The advancement of data capture and workflow automation technology has caused a dramatic transformation in how the accounts payable (AP) department processes invoices and travel and expense claims. Along with this new technology, numerous opportunities are arising that can make the AP operation significantly easier and more cost-effective for smaller and mid-size companies that have been locked out of automating their invoice process by the high cost of technology and associated systems integration.
Before taking the necessary steps to capitalize on these opportunities, it is important to understand the major challenges that many AP departments face and why it is so important that they implement more efficient processes. According to a Paystream Advisors study, 84 percent of invoices enter processing in formats that include paper, fax and email attachments, which require manual conversion into ERP-formatted data. In our experience working with major enterprises, the average cost of manually processing an invoice can be around $20 versus $4 for automated processing. Furthermore, average costs are highest for small companies (roughly 33 percent higher than medium/large size companies), as observed by Paystream Advisors.
These challenges can result in an exorbitant amount of wasted time and money. Once again in our experience working with clients, AP managers noted that converting and entering invoices into the ERP system, resolving errors/exceptions and processing invoices on time are some of the biggest challenges in the AP process. It's easy to understand why.
So how can an enterprise get to the point in which accounts payable becomes an efficient and cost-effective business function?
Some organizations tend to immediately reach for new technology that promises instant gratification. Often, these companies are disappointed when they discover that a series of projects requiring fundamental process change should have been implemented first.
Our experience suggests a different strategy. Transforming an AP department from a manual, paper-based invoice process to an automated methodology requires three steps that address process, labor and technology requirements.
Step One: Centralize and Digitize the Invoice Intake
The first step is to centralize and standardize the receipt of invoices and their conversion into ERP-formatted data, which we refer to as the "receipt-to-ERP segment." This step is crucial because it alone can provide up to 60 to 70 percent of the benefits expected from a fully automated process. It addresses direct and indirect invoice processing costs such as labor, late fees, discounts, vendor support and general AP support costs. It also creates the foundation for process automation and labor optimization downstream.
Centralization dramatically reduces idle and transit time and thus expands the processing window. Standardization reduces the variation in invoice receipt locations, format and data quality. Digitization replaces the manual data entry with a process involving intelligent optical character recognition (OCR) and business rules. Converting the paper invoice into ERP data is the most challenging and most rewarding part. Here, the cost can be reduced in half compared to manual data entry. Workflow driven by business rules can be initiated right after scanning.
By way of example, for one client, we validate the invoice header data and automatically reject and notify the supplier and procurement buyers if the invoice does not pass the initial acceptance screen. Automation can be used to change supplier behavior and standardize invoice data while simultaneously improving the invoice process workflow.
The principles illustrated up to this point, including the case history example, underscore what can be a fundamental change in the invoice process for an organization. Instead of executives pressing the AP staff to rush payments at the end of the payment window, now AP puts pressure on the business staff and suppliers to approve and resolve discrepancies at the beginning of the payment widow. The result is better control, less errors, less labor and the potential to pay all invoices on time.
In another client example, by centralizing and digitizing the company's incoming paper invoices, they were able to reduce the average processing time by five days. With all invoices coming into one location, within hours after receipt they are available in electronic workflow and being processed. Accounting and procurement managers are able to see and act on discrepancies immediately.
Step Two: Optimize Labor Cost
Once the intake process is firmly laid down, the next step towards a fully optimized process requires minimizing labor cost. Let's say a company initiated step one and as a result dramatically reduced the labor requirements associated with receiving and converting invoices. The next step for that company would be to reduce the cost of the remaining labor necessary to process the invoices, support vendor inquiries, provide analytical work, perform compliance tasks, initiate reporting and provide general AP support. With further automation in step three this labor can be further reduced. At this stage the goal is to reduce the processing labor cost while preparing to implement more advanced processing automation.
The option for most organizations is to outsource the labor so they can leverage higher scale productivity and lower labor rates. This does not automatically mean offshoring. Lower labor cost can be realized through process improvements, productivity improvements and tapping lower rate markets. For example, in business processing centers the labor for invoice conversion can also be used for approval and discrepancy resolution. It takes significantly less labor to scan and capture data than it does to process exceptions and obtain approvals. Working in a business processing center under a service level agreement and performance metrics, an employee's productivity can be 30 to 50 percent higher compared to an employee working in an AP department.
Step Three: Invoice Workflow Automation
The third and final step on the road to a fully optimized AP process is to automate the invoice discrepancy resolution and approval workflow. The ideal goal is straight-through processing where the invoice is processed by the automated workflow from receipt to payment without human intervention. The challenge, however, is implementing a system that can work for all invoices -- purchase order (PO) and non-PO invoices -- and across all ERP systems in use. Another challenge is integrating the workflow system with electronic content management and procurement systems as well as today's new mobile-enabled approaches. Beyond that, line item matching, a vendor portal, an easy to customize workflow and analytics functionality are among the top ‘must-haves.'
Most organizations cannot process invoices straight through after entry into the ERP system. Homegrown ERP system workflows have limitations and implementing upgrades can be taxing on the AP department.
Two strategies exist in automating the discrepancy resolution and approval steps. First, apply validation screens upfront and reject or prevent unacceptable invoices from entering the process. This requires suppliers to submit an acceptable invoice. Second, implement approval workflow to take care of the non-PO invoices that are harder to approve using business rules.
To provide some real-life perspective on implementing these three steps, we recently put these practices in place for a bank that processes on average 20,000 invoices per month. The bank utilizes a procure-to-pay (P2P) system for its PO invoices, which represent about half of the total amount of invoices. Our client's goal was to reduce costs and increase on-time payment to 90 percent, as well as to integrate non-PO invoices into its P2P system.
First, we centralized invoice receipt and implemented automated invoice conversion. All invoices now enter the same P2P system. We implemented a validation workflow to prevent duplicate and otherwise unacceptable invoices from entering the system. As a result, the number of invoices reaching on-time payment increased from 40 percent to 80 percent. Staff decreased from 16 to 11. In step two we leveraged our business processing centers around the world to further decrease labor costs by 20 percent. In the final steps we will automate the discrepancy and approval workflow, which can reduce costs further.
Delivering on today's expectations for the upgraded role of AP processing can seem daunting, but an evolving business climate and the availability of new technologies have made fresh opportunities possible. Taking these three steps can help accounts payable teams navigate this transition and deliver greater business value by reducing costs, mitigating risk and increasing efficiency for their organizations.
Ted Ardelean is a marketing director for Canon Business Process Services Inc., a provider of managed services and technology.