Changing the Economics of Supply Management: Strategies to Transform Accounts Payable

June 3, 2009
Improvements in the A/P process itself, and better integration across functions in procure-to-pay, can help companies lower costs and maximize service delivery.

In the current economy, visibility and control over the processes that drive a company's cash, accounts, net performance and working capital have never been more critical. And while inventory and receivables continue to be important levers for cash flow, cost-cutting demands are causing a renewed focus on financial supply management. As a result, companies are taking the opportunity now to improve their procurement to payment process by transforming accounts payable (A/P). Those that are successful will make a significant contribution to cash flow and the bottom line.

Why focus on accounts payable? When it comes to buying goods and services, businesses face significant, costly, and flawed A/P processes, so improvements there can have a big impact for the corporation. Consider that accounts payable professionals process more than a billion business-to-business invoices each week, and 97% of those are still processed manually. The average cost to process and pay a supplier invoice is between $5 and $15, with 10% processed too late to be paid within discounting terms, and nearly 2% containing errors. Not only do these manual processes slow down productivity across the entire organization, long cycle times mean late payment penalties and an inability to take advantage of negotiated payment discounts.

Improvements in the A/P process itself, and better integration across functions in procure-to-pay, can help companies achieve a much higher degree of reliability and confidence in supply decisions, as well as lower their costs and maximize service delivery.

How the Economy Affects A/P

Most organizations have negotiated favorable terms and prompt payment discounts from their vendors, often 2-3%. The recession has further strengthened negotiating positions according to a recent global study done by independent researcher Loudhouse across Chief Purchasing officers and directors of large organizations. In fact, 4 out of 5 purchasing professionals they surveyed have seen unexpected supply management opportunities as a result of the economic downturn. More than 50% believe they are now in a stronger negotiating position with suppliers and 48% state they have more flexibility when it comes to reviewing existing contracts.

Yet organizations find that they are unable to actually process invoices within the designated time period and qualify for negotiated discounts. Further, the majority are unable to systematically prioritize invoice processing to ensure those with favorable terms are processed first.

Critical Issues Around A/P

In this environment, company leaders are increasingly looking to address five critical issues that surround supply management and their A/P processes:

  1. How well can we manage to service level agreements to get vendor discounts?
  2. Can we track invoices through the approval cycle?
  3. Can we meet disclosure and audit mandates?
  4. How do we tailor payments to respond to current business conditions?
  5. How efficient is our exception handling and discrepancy resolution?

While there is a wide range of organizational challenges linked to A/P productivity, they can be categorized into three key priority areas: information management, automation, and business optimization. To address their top of mind issues, companies are focusing on these areas:

Volume and paper overload presents an information management challenge. A/P is a document-intensive function by nature. Organizations struggle to find efficient ways to manage, store, and access their high volume of invoices, purchase orders and associated documents, and find their current manual handling to be error prone and difficult to track. Most companies receive invoices by multiple means and in multiple formats; including, e-mail, fax, web forms, and most commonly as paper documents sent by snail mail. This translates to manual processing. And, as if this wasn't enough, organizations must factor in the high cost of paper document storage.

Inefficient and complex environments present automation challenges. A/P processes are complex, dynamic, and intertwined throughout an organization. While exceptions may be few in actual incidence volume, they can be the most costly to process. Enabling A/P staff to identify non-standard invoices for additional auditing and special handling as quickly as possible is essential. Invoices are often distributed to the wrong person, resulting in additional delays in getting the invoice into the system.

Lack of control and visibility presents optimization challenges. Managers cannot get the reports on payable status and process performance that they need to effectively manage their departments and to manage cash strategically. For example, sometimes taking discounts for early payments of invoices is advantageous, while other times keeping cash longer is more strategic. The ability to tailor payments to respond to current business conditions is critical. And, organizations have difficulty determining whether current performance meets their established Service Level Agreements (SLA's). Finally, providing accurate data for financial statements, and meeting the disclosure and auditing mandates for regulations like Sarbanes-Oxley is impossible without process transparency and robust records management.

Process Improvements Yield Results

Responding to the challenges and opportunities that A/P presents, best-in-class companies are focusing their process change strategies to improve in three areas:

  1. Assure Financial Transparency. Capture invoices upon arrival so there is visibility into financial liability. Delays can result in missed discounts, late fees, as well as impacted reputation. Ensure strict compliance requirements are met with KPI (Key Performance Indicators) metric dashboards and reporting audit trails.
  2. Streamline Processing and Approvals. Get paper off the floor and then automate approvals to streamline the process in a distributed environment. Implement key improvements that assure flexibility for centralized and combination environments as well. Automation brings consistency to multiple systems and processes that may exist in a large organization by line of business, removing complexity and improving efficiency and overall visibility.
  3. Enable Collaborative Exception Processing. A/P core systems typically don't handle exception processing well, requiring additional labor to manually address exceptions. Focus on support for collaborative exception handling that involves efficient people, process and document interactions. These strategies can result in significant changes to the economics of key business processes.

Focus on People First

Companies typically do not pay enough attention to cash, except in recessions. Current economic conditions have raised the importance of cash flow strategies like A/P transformation to the board level. As a result, many enterprises have both a priority and a solid opportunity to improve A/P and the related processes; however, they are not necessarily fully equipped to do so in a cost-effective timely manner.

This is where a new approach to process and document management -- Persona-based BPM -- can be effective. Unlike BPM solutions that focus on the way work moves through a process and on the people who build BPM systems, Persona-based BPM puts the focus first on the way work gets done and on empowering all three types of people critical to the success of BPM systems: Builders, the people who build them; Participants, the people who use them; and Managers, the people who manage them. By putting people first, Persona-based BPM can cut deployment time by 50% and achieve a 40% increase in productivity compared to other BPM solutions.

With BPM, companies can automate their paper-based, labor-intensive A/P processes. However, this "model-driven" approach is not sufficient, because it lets the model dictate how work gets done and treats users as an afterthought. Improving a process with speed alone can only help make the same mistakes faster; and forcing an unfamiliar, non-intuitive user interface on staff can hurt productivity more than it helps. Persona-based BPM solutions deliver both an improved process flow and an optimized user experience, delivering significant contribution to the bottom line.

To pay an invoice, for example, the A/P staff will have to involve many stakeholders. Because of this, opportunities for errors and delays are the norm. Invoices are often sent directly to department managers, where they may sit ignored on desks for days and weeks at a time. A/P does not know about the liability until it physically receives the invoice, which could be anywhere from just days before it's due or, in many cases, after its due date. In addition, the A/P department often loses complete control of any invoice that must be forwarded out of their department for approval. Further, A/P managers need to see process flows and trends. Ideally they should be able to link their organizational objectives with the business rules that drive their processes.

What is required, then, is a robust yet easy-to-use A/P solution that takes the process Participant, the Manager, and the IT design and support perspectives into account, and enables work to be effectively organized, prioritized, managed, and tracked.

First Adopters are Already Seeing Results

Market leading companies like Ciba Vision and Lowe's use Persona-based BPM to improve accounts payable, eliminating errors that cause delays and unnecessary adjustments, such as goods being received for which no invoice has been generated, or vice versa. These companies avoid situations where the processor needs to track down the information, delaying the process and possibly missing time sensitive vendor discount terms.

As a result, these companies are experiencing key economic benefits, including increased "straight-through processing," so that processor staff and approvers can focus on more strategic value-added tasks and improved prioritization of payables as well as tracking of organizational performance. Process steps are automated and all related documentation is consolidated, A/P staff can reduce processing time while simultaneously increasing volume. This can represent hundreds of thousands of dollars in discounts that might otherwise have been wasted.

Perhaps now is the time for you look at transforming your accounts payable. It could really "pay off" for the business.

Deb Miller is Director of Market Development for Global 360, a leading provider of Persona-based BPM and Document management solutions.

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