OCR and XML are two alternative methods for automating invoice handling. Curtis Taylor clarifies the difference between the two methods and gives some advice on what it is important to consider when selecting a service provider.
Two methods with important differences
Manual processing of invoices – processing supplier invoices in particular – is a time and resource consuming process. The larger the company, the more the stock of paper invoices increases. To cope with the workload, the company must either hire more people in the financial department, or try to automate the process: AP Automation.
OCR and XML are two alternative methods for automating invoice processing. At first glance, they may seem very similar – they both cause “digital” invoices in the business system – but in reality, the differences between the two methods are large and numerous. Not understanding the difference can be a very costly mistake.
This article aims to clarify the difference between the two methods and to give some advice on what is important to consider when selecting a service provider.
OCR – paper invoices outside of your system
What is OCR?
Optical character recognition (OCR) is a technology that makes it possible to interpret certain value fields in a document and convert them into searchable data. Many companies use OCR technology to convert paper or PDF supplier invoices into digital data which can then be uploaded to the company’s workflow system for further processing.
Even the most advanced automated OCR systems have their share of errors. To capture them, it is necessary to make a significant investment in quality validation. That’s why good OCR solutions tend to be very expensive. On the other hand, the OCR requires nothing in terms of modifications by the issuer of the invoice.
A method with serious shortcomings
I experienced and breathed the difficulties of trying to automate AP billing with OCR solutions. After several years, I can honestly say that it is a method that I do not recommend. It’s a nightmare to manage, with false returns on investment and expectations that don’t allow an organization to work smarter.
When trying to automate AP invoices, accuracy is the key. This is where I see the major problem with OCR-based services. Since with OCR, a machine interprets values on paper, errors inevitably occur. It is extremely difficult to achieve 100% accuracy.
“I experienced and breathed the difficulties of trying to automate AP billing with OCR solutions.”
Can you imagine automating barcode shop transactions if the accuracy rating of barcode labels is less than 100%? This would translate into millions of dollars lost in the General Motors workshop.
For the OCR solution to give you the desired result, you need excellent paper invoices. Just try to tell all of your business suppliers that they need better quality invoices or that they need to change the font on their invoices. When they do not conform, you will be in constant struggle with your OCR solution as it attempts to distinguish between the lowercase L and the number 1 (just one of the many frustrating examples of everyday problems).
E-invoicing – true digital files in your system
What is an electronic invoice?
A true e-invoice is an invoice issued, received and processed electronically. It is digital from its creation in the financial system by the issuer to its reception and processing by the recipient. In other words, true electronic invoicing is electronic throughout its life cycle.
By now, your computer system can probably already handle some sort of digital input – most likely an XML file. The extensible markup language, better known as “XML”, follows a scheme and you can customize the tags that are important to you and your organization. With the right set of tools, you can import invoices directly into your system without any manual intervention.
The use of electronic invoices means that the sender will produce the invoices digitally. This will result in savings in process costs for the sender, but more importantly, the conversion step is eliminated, as invoices are digital throughout the process. It also means that each data field has a meaning. It is defined, which creates an opportunity to capture errors and discrepancies, identify where information is insufficient, and much more. This allows you to automatically validate and 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 electronic / XML invoicing solution and compare it with OCR technology. The only similarity I see between OCR and XML is that they are both three-letter acronyms; the two methods of decrypting and translating an AP invoice are not at all similar. Automation of XML AP invoices has many advantages over OCR, but in my opinion, the main advantage is accuracy.
Precision is processed before the invoice reaches your ERP system. Modern electronic invoice providers will work with suppliers to ensure their invoices are formatted according to the appropriate XML schema and pass validation checks (PO number, invoice date, service code, etc.) even before reach your ERP system.
“Electronic invoices automatically validate and correct errors before they end up in your system.”
Some of these modern operators can also “manipulate” the content of the invoice before it reaches your supplier’s invoice workflow. This means that the necessary information (not provided by the supplier) is automatically added. This is normally a manual step performed by the recipient (for example, supplier IDs, changing a reference name to a reference code, calculating exchange rates, etc.).
When the e-invoice / XML file has undergone its extraction, transformation and loading (ETL) process, it is 100% accurate. Only then can you achieve a contactless process and 100% PA automation, allowing your organization to work smarter, not more.
There is only one way forward
To summarize: OCR is an expensive shortcut for carrying out a “digital” billing process while not benefiting from the efficiency improvements of actual digitization. In addition, errors that may occur during the scanning process add potential sources of errors.
Moving to electronic invoicing means creating a real flow of digital invoices. This allows you to take advantage of all the additional opportunities achievable with modern technologies without spending most of your efforts to ensure that the incoming information has been properly converted.
“If you want to streamline processes, electronic invoicing is the only way to go.”
OCR ambassadors will argue – and they will be right – that OCR requires minimal changes to existing processes. That’s right. All the steps will remain, and the OCR will even act as a tool that will help these defenders to keep their existing processes, because the changes will be more difficult to implement. But if you want to streamline processes, create more value, reduce errors and save time, in our view, electronic invoicing / XML is the only way to go.
If you go with 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:
- Choose a platform that can handle multiple format standards. Your suppliers shouldn’t have to make expensive investments or customize their systems to meet your needs.
- Choose an operator who can validate and manipulate (for example enrich) the data so that it corresponds to the processes of your ERP system.
- Choose an operator that has an open network – that is, an operator that can communicate with other electronic billing platforms (as it does in the telecommunications industry).
- Choose an operator who can take care of the supplier integration process, which can take a long time to manage internally.
- Choose an operator that can offer providers several options for logging in. Suppliers should be able to choose their preferred option: portal solutions, semi-automated solutions, or fully automated EDI solutions.
- Choose an operator with a support organization that can both meet your needs and answer questions from your suppliers.
- If you have a global supplier base, choose an operator that can operate in multiple markets and that supports multiple languages.
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