Battling the High Cost of Invoice Processing
Corporates looking to reduce costs in their accounts payable (A/P) departments are intent on automating the capture of paper invoices at the beginning of the process. Often the result of such an approach is a more complex, more costly solution that increases frustration rather than decreases costs.
To really tackle the imbedded costs associated with certain A/P processes, one must understand the true costs associated with processing an invoice. According to a 2008 Forrester Wave Report, analyst Duncan Jones states those manually processing suppliers’ invoices costs A/P departments anywhere from US$10 to US$100 per invoice, compared to about US$2 for a fully automated solution. When taking into account every step, including the receipt of paper invoices through the mailroom; the role human error plays in adding incremental costs when manually keying in invoice data; taking phone calls from suppliers following up on their invoice and payment status; and the opportunity costs associated with not taking early pay discounts, the primary culprit of high invoice processing costs and inefficiency is paper.
According to Gartner analyst John E. Van Decker’s December 2008 report, Accounts Payable Invoice Automation, approximately 75-80% of invoices in the US are still paper-based. With an estimated one billion business-to-business (B2B) invoices processed each week, hundreds of millions of paper invoices are at work clogging up organisational processes and increasing costs.
When concluding that paper is the primary driver of high A/P costs and that accepting paper invoices may not be the best way to initiate the approval and payment process, the obvious question becomes how to best eliminate the paper.
There are three primary options companies should consider when looking to move away from the receipt of paper. Electronic Data Interchange (EDI) is the electronic exchange of business data between two entities in an agreed upon standard format. Optical Character Recognition (OCR) is a software-based solution that extracts data from scanned paper documents. Finally, e-invoicing, which is relatively new and involves bringing together large communities of buyers and suppliers via a shared platform or network to exchange invoices and other commercial documents.
As in most cases, there is no right answer for every company, nor is there one single solution that solves the entire problem. The ideal solution or configuration of solutions varies depending on the organisation and the nature of their spend. For instance, EDI is a time-tested solution for addressing the flow of invoices from high volume, strategic suppliers. The pitfalls of EDI are the costs for both a company and its suppliers and the limited number of suppliers for which it can be cost-effectively applied. The costs and lack of scalability prohibit it from being widely accepted as an ideal solution.
OCR is an alternative that does not require supplier participation, but like EDI, does require costly investments in hardware and software. While OCR can deliver incremental savings to an organisation, it does not eliminate the receipt of paper into a company’s mailroom and the extent to which it truly eliminates manual data entry is unclear. While OCR vendors tout very high recognition rates, i.e. the number of characters that can be captured, the far more meaningful metric is the first pass rate, or the number of complete invoices that can be processed without requiring human intervention. First pass rates usually fall within the 50% range, requiring significant manual intervention and limiting OCR’s value in eliminating costs.
While still relatively new, e-invoicing is gaining momentum and is certainly worthy of consideration. Like EDI, it eliminates paper altogether. However, it scales to hundreds, if not thousands, of a company’s suppliers. The true potential of e-invoicing is the power of the network. A small supplier in Taiwan can send invoices electronically to a customer in Italy, without ever having to agree with the client on a mind-numbing array of technical protocols and formats to establish a proper electronic ‘handshake’. No paper is involved and the manual intervention associated with exception handling in the OCR process is eliminated through multiple levels of validation, which can be imposed by the network providers to ensure invoices are accurate.
When deciding to implement a solution designed to reduce invoice processing costs, A/P teams need to know what drives the internal groups from which they’ll need to gain support. Once the team has an understanding of their organisation’s issues, they can more clearly outline and explain the benefits and expected outcomes of moving to a particular solution.
When it relates to e-invoicing, organisations must complete due diligence of the available vendors to gain a full understanding of which options and features are available and which solutions best meet their needs. While choice is good, it also creates confusion for A/P departments about which vendor provides the best fit. With that as a backdrop, organisations should make sure to take the time to conduct careful research and ask relevant questions to know and understand exactly what vendors will do and what they will not do. Look at their customer list. Does it include well-known and well-respected brands from a variety of vertical markets? Moreover, will they provide you the customer references with whom you can speak about their customer service levels and supplier adoption strategies?
In turn, buying organisations must have a clear picture of what will be required from them when implementing a chosen initiative. Providers will likely be responsible for quite a number of activities during the implementation process. However, customers will have to share responsibility in order for a project to be successful.
Regardless of which option is chosen, organisations will be compelled to shine a spotlight on hidden costs associated with the invoice approval and payment process in the coming months. While some solutions are more cost-effective, scalable and easier to implement than others, the important issue is that organisations do something to begin eliminating the paper in their A/P departments. With proper upfront planning around the right solution, A/P departments can lose the paper, gain efficiency and significantly reduce the costs associated with processing an invoice.