Market view: Kurt Cavano

Global trade will reach $14tn by 2005, with each shipment requiring about 40 documents. It’s no wonder finance departments are being overwhelmed by paperwork.

Processing all these documents not only taxes a trading company’s time, it also adds 5% to global trade’s total costs, while obscuring visibility into working-capital requirements. As a result, companies are re-evaluating the efficiency of their order-through-payment cycle, also known as the financial supply chain. Many, in turn, are looking to outsource.

Outsourcing the financial supply chain can lower a trading company’s costs and allow its finance executives to focus on strategic issues like stabilising cashflows and minimising working-capital requirements. However, even if the financial supply chain is entirely outsourced, companies must still incorporate their processes into supply-chain, finance and procurement management. That’s because the financial supply chain directly impacts the flow of goods and cash. For companies considering outsourcing, here are four tips for making the right decision – and delivering the right value:

Automate financial processes. The greatest cost-savings are consistently found in services or technologies that automate the order-through-payment cycle, particularly if the business is growing. Automation prevents re-keying errors and other mistakes from disrupting the flow of goods, while providing finance with sharper visibility into payables or receivables. There are a number of ways to automate the financial supply chain. All involve replacing paper with electronic information. Some are comprehensive, while others are tightly focused. If a more comprehensive approach makes sense for the organisation, look for a service that automatically matches all the associated electronic documentation to the original purchase order, checking for errors, and routing appropriate notifications to trading partners, for both open-account or credit-protected transactions. These workflow and automation features can shave days off the financial supply chain.
Collaborate with trading partners. When it comes to managing the physical supply chain, we all know that a company reaps the most value when it collaborates with suppliers. The same goes for the financial supply chain. The challenge is determining which provider delivers the right level of collaboration. For instance, there’s the electronic data interchange (EDI) approach, which has been available for over a decade. It enables different vendors to exchange data, even across ERP platforms. However, trading partners that use different ERP systems have to customise their communication channels to accommodate EDI, which becomes cost-prohibitive if numerous trading partners use different systems. EDI is also expensive for smaller suppliers, so buyers usually have electronic collaboration with only a portion of their supplier base. In addition, there is no context for EDI data relative to other documents in the transaction. In contrast, the internet provides a universal platform for real-time electronic data management. One good approach is an application service provider model that connects trading partners over the web.
Be flexible. Are all trading partners the same size, or do they all use the same technology and processes? Will the company and its partners always use the same shipping company or finance providers? Probably not. That’s why the outsourcer should deliver services not tied to use of any particular financial service, technology or logistics service. It should be flexible enough for use by multinational corporations with ERP systems, mid-sized corporations with complex back-end systems, and even small enterprises that just have personal computers and internet access. These services should be open to third parties, creating competition for a company’s banking and logistics business.
Maintain real-time visibility into data. Automation should provide a faster, more detailed understanding of a company’s working-capital requirements: what accounts need to be paid or received on what day in what currency – far in advance of when manual processes could indicate. Many companies use this approach to cut down on short-term borrowing, or to free up cash for growth. If you’re focused on receivables, look for services that deliver financing to reduce days sales outstanding. Rates should be more competitive than factoring because automation provides transaction visibility – and in turn, less risk – to third-party financing institutions or buyers.

Kurt Cavano is chairman and CEO of TradeCard Inc in Hong Kong.