As trust and information replace risk in the global trade equation, U.S. companies are increasingly sourcing from overseas vendors on open account terms. At the same time, businesses continue to outsource key finance functions to reduce operating costs. In a PricewaterhouseCoopers survey of CFOs and managing directors, 63 percent of companies indicated that they either outsource A/P, payroll or billing, or plan to do so in the next two years. For companies that import, the convergence of these two trends presents a strategic opportunity to maximize the efficiency gains and cost reductions associated with open account trade.

Automated processing, streamlined work flow

Although open account eliminates the processing and service fees incurred under traditional trade instruments, it presents an administrative burden. Companies must grapple with the documentary processing activities, which were formerly handled by banks under letters of credit. For many companies, this entails taking data from multiple sources, consolidating it and matching commercial invoices/bills of lading against purchase orders. This manual process is both time-consuming and subject to error. Technology can enhance this process through automation and remove the documentary risk by ensuring that the invoice conforms to the purchase order. Consequently, businesses can be much more confident dealing in cross-border open account. Moreover, the staff that formerly matched documents, handled inquiries and resolved disputes can be redeployed in more productive core business activities.

Companies can invest time, funds and resources to develop a platform that automates this process. A more cost effective option is to outsource management of the purchase-to-pay cycle to a third party that already has the technology in place to link the buyer and supplier online. Companies will benefit the most from an end-to-end outsourcing solution that automates the entire process on both buyer and seller sides of a transaction. Ideally, this would cover electronic delivery of a purchase order for online supplier review and approval, submission of supplier documents, invoice comparison, electronic discrepancy reports, images of documents related to the transaction, all the way to reconciliation and payment. The buyer's company shouldn't have to change its current processing, and the technology should be flexible enough to enable the choice of any or all the steps involved in the seamless electronic processing of a transaction. The value of the outsourcing solution lies in delivering greater efficiency to existing processes at lower costs.

Leading global trade banks are redefining their traditional role as trusted intermediary in cross-border trade. Through the use of the Internet and sophisticated technology, industry leaders are automating open account management and providing valuable management information online. For banks like LaSalle Bank, a subsidiary of Amsterdam-based ABN AMRO, a key advantage is their extensive on-the-ground presence, through which they are able to integrate suppliers and buyers online. This provides unprecedented transparency in the financial supply chain, no matter whether the supplier and buyer operate in disparate paper, web-based or digital environments. Not only do these solutions reduce A/P costs and improve efficiency on the buyer side, they also provide useful tools for working capital management.

Improved liquidity management

Provided the outsourcing solution has in-depth reporting, treasurers can now predict cash flows with much greater accuracy. With more precise information about their debt obligations, they can avoid overestimating liquidity requirements and excessive holdings of operational, day-to-day funds and cash reserves. These funds can instead be redeployed in an array of flexible, short-term investments. As cash is released from inefficient processes, the company's overall requirement for and cost of funding is reduced.

Managing supplier relationships

The robust functionality of these outsourcing solutions also enables importers to mine detailed information about their suppliers' performance. For example, by tracking the timeliness of shipments, pricing history, frequency of errors and cost of discrepancies online, buyers can exercise more leverage in negotiating pricing concessions or more favorable terms from their vendors. A powerful tool in this price sensitive world!

Where age-old trade and modern technology meet, today's global banking leaders are there to help you manage the process.

Sidebar: FAQs About Open Account

How can your company get the best out of open account trading? WORLD TRADE presented some frequently asked questions to Michael Klausner, Global Product Manager, Supply Chain Services at ABN AMRO.

Q: Why are companies moving to more open account trading? What particular advantages does it offer?

A: These days, companies generally have fewer and more strategic trading partners, and they establish trust through many channels, such as service level agreements and so on. So when it comes to settling accounts, there is less need for the additional security offered by an L/C.

The advantages of open account trading are that it offers more efficient settlement at lower cost-not least, because credit lines will not be used to underwrite transactions.

Q: Won't open account trading increase my trading administration?

A: With an L/C, your trade bank handles the bulk of administration, matching and reconciling the documentation required for each trade. So, moving to open account trading and bringing the work in-house does have the potential to significantly increase your trading administration.

But, as explained in the article, using technology-or the technology owned and operated by an outsourcing partner-you can manage this very efficiently. There are several good reasons to give this work to a bank: banks are experts in the administration of trade documentation, they have invested in the technology and the geographic coverage to facilitate your global trade, and they provide the level of process security required of a financial institution. In fact, a bank is the ideal central point of data collection for purchase orders, invoices and related documentation and can provide a one-stop shop for administration and settlement of your trade transactions.

Q: What level of savings can I expect to achieve by moving from letters of credit to open account trading?

A: Savings will depend on the number of transactions, the level of automation and so on. But any cost-benefit analysis should include the following elements: bank fees, cost of credit lines, impact on day's sales outstanding, cost of technology development/change. We think you'll find significant savings can be made.

Q: Some of our trading partners are less automated than we are-how can we best manage our relationships with them?

A: The solution you choose should allow for various levels of technology integration-from paper to electronic data interchange to the latest XML standards. Imaging technology is now powerful enough to provide a viable route for paper to digital-but it will of course help if your processing partner is close to your paper-based suppliers and markets. This is where a global player can provide real added value to your operations.

Q: Is this the end of the L/C?

A: No. There will probably always be a need for L/Cs. For example, it may be advisable to use L/Cs for the first few transactions with a new trading partner, and there are some volatile markets where the security provided by L/Cs will always be required. We think the important development is the flexibility provided by the best trade platforms by integrating various tools for international trade. For example, our clients are able to initiate and track their transactions (whether open account or L/C) through our online portal, starting from a purchase order or invoice. They can also link in pre-arranged supply chain finance programs for payables or receivables.

Michael Klausner can be reached at michael.klausner@abnamro.com.