AP Automation: Quick returns and hard savings

Accounts Payable (AP) processes have typically grown organically in line with the growth of the organisation; the need to pay suppliers has been seen as a transactional function and of little additional value to the organisation.

With the growing desire to align processes with company strategy, Accounts Payable processes are now getting the attention they deserve as organisations look to implement processes that are efficient and effective in the delivery of objectives to the organisation.

Use case: Focusing on quick returns and hard savings
An organisation is processing in the region of 10,000 invoices every month with a small degree of automation. The Accounts Payable Manager has decided that it would be beneficial to introduce automation earlier into the process but does not have the time to fully assess the operation and collect detailed information. Based upon the understanding of the process, the focus becomes key areas that will drive real cashable benefits from the new system - the amount of resources involved in the process, early payment discounts, duplicate payments and reduced costs in document storage.

The labour-intensive aspects of the process:
Various industry standards outline that a "high performing" Accounts Payable function can process between 24,000 and 27,000 invoices per FTE per annum. The Accounts Payable Manager is aware that, at the moment, he/she has 7 people involved in the processing of invoices, with the current performance level being 17,143 invoices per FTE per annum. If the department could reach "high-performing" levels, the invoices could be processed with 5 people, this would allow the remaining two people to become involved in "value-added" activities such as supplier statement reconciliations or supplier relations.

Equally, the Accounts Payable Manager may focus on a specific segment of the process that he/she is certain will benefit from invoice automation. It may be identified that the keying and exceptions management process is particularly inefficient.

Having looked at "intelligent" invoice data capture solutions that result in over 90,000 invoices being input per person per annum, the Accounts Payable Manager looks at the current manual process and finds that 30,000 invoices are currently being entered per person per annum. This is a significant saving that particularly addresses an area of great inefficiency within the cycle.

Early payment discounts:
The introduction of an automated AP process enables processing cycles to be shortened, and as such the opportunity exists to seek additional discounts from suppliers in return for more rapid payment. After analysis, an organisation making £250 million worth of supplier payments finds that 25% of payments are eligible for a 1.5% discount, translating to nearly £1m in savings.

Document storage:
Paper invoices within a manual process may need to be posted as part of an authorisation process. The automation of this process can lead to substantial cost savings, not least the time spent filing/retrieving documents in addition to the storage costs. At the same time the employee time spent telephoning and printing is also substantially impacted. According to a study by Gartner, the average document is copied between nine and 11 times. When taking into account the previously mentioned storage costs and inefficiencies, they came to the conclusion of a cost of around £8 per invoice. When looking at the physical storage of documents, whether this is internal or to a third party it is important to look at the cost of the space, even if this is estimated as a % of the total space of the building that the organisation utilises.

Duplicate payments:
When handling paper documents it is not uncommon for invoices to get lost or misplaced, and often this leads to a duplicate invoice being sent by the supplier. The original is then found and processed, unless the Finance/ERP system has effective controls - this can lead to a duplicate payment. With AP functions often not having either the people or time to focus on supplier statement reconciliations, the opportunities for inefficiencies and potential duplicates is heightened and an ongoing risk. It is fairly common to have third party organisations who will come into the business to recover such costs and take a percentage of what it recovered.

According to a benchmark study conducted by the IOMA (The Institute of Management & Administration), 19% of organisations surveyed reported a duplicate payment rate of between 0.1% and 0.5% (percentage of invoices that where duplicate payment took place).

When taking into account the four areas highlighted above, it is not uncommon to see enormous savings and real examples of such savings do exist with payback periods estimated at shorter than 12 months.

Understanding the existing process
To ensure that the correct solution is adopted, it is essential that the pains and problems within the processes are understood. An internal assessment is required to understand all of the issues; the answers to key questions will help you to develop a business case for implementing an invoice automation solution:
  • What types of invoices do we receive? (e.g. stock(GFR)/non-stock (GNFR)/PO/non-PO)
  • How is each type currently processed? (e.g. are non-PO manually routed across sites?)
  • How many invoices are received and processed per annum? (by invoice type)
  • Is this volume set to grow/decline/remain static over the next 3 to 5 years?
  • How many active suppliers are in the supply base? (suppliers by type - stock/non-stock)
  • How many people are involved in AP to process the invoices?
  • How much does it cost to process an invoice today?
  • How long does it take to process an invoice?
  • Are early payment discounts available from suppliers? Are they being taken advantage of?
  • How many invoices become exceptions? (e.g. incoming invoices not quoting required information such as PO number)
  • How are the exceptions currently managed?
  • What systems are used to hold information relevant to the processing of invoices?
Drive down costs and increase straight-through invoice processing.