Eight Myths of Accounts Payable Outsourcing Addressed
Whenever businesses explore the potential merits of outsourcing their accounts payable (A/P) area, a lively and prolonged debate of its potential pros and cons often follows – and in many cases, creates so much controversy that projects stall before they get off the drawing board. Many of the issues discussed and dissected are based on myths originating from industry hearsay, rather than on facts that can be substantiated by an actual track record of outsourced projects.
I would like to share some thoughts to help your organisation evaluate the true potential of A/P outsourcing by outlining – and dispelling – some of the more common industry myths surrounding the option.
According to The Outsourcing Institute’s annual survey of outsourcing end users, survey participants listed reducing and controlling operating costs as the top reason for outsourcing. The problem with using cost savings as the sole criterion on which to base and evaluate a decision to outsource is that it implies that there is a baseline from which companies can measure savings. In an ideal world that would be true. However, according to the Aberdeen Group’s December 2006 Accounts Payable: Strategies for Success report, paper invoices can cost up to US$64.97 each to process. What’s more, the Economic Intelligence Unit found that one-third of senior executives didn’t know how much it cost their organisations to issue invoices. Obviously, without this information, it would be difficult, if not impossible, to measure the value provided by an A/P outsourcing solution.
The bottom line is that organisations need to think more broadly when evaluating the potential benefits of outsourcing. Outsourcing has many positive impacts on many aspects of a business. Some factors to consider include: What is the cost benefit of returning 30 minutes to your field personnel, or of negotiating better supplier terms because your bills are paid on-time and accurately? What is the cost of having to deal with a fraudulent payment? Outsourcing can help you proactively address all of these issues.
While the CFO will expect you to document some degree of cost savings, your decision factors should branch well beyond cost to the consideration of benefits such as:
The A/P process consists of five basic components, some of which are ideal candidates for arbitrage, and others that are not.
Consequently, while other disciplines are ideal fits for arbitrage (e.g. IT programming), a good A/P process is not ripe with elements of labour arbitrage. And, when you consider the additional oversight necessary to manage processes across geographic barriers, the potential cost savings quickly become cost elements.
A/P is a standard and straightforward process – you receive, code, audit and pay bills but where it varies for individual companies, differs. Each client most likely has its own customised internal approval processes, its own chart of accounts, strategic and not so strategic suppliers and other factors.
The best A/P outsourcing solutions focus on optimising transactional processes, like scanning, opening mail and data capture, while at the same time, customising the higher value tasks associated with your business requirements (e.g. supplier interaction, discount management, approvals and escalation, and exception management).
If you solicit a service provider to deliver A/P services the same way you’ve always performed the function within your business, you should not expect much to change. Instead, you should take advantage of the provider’s knowledge and their skill in optimising processes to meet your business requirements as identified by your company’s experts.
Consequently, an A/P outsourcer manages numerous performance metrics and should share continuous improvement processes with you.
Communication on a regular basis is critical. With A/P outsourcing, as with any business relationship, the more frequent the communication, the stronger the relationship. Ensure that your A/P services agreement considers:
Almost all A/P service providers can be expected to have many more metrics than the typical in-house A/P shop – an outsourcing solution will enable you to gain access to those metrics to demonstrate process improvements.
Again, cost savings are measured from some baseline, which is usually an estimate at best. If the outsourcing relationship is not providing other benefits as outlined below, you’ll be less than likely thrilled with your results. In order to alleviate this risk, be sure that part of your regular discussions with the provider includes your perceived value of their services.
Outsourcing A/P offers a range of benefits, including cost savings and improved process efficiencies, however, other savings drivers include simplifying and standardising operations and the underlying business rules, as well as process automation through the use of new technologies.
Cost efficiencies and gains can be dramatic. Your return on your outsourcing investment should go well beyond merely making your systems more efficient; your selected provider should focus on developing a solution that guarantees other measurable results, including:
Rather than selecting a provider with a one-size-fits-all financial and accounting back-office solution, it is important to select a specialist that will focus exclusively on your payables management needs. Overall, some vendors are good at managing paper processes; others are good at helping clients apply e-commerce solutions. Most providers and industry experts agree that you will always have to address both paper and electronic invoices. Beyond that, some providers focus on:
Applying technology to unwieldy processes just makes bad things happen faster – and companies often have difficulty inspiring change internally because employees are so closely tied to the processes they perform within their own jobs. Outsourcing is a mechanism that can be used to break down ingrained habits and promptly modify established processes.
Changing systems, processes, and strategies may have many benefits, however, time and financial resources will be required. For back-office changes, is it really worth waiting 12-18 months for your company to implement a solution rather than letting a provider bring those same benefits in a matter of three to four months.
When you outsource A/P, you should expect to use your new service provider as your A/P department. Will you have some surprises? Yes, just like today, you’ll face an occasional A/P-related issue. A good provider will handle those one-time surprises in the course of business – just as your staff does today.
The ‘scope of work’ document you put in place with your A/P outsourcing provider should clearly identify the A/P tasks that need to be accomplished. Any time you involve people in your new outsourced process, there is a danger that responsibilities will overlap. Be sure to identify the exact tasks that your remaining staff members will perform. It is absolutely unnecessary – and counterproductive – to keep them ‘just in case’ you need them.
Select a provider that takes the time to document your current ‘as-is’ process and ensures that your customised scope of work document details all required tasks.
For those who manage the process well, A/P outsourcing offers benefits extending from simple cost savings to providing an impetus for far-reaching strategic change. An effective A/P outsourcing solution works with you and your suppliers to maximise the benefits of the services to all parties involved. By streamlining approvals, receipt matching and ensuring timely, accurate payments, both sides of the A/P process begin to build a ‘preferred’ status that, over time, builds a stronger relationship.