Electronic invoice and payment systems have been slow to catch on, even though they offer enormous promise for cost savings, speed and transparency in business-to-business transactions. The technology has a lot going for it: It’s getting more robust all the time, and big financial services firms, including American Express and JPMorgan Chase, are partnering with payment software developers to host the systems.

But paper still rules. Some 70 percent of US business-to-business transactions involve paper invoices and checks. The annual cost of managing that exchange comes to some $116 billion, according to a Bain & Company estimate.

What will it take to break the paper jam? First, companies need to fully understand the benefits of EIPP (electronic invoice presentment and payment), which allows vendors to send electronic bills to buyers and lets buyers reconcile invoices with purchase orders and authorize payment through a financial services provider’s online platform.

EIPP can help cut accounts payable overhead by more than 50 percent, according to our analysis. In addition, invoices can be handled more quickly, and faster processing enables purchasers to negotiate discounts for prompt payment.

Second, purchasing companies need to be smart about getting vendors to sign on. Our research shows that the full benefits of EIPP generally don’t materialize until more than half of a purchaser’s invoices are being processed online, so it’s important to convert suppliers quickly. For some companies that means all in one stroke; for others it means a rapid phased conversion.

Kennametal, a Pennsylvania-based global provider of engineered components and advanced tooling and materials, is for most of its 18,000 suppliers one of the biggest accounts. Because of that clout, it was able to convert them all at once.

The team that managed the conversion showed the suppliers, with support from the company’s EIPP provider, how to minimize disruption. Once the system was working, Kennametal’s payment overhead fell by two-thirds, and processing costs plunged by 90 percent, to just nine cents per invoice.

Memorial Sloan-Kettering Cancer Center, in New York, buys from big vendors of medical supplies for which there are no ready substitutes and from a wide variety of other providers of highly specialized services. Winning over its vendors required a deft touch and the coordination of a military campaign.

Sloan-Kettering split the conversion into three phases, beginning in 2003. Looking for a fast initial success, it conducted a 90-day blitz to convert 50 vendors that provide mission-critical materials and supplies. In phase two it tackled vendors whose high-volume, paper-intensive transactions would translate into the biggest savings. In the final phase the conversion team focused on vendors whose technical medical services are often tailored to specific patient circumstances.

Sloan-Kettering shortened the payment cycle for all its vendors but also stipulated that conversion to EIPP would be a requirement for contract renewal. Today it processes 877,000 payments a year—nearly twice as many as before EIPP was adopted—with no added staff.

As more companies begin using EIPP, the supplier-purchaser interdependence that has slowed adoption of the technology may provide its greatest boost, fulfilling at last the Internet’s promise of frictionless commerce.                 

(Steve Berez is a Bain & Company partner based in Boston. Arpan Sheth, also a Bain partner, is based in New York. Both are members of the firm’s Financial Services and Information Technology Practices.)

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