This article is reprinted/republished by the express written permission of IOMA (The Institute of Management & Administration). ©2009; for more information about IOMA publications visit www.ioma.com

 

When AP departments begin to implement new automation, there are certain obstacles that are bound to pop up. Luckily, there’s enough experience here to reveal what these common obstacles are—and how AP managers dealt with them and were able to get their department further down the road to paper-free processing.

Trouble Areas

There are certain areas of the overall AP process that contain hidden barriers to automated invoice processing, according to Jon Casher, APM, president of Casher Associates Inc., a firm that specializes in project management, process management, and information technology consulting. Casher has worked with hundreds of organizations in the public and private sectors, providing help with a broad range of accounts payable and procure-to-pay topics.

Speaking at IOMA’s Paper-Free AP conference in Ft. Lauderdale, Fla., Casher gave an overview of going paperless in AP, which we presented in the February issue of Managing Accounts Payable. He also discussed how to overcome common obstacles to automation and advised that AP managers should examine the following areas:

• Ordering Process
• Invoicing
• Expense Reports
• Approvals
• Dispute Resolution
• Posting to the GL
• Payments
• Reporting
• Final Point

"Take a look at each of these areas and think about what you are currently doing to make each one work and what you need to do to overcome barriers in each area," Casher said. He points out that fully understanding the barriers leads to being able to come up with the recommendations for dealing with them.

 

Ordering Process

To overcome the paper requisitions process for ordering, find your top five vendors by paper transaction volume. These vendors are likely to fall into the following five categories:

1. Overnight Delivery Services
2. Telecommunications
3. Office Supplies
4. Temporary Help
5. Raw Materials Suppliers

"These five vendors might account for 50 percent of your transactions," Casher said. "I recommend that you use vendors’ Web sites for ordering if you don’t have your own e-procurement capability in place. Many vendors can and will customize screens on their Web sites to restrict what can be ordered, as well as provide a custom ‘look and feel’ designed for your organization’s specific needs."

 

Invoicing

The question to ask here is: "How can we eliminate paper invoices?" Some AP departments use Electronic Data Interchange (EDI). You can also use purchasing cards (p-cards) and get one invoice from your p-card provider in place of 50 or 100 different invoices. P-cards are ideal for small-dollar invoices. Between 60 percent and 80 percent of all invoices that come into AP in a typical organization are for $500 or less. It costs just as much to process a $7 invoice as a $7,000 invoice, so get rid of them, Casher advised.

If you can’t eliminate every single paper invoice, the ones that remain can be scanned and you can use Optical Character Recognition (OCR) technology to read the data and eliminate manual input. "There are some caveats about using OCR, and providers such as KeyMark, AnyDoc, and ReadSoft will give you insights into things you have to be careful about and how to avoid them," he pointed out. "I have found that at organizations that use OCR, the productivity doubles or more than doubles. While these organizations may not eliminate the paper, they do truncate it so paper doesn’t have to flow any further than is absolutely necessary," Casher explained.

 

Expense Reports

Typically, organizations get nine to 10 times as many invoices as they get expense reports—but it can take a lot more work to process one expense report than it does to process several invoices, Casher noted. "The biggest problem on manual expense reports is that the numbers don’t add up, so people spend a huge amount of time processing and reconciling expense reports," he said. "Some organizations use spreadsheets and others use off-the-shelf products that they can run in-house. You can also use an application that you access over the Web, a method known as SaaS, or ‘software as a service.’" Most providers of expense report software offer it via this method.

"Organizations have been successfully using automated solutions for travel and entertainment (T&E) expense management for five to 10 years," he pointed out. "If you use one, go with a package that allows booking of trips to be done electronically and is linked to the corporate travel card. That way, when you do spend analysis, you don’t have to dig for data such as the hotels travelers stayed at, the price of the airfare, or what car rental agency was used. That’s because all that data can be prepopulated into the expense report automatically. So the only things you’d have to be concerned about are the transactions done without a credit card or travel booked in advance."

 

Approvals

The approval process is another area that can cause a bottleneck in your organization, Casher noted. "One of the problems is identifying who has to approve a transaction," he said. "This can be a big barrier to trying to do processing electronically. In the perfect world, invoices should all come to AP. But if you have a problem, if invoices come directly to AP, you may not know who has to approve them."

What about blanket purchase orders? Should you use them to streamline the approval process? Maybe, Casher said.

"I was never a big fan of the idea of a blanket purchase order until I was at an organization that issued POs for all types of purchases," he recounted. "Rather than issuing a ‘blanket’ PO, this organization called it a ‘fictitious’ PO. They used fictitious POs for all their utility and telephone bills, and the PO number in their system is actually the account number. The vendor never sees their fictitious PO; but when that bill comes in, the organization knows exactly which department gets charged for the item. This organization even issues fictitious POs for the tax bills of their branches all over the country so they know exactly what cost center is supposed to get hit with each charge.

"The POs are fictitious in the sense that they don’t go out the door," he continued. "The organization doesn’t have to worry about who has to approve the invoices against these POs because they will get the approval in advance—or they know, based on the fictitious PO that they set up when they opened the particular branch office, that it has to go to Joe Smith, Mary Jones, or somebody else for approval," Casher explained. "It’s really simple and very effective."

Another problem with approvals is that they take too long. According to Casher, most organizations have a standard that says, for example, that AP will process an invoice within five business days, but they don’t have a standard that says: "When we reject something to you, you have five days to get back to us." It’s not a double standard because you have only one standard. The typical standard is how fast AP has to do its processing, not how fast other people have to respond to AP when AP needs an answer, he pointed out.

"Give them a window," he advised. "Tell them: ‘If we don’t hear from you in 10 days, we’re going to pay it,’ or ‘If we don’t hear from you so that we can take a discount offered by a vendor, we are going to pay it—so you’d better get back to us faster.’"

 

Dispute Resolution

Sometimes problems arise when your organization and a vendor disagree on price or quantity on the invoice versus the PO. "The contract you have with vendors should state how and how quickly discrepancies are to be resolved," Casher stressed. "You should hold your vendors to a standard. Over the 18 years that I ran an audit firm, we recovered over a million erroneous payments. We would tell our clients to put terms and conditions into your standard contract so that when you inform a vendor that you’ve overpaid an invoice, the vendor would have a time limit to make the refund or otherwise resolve the issue, typically within 30 or 60 days. Give them a time limit and hold them to it."

"Of course, you want to make sure your POs are accurate in the first place to eliminate this issue altogether," he continued. "So you should require the purchasing department to update POs to reflect accurate prices and terms.

Some organizations are also trying to eliminate disputes by using a ‘PO-Flip’ to create electronic invoices. A PO Flip is where the vendor receives the PO electronically and then turns it (flips it) into an invoice using the very same data, which eliminates discrepancies. However, this doesn’t always go so smoothly.

"In some organizations, the PO Flip is really PO Flop," he cautioned. "It’s a flop because it assumes that the PO is correct. And who gets blamed when you do this and there is a dispute? AP, of course—because AP paid something based on the PO that was for that amount, even though the price has changed, the quantity has changed, or maybe there was freight, or insurance, or it should or shouldn’t have been taxed, or something was or wasn’t on the invoice." The point is to be aware of these issues if you use this technique.

 

Posting to the GL

"The problem with posting is that when there is no PO, you need to find out what cost center and general ledger code to charge," Casher said. "The solution is to use blanket POs or ‘fictitious’ POs to automatically look up necessary information. It’s easy to implement this."

You can also use default GL codes based on the vendor or purchasing department, and then the charges can be reallocated.

 

Payments

"Paper checks are costly and vulnerable to fraud," Casher warned. "The best approach is to identify your top vendors by check volume—the ones to whom your organization cuts the most checks. Survey them to find out which ones are getting paid electronically via ACH (Automated Clearing House) and talk with other customers who are paying those vendors via ACH. Then start paying selected vendors via ACH."

"What’s really interesting is that you don’t have to pay everybody by ACH to get a huge benefit," he said. "I know of organizations where they get as few as 100 vendors onto ACH and they eliminate 90 percent to 95 percent of the checks. It’s a no-brainer. If I were going to take any one of these areas and tackle it first, I would go after this—and the reason is that once you are dealing with a vendor electronically from a payment side and it’s working pretty well, it makes it easier to take the next step and ask the vendor to send you its invoices electronically."

Tip: Use the payment process to give vendors incentives for switching to electronic invoicing or electronic payment. To get vendors to use ACH, tell them you will have to pay more slowly if you pay by check. To get vendors to submit invoices electronically, you can say that they will get their payments faster if they send e-invoices.

"That’s what one organization did in 1983, and, as a result, it was getting more than 90 percent of its invoices electronically in 1984," Casher said. "Before it was doing anything electronically, it got over 5,000 paper invoices a day. By 1986, it was getting about 7,000 invoices a day and handling 92 percent electronically. As a result, it needed only five people in AP."

 

Reporting

Employees want to know the status of their expense reimbursements, and vendors want to know when and if their invoice is being paid. "You can use interactive voice response (IVR) or interactive Web response (IWR) to provide a portal through which people can find out the status of their expense reports without disrupting staff," Casher explained. "However, IVR can be cumbersome. Most organizations have no concept of how to design a system to handle increased call volumes, so callers just hang up."

He noted that the Web is a great place to put invoice and payment information. Vendors and others can use passwords to find out status, and they don’t have to call AP. "In some organizations, 10 percent to 15 percent of AP’s time is spent answering vendor inquiries, such as ‘Where is my check?’ or ‘Why haven’t I been paid?’ or ‘How do I apply this check?’" he noted.

 

Other Obstacles

Casher offered these other common barriers to creating paperless AP:

• Legacy system: An organization’s legacy computer system, which is often outdated, is a very common barrier to AP automation. In fact, "integration with legacy systems" was cited as the most formidable barrier in an IOMA survey (see exhibit).
  
  Casher advised that if your legacy system is a problem, many vendors have automated invoice workflow solutions that can "bolt onto" legacy software.
  
  
• Cost: If you find that budgetary constraints are an issue, you can use software as a service (SaaS) solution where you pay based on transaction volume, Casher pointed out.
  
  
• Complexity of universal solutions: "Universal solutions are very hard; you may not be able to get a 100 percent solution, but it’s very easy to get an 80 percent solution," Casher said. "Fewer than 100 vendors typically account for 80 percent or more of your transaction volume. Pick one vendor at a time and implement a solution. By starting with fewer than 100 vendors, you’ll get a great start; and once you’ve worked out the kinks, it becomes easier to add new vendors to the electronic transaction process."
  
  
• Lack of business case: One big problem for a lot of AP departments is not being able to make a sufficient business case for new systems. "Ask vendors to help you make the case—many of them will be very happy to help you," he advised.
  
  
• Vested interests: Software vendors have vested interests in their proprietary solutions, so that can cause a problem. "There are ways around proprietary solutions," Casher noted. "Third-party innovators have long been able to provide ‘front ends’ and ‘back ends.’ They can extract data from a file and mimic data entry into a screen or extract data from a ‘print file’ and use it to feed another system."
  
  
• AP departments themselves: If you’re afraid of going paperless, AP itself is probably one of the biggest barriers, according to Casher. "AP departments are going to get smaller—there is no question about that. But you also need to focus on new things. The role of AP is, and should be, changing to focus more on such issues as regulatory compliance, contract compliance, and spend analysis. There are many things that AP should be doing, and one of those things should not be manual transaction processing."

 

Final Point

"The barriers to paper-free AP may seem to be high," Casher acknowledged. "Do not try to tackle all of them at once, as you are likely to fail. By tackling one of the areas discussed above, you have a much better chance of getting cost-effective results and gaining experience that you can then build on to overcome the barriers in one of the other areas."

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