The limited use of SMEs by local government has been flagged as a problem for many years. There are 4.8m SMEs in the UK, making up around 50% of the private sector with an annual turnover of £3 trillion.
Yet SMEs are often discouraged from public sector deals due to the bureaucracy that comes with working with them and the associated costs which can price SMEs out of this market space.
In a bid to increase the use of SMEs, UK government and the European parliament have introduced initiatives to make it easier for SMEs to do business with the public sector. Yet the success of these has been limited. Initiatives have mainly focused on the use of technology and frameworks to reduce the barriers SMEs face in doing business in the public sector. Although a step in the right direction, the myriad of frameworks and poor adoption rates within government has hindered success.
E-invoicing is a service that plays to the SME agenda
- It reduces costs while increasing visibility and controls for the supplier – themes that resonate politically in challenging times.
- It also provides the supplier with comfort that paper invoices can no longer get lost in the post or around the office, and removes the possibility for data entry errors.
- E-invoicing automation enables payments to be made more efficiently, a key for SMEs as a lack of access to credit, and often reduced working capital, means late payments can be a massive issue.
The Federation of Small Businesses reports that 97% of local authorities say they will pay within 30 days. Yet, only 62% do. Archaic accounts payable processes is a key factor in this.
And the benefits of e-invoicing isn’t just for the SMEs:
- E-invoicing will bring back office efficiencies and improve front line services for government organisations; not to be sniffed at during this ‘age of austerity’ we hear so much about.
- Reduction in fraud is a bi-product for many of these systems , saving further costs. The UK e-invoicing Forum has calculated the end-to-end cost savings for the UK public sector, inclusive of procurement, invoicing, fraud reduction and supply chain finance is between £4-£6 billion per year.
So it’s a win-win, isn’t it? E-invoicing will enable SMEs to do business with local government, and will allow local authorities to improve processes and reduce costs.
So why is the uptake of e-invoicing by SMEs doing business with government orgs. so limited?
1) SMEs are unwilling to adopt new technology. Somehow they are adverse to change.
This conjures up images of companies drawing up their invoices with a quill and paper, but surely a sector with a turnover of £3 trillion cannot be that unsavvy. I just don’t buy it. In fact, SME’s massive adoption of PDF invoicing is an example of how if the technology is there - free and easy to use - SMEs will readily accept and utilise it to its full potential.
2) E-invoice initiatives often require SME to provide their invoices in another format.
These formats are usually XML or EDI, and SMEs often don’t have the in-house skills or technology readily available. So financial outlay is required (plus time spent making the changes, and often duplicating invoices if the supplier is being asked to use a 3rd party invoice portal).
3) Local authorities have been known to charge businesses to use the e-invoicing system.
Well this just misses the point entirely. A major benefit of e-invoice adoption is the massive financial savings are often so valuable to SMEs, charging businesses to use the system provides a big excuse for them to avoid making the transition. And it’s a valid excuse at that…
It’s these things above which discourage SMEs – an initiative supposed to make it easier for them to do business has just become another barrier.
It’s pointless having brilliant technology in place if no one is using it. In some countries, high on-boarding rates have been achieved by mandating the use of e-invoicing (Denmark, Mexico, Finland, to name but a few). In this carrot/stick scenario, mandating is a huge stick. But we believe a nice juicy carrot can do just as well.
Without mandating and thereby effectively forcing suppliers to use e-invoicing, high ‘voluntary’ on-boarding rates can be achieved by adhering to the following:
- Make it free for suppliers to use
- Don’t ask suppliers to make any technology changes
- Don’t make suppliers raise their invoice in their own accounting package and then dupicate this process in a 3rd party portal
Local authorities in the UK are starting to realise the benefits of the above. At CloudTrade, we have seen a huge increase in government bodies taking on this approach and the success they have with the solution is astonishing (almost 40 local authorities and other public sector organisations in the last 3 years have adopted this method). When done in the right way, e-invoicing can indeed be a key to getting SMEs doing business with local authorities.
For too long we have heard about how technology changes will improve the situation, but with few results, finally the situation is changing.
Would you like to see SME's e-invoicing direct into your AP system?