Show me the money! Funding and implementing best practices in Accounts Payable

Overview In my seventeen years of involvement as head of shared services at multiple companies, one thing has remained constant. That constant has been the ability to create significant value in terms of cash generation by implementing numerous best practices in the Accounts Payable process. This discussion will be a high level summary of AP best practice opportunities and experiences associated with funding and implementing automation, analytics, and AP Vendor Audit and Credit Recovery. Automation and Analytics From my perspective, the AP Process, and the full "procure-to-pay" process stream, represent one of the top areas for quickly creating cost efficiencies, as well as improvig quality and timeliness. This can be done by streamlining the end-to-end process flow to reduce exceptions by using many of the automation solutions currently available. Value can also be created by establishing and executing governance processes and data analytic techniques to monitor and control spend. In addition, establishing improvements in cash flow management by negotiating and executing optimal vendor terms and discounts will create significant value. Listed below is a sample of some of the common AP best practice elements available for deployment. EDI (Electronic Data Interchange) Purchasing Card AP Self Service Portals Workflow, Imaging and Document Management OCR (Optical Character Recognition)/Data Capture Automatic Spend Control Alerts/Reports Supplier Governance and Portals Purchase Order/I-Procurement Vendor Terms and Dynamic Discounting for Early Payments The practices listed above have been around for a long time. Despite this, there are still many companies that process the vast majority of invoices and payments manually. Why is that? Part of the reason is due to the inability to secure funding for the investment in systems (i.e., 3rd party solutions or ERP functionality enhancements). Another reason is the confusion as to where to start. How does an organization decide which best practices should be deployed first? These are two questions that can be addressed by performing an analysis of options and considering the relevant factors to make the decision. First, a logical roadmap can be created that identifies and prioritizes the deployment of best practice elements in sequential order, based on consideration of the optimal business cases relative to the organization’s goals. For example, is the intent to significantly reduce labor cost, improve quality, increase timeliness, or all of the above? The tolerance level on the timeframe to complete the project, and the incremental resource requirements, are also critical factors to consider in creating the roadmap and identifying the prioritization. It is important to consider the current state environment and interdependencies that exist among the different best practice elements. For example, if the company has not yet established a focused governance process over supplier selection and terms, then it might not be ready to implement a supplier portal. Unless of course, the supplier governance process is approved to be part of the project scope. These were the factors we considered in my former shared services organizations. We chose to first focus on automating and streamlining the AP manual invoice and payment process flow to minimize the exception processing and manual work. This also achieved our business objective of significantly reducing labor cost. The best practices that we prioritized and implemented included the following. A Purchasing Card process with controls on use of merchandise categories and vendors, workflow notifications to account holder and supervisor, and automated direct payments to card company. Automated spend analytics, reporting and enforcement, for AP and T&E spend. Self-service AP portals for data input by the field with tight automated policy enforcement on vendor terms and discounts. Automated invoice imaging and attachment to ERP transactions, with automated workflow approvals and automating routing to the payment queue. Automated payments from payment queue based on Vendor Master File terms and/or discounts entered. A continuous program of increased EDI and ACH penetration. The implementation technology that we used in our automation projects was a combination of implementing enhanced workflow functionality embedded or developed in the ERP system, and the use of a 3rd party technology (i.e., imaging). In order to develop the proposed business cases associated with the best practice elements above, it was critical to identify the required project resources, costs, and anticipated savings. In our case, we had deep internal functional project skills, so we used internal resources for those functional activities. However, the technology resource efforts and cost were incremental to the business case. This included our 3rd party imaging solution provider software and consulting cost, and our technology resource cost billable from our IT Outsource group. Our business case did secure approval due to the high payback on the investment cost. A high payback was driven by the estimated labor cost savings. The implementation of these initiatives reduced the AP staff labor cost in excess of 50%, which exceeded our targeted labor cost reductions in the business case. Or said another way, our objective of "show me the money" exceeded expectations! AP Vendor Audit and Credit Recovery Process A clear best practice in AP is an effective AP Vendor Audit and Credit Recovery process. I recently engaged a 3rd party Vendor Audit and Credit Recovery partner to perform this function as part of our continuous improvement plan. We reviewed multiple 3rd party offerings, and gained a significant appreciation as to the value creation opportunities this process can achieve. In retrospect, I wish I would have initiated this much earlier. It was critical to find the right partner that could deliver this service without funding requirements, and without increasing the AP staff resource levels. Once the 3rd party selection was made, we kicked off the process and the 3rd party partner started "showing us the money". From my perspective, it was easier and quicker to implement than expected and took minimal effort compared to other AP improvement initiatives. While minimal effort is required by the AP staff, it is important that the internal staff does their part in reviewing and approving the cash recovery presented by the 3rd party partner on a timely basis. The use of software to catch duplicate payments is also a standard offering by 3rd party service firms. The scope of agreement with our 3rd party service provider included the identification of duplicate payments. However, sophisticated ERP systems, such as our Oracle platform, are very effective in catching duplicates. Also, in networking with some of my shared services peers, I have learned that some companies have developed their own system scripts to catch and/or recover duplicate payments. As a result, the cash generated from the prevention and/or recovery of duplicate payments has decreased over the years. That means the large cash recovery opportunities can be found in an AP Vendor Audit Credit Recovery process that recovers cash credits that reside on the AP vendors’ Accounts Receivables (AR) books. These credits are the result of various factors such as overpayments to AP vendors by the AP staff, as well as returns, rebates and allowances not properly processed by vendors. One simple example of an AP overpayment is when an AP associate incorrectly keys an invoice amount in the AP system. For example, an AP associate might incorrectly key an invoice amount of $100,000 instead of $10,000, resulting in a $90,000 overpayment to the AP vendor. Due to the "heads down" high volume processing nature of the AP vendors’ AR department, the amount of overpayment may be immediately posted as unapplied cash, or to a miscellaneous account on the AP vendor’s books, to be investigated later. In many cases, later never comes. Then, months or years later the AP vendor may either escheat the overpayment, or take it to income on their books. The cash due to the company is lost forever! An effective Vendor Credit Recovery process prevents that from happening. The cost to implement our 3rd party Vendor Credit Recovery process was zero, since fees to the 3rd party are on a contingency fee basis. The 3rd party receives a small percent of cash recovered, so there are no fixed fees. More importantly, there was no investment required by IT. The AP resource requirement is minimal, assuming the AP staff approve and process the credits provided by the 3rd party partner on a timely basis, and avoids unnecessary review. From my perspective, use of a 3rd party partner is critical to leveraging economies of scale and specialized skills. This allows the company to avoid the high internal labor cost involved in an AP Vendor Audit Recovery process. It has been my experience that AP staff takes pride in thinking they are effectively recovering credits by reviewing vendor statements. In fact, one of my AP staff members told me that they receive and review statements from most of the AP vendors with big spend. My analysis proved that to be 100% FALSE! It was determined that we only had $5 million of annual payment/spend with those vendors providing statements, out of the $1.8 billion total AP payment/spend. I was already aware that we were NOT performing an AP Vendor Audit Recovery process, and our analysis of statement data received from vendors also confirmed that we were not even performing a real statement audit. This further supported the need to select and use an effective 3rd party service provider to implement and maintain an effective AP Vendor Audit Credit Recovery process. The objective is for the 3rd party service partner to identify and secure cash recovered from the AP vendor, which makes an incremental contribution to net income! Our 3rd party service provider had a significantly high rate of success in securing the data from the AP vendors necessary to analyze and identify credits and cash due to the company. This is important, since if you cannot collect the data, then you cannot collect the cash. There were minimal issues regarding our partner presenting us cash that does not belong to us, since our 3rd party partner did pre-filtering based on data we provided to them. The cash recovery is continuous. It is not a periodic audit done in a snapshot point in time every other year. Some companies have the misconception that it is not necessary to have a continuous process. They are under the mistaken belief that the vendors will quickly change their processes to promptly investigate and return cash to the appropriate companies. That is a nice thought, but probably not realistic. Also, a continuous recovery process captures spend from the new vendors that are constantly added to the Vendor Master File. The Vendor Credit Recovery process is a direct form of AP value creation. In fact, the ROI achieved from an effective 3rd party AP Vendor Audit Recovery process usually is much better than the ROI achieved in AP automation projects. Unlike the AP automation projects that I discussed earlier, there are no fixed fees or initial investment required. That makes it significantly easier to quickly secure project approval and implement the process, as compared to automation projects. Summary Hopefully this high level look at a sample of real life experiences regarding AP best practice value creation opportunities was helpful. Please do not hesitate to contact me at should you have questions or wish to explore other process improvement and value creation opportunities across any of the shared services process areas. [eventpdf]

Show me the money! Funding and implementing best practices in Accounts Payable

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