The Case for Outsourcing Accounts Payable

by Ted Ardelean | 3/11/15

According to a recent industry survey report issued by Canon Business Process Services1, the accounts payable (AP) function is the most frequently outsourced process with Finance & Accounting. The reason: organizations optimize AP—by leveraging the advantages of outsourcing—as one of the most effective ways to improve overall business performance.

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The report also details how outsourcing is a strategic move that can quickly transform manual, paper-filled AP departments into automated, efficient operations. Benefits can include faster invoice processing, superior customer service and improved visibility into and control over AP processes.

Outsourcing their entire AP department may not be practical for some companies. However, by outsourcing specific, non-critical AP activities while keeping some functions in-house, organizations can enhance the efficiency of their entire AP operation. The structure of AP—with separate activities such as receipt-to-ERP invoice processing, approval and discrepancy resolution and managing supplier inquiries and monthly routines—lends itself to a modular outsourcing approach.

With the above points in mind, I’d like to highlight three main reasons why companies outsource AP processes and provide some additional insights on the benefits outsourcing can bring to organizations. Let’s begin with the first reason why companies outsource AP: to ease “front-end” burdens.

Easing front-end burdens

The front-end of AP processing is sometimes referred to as the “invoice receipt-to-ERP” stage. It’s the first phase of the AP workflow that organizations choose to outsource. While receipt-to-ERP is a significant challenge for many organizations—especially if the majority of invoices arrive in paper format—it is also a critical phase of AP processing. Typically it requires expertise in scanning, optical character recognition (OCR) capability, data extraction and digital workflow.

Although critical, the front end of AP is viewed as a non-value-added activity. However, organizations want to achieve a best-in-class level of invoice data conversion while avoiding high investment in labor, technology and facilities. For this reason, outsourcing the invoice receipt-to-ERP phase to a specialist is an appealing solution. This approach can ease the data entry burden and provide a more efficient paperless process. The organization’s internal data entry labor can then be reallocated to more valuable AP tasks, making AP outsourcing a strategic best practice for optimized processes.

Improving AP performance

The second reason companies outsource is to increase overall AP processing performance. They can begin by tapping the expertise of a service provider to do an initial assessment based on Six Sigma-based performance improvement methodologies. This approach would ideally leverage the service provider’s experienced staff in mapping existing processes, identifying gaps between the current and desired future state and then providing a plan for implementing improvements that can lead the company to a successful transition. This strategy also helps avoid the initial trap of shifting current problems and flawed approaches to a service provider that simply continues to manage a less than optimum process.

Avoiding technology investments

The third motivator for outsourcing AP is that many companies do not need to own AP automation technology. Or, they may not see a cost benefit in updating their internal system. When using an outsourced AP service, organizations can avoid tying up capital and IT resources necessary for purchasing, implementing and maintaining AP automation. Instead, they can leverage the service provider’s system in a pay-per-use fee structure and transform a fixed cost into a variable one. Additionally, today’s outsourced SaaS AP automation systems usually provide advanced features including the ability to standardize AP workflow across multiple ERP systems.

Outsourcing can yield many benefits

AP outsourcing can yield many business benefits besides those I mentioned earlier (i.e. ease the data entry burden and provide an automated, paperless process). These benefits include more consistent processing performance. An outsourcing service provider is driven by competitive market forces. This means its work is structured according to a service level agreement (SLA). SLAs help apply consistent performance and management according to agreed-upon metrics, such as entering all invoices into workflow within 24 hours of receipt. These guidelines can help ensure that AP outsourcing providers offer process management practices that improve overall performance as measured by time, cost, error rate, quality of work and internal control metrics.

If your company is considering outsourcing, it is important to be aware of three key options. One is to outsource invoice conversion, which will eliminate the paper and data entry in processing. Another alternative is to outsource invoice processing, which will provide invoice conversion as well as simple rules-driven approval processing for some of the invoices.

The third, and most robust option, is AP process outsourcing. It is the most customized and flexible option, including centralization and digitization of invoices, approval and discrepancy resolution processing, and AP administration. The scanning and processing work can be done on the client’s site or in the provider’s shared service centers, and the service provider may use the client’s systems or its own invoice automation platform, depending on client needs. The client’s processing workload is usually transferred to the provider though the client may retain AP managers and skilled analysts to oversee and govern the operation.

The best approach will depend on the specific challenges your company is facing. What is most important is that your organization realizes the benefits that can come from AP outsourcing and begins taking steps to achieve them.

 

1.     Canon Business Process Services and PayStream Advisors (2014) The Case for Outsourcing Accounts Payable.

 

Ted Ardelean is director of R&D for Canon Business Process Services, Inc., a leader in managed services and technology. Please visit www.cbps.canon.comfor more information.