This article is reprinted/republished by the express written permission of IOMA (The Institute of Management & Administration). ©2010; for more information about IOMA publications visit www.ioma.com

 

The reason that automation is the hottest topic in AP today is because of its power to cut costs, improve productivity, and reduce error rates. In our recent survey of over 450 AP departments, we asked AP pros to calculate some key metrics and examined them in terms of their departments’ level of automation.

Overall, the metrics were materially improved for departments with a "high" level of automation. By this, we mean a great deal of paperless processing through the use of invoice scanning or imaging, data extraction, electronic invoicing, automated workflow, electronic payments, and so on.

 

Invoice Processing Costs

The average cost to process an invoice with an accompanying purchase order (PO invoice) can be slashed by 40 percent (from $11.62 to $6.99) when moving from a low level of automation to a high level of automation (Figure 1).

 

Figure 1. Average Cost to Process PO Invoice, by Level of Automation
	Average	Median
High	$6.99	$5.00
Medium	$9.54	$6.00
Low	$11.62	$6.00

 

The cost figure includes all AP department costs associated with processing invoices (salaries, overtime, benefits, etc.), but excludes corporate overhead, such as rent.

Similar cost savings can be achieved when processing non-PO invoices. The average cost to process a non-PO invoice is $11.79 in an AP department with a low level of automation but is reduced to $7.68 when a high level of automation is used (Figure 2).

Figure 2. Average Cost to Process Non-PO Invoice, by Level of Automation
	Average	Median
High	$7.68	$5.14
Medium	$9.96	$6.09
Low	$11.79	$6.13

 

The key to cutting costs using automation is to use it to eliminate the paper invoice. Imaging technology can be used, where you scan your paper invoices and route the images for approval and payment. Along with this, you can use so-called "data extraction" technology, such as Optical Character Recognition (OCR), to eliminate manual input of the invoice data.

You can also eliminate paper by using electronic invoicing. That is, receiving the invoice from the vendor in an electronic format that goes right into your accounting system. Up until recently, the only way to do this was to use an Electronic Data Interchange (EDI) setup, which could be expensive and cumbersome. But now, you can do this without the one-to-one EDI hookup—you can tap into supplier networks and receive e-invoices through a middleman.

Another big chunk of costs can be eliminated by moving to electronic payments, such as ACH. That’s because paper checks are very expensive—and they are also subject to fraud.

In terms of employee reimbursements for travel and entertainment (T&E) expenses, the average cost to process an employee expense report is $13.60 in an environment of low automation, but is $8.96 at companies with a high level of AP automation (Figure 3).

 

Figure 3. Average Cost to Process T&E Expense Report, by Level of Automation
	Average	Median
High	$8.96	$9.00
Medium	$12.34	$7.80
Low	$13.60	$8.00

 

Automated T&E systems can be built in-house (if you have the IT resources), implemented by turning on the T&E module in your main accounting system (if available0, or by buying one off the shelf from a specialized vendor. A recent survey we did revealed that the most prevalent systems were those from Concur, Gelco, Databasics, InterplX, ExpensAble, Necho (Cybershift), Deltek, and Extensity.

The key to a good automated T&E system is that it must be an "end-to-end" system that links the various T&E processes together. These processes include the booking of the trip, expense reporting, auditing, and the reimbursement. An end-to-end system pulls these separate processes together along with the associated data. And the data is like gold because it can be used to negotiate better deals with T&E "vendors," such as hotels, airlines, car rental companies, and so on.

 

Cycle Time

Cycle time—the number of days it takes to make a vendor payment—is improved because of automation. Respondents with a low level of AP automation say it takes them 8.6 days to make a payment—but only 5.4 days with a high level of automation (Figure 4).

 

Figure 4. Days to Process a Vendor Payment, by Level of Automation
	Average	Median
High	5.4	3.0
Medium	7.8	5.0
Low	8.6	5.0

 

If your cycle time improves, then what else improves? Of course, you’ll be able to capture more early-payment invoice discounts. And if your technology is robust enough, you will be able to better manage the discount process, and even allow for "dynamic discounting." Let’s say an invoice has standard terms such as 2/10, net/30 and the invoice is not approved until the 10th day. Typically, AP would then not pay the invoice until the last possible moment. Dynamic discounting offers an alternative: a smaller discount for a faster payment. In the above example, at any time between Day 10 and Day 30, the vendor and buyer may agree on an intermediate deal, say 1.8 percent for payment on Day 13 or 0.7 percent for payment on Day 25.

 

Staff Productivity

Hand in hand with cost reduction in the invoice process comes increased efficiency. This is triggered because automation reduces the "touch points" an invoice has to go through on its way to payment.

If you use imaging and automated workflow, you no longer have to route invoices by hand—the invoice images are routed electronically and passed thorough to the accounting system for payment. With certain electronic invoicing setups, AP doesn’t even see the invoices coming in—they are automatically received, matched to purchase orders (POs), and then paid. For non-PO invoices, the electronic bills are automatically routed to approvers. All AP sees are the exceptions (and any invoices that do not come through the e-invoicing process).

Regardless of the actual automation tools used, productivity improvements will materialize, as our survey found these improvements when going from a low to a high level of automation (see Figure 5):

• Average number of PO payments per month per AP staff member: from 930 to 3,647;
• Average number of non-PO payments per month per AP staff member: from 934 to 2,263; and
• Average number of T&E expense report payments per month per AP staff member: from 450 to 1,335.

 

Figure 5. Average Number of Payments Per Month Per AP Staffer, by Level of Automation
	High	Median	Low
PO Invoices	3,647	1,865	930
Non-PO Invoices	2,263	1,414	934
T&E Expense Reports	1,335	741	450

 

 

Error Rates

It’s very time consuming to deal with errors in the invoicing process. You have to do a lot of un-productive re-work, you get tons of calls from vendors, and you run the risk of making duplicate payments.

Automated invoice processing systems help reduce errors because they have data verification and quality assurance features that come into play either before the invoice is received or while it is in the AP department being prepared for approval. In some cases, the invoices are "pre-screened," meaning that the solution applies various tests to ensure that they are complete and accurate. For instance, they may check for a valid vendor number or PO number. And they can do a math check by cross-checking the addition of line items with the invoice total. You can also define parameters, such as minimum dollar amounts or maximum variances (variances to the PO), for your key vendors.

Data extraction technologies have become more accurate, so that eliminates errors from manual data entry. And data entry can be eliminated completely by using electronic invoicing. So it’s no wonder why we see improvements in error rates when moving from a low level of automation to a high level (see Figure 6):

• vendor invoice error rate: from 4.0 percent to 3.1 percent;
• vendor payment error rate: from 2.6 percent to 2.3 percent;
• vendor checks reissued: from 1.9 percent to 1.8 percent;
• employee expense report error rate: from 3.6 percent to 1.7 percent;
• expense report payment error rate: from 1.8 percent to 1.3 percent; and
• employee expense reimbursement checks reissued: from 1.2 percent to 0.6 percent.

 

Figure 6. Invoice and Payment Error Rates, by Level of Automation (Average Percentage)
	High	Median	Low
Vendor Invoice Errors	3.1	3.0	4.0
Vendor Payment Errors	2.3	1.7	2.6
Vendor Checks Reissued	1.8	2.0	1.9
Employee Expense Report Errors	1.7	2.9	3.6
Employee Reimbursement Errors	1.3	1.7	1.8
Employee Reimbursements Reissued	0.6	1.3	1.2

 

 

What to Do

If you have yet to introduce any automation at all in your AP department—and many have not—then consider implementing a solution where it will do the most good. Many AP departments start with automating the T&E expense management and reimbursement process. That’s because it can act like a model for automating the invoice process—many of the same issues will arise in both cases.

If you are currently using some technology, consider stepping it up or using automation in a different way. The average improvements in costs and productivity presented in this article can be used to build a case for implementing new or improved technology in your AP department.

 

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