World-class companies are using benchmarking to turn a traditional white elephant into the business equivalent of Tony the Tiger. Here in a nutshell are their best practices to help you overhaul your process.
When it comes to launching a successful benchmark program in the lean-and-mean 1990s, companies of all sizes first look at essential finance functions that contain the most fat. Duplicity of procedures, mounds of unnecessary paperwork and error-prone internal processes are out. Improved time management, the implementation of electronic data systems and increased cost awareness are in.
Typically, the accounts payable process represents the greatest opportunity for improvement in the accounting function. In fact, many benchmark experts consider accounts payable to be a natural focal point for novice benchmark teams. The stakes are high: The average company processes 190,000 vendor invoices per $1 billion of revenue, pays each employee $36,705 per year in salary and benefits, and uses systems that are at least six years old.
And just how worthwhile has the process been? The average company that has benchmarked accounts payable has seen costs decline 24 percent and productivity increase 16 percent, according to The Hackett Group, an Ohio-based benchmark consulting firm. These companies have taken a quantum leap in several categories and contributed greatly to their organization's long-term success. The average billion-dollar company can save $360,000 annually by moving from average to first-quartile performance, according to a 1994 study performed by The Hackett Group.
In benchmarking the accounts payable process, you're trying to find the best practices that offer quicker and fewer steps with less effort and less cost, says Hackett Group VP Mark Krueger.
The typical accounts payable process is very labor intensive and paper intensive. As a result, it's common for most companies to focus on minimizing small transactions when benchmarking accounts payable. The average billion-dollar company has more than 18.5 people involved in the accounts payable process. But the same size company that has benchmarked the process and is considered best in class has three people performing the same process.
That's an incredible difference, Krueger says. The average company also processes 11,100 invoices per person per year. But the best in class processes an average of 54,900 invoices per person per year. By benchmarking this process, a company can make tremendous strides in time management and cost efficiency.
More importantly, many companies have been able to redirect a portion of these resources to higher value-added decision-making. For every dollar of cost savings that is realized, finance in such companies is generating three to five times the value and playing a major role in accelerating the corporation's profit-improvement process. Benchmarking is the starting point of capturing these benefits. It's a wake-up call for radical change. And if you're not driving radical change in your finance organization, your peers — or worse, your competitors — are passing you by.
Virtually every client we've worked with in the finance area has worked on accounts payable, Krueger says. We've helped approximately 45 of the top Fortune 500 companies redesign their accounts payable process.
When benchmarking accounts payable, companies must perform an external comparison to learn how other companies have successfully implemented new methods. Selecting benchmarking partners can be a direct person-to-person approach, aided by leads on best practices companies from trade journals, professional associations, magazine articles and benchmarking databases, or you may choose to hire a benchmarking consultant.
Maximizing Work Drivers
After making an external comparison of your accounts payable process to the processes of other companies, the next step in the benchmark process is determining how your company can positively impact four principal work drivers — the volume of transactions, the nominal value of transactions, who is performing the data entry and what type of matching process is being used.
One way to impact several work drivers is through the introduction of a procurement or purchasing card. This can eliminate 30 percent to 40 percent of the typical company's small-dollar invoices. Reducing the volume of transactions can be accomplished by consolidating invoices or through a purchasing card at the department level. Because it offers guaranteed payment, the procurement card is an option that has grown in popularity among some vendors, especially those involved in retail operations. Service-related companies, however, have been less willing to use them.
Walt Hazelton, event coordinator at San Francisco-based Gunn Partners, a consulting and research firm, explains how the cards work: Typically, employees are given charge cards for small purchases, commonly limited to $1,000 per transaction. An employee makes a purchase, pays for the purchase with the charge card, notes the purchase on the charge card log, and attaches the receipt to the log. Each month, the employee receives a statement of their charges from the credit card company for verification. The reconciliation can be as easy as a total dollar invoice match. Then a single monthly invoice is given to accounts payable to pay. The invoices provide the detail by account for booking to the general ledger.
Avoiding the Pitfalls
There are certain pitfalls to avoid, such as making sure the use of a procurement card doesn't duplicate previous efforts. After all, 50 percent of the transactions at a typical company can reflect 10 percent of the purchases. Those involved in the process have to overcome the tendency to take every step to the most minute level of detail.
|If you're not driving radical change in your finance organization, your peers — or worse, your competitors — are passing you by|
We've actually seen some companies try to mimic their current accounting system process with the procurement card so they gain absolutely nothing. In fact, it's probably an extra step in the process, Krueger says. The major pitfall is attempting to maintain the same invoice coding scheme you have when you're booking each transaction as a separate invoice.
While there are pros and cons involved, the bottom line on procurement cards is that you should consider one for your company's accounts payable department, regardless of your company's size.
That's something anybody can do, Krueger says. And many of the larger companies are getting an electronic interface into their AP process through their vendor. Whether you're big or small, you can use pay-on-receipt. Some smaller companies can even do Electronic Fund Transfers (EFT) through Quicken or via the Internet.
Reaping the Benefits
Many companies that have benchmarked the accounts payable process have come to these conclusions:
- End multiple approvals. Accounting department personnel do not have to verify whether a specific transaction has multiple approval signatures. From the operations standpoint, manpower is not wasted in additional approval cycles. Accounting software with built-in workflow functionality (see Workflow in Accounting Software on page 61) can be instrumental in streamlining the approval process. Perhaps the most interesting benefit of eliminating multiple approvals is that it shortens the cycle time for processing invoices, thereby reducing the tendency for companies to miss payment discounts because of invoices that are being routed all around the company.
- Raise limit for checks requiring duplicate signatures. In many companies that have multiple signatures today, one may be automated and the other may tend to be a manual signature. This eliminates the process of having highly paid finance people sign checks manually. I've been around the world on this and it's amazing — I've seen examples where Controllers spend the better part of an hour a day signing checks, Krueger says. I ask, 'Why are you doing this?' And they say, 'Because corporate or internal audit has told me we have to.' And, for the most part, they're not comparing anything. They're just signing checks. They'd be better off endorsing checks instead of signing them.
- Eliminate routing of invoices that have been matched (three-way). Many companies follow a familiar pattern. They take a purchase order and a receiver and match them together. Then, when the invoice comes in, they send that same package all over again. A question to ask while benchmarking your internal accounts payable process: If the purchase order has been approved and the receiver has been approved, then why are we sending it back again for another signature?
- Automate signature blocks applied to checks. This is similar to raising the limit for checks requiring duplicate signatures in that instead of having manual check signing, you would have an automatic check signer. This method has worked exceptionally well in companies that may have had small volumes, but have grown quickly.
- Avoid multiple copies and files. Krueger offers the following suggestion for companies searching for the life preserver that can prevent them from drowning in a sea of paperwork. I'm working with a client right now who makes photocopies of their invoices and stores the photocopies in purchasing and the local accounts payable department before sending the original to the corporate paying office and then filing copies of that invoice. The point here is eliminating multiple places for filing the invoices. Either capture the information electronically in your purchasing agent system, or use some sort of image scanning device.
- Establish an automated link with a bank. This allows the accounts payable department, which has been issuing manual checks, to initiate an electronic file from its computer system to a bank's computer system with the information for paying vendors electronically. According to Hazelton, although electronic funds transfer (EFT) doesn't save a company that much money, the efficiency is a big benefit. Hazelton said that even most small banks find setting up EFTs easy to do.
- Reimburse sundry items through expense reports. The big benefit there is that you're eliminating another small-value transaction and you're consolidating that around the employee, Krueger says.
- Discourage manual checks. A lot of companies have taken a step toward eliminating checks through EFT. This eliminates paper cost — an important consideration since checks ultimately can cost between 40 cents to 50 cents each — and postage. And that doesn't even cover the time, cost and frustration level when checks are lost in the mail. Although only about 15 percent of U.S. companies have strong EFT programs, 85 percent of western European companies have adopted the EFT process for accounts payable, Krueger says. He adds that many companies today still do a manual check at the whim of whoever is requesting it. I've actually seen someone do this. Because it was not during the regular schedule, they could not enter it into the computer system and get an automated computer-printed check, Krueger says. Instead, they went over to a typewriter and typed it up. And then, on the day they were going to run the check, they'd enter that information again through the computer system to record the fact that it was actually paid and they put a special manual check number on it.
No matter which of the above guidelines might suit your company, keep in mind that several common threads exist among best-practice companies in the accounts payable process. Many utilize purchase orders for large-dollar purchases and a procurement card for small-dollar purchases. They also utilize on-line systems for requisition by end-users and Electronic Data Interchange (EDI) for purchase-order submission. Best-practice companies also tend to use pay on receipt, ad hoc reporting, and integrated systems for purchasing, payables, receiving and general ledger.
If nothing else, pledge to challenge your company's current practices in the accounts payable process. That's what benchmarking is all about.