May 24, 2018

Why Has the Digitalization of B2B Trade Not Gone All the Way?

by and Digitalization, Buyer-Supplier Ecosystem, Point-of-View, Source-to-Pay, Business Network

In many organizations, purchasing and ordering require a lot of manual work and time, which adds to the cost of the goods or services purchased. The digitalization of B2B trade has not yet reached the early stages of the order-to-delivery chain.

Digitalization of B2B trade

In the Nordics, B2B trade has used electronic payments with reference numbers already in the 1990s. Soon after that buyer organizations – especially the bigger ones – also started demanding electronic invoices from their suppliers. Suppliers had no alternative but to move to e-invoicing, as all paper invoices were rejected and simply returned to the sender.

While electronic invoicing has become business-as-usual, digitalization of B2B trade has not extended to purchasing and ordering. The question is: why not?

1. Industry-specific requirements make standardization difficult

If you think about it, an invoice is really a fairly simple document. This means that it has been fairly straightforward for the different stakeholders to agree on the data an invoice should contain. However, in the transactional documents used in the earlier stages of the order-to-delivery process, there are more industry-specific requirements, and this has made it harder to agree on standards.

Since the end of the 1980’s, large industrial corporations have digitalized their order flows using EDIFACT messages when exchanging trade documents with their suppliers. However, these solutions are typically based on a direct connection between the buyer and the supplier, and apply only to direct industrial purchasing where the volumes per supplier are significant.

2. Electronic orders are not in demand

Electronic invoicing adoption has been accelerated by public sector entities and big buyer organizations making e-invoicing mandatory. Similar developments are currently underway for other financial documents: for example, all European listed companies need to submit their financial statements to the authorities in a machine-readable XBRL format by 2020.

Though the electronic way of working greatly benefits document recipients, there is no push for electronic orders. Currently, many large suppliers prefer to guide buyers to webshops rather than delivering  product information to the buyers’ purchasing systems as e-catalogs. As a purchasing decision typically requires an approval in the buyer’s system, this way of operating does not encourage a change in the order-to-delivery chain nor advance the digitalization of B2B trade.

3. The costs of an inefficient ordering process remain hidden

It is easy to demonstrate the benefits and savings that come from switching from paper invoices to electronic ones. The Accounts Payable department can track the handling process of a paper invoice and measure the time and effort that is spent on the approval, posting and payment of the invoice.

When it comes to electronic orders, however, the benefits are spread out across the organization all the way to the business units, which makes it difficult to see and calculate the full benefit.

Handling a paper invoice typically costs 30€–50€. The friction costs of processing a purchase order are certainly more: searching and finding the right supplier and the right product, making and approving the order, and handling and paying the purchase invoice require a lot of manual work. All this adds to actual cost of the goods purchased.  

4. Few organizations have the tools for efficient purchasing

One key reason for the continued use of manual processes in B2B trade is simply the lack of purchasing systems currently deployed in buyer organizations. As the minority of companies has modern solutions for purchasing and ordering in use, they have not yet become standard corporate tools, which also obstructs the development of common standards and formats for electronic orders. The professionalization of purchasing and the advances in technology have now raised the digitalization of the ordering process high on the agenda in many companies.

Breaking the barriers to digitalization of B2B trade

What is needed for B2B purchasing and ordering is an open, many-to-many network – like those used for the exchange of electronic invoices. Network operators would take care of converting the documents to the right formats and of transmitting them between buyers and sellers. These networks could break the remaining barriers to the digitalization of B2B trade.

To create a functioning ecosystem, we need a neutral party to bring all the stakeholders together to develop the standards. For e-invoicing, there are several of such forums – where will we find one for purchasing and ordering?

In Europe, the PEPPOL e-invoicing and e-procurement network is expanding rapidly. The new EU directives are pushing the European public sector to be ready to receive e-invoices very soon. Several European countries (most recently Germany) see PEPPOL as an interesting option for complying with the requirements. It looks like the European public sector may be the one who takes the crucial role to accelerate the digitalization of the order-to-delivery process by driving its suppliers toward electronic ways of working.

This blog was originally published at Kauppalehti (in Finnish).

Petri Karjalainen

Petri Karjalainen

Petri is the Head of Strategic Partnerships at OpusCapita. He also sits on the board of Finland’s Artificial Intelligence and Robotics Association, AiRo.

Esko Penttinen

Esko is Professor of Practice in Information Systems Science at the Aalto University School of Business. He is also the Chairman of the XBRL consortium in Finland and the Director of the Real-Time Economy Competence Center.

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