Control in the hands of the purchaser

In late 2007, two directors with Memorial Hermann Healthcare System began investigating ways to streamline the organization’s payment function. At the time, the process was largely paper-based. The accounts payable department was starting to miss payment terms because invoices were held up during the approval process, and suppliers would often call to check the status of their payments.

The Houston-based company made several changes. First, the AP department worked with its vendors and installed software to allow it to receive invoices electronically. In addition, the department implemented a buyer-initiated payment, or BIP, program that was up and running by April 2008.

BIP is a payment tool that leverages the commercial card network yet enables transactions that require more control than typical card transactions. After the buyer approves an invoice and schedules payment, a payment file moves from the buyer’s enterprise resource planning, or ERP, system to a BIP solution. The solution transmits remittance information to the supplier and deposits the payment in its account.

By contrast, with traditional card transactions, the supplier initiates the payment process, says Linda Albornoz, vice president in the business-to-business payments group with American Express.

Although it’s sufficient for smaller purchases, the process is less suitable for larger transactions in which a three-way match is needed between a purchase order, an invoice, and receiving documents. For these, “BIP is the way to go because the transaction is initiated by the AP department only after determining payment should be made,” Albornoz says.


Advantages of BIP programs

Putting a BIP program in place has brought distinct advantages, say Daron Whisman, director of finance-supply chain, and Donald Sands, director of system accounts payable, the two leaders who initiated it.

Memorial Hermann’s BIP program allows Sands and his team to replace about 30,000 checks each year with electronic transfers of the payments. In addition, vendors are paid more quickly – in about 20 days, versus 45 to 50 before the BIP solution was implemented. They also receive remittance information. What’s more, Memorial Hermann is earning rebates on the transactions processed through BIP, and is using the money to make other investments in technology.

Perhaps most significantly, the new process allows the organization to more accurately forecast cash flow, Whisman says. Under the previous model, Memorial Hermann would make varying payments to suppliers throughout the month. Now it sends one amount each month to American Express and is able to closely estimate the amount about 30 days before it hits the organization’s bank account.

As Whisman’s experience shows, BIP really is a working capital tool, says Shari Krikorian, vice president of global commercial products with MasterCard. While buyer-initiated payment programs often remove paper from the process, their true value is to boost working capital. Buyers have more control over their payment schedule, even as suppliers are paid more quickly.

Moreover, BIP “can be a quick win for accounts payable managers,” says Henry Ijams, managing director with PayStream Advisors. That is, in most organizations, AP can implement a BIP program without having to make heavy use of IT and other resources.

Perhaps not surprisingly, a growing number of organizations are showing interest in BIP. “The market is in its infancy, but ramping up,” says Jim Lister, vice president of e-commerce solutions with First Data Corp. Interest appears strongest in several sectors, including temporary services, overnight shipping, and office supplies. Many companies in these industries already use purchasing cards. With BIP, they can use the cards for larger purchases in which more control is desired.


Implementing a BIP program

Getting up and running with a BIP initiative is fairly straightforward. As a starting point, the buyer needs to determine which suppliers to enroll in the program. At Memorial Hermann, for instance, Whisman and Sands divided their suppliers into three tiers based on invoice, spending volume, and the strategic relationship between the two firms. Those in the top tier were the first to move to the BIP program.

In addition, the buyer has to generate a payment file that is sent to the commercial card company so that payment can move to the suppliers. Also on the buyer’s to-do list: obtaining an account number to use when paying suppliers.

Many card companies handle the task of moving a firm’s suppliers onto the BIP program. For instance, they’ll help them obtain a merchant number in order to accept payments, Krikorian says.

Because many of the technical steps, such as producing the buyer’s payment file, can occur while suppliers are getting on board, implementing a BIP program usually occurs fairly rapidly. Twelve weeks from start to finish isn’t uncommon, Albornoz says.

For some buyers, BIP programs offer clear benefits. However, there are several actions a company can take to implement a successful BIP program. These include:

• Gaining an understanding of how BIP might fit into a company’s overall payment strategy before initiating a program, Albornoz says.

• Assembling a cross-functional team to drive the implementation, Krikorian says. Without a solid representation of all areas affected, it’s easy for projects to stall while the various departments come together on objectives.

• Communicating and selecting a team, Whisman says, because people have various projects on their to-do lists. Those leading the BIP team need to respect others’ time commitments, but also show how this project can benefit the organization. “You have to have a story that transcends different parts of the organization,” he says.

• Communicating frequently, both internally and externally. Whisman and Sands, for instance, issued about 6,000 different points of communication to both suppliers and internal partners. This included posting information on the Web site, sending letters and e-mails, and hosting meetings and seminars.

• Making sure the card company you choose as a partner has a strong plan for enrolling suppliers, Whisman says. Then your team can focus on getting the systems needed for the program in place and operational.

• Making it easy for vendors to both sign up and remove themselves from the program if they want to, Lister recommends. Knowing that an option is available to end their involvement can ease suppliers’ concerns about enrolling in the first place.

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FROM THE SUPPLIER'S SIDE

While buyer-initiated payment programs offer buyers several compelling benefits, what are the advantages from the seller’s point of view?

Suppliers are paid more quickly and get remittance information with each transaction. In addition, they can access information on payment status online and at any time.

Consider a vendor of Memorial Hermann Healthcare System that sends thousands of invoices annually. “They can post the payments immediately, because they know what was paid and the exact amount of cash,” says Don Sands, director of system accounts payable with the Houston-based healthcare organization.

Suppliers aren’t charged to participate, although they do have to set up a merchant account and will need to cover the interchange rate on the purchases. However, the rate for these transactions typically is lower than it is in a brick-and-mortar environment. For instance, as of mid-March, MasterCard’s interchange rate for BIP payments was about 100 basis points lower than the rate for using purchasing cards, says Shari Krikorian, vice president of global commercial products with MasterCard.

Some buyers may ask their suppliers to renegotiate their contracts, given the earlier payment terms possible with BIP transactions, says Jim Lister, vice president of e-commerce solutions with First Data Corp. For some suppliers, the benefit of receiving their payment earlier more than compensates for these changes and costs. For others, it may not, at least with some customers.