An AP Automation Tale – How Much is Enough?
The heroine of our story is a CFO, Sally Smith (not her real name), who has been struggling with how to manage the impact of the economy on her areas of operation. She is painfully aware that times have changed: Cash is king, working capital must be managed more closely than ever, regulatory compliance continues to demand better controls and reporting, and staff reductions have made everyone work harder each day, especially at closing periods.
Several years ago, her company spent a large amount of time and money on an ERP system with a terrific financial package. The vendor showed them a vastly improved purchase to pay process that was far better than their old legacy system. The promise of this new ERP system was a “transformed financial accounting and reporting solution.” And in many respects, it delivered. Having observed closely how Accounts Payable operates in her company, she also knows that how efficiently they process supplier invoices can have a dramatic effect on the challenges facing her company. She also realizes that even with EDI (electronic data interchange), which they have implemented with a few key suppliers, most invoices are still arriving as a paper document. Her highly efficient transactional ERP system is being handcuffed by paper-bound activities. How can she continue to improve processing efficiency in an environment like this?
Speaking with her peers in other companies who have faced these challenges and addressed them and doing a bit of research on her own, she has decided to explore automating her accounts payable department. Her research raises a set of questions:
- “Should I consider a standalone AP automation solution?”
- “Should I just scan and capture the invoices after they have been processed in my ERP system?”
- “If not, how much integration to my ERP system should I implement?”
- “What about OCR (optical character recognition) that can read invoice data right from an invoice image?”.
It’s enough to make her head spin.
Being astute, she concluded the real question was this: “How much automation do we really need?” Thus armed, she set off on her quest for the different ways and degrees of benefit to be derived from automating her accounts payable department. Here is what she found:
Late archiving or scan-after-voucher
She found this method had the least impact on current processes (and the least benefit) but did have some appeal. The cost was fairly low to implement. In a nutshell, supplier invoices are processed the same way as they have always been processed. They’re then scanned after the voucher record is created in the ERP system. This is done at the end of the process. The main benefit is retrieval of the images (not the paper) to satisfy any research or audit requests. Since the process of moving paper and manual data entry is not changed, it does not provide early visibility and control of the invoices while “in process”.
Early scanning into a workflow solution with key from image (KFI)
This method had great appeal to Sally Smith. Why? Because it does improve many aspects of the process and will help her resolve the challenges we outlined at the beginning of this article. Early scanning with a few key attributes (invoice amount, due date, terms, etc.) would provide immediate visibility into the “work in process” invoices and data. Invoices with favorable terms could be prioritized, invoices requiring approval could be routed electronically (workflow) to shorten the cycle time, and being able to see the backlog and dollars associated with these invoices would reduce bottlenecks and greatly help with cash management. By linking the new system closely with the ERP software, data entered from the invoices would be done from the on screen image (KFI) vs. the paper process used in the past. With the integration to the ERP system, any user granted access rights could see the invoices and data without chasing down a paper file. This option is more costly than the first, but provides greater benefit by addressing more of the business challenges she faces.
Advanced OCR (optical character recognition) and Automatch/Autovoucher
In Sally Smith’s research, she came across articles describing what “best in class” performers in AP automation were doing. She discovered that many of them were processing an invoice from receipt to ready-to-pay for around $3.00 per transaction and under four days’ elapsed time. While she had not yet measured her company’s cost per transaction, she also read that the average company processing paper had transaction costs that were about $15.00 with about 10 days’ elapsed time to process an invoice payment (Aberdeen Research – May 2011). That started her thinking: “We have suppliers that offer (or would offer) better terms if we could pay them consistently against those terms. There would be a lot of cash freed up through this reduction in our cost of goods.”
Now she was on to something. She discovered that there were very powerful and efficient software applications that could “read” the data from a vendor invoice just like a person would. And it could do so from any vendor layout. Additionally, the software could compare what it read from these invoices to data in her ERP system. Thus if a PO number was found on the invoice, this software could check the ERP system for a match. As she also learned, the data that was extracted from these invoices could be sent to a workflow system where correctly matched data were vouchered automatically without additional human intervention. Exception items that failed to match properly were routed for attention. This greatly reduced the time to process and the workload on her staff. She also thought this could have a positive impact when they completed a planned acquisition of a competitor. Bringing the AP volume of the new acquisition on board would be far easier. This would be the most costly approach from an acquisition perspective, but could be implemented as a second Phase if she went with a key-from-image solution as her initial implementation.
Armed with this newfound knowledge, she proceeded to the next step of her process: Building the business case. She planned to form a project team that would begin to further refine their pain points and identify benefits that an investment in AP automation would bring. She is very confident that she is on the way to a more efficient system with enduring benefits to her company.
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