wide perspective. To start, a walk-through and audit of the organization's current processes enables the group to consider, in a holistic fashion, all the steps that lead to the desired outcome in the organization's payment systems. The audit should include in-depth analysis with stakeholders' objectives and overall corporate objectives in mind. This is a major shift; most audits look only at specific internal processes. By starting with the desired outcome and then exploring all the activities that impact that outcome, the group can identify the processes that impede organization-wide goal attainment, while also validating that certain strategies are an optimal fit.

Leveraging Metrics to Drive Integration

The most impactful business cases are founded on detailed discovery and fact-based metrics, as opposed to anecdotal information and industry benchmarks. Every organization is different, as is every situation and process flow. That's why the second step in building a business case for payments-process change is data discovery and analysis.

A comprehensive source-to-settle strategy should be built on information about the company's KPIs for each payment type it uses—including hard-dollar costs, process costs, and internal rates of return (or weighted average cost of capital)—as well as the organization's business goals, objectives, and challenges. Someone in treasury or another function can compile this data, then present it to the cross-functional committee for consideration.

Using this fact-based foundation, the cross-functional team should undertake a detailed analysis, through which the group identifies the optimal payments solutions to support the business's goals. This will serve as a compelling and accurate business-case justification for the strategy and road map the team will develop.

As an example, a well-intended initiative to drive payments from check to card may be justified using industry benchmarks that are not precisely reflective of the organization's specific payments cost structure. To fully understand its actual costs per payment type, the company needs to undertake a detailed analysis that extends well beyond benchmarks evaluating one particular payment method in isolation. A cross-functional team should look at the organization's current payment terms and internal rate of return (IRR) on working capital, and should work to tie those metrics to overall corporate objectives.

To understand why this analysis needs to consider an assortment of variables, consider the following example: If a company's documented cost per check is $10 and a discovery process establishes that the cost per purchasing-card–based payment is $2, one might assume that migrating 50,000 check payments to card would result in a savings of $400,000. But this may not be the case. Not all payments can be supported by a card, and those vendors that will accept card payments may not honor early-payment discounts, or other payment terms that the company previously negotiated, when the company pays by card. Logical, algorithmic-modeling analysis is crucial to eliminate inappropriate options before the cross-functional team determines the ideal payment-solution outcome.

Note that the data analysis must be payment-product agnostic. Some members of the cross-functional team may be partial to a particular payment type, but it is critical to avoid using data analysis to create a case that favors a particular payment method or an investment that may not be the appropriate solution.

Every organization's situation is different, but a company moving forward with a payments analysis and development of a road map for implementing a comprehensive payments strategy might begin by dividing the project up. Phase one might encompass automation of A/P processes; phase two might involve migration of suppliers from undesirable payment types to desirable ones; and phases three and four might involve negotiations around payment terms and discounts—and the company might prioritize each phase based in part on the difficulty of implementation and the benefits it expects to receive.

Note that this high-level view of the project is not the end of the road map. If, for instance, one objective is to migrate a certain population of vendors from check to purchasing card to earn higher levels of rebates, the road map should include a clearly defined, prioritized, and phased plan that specifies which vendors to migrate first. A company may find that it can reach 80 percent of its overall rebate objective by migrating as few as 20 percent of its vendors. Prioritizing the transition so that the company achieves the biggest benefits first is a pragmatic way of ensuring that the company's broader financial goals are met in the quickest and easiest way possible.

As traction is established and subsequent phases of the road map are implemented, the cross-functional team can measure the success of the initiative, both from an income statement and a balance sheet perspective, using the same metrics it used in developing its strategy. Even if a business has already implemented what it considers to be a comprehensive and integrated source-to-settle strategy, it should continue to leverage established metrics to calculate progress and re-assess new metrics and costs on an annual basis.

Communicating the road map on whom to pay, how to pay, and when to pay—supported by the strategy explaining why, along with the metrics for tracking success—can be effective in ensuring a smooth implementation and immediate results. The road map should be communicated to all stakeholders within treasury, payments, and procurement. Along the way, events and developments will likely trigger new challenges, costs, opportunities, and needs for measurements. For example, anytime an organization is involved in a merger or acquisition, it will need to ensure that its available working capital can support the transaction. It will also need visibility into not just its cash position, but also the strategies and processes that optimize working capital, including its payments strategy.

Collaborating for Treasury and A/P Success

For finance and treasury professionals, it's important to take away communication barriers and to think collaboratively, analytically, and objectively about the business goals behind integrating treasury, procurement, and accounts payable. Just because an organization brings together a cross-functional team that identifies metrics, analyzes appropriate data, and implements a plan to breathe life into a new payments strategy, it doesn't necessarily have to eliminate previous processes. Rolling out a new payments strategy may simply involve redeploying and improving on the organization's current payment methods.

Once a business has identified its costs per payment type and potential process improvements via discovery, and has incorporated this knowledge into a detailed and objective A/P analysis, the organization is well-aligned and primed for almost immediate and measurable success.

Sandra Larin is director of North American treasury and payment solutions sales and technical consulting at BMO Financial Group. She is accountable for the development and delivery of BMO's treasury and payments consultative engagement approach, enabling sales teams to work collaboratively with clients to uncover ways to improve their working capital management and implement actionable solutions. Prior to her current role, Sandra held a senior sales position managing corporate and institutional clients. She has worked within Commercial Banking at BMO for the past 15 years.