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Invoice Verification – What and Why? – Consider this Foundational Practice for Proactive ITAM

By Sherry Irwin, Technology Asset Management, Inc.

ITAK V10 I4

Disclaimer:  Specific content, while representative of industry practices, is provided as example only and should be modified for your organization.

The Challenge

Invoices are the means by which vendors collect payments due for products and services provided to their customers, usually under the terms of a contract, order form and/or purchase order – the governing documents.  Despite contractual terms to the contrary, invoices may have additional or different terms from the governing documents.  These additional terms often include an E&OE (errors and omissions excepted) statement in an attempt to excuse slight mistakes or oversights and to reduce legal liability for potentially incorrect or incomplete information.

Invoices for information technology (IT) products and services seem to have a higher rate of errors than for non-IT products and services – especially software-related invoices (license, upgrade, maintained and support).  The results of several client studies suggest that up to 75% of software invoices are incorrect, with the average between 50% and 60%. That is not to say that all such errors are material to cost and risk; some are not.  There is, however, a correlation between invoice errors and contracts with negotiated terms:  the more negotiated terms, the greater probability that the invoice will be incorrect.

Other reasons for higher error rates include:

  • Vendor’s billing system is often antiquated and/or inflexible – apply the “shoemaker’s children analogy” to technology companies.  The systems simply cannot accommodate non-standard or current terms – whether negotiated or as applicable under the vendor’s current business model
  • Change in vendor’s business model and/or terminology; for example, scope of use or support coverage
  • Based on the wrong governing document – e.g., incorrect schedule or order form
  • Missing information such as start/end dates, product titles, versions/editions or quantities (as might be required as proof-of-license in a license compliance audit)
  • Vendor or product has been acquired by another vendor, with a different business model and billing system
  • Global differences such as currency and taxes

Common Practice: Invoice Reconciliation

Many organizations have automated the invoice payment process or delegated the decision to accounting staff unfamiliar with the IT industry and governing documents.  In either case, the decision to pay an invoice is made based on a three-way reconciliation; specifically, a comparison of purchase order, receipt and invoice.  The comparison – whether automated or manual – may consider only the purchase order number and amount, without consideration for other information of interest to IT asset management (ITAM), including whether the product or service is:

  • Installed and compliant
  • In use and compliant
  • Providing value commensurate with the invoice amount, as well as past and expected future amounts (total cost)
  • Providing value that meets or exceeds projections in the original business case
  • Covered by an appropriate support plan (if any)

And, of course, the comparison does not consider whether the invoice is consistent with the (negotiated) terms of the governing documents – especially if the vendor has changed its business model (which would not necessarily have effect under the governing documents).

A few examples to demonstrate how a three-way reconciliation can be inadequate, even though in all cases, the amount may be as expected (“correct”):

  • Support renewal:  Coverage has been reduced from 24/7 to 12/5:  reduced value for same cost
  • License purchase:  License type not specified; or, is not as negotiated (with broader grant)
  • Currency:  Amount has been converted from one currency to another, resulting in an effective increase of 40%; may be better to pay in the source currency
  • Vendor:  The invoicing vendor differs from the original vendor and the terms on the invoice reflect the new vendor’s terminology; including product name and license type, which cannot be reconciled to governing documents

Best Practice:  Invoice Verification

A more comprehensive verification of IT invoices should be done in support of IT asset management (ITAM) as well as contract and vendor management.  Additional factors, including the ones listed in the table should be considered.  Such verification may involve multiple parties within the organization and is not necessarily required for every invoice.  Although this is largely a manual effort, there are always savings opportunities through selective invoice verification.  (Invoice verification is also a means by which to identify products/services that the organization acquired in the past and to update or validate the IT asset and license repository of owned IT assets.)

Invoice verification criteria and a checklist should be included in your ITAM Toolkit – a set of documents (checklists, templates) in support of the ITAM program.

What invoices should be verified? Representative criteria to determine whether invoice verification is required include:

  • Related to a contract with negotiated terms (to which the vendor may not be able to correctly invoice)
  • Over a specific dollar amount (as defined by the organization)
  • Covering periods longer than six months (e.g., annual invoices)
  • For which there is no purchase order or contract
  • From specific suppliers, based on acquisitions/mergers, ranking, performance, reputation, product directions, overall relationship, financial viability or other factors as defined by the organization
  • For specific products (e.g., pending retirement, new to the organization, acquired by another vendor, for which there is a problem history, and other factors as defined by the organization)

What should be considered when verifying invoices?  Depending on a variety of factors (vendor, product, cost etc.), verification may address all or a subset of the following (and more):

Note: Many invoices do not have complete information; for example, term of maintenance renewal, fees broken down by product or service.  Also, product names and quantities are often not specified.  Where this and other information is missing or cannot be reconciled with the governing documents, a revised, complete invoice should be requested from the supplier and payment held until such invoice has been received.

In summary, invoice verification is a foundational practice for proactive management of IT assets, as well as the vendors and contracts by which IT assets are provided.  Successful ITAM programs have realized significant financial and other benefits from invoice verification, easily and far surpassing the effort involved.

About Sherry Irwin

Sherry Irwin, founder (in 1995) and President of Technology Asset Management Inc., has over 30 years of experience in IT asset management (ITAM), including license, contract and vendor management, across a broad spectrum of industries. She is widely recognized as a pioneer, expert, educator and advocate in this maturing discipline. As an advisory consultant and mentor, Sherry advises clients on ITAM best practices, with a focus on minimizing costs, minimizing risks, and maximizing benefits related to IT investments. She also conducts a series of educational workshops and seminars on various aspects of IT asset management including ITAM strategy and program development, software asset and license management (SAM), and contract management and vendor management (CVM). In addition to her consulting and education practice, Sherry is also: * Founder (1992) and chair of the Canadian IT Asset Management Users’ Group (CITAMUG), a forum in which to share ITAM knowledge and influence industry practices. * An IAITAM Fellow, recognized as an industry leader and advocate. * An Accredited Training Organization (ATO) for selected IAITAM courses. * A Canadian delegate to ISO/IEC 19770 (Software Asset Management) standards development. * An advisor (TAC Expert) to clients of The Advisory Council (TAC).