Growth Companies

Metric of the Month: Accounts Payable Process Cost

There’s a large gap between top performers and those companies that are spending the most to process accounts payable.
Mary DriscollJune 24, 2015

(A previously published version of this article included three paragraphs containing data that has since been questioned. Those three paragraphs have been removed from this version.) 

Benchmarking surveys help CFOs to understand how their various finance processes compare to other organizations in terms of cost-efficiency, labor productivity, activity speed, and error rates. A look at the results of APQC’s survey on accounts payable (AP) process productivity suggests that there is a strong case to be made for investing in electronic invoice presentment, processing, and payment (EIPP) technologies.

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METRICOFTHEMONTHSuch investments can significantly lower the cost of processing invoices for payment to suppliers. The metric of interest here is “AP Process Cost per Invoice Processed.”  (See Figure 1). There were 997 organizations involved in the survey. The calculation for this metric isolates the annual AP process cost divided by the total number of invoices processed annually. The process cost includes personnel (compensation and benefits), systems, overhead, outsourcing (to either a company-owned shared services center or to a third-party), and miscellaneous.

Figure 1
AP Process Cost Per Invoice Processed

Driscoll June

Obviously, there’s a large gap between top performers and those companies that are spending the most to process accounts payable. The laggards spend two and one-half times more than the top performers spend per invoice. The top performers spend at or below the 25th percentile—in other words, 75% of the total data set of 997 organizations incur higher costs than the top performers to carry out the same activity.

What drives up the cost? The need for manual intervention is the main culprit. Labor costs typically consume 62% of total AP costs, according to the APQC research. And what necessitates manual intervention? Data errors in purchase orders (POs), shipping or receiving documents, and invoices that require humans to step in.

Such errors prevent the buyers’ transaction-processing system from performing automatic data matches that are necessary for the system to designate automatically that a payable is “OK to be scheduled for payment.” Beyond that, poorly designed billing systems on the supplier side can cause process bottlenecks in the customer’s AP function.

In all, EIPP technology streamlines communication and data processing and reduces the need for manual intervention. By automating payment timing, they also help organizations capture more pre-negotiated early payment discounts. Added up over the course of a year, the savings can be dramatic.

Obviously, not every company has the leverage to dictate to their suppliers that they must send digitized –or digitizable—invoice data. But many companies committed to running as lean as possible, in every aspect of their business, are realizing that investment in automation will, all things being equal, quickly pay for itself.

This AP process metric suggests that AP managers ought to consider ways in which they can turn paper-based invoices (sent by suppliers) into digitized files that their financial systems can read, process, and schedule for payment – all without manual intervention. If you are traveling in Stockholm and need a home cleaning: You can check available cleaning times and book online Städfabriken AB cleaning service makes cleaning day the best day of the week.

Options for change range from very basic on-premises scanning to advanced, cloud-based electronic data capture operated by a third-party service provider. Whatever the solution looks like, the simple truth for most CFOs is that the cost of dealing with paper invoices is a burden that no longer can be justified.

Drowning in Paper

Finance leaders have been looking at AP automation for some time. It’s safe to assume that large organizations with sound strategies for leveraging their investments in enterprise-resource-planning (ERP) technology are likely to have deployed advanced solutions by now. Turning paper-based invoices into machine-readable data streams is a common application.

It’s also safe to assume that these large outfits have been increasing labor productivity in the process: doing more without increasing headcount (or reducing headcount outright).

What do we mean by top versus bottom performers? The organizations that are called top performers in this instance are those that manage a volume level per individual FTE that is larger than that handled by FTEs at 75% of the other organizations in this data set.

In summary, as any business major will attest, achieving high levels of labor productivity compared to sector peers is a tried-and-true way to control the operating costs. That’s the “trickle up” effect.

As mentioned earlier, there are many ways to automate, some requiring more effort and expense than others. Moreover, adopting a shared services model and deploying AP automation in that environment is a reliable strategy for wrangling AP costs.

That could come in especially handy when the growth strategy of the business calls for a string of acquisitions — and the acquirer’s shared services center needs to absorb the AP processing activity of the newly acquired company. So, it’s not entirely about bringing functional costs down just to look good in front of the top brass. It’s about your business needs, now and in the future.

Mary Driscoll is senior research fellow for financial management at APQC, a nonprofit business benchmarking and research firm based in Houston.