28 Harvard Business Review | November 2007 | hbr.org

Second, purchasing companies need to be smart about getting vendors to sign on. Our research shows that the full benefi ts of EIPP generally don’t material-ize 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 compo-nents and advanced tooling and materi-als, 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 pro-vider, how to minimize disruption. Once the system was working, Kennametal’s payment overhead fell by two-thirds, and processing costs plunged by 90%, 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 fi nal phase the conversion team focused on vendors whose technical medical services are often tailored to specifi c patient circumstances. Sloan-Kettering shortened the payment cycle for all its vendors but also stipulated that conver-sion 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 technol-

BACK END

Break the Paper Jam in B2B Paymentsby Steve Berez and Arpan Sheth

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 fi nancial services fi rms, including American Express and JPMorgan Chase, are partnering with payment software developers to host the systems. But paper still rules. Some 70% of U.S. busi-ness-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 un-derstand the benefi ts 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 autho-rize payment through a fi nancial services provider’s online platform. EIPP can help cut accounts payable overhead by more than 50%, according to our analysis. In addition, invoices can be handled more quickly, and faster processing enables purchasers to negotiate discounts for prompt payment.

ogy may provide its greatest boost, fulfi lling at last the Internet’s promise of frictionless commerce.

Steve Berez (steve.berez@bain.com) is a

Bain & Company partner based in Boston.

Arpan Sheth (arpan.sheth@bain.com),

also a Bain partner, is based in New York.

Both are members of the fi rm’s Financial

Services and Information Technology

Practices. Reprint F0711D

STRATEGY

Strategic Insight in Three Circlesby Joel E. Urbany and James H. Davis

Although most executives can recite the truism that a company must build a distinct competitive advantage in order to grow and be profi table over the long term, many have only the fuzziest idea what that really means. They’re confused by the esoteric language of strategy or they’ve gotten bogged down in the technical details of analytical tools.

We often encounter these execu-tives in our consulting work and in our classrooms. We tell them to draw three circles. Those circles, placed in the proper relationship to one another, provide a good visual representation of what strategy – both internal and external – means. Hundreds of leaders and future leaders have quickly absorbed strategy concepts by using this simple tool and have taken it back to their orga-nizations, where it often becomes part of the decision-making process.

Let’s assume that this exercise is being conducted by an executive team. The team should fi rst think deeply about what customers value and why. For ex-ample, they might value speedy service because they want control of their own time or they have other business or fam-ily obligations. (Exploring deeper values can open managerial eyes and reveal new opportunities for value creation.) The fi rst circle thus represents the team’s consensus view of everything the most important customers or customer segments want or need. (Other seg-ments can be analyzed later.)

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source of relationship building and growth opportunity.

The third circle represents the team’s view of how customers perceive the of-ferings of the company’s competitors.

Each area within the circles is stra-tegically important, but A, B, and C are critical to building competitive advan-tage. The team should ask questions about each. For A: How big and sustain-able are our advantages? Are they based on distinctive capabilities? For B: Are we delivering effectively in the area of

The second circle represents the team’s view of how customers perceive the company’s offerings. The extent to which the two circles overlap indicates how well the company’s offerings are fulfi lling customers’ needs. Even in very mature industries customers don’t articulate all their wants or problems in conversations with companies. They weren’t banging on Procter & Gamble’s door demanding invention of the Swiffer, whose category now contributes sig-nifi cantly to the company’s double-digit sales growth in home care products. Rather, the Swiffer emerged from P&G’s careful observation of the challenges of household cleaning. Customers’ unex-pressed problems can often become a

parity? For C: How can we counter our competitors’ advantages?

The team should form hypotheses about the company’s competitive advan-tages and test them by asking custom-ers. The process can yield surprising insights, such as how much opportunity for growth exists in the white space (E). Another insight might be what value the company or its competitors create that customers don’t need (D, F, or G). Zeneca Ag Products discovered that one of its most important distributors would be willing to do more business with the fi rm only if Zeneca eliminated the time-consuming promotional programs that its managers thought were an essential part of their value proposition.

But the biggest surprise is often that area A, envisioned as huge by the com-pany, turns out to be minuscule in the eyes of the customer.

Joel E. Urbany (urbany@nd.edu) and James H. Davis (davis.31@nd.edu) are professors at the University of Notre Dame’s Mendoza College of Business in Indiana. For the full three-circle analysis, e-mail Joel Urbany. Reprint F0711E

UNWANTED MERCHANDISE

Improve Your Return on ReturnsCompetitive pressures have forced many retailers and manufacturers to liberalize their returns policies in recent years and gladly accept for a refund just about any-thing customers regret having bought.

Well, maybe not gladly. Most com-panies continue to view returns as a costly nuisance, and few have formal strategies for dealing with products that customers don’t want. But fi guring out how to effi ciently reuse returned items can increase profi tability by reducing ma-terials requirements: Every component reinserted in the forward supply chain is one unit fewer that must be procured or manufactured. And by reusing rather than disposing of units, a fi rm may be able to increase loyalty and attract new customers as it boosts its environmental image.

30 Harvard Business Review | November 2007 | hbr.org

Customers’ needs

Company’s offerings

Customers’ needs

Competitors’ offerings

Company’s offerings

F

G

EWhitespace

D

AOur

points ofdifference

BPoints of

parityC

Theirpoints of

difference

Managing the fl ow of fi nished prod-ucts back into the company can be an important profi t driver, write Vaidyana-than Jayaraman and Yadong Luo, of the University of Miami School of Business Administration, in a recent issue of the Academy of Management Perspectives. Jayaraman and Luo say the evidence shows that a “reverse logistics” value chain strategy can strengthen a compa-ny’s competitiveness.

The authors cite Estée Lauder’s stra-tegic management of its returned goods

fl ow. In the fi rst year after investing $1.3 million to build a system of scanners and other technologies, the company was able to sharply reduce the percentage of such goods that it dumped into landfi lls and also to save half a million dollars in labor costs. It has built a $250 million product line from returned cosmetics, selling them to seconds stores or to retailers in developing countries.

Among the insights Jayaraman and Luo offer executives: First, in many industries, such as computers and

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