EMA software helps companies control spending by automating the filing, approval and payment of employee expense reports.
Only a few years ago, as the economy boomed and e-commerce flourished, revenue opportunities seemed boundless. So while stock prices zoomed upward, budgets expanded at a similar velocity. At many companies, travel and entertainment (T&E) and other expenses became an afterthought in the quest for new market share and sales growth.
When the economy turned sour, the trouble began. Organizations large and small started slashing costs and looking for ways to better manage spending. Suddenly it wasn't acceptable for employees to book flights on the airline of their choice or stop by their local office supply store to buy a printer for business use. "Over the last couple of years, the environment has changed and the mind-set has changed," observes Michele Flynn, president of Expense Management Solutions Inc., a Southborough, Mass., consulting firm.
Many organizations are now turning to software that helps them control costs. According to Christa Degnan, a senior analyst at market research and consulting firm Aberdeen Group Inc. in Boston, today's expense management applications enable companies to better monitor and control enterprisewide spending by automating the filing, approval and payment of employee expense reports. Many of these Web-based applications help organizations streamline reimbursement processes, enforce purchase-policy compli- ance, and track spending patterns for improved reporting and analysis.
These systems provide substantial benefits. Aberdeen Group estimates that with the right expense management automation (EMA) system, an enterprise can shrink the time required to enter an expense report by 60 percent. Companies can also trim the costs associated with processing reports by 80 percent and reduce the time required to settle a claim by 90 percent. Last year, Aberdeen Group found that companies processing expenses manually averaged $48 per transaction, compared with $18 at firms using EMA applications. "It's an area that can offer a tremendous return on investment," Degnan says.
According to another market research and consulting firm, AMR Research Inc. in Boston, expense management is expected to grow from a $700 million market in 2002 to a $1.8 billion market by 2006. While many organizations have initially focused on better managing T&E expenses, indirect e-procurement is beginning to grab the attention of CFOs and others, says Monica Barron, a senior research analyst at AMR. (See Putting the Lid on Procurement Expenses, below.) "Process cost reduction is only one piece of the puzzle. Applications that help to reduce overall ... costs will be the winners in this market," Barron predicts.
Putting the Lid on Procurement ExpensesWithin the expense management arena, indirect e-procurement is attracting a good deal of attention. "One of the biggest problems for companies is that they build a sophisticated e-procurement system but still allow employees to buy things other ways -- over the phone, in stores and through an assortment of vendors," explains Michele Flynn, president of consulting firm Expense Management Solutions Inc. in Southborough, Mass. Not surprisingly, this approach can create enormous headaches. For example, the person making a purchase might receive the invoice and submit it as an expense item. As a result, "the accounts payable department might not record what the item is, and it might not appear in an official list of assets," Flynn says. Likewise, the item might be categorized as an employee reimbursement, which would not reflect the true nature of the purchase. Like travel and entertainment (T&E) expense management, indirect e-procurement requires strict guidelines to eliminate off-contract buying and boost volume discounts. A growing number of best-of-breed and ERP vendors have introduced modules that manage the e-procurement process while offering sophisticated work flow and analytics tools. In addition, these applications help companies understand which suppliers offer the greatest value. Ametek Inc., a manufacturer of electronic instruments and electric motors, is among the businesses that have focused on getting e-procurement costs under control. The Paoli, Pa., company annually purchases more than $500 million worth of direct and indirect supplies from 20,000 vendors worldwide. A few years ago, the company recognized that its procurement processes were complex and cumbersome. What's more, says vice president and comptroller Bob Mandos, with 15 business units and a decentralized structure, the company "had virtually no leverage on our consolidated North American spend." That's no longer the case. Using Oracle 11i Procurement, Ametek has consolidated buying among a few key vendors, reduced administrative overhead and adopted shared services. The result: The company has consolidated spending and reduced machine-tooling costs by 14 percent, which amounts to an annual savings of nearly $600,000. Ametek plans to expand the use of the system to include direct procurement as well. Says Flynn, "When companies get their hands around procurement costs, they're in a better position to boost their performance and profitability." |
Tangible Payback
One company that has put its money on expense management is The Thomson Corp., a Stamford, Conn., publisher and provider of information services. With 44,000 employees worldwide, the $7.2 billion enterprise required an approach that could not only automate and streamline expense management, but also help nail down better pricing with vendors. In the past, the company dealt with piles of paper and disparate expense systems that had accumulated as a result of numerous acquisitions, notes Maggie Lagana, director of U.S. cash management.
Then, nearly three years ago, Thomson surveyed its expense management software options and chose a system from Extensity. The system went live in January 2002, and Thomson immediately began to see dividends. Employees can enter data through the Web anytime, anywhere, and update the report before submitting it. The expense management application has helped Thomson save more than $16 per transaction. Plus, the company dramatically improved its ability to enforce spending policies and enhanced its data-capture capabilities. "For the first time, we were able to understand spending patterns and trends, detect policy violations, and negotiate better pricing with preferred vendors," Lagana says.
Web-based expense management systems began to emerge in 1999. Before that, some ERP suites tracked expenses, but the functionality was fairly basic. "They were mostly a way to keep track of paying employees," Degnan points out. In fact, many companies relied on Excel spreadsheets to house T&E expense reports, and accounts payable clerks inputted data manually using hundreds of accounting codes.
What makes Web-based T&E expense management systems so attractive is that they tie together and automate a variety of processes, from the submission of employees' expense forms to the management of currency exchange rates to the issuance of approvals and payments. "No longer do employees find themselves stuffing receipts in an envelope, mailing FedEx packages and filling out cumbersome forms," Degnan observes.
When combined with corporate purchasing cards or credit cards, these systems can simplify expense tracking and reimbursements even further. Aberdeen Group reports that employees using Web-based software reduce the time they spend filling out reports from 35 minutes to 18 minutes. Meanwhile, A/P clerks see the average time required to process a transaction drop from 22 minutes to 5 minutes.
Improved Reporting
Another company sold on the expense management concept is Bar-S Foods Co., a Phoenix-based meat processing and manufacturing firm. The company has migrated expense reports for its 1,600 employees from spreadsheets to a semiautomated solution to an EMA package from Concur Technologies.
"Early on, we recognized that we needed to manage expenses and also make sure that expenses were being approved or rejected appropriately," explains David McEldowney, a manager of systems development at Bar-S. "Ultimately, we needed to know that people were spending what they are supposed to be spending." By consolidating data and using drill-down capabilities, Bar-S can now view purchasing details by department, type of employee and individual from the more than 200 reports submitted each month. In order to ensure compliance, Bar-S created a single spending policy for the entire organization.
The net effect? By predefining and coding all expense categories, the company has greatly simplified reporting and boosted the ability of the finance department to put its data to good use. The Concur system feeds information into general ledger entries in the company's J.D. Edwards ERP system so that Bar-S can conduct activity-based costing analyses.
"We have a P&L set up for each customer, and we know what the expenses should be for sales reps on any given route," McEldowney explains. What's more, finance can view the data by percentages and monitor changes. Ultimately, "it's possible to view the true cost of servicing each customer," he adds.
Stricter Enforcement
One of the keys to success with expense management software is ensuring that employees follow the company's rules. Although T&E expenditures are highly controllable, it's easy and tempting for employees to make off-contract purchases. Aberdeen Group estimates that maverick buying accounts for more than 40 percent of travel expenditures and that, on average, employees purchasing outside corporate contracts pay 15 percent to 27 percent higher prices. Too often, these workers believe they are landing better deals online, but they undermine their company's ability to earn volume-based discounts with preferred suppliers that would ultimately save the organization more, according to Degnan.
Compliance starts with the finance department. "It is essential that A/P stops approving invoices and expense forms that haven't been properly submitted or contain off-system purchases," Expense Management Solutions' Flynn says. Although an automated system can flag exceptions and manage work flow more effectively, "a company must also make changes to its underlying business processes," she adds. At the same time, the system must provide some flexibility so that an organization doesn't punish employees for legitimate exceptions, such as a salesperson buying a new personal digital assistant off the shelf at an office supply store if her old one fails during a business trip.
Many observers, including Flynn, believe that best-of-breed solutions have a head start in the expense management space. In many ways, these products' functionality and capabilities are far more robust than those of current ERP solutions. She suggests that companies eyeing expense management solutions consider what level of sophistication they need -- though, in general, more automation usually translates into greater cost savings.
Finance must play a role in the EMA purchase decision by gauging potential ROI and determining how the data can be used for advanced analytics and financial planning. Finance managers should also ensure that the organization understands the tax and cash management implications of the software.
Ultimately, savvy organizations use expense management systems to evolve beyond simple reimbursement and adopt a holistic spending-management strategy. In the end, more thorough expense management provides detailed insights into cost-containment efforts, volume-buying opportunities and other areas of savings, AMR's Barron notes. And when all the pieces of the expense management puzzle come together, an organization can operate more productively and profitably -- during good times and bad.