Two automation methods with important differences

Manual invoice handling – supplier invoice handling in particular – is a time and resource demanding process. The larger the business, the larger the stock of paper invoices gets. To cope with the workload, the company has to either hire more people within the finance department or try to automate the process: AP Automation.

OCR and XML are two alternative methods for automating invoice handling. At first glance, they may appear very similar – they both result in “digital” invoices in the company’s system – but in reality, the differences between the two methods are important and many. Failing to understand the difference can turn out to be a very costly mistake.

This article aims to clarify the difference between the two methods and to give some advice on what it is important to consider when selecting a service provider.

OCR – a way to handle paper and PDF invoices outside of your AP system

What is OCR?

Optical character recognition (OCR) is a technology that enables interpretation of certain value fields in a document and their conversion into searchable data. Many companies use OCR technology to convert paper or PDF-based supplier invoices into digital data that can then be uploaded to the company’s workflow system for further handling.

Even the most advanced automated OCR systems have their fair share of errors. In order for these to be captured, it is necessary to make a significant investment in validating quality. That is why good OCR solutions tend to be very expensive. On the other hand, OCR requires nothing in terms of changes by the invoice issuer.

A method with serious shortcomings

I have lived and breathed the struggles of trying to automate AP invoicing with OCR solutions. After several years of this, I can frankly say it is a method I do not recommend. It is a nightmare to manage, with false ROIs and expectations that do not enable an organization to work smarter.

When trying to automate AP invoices, accuracy is key. This where I see the major problem with OCR-based services. Since with OCR, a machine is interpreting values on paper, mistakes will inevitably occur. It is extremely hard to achieve 100% accuracy.

Can you imagine automating barcode shop floor transactions if the accuracy rating of the barcode labels is less than 100%? That would translate into millions of dollars lost on the General Motors shop floor.

For the OCR solution to give you the result you want, you need excellent paper invoices. Just try telling all your enterprise suppliers that they need better-quality invoices, or that they need to change the font on their invoices. When they fail to comply, you will be in a constant battle with your OCR solution as it attempts to distinguish between the lower-case L and the numeral 1 (just one of many frustrating examples of daily issues).

“I have lived and breathed the struggles of trying to automate AP invoicing with OCR solutions.”

E-invoicing – a way to handle true digital files directly in your AP system

What is an electronic invoice?

A true e-invoice is an invoice that is issued, received and processed electronically. It is digital from the time it is created in the financial system by the issuer until it is received and processed by the recipient. In other words, true e-invoicing is electronic throughout its entire life cycle.

At present, your IT system can probably already handle some kind of digital input – most likely an XML file. Extensible Markup Language, better known as “XML”, follows a schema and you can customize the tags that are important to you and your organization. With the right toolset, you can get invoices directly into your system without any manual intervention.

Using e-invoices means that the sender will produce the invoices digitally. This will result in process cost savings for the sender, but more importantly, the conversion step is eliminated, as the invoices are digital throughout the process. This also means that every single data field has a meaning. It is defined, which creates an opportunity to capture errors and deviations, identify where there is insufficient information, and much more. This makes it possible for you to validate and automatically correct errors before they end up in your ERP system.

A method that will give you the accuracy you need

Now take a more modern e-invoice/XML solution and compare it with the OCR technology. The only similarity that I see between OCR and XML is that they are both three-letter acronyms; the two methods of deciphering and translating an AP invoice are hardly similar at all. XML AP invoice automation has many advantages over OCR, but in my opinion the main advantage is accuracy.

Accuracy is addressed before the invoice reaches your ERP system. Modern e-invoice providers will work with suppliers to ensure that their invoices are formatted according to the proper XML schema and pass validation checks (PO number, invoice date, department code, etc.) before they even reach your ERP system.

A few of those modern operators can also “manipulate” invoice content before it reaches your supplier invoice workflow. This means that necessary information (not provided by the supplier) is automatically added. Normally this is a manual step taken by the recipient (e.g. supplier IDs, changing of a reference name to a reference code, calculation of exchange rates, etc.).

When the e-invoice/XML file has gone through its extract, transform and load (ETL) process, it is 100% accurate. Only then can you achieve a touchless process and 100% AP automation, enabling your organization to work smarter, not harder.

“E-invoices makes it possible for you to validate and automatically correct errors before they end up in your ERP system.”

There is only one way forward

To summarize: OCR is a costly shortcut to achieving a “digital” invoice process while not taking advantage of the efficiency improvements of real digitization. In addition, the mistakes that can take place in the scanning process add potential sources of errors.

Taking the step to e-invoicing means creating a true digital invoice flow. This makes it possible to benefit from all the additional opportunities achievable with modern technologies without expending the bulk of your effort on ensuring that incoming information has been correctly converted.

Ambassadors for OCR will argue – and they will be right – that OCR requires minimal change to existing processes. That is correct. All the steps will remain, and OCR will even act as a tool that helps those advocates keep their existing processes, as changes will be harder to implement. But if you wish to streamline processes, create more value, reduce errors and save time, then in our opinion e-invoicing/XML is the only way forward.

If you decide to go with true e-invoicing – then what?

To be successful in your e-invoice project, it is important that you choose the right partner to work with. Here is a quick checklist to help you in the decision process:

  1. Choose a platform that can handle multiple format standards. Your suppliers should not have to make expensive investments or customize their system to fulfill your requirements.
  2. Choose an operator that can validate and manipulate (e.g. enrich) data so that it fits the processes within your ERP system.
  3. Choose an operator that has an open network – i.e. an operator that can communicate with other e-invoice platforms (like it works in the telecom industry).
  4. Choose an operator that can take care of the supplier onboarding process, which can be very time-consuming to handle internally.
  5. Choose an operator that can offer suppliers multiple options for how to connect. Suppliers should be able to choose their preferred option: portal solutions, semi-automated solutions or fully automated EDI solutions.
  6. Choose an operator with a support organization that can both support your needs and handle your suppliers’ questions.
  7. If you have a global supplier base, choose an operator that can operate in multiple markets and which supports multiple languages.

“If you wish to streamline processes, create more value, reduce errors and save time, then e-invoicing/XML is the only way forward.”

Want to know more?

Please don’t hesitate to get in touch for a more in-depth discussion about the opportunities of true e-invoicing and how to select a service provider that will help you succeed in your digitization process.