Transforming Accounts Payable

Transcription

1 A Special Report from The Accounts Payable Network Transforming Accounts Payable How the Right Solution Can Increase Value and the Bottom Line Sponsored By: $95 USD

2 Transforming Accounts Payable How the Right Solution Can Increase Value and the Bottom Line A Special Report from The Accounts Payable Network Sponsored By: 2100 RiverEdge Parkway, Suite 1010 Atlanta, GA

3 2013 Financial Operations Networks LLC Published by Financial Operations Networks LLC, Atlanta, Georgia. All rights reserved. No part of this publication may be used or reproduced in any manner or stored in any form whatsoever without written permission of the publisher. For information, contact Financial Operations Networks, 2100 RiverEdge Parkway, Suite 1010, Atlanta, GA 30328, ,

4 Table of Contents The Accounts Payable Network Advisory Board... 4 Introduction... 5 From Manual to Automated The Evolution of Bill Payment... 8 From Clerk to Analyst The Changing AP Role From In-house to In-cloud The Cost Benefits of SaaS From Patchwork to Single Provider The Procurement through Payment Process Summary About The Accounts Payable Network About Commerce Bank Financial Operations Networks LLC 3

5 The Accounts Payable Network Advisory Board Steve Adams, CPA Director of Global Shared Services Implementations, McKinsey & Co. Vivian Baker, APM Accounts Payable Director, Financial Shared Services, The Coca-Cola Company Judy Bicking, APM Former Global Director, Accounts Payable European Project, Johnson & Johnson AP Best Practice Consultant and Managing Owner of Island Decor & More / Ship to Shore Home Decor Debbie Vander Bogart Senior Director, Finance General Manager, Shared Service Center, Levi Strauss & Company Larry Brang, CPA, APM Director, Commercial Services - Americas, Merck & Company, Inc. Tom Brewer, CPA Vice President, Shared Services, Michaels Stores, Inc. Dennis R. Cooper, MBA, APM Vice President, Operations Director, Accounts Payable, PNC Bank Lynda Foertschbeck Executive Vice President, IRSCompliance, Inc. David W. Hay Consultant, Former Director, Shared Services, Hewlett-Packard Company Frederick C. Litow, CTP, APM Head of Financial Administration, ING Thomas F. Nichols President, Process Management Improvement, Inc. and former Director of Financial Operations for AT&T s Corporate Accounts Payable and Payroll Management Judi Thallas, APM SAP Finance Change Management Leader, Finance Manager, ConAgra Foods Susan Tinkler-Muller Vice President, Accounting Services, Viacom Media Networks 2013 Financial Operations Networks LLC 4

6 Introduction A modern automobile manufacturing plant looks nothing like an auto plant did several decades ago. Where there had been lines of labor workers, now there are rows of bright, synchronized robots that weld, bolt and burnish. There are still workers, of course. They run the sophisticated machinery, but it takes fewer of them and their skillset has become more technical. Now consider an accounts payable department. Chances are that it more closely resembles the old auto manufacturing plant than the new one. Many workers manually process invoices surrounded by stacks of paper, interoffice mail bins and rows of filing cabinets. Unfortunately, the cost to process an invoice sometimes can be more than the amount of the invoice being paid. There are exceptions. In some larger organizations, there is much less paper, much more automation, fewer workers per invoice volume, more efficient throughput and lower cost per invoice. Accounts payable departments are undergoing a transformation akin to the modernization in manufacturing. Accounts payable (AP) has been, and for many is still, a labor-intensive cost center. AP s often-elusive goal is to pay the company s bills accurately and on time. Today, AP is changing. The modern AP shop is an automated operation run by fewer workers whose proficiencies are more analytic than manual. The transition is just in time to keep up with new complexities that are arising from the opportunities and relationships of a global economy. Change in AP has progressed slowly, through organizational and procedural changes, introduction of new tools, and development of process automation. Along with a central goal of cost reduction, AP process improvements have targeted key tactical goals such as reducing errors and improving paid-on-time rates. However, these are also steps towards more strategic goals that move AP beyond operational efficiency to bring broader value to the organization s financial operations Financial Operations Networks LLC 5

7 Along with automated electronic processing has come visibility that provides real-time information on a company s short-term liabilities, enabling better cash management. More efficient processing enables discount capture, adding dollars to the bottom line. The capture and analysis of data on actual expenditures can lead to reduction in cost of goods sold, thus improving the company s margin. Invoice data capture and electronic conversion are complex and critical first steps in automation, with separate challenges for paper and electronic invoices. But today a convergence of technical solutions by service providers allows companies to forgo the cost and struggle of multiple technology implementations in favor of contracting for an end-to-end solution providing a single formatted flow of electronic invoice data. Technology acquisition is also undergoing a paradigm shift. The movement from inhouse/on-premises hardware and software to cloud services has rapidly gained traction. In-house automation carries significant initial investment costs in hardware, software and IT support requirements, which is why only the largest organizations have been fully able to exploit it. However, cloud-based solutions open up automation to enterprises that cannot afford the initial investment required for on-premises AP automation. Software-asa-Service (SaaS) delivered via cloud computing lowers the entry barriers to automation technology for companies of all sizes, giving new impetus to AP s transformation. Meanwhile, the final step in procurement-to-payment also has seen changes. In particular, banks offer a broad scope of automated payment tools and methods. These can be tailored to the company s requirements according to its supplier relationships and cash-flow considerations, combined with the bank s expertise in payment practices and mechanisms for local and international transactions. Savvy AP managers now have the tools to advance their operations to bring about transformation. One further challenge is trying to build a unified automated process through multiple, piecemealed solution providers. It can be done, but now there are options here, too. There are solution providers that have done the work of assembling all the automation tools and services, and now deliver them via the cloud. With process and technology expertise, they 2013 Financial Operations Networks LLC 6

8 partner with companies to automate a part or all of the process from PO through payment, and enable AP to concentrate on the value-adding analytical activities. Improved process practices, automation and visibility can give companies much greater control of their payables, bringing them a new opportunity to address cash optimization while addressing their suppliers need to get paid. With the movement from in-house implementation to execution via the cloud, more enterprises stand to gain these benefits Financial Operations Networks LLC 7

9 From Manual to Automated The Evolution of Bill Payment The accounts payable department s role is to pay invoices accurately and on time. To do that there are many procedures and processes that need to be followed before actual payment, including: Validating and logging the vendor Verifying the order (and its authorization) Confirming receipt of the product or service Reconciling discrepancies Recording the transaction to the right accounting code Guaranteeing the availability of cash Processing and issuing the payment on time Complying with government tax and regulatory requirements Following process controls Being aware of opportunities for fraud Ensuring appropriate documentation and record retention Bill payment is a process that is significantly influenced by several parties outside of AP, from the purchasing department to government agencies, business units to suppliers. When this process is a manual one involving paper documentation, the mere transfer of documents back and forth represents a significant hurdle to speed and cost reduction Financial Operations Networks LLC 8

10 These AP challenges have been well documented elsewhere, and explain to the uninitiated why the simple task of paying a bill on time can be so challenging. There are a number of proven practices that contribute to a better process for most organizations, starting with centralizing and directing all invoices to accounts payable rather than to purchasers. (AP can t account for and manage what it does not know about.) An important tool has been the purchasing card (p-card). Often used for smalldollar expenditures, a p-card eliminates a great volume of invoices, replacing them with one monthly statement. This in itself has been a boon to purchasing and payables. Additionally, now cards are employed to settle large-dollar invoices that have gone through a PO-Invoice process (see more below). Format of invoices Received in AP For the remainder of the non-card invoices, the key to the future is automation, ideally end-to-end, fully integrated automation. Automating accounts payable means going digital, i.e., converting from paper documents to electronic data. Once the information is digital, AP can eliminate many cost- and time-consuming aspects of the process. Electronic information transmission is instantaneous for authentication, validation, coding and approval of invoices. The process of matching invoice, PO and receiving documents is done automatically rather than manually. State-of-the-art automated workflow systems provide AP process controls that weren t available in a paper world. More important, automated invoice processing provides companies with visibility into where an invoice is in the process workflow. AP has reengineered practices to get invoices into the system upon arrival, requiring invoices to 2013 Financial Operations Networks LLC 9

11 be sent to AP rather than to business units or purchasing, where they are often ignored or lost. As a result, AP has the ability to know real time the company s short-term liabilities. The paperless environment necessitates format-independent data capture and extraction for all invoice types. Whether an invoice arrives on paper, as a fax, as a PDF, or another electronic format (XML, EDI, flat file, web portal), convergent technologies now allow the data to be captured and in the case of paper, fax or PDF, extracted and converted to a uniform digital format ready for electronic processing. Capture and extraction from paper still requires a degree of human intervention, but at a much lower level. Once in digital format, invoices go through either a matching process (if there is a purchase order for the purchase) or an automated workflow for approval and coding. State-of-the-art matching and workflow systems are integrated with the company s accounting or ERP system, with two-way data flow. This enables the AP automation program to access POs and contracts for matching or comparison, and allows the flow of approved invoice information into the accounting or ERP system. Exceptions (invoice data that does not match) are routed as necessary for reconciliation or correction, whether to the buyer, the purchasing department or the supplier. Invoices that are ready to pay are queued for payment according to terms and cash-flow requirements. By doing these steps electronically, AP gains both greater control and visibility into available funds. A full procure-to-pay process goes beyond ready-to-pay to the final step of payment, where advances are also available not only to reduce cost, but also to facilitate cashmanagement strategies. Electronic payment methods include ACH/EFT, corporate card, trade finance and wire, and each is an important part of the disbursement strategy. Paper checks can still be issued where necessitated by supplier limitations and relationships, though of course they cost more to process. Though only a few years old, settlement via commercial card, also termed virtual card payment, AP card payment, or electronic payables, has gained traction very quickly Financial Operations Networks LLC 10

12 It provides a way of paying the vendor while retaining cash for a longer period, with an ancillary benefit of earning rebates that can offset AP department operating costs. Virtual card payment through a financial services provider allows companies to retain their PO and invoice approval processes for large-dollar spend, and then settle via card. The vendor is paid promptly in exchange for providing discount fees, while AP does not pay the bank until the statement is due. The benefits of automation begin with efficiency, productivity and lower cost all valuable, but only the beginning of what a transformed accounts payable operation can bring. The additional advantages are detailed below. Procurement Advantage AP is in a perfect position to help the CFO meet margin goals through spend analysis. As seen in the example below, a 5 percent reduction in the overall cost of goods sold (COGS) results in an increase to the bottom line equal to a 22 percent increase in sales. For example, suppose a company has: Sales: $250 million Profit before Tax: $25 million Cost of Goods Purchased: 45 percent of revenue Through spend analysis many companies achieve a 10 percent reduction in price paid for goods and services. In the example above, if the company achieves a 10 percent reduction to just half of the company s total spend, the return to the bottom line would be $5.6 million. Cash Management Advantage Automation gives an accurate picture of all transactions from first capture through to final payment. This gives finance managers an accurate view to allow full accruals and provides a picture of cash requirements over time, allowing for the best cash-management 2013 Financial Operations Networks LLC 11

13 decisions to be made. In addition, invoices can be paid on the due date early payment can be managed as easily as late payment. Queuing payments for release according to specific due dates, rather than paying upon match or approval, frees up cash that can be used for other purposes. Discounts and Penalties Companies without efficient automated processes often lose out in two key areas. They are unable to obtain early-payment discounts, and for most, they are paying high monthly fees for late payments on everything from accountants invoices to utility bills. One Fortune 100 company had a target of adding $200 million to the bottom line through discounts, while another admitted that late fees totaled $1.5 million per month. What is the value of discounts? Modest discount terms of 1/10 net 30 will return an annualized 18 percent to the bottom line. Another settlement option is available with the right payables partner trade finance. Under this option a company can maximize its discount capture based on allocated dollars for AP discounts. Once that amount is depleted, the partner steps in to offer trade finance to the rest of the vendors that want to be paid early, but for which the company does not have the short-term cash to support early payment. The vendors are still paid, less a fee, as with an early-payment discount. AP then pays the partner according to terms with no fee. The tug-of-war between vendors AR departments wanting to be paid and buyers AP departments wanting or needing to hold onto their cash is resolved. SOX and Regulation A fully automated process gives management and both internal and external auditors a real-time view of all transactions and the financial position of a company. Management can attest to the accuracy of the business reports, as required by regulations such as the Sarbanes-Oxley Act, with a degree of confidence that is not available in a manual operation Financial Operations Networks LLC 12

14 From Clerk to Analyst The Changing AP Role Automation of what historically has been a labor-intensive clerical process is producing changes to the AP staff. Automation is raising the educational requirements of staffs while reducing headcount numbers, as the roles shift from clerical to analytical. A survey by The Accounts Payable Network reveals a shift in the makeup of AP staffs. The 2013 study i notes that an indicator of change in accounts payable is the upward trend in educational level of AP staffs. As the charts below show, there has been an upward shift in the average educational level of AP staff from just five years ago. The average number of years of AP experience remained flat over the same period. The change could reflect hiring staff with more education in the churn of workers, though it could also reflect the acquisition of additional education by existing staffs. Either way, it reflects changing needs and greater expectations of accounts payable than in the past, and lays the groundwork for AP s continued evolution. Coinciding with the increase in educational level (and increasing use of technology), 84 percent of study participants reported an increase in proficiency Financial Operations Networks LLC 13

15 Automation reduces clerical processing head count, but it does not eliminate the need for AP staff. When AP reduces or eliminates the data-entry element and manual workflow is replaced by an automated system, the needed skillset shifts. Analytical skills become more important than keyboard speed. Rather than spending time in the paper chase, AP is freed up to address analytical and qualitative tasks to better manage payables and bring additional value to the company. AP not only can, but must become an analytical function that contributes to cash flow and favorably impacts a company s bottom line. The transactional function is passing; the future of AP is adding value through analytical and professional operations. Those failing to make the transition will negatively impact their organizations competitiveness Financial Operations Networks LLC 14

16 From In-house to In-cloud The Cost Benefits of SaaS The efforts to automate accounts payable have been ongoing for decades, and parts of AP processes have been addressed successfully. EDI has been effective, for the large companies that could afford it, in dealing with massive numbers of invoices from other large suppliers that could match the EDI investment. The advent of p-cards served to eliminate a large number of low-dollar invoices that cost more to process than their dollar amount. AP and procure-to-pay automation solutions grew out of electronic record keeping, electronic procurement software, and from attempts to develop electronic invoices apart from EDI and other business process software approaches. The major obstacle to automation has been to present the invoice to AP in electronic format, overcoming the problem of a multitude of different systems, and suppliers unwillingness to cooperate. Various approaches found limited success for select suppliers but have failed to produce a one size fits all solution. Finally, instead of a one-forall solution, an aggregation of multiple solutions at a single point solves the problem. Leading solution providers offer invoice capture, extraction and conversion services that receive input from suppliers in any format, from paper to EDI and XML, and feed uniform data into match and workflow systems that interface with a company s ERP or accounting system. A sizable barrier for companies that are not in the Fortune 500 has been the initial investment required for hardware, software and IT support resources. But in the last few years, solution providers have embraced a new model of delivery Software-as-a- Service (SaaS) via the cloud. Cloud-based solutions remove the requirement of a large up-front investment to implement automation. Instead, companies access AP automation software via the cloud there is no complicated hardware installation and no lengthy software implementation, but rather a simple sign-up and flip-of-a-switch activation. The application-in-the-cloud phenomenon in its current iteration (its former incarnation was ASP application service provider) is only a few years old, but has caught on, 2013 Financial Operations Networks LLC 15

17 and SaaS is already widely used in mature markets such as the U.S., according to a 2012 Gartner study ii. A study iii by Aberdeen found the leading reason for adopting SaaS is the overall cost of IT infrastructure. Cloud-based solutions do not necessarily offer lower cost than onpremises solutions over the long term, but the pay-as-you-go approach removes the high entry cost, and it is much easier to launch, requiring software activation rather than fullsystem implementation. SaaS solutions easily exchange data with ERP systems through standard industry data interfacing there is no proprietary code writing involved. Cloud-based solutions eliminate maintenance and upgrade worries, and do not require internal IT support. Both in-house and cloud-based automation provide a return on investment (ROI) over manual processes, but ROI is reached sooner with a cloud-based solution. The precedent for such an approach has been set for years in other areas, such as payroll. Companies should know their costs, IT as well as AP, to evaluate the total cost of ownership Financial Operations Networks LLC 16

18 From Patchwork to Single Provider The Procurement through Payment Process AP now has the option of working with a single partner to automate its entire process, rather than working piecemeal to assemble the requisite solutions on premises using multiple individual solution providers. Instead of building a fully automated system internally, including scanning and OCR (for paper invoices), electronic format conversion, approval and exception workflow, automatic GL coding, and payment option routing, AP can partner with a single-source provider that has built and assembled all the requisite tools to handle the process, freeing AP to observe, analyze and report on the process in order to improve it. In particular, a solution partner from the financial services industry (rather than a technology-focused partner) can handle the AP process not only through ready-to-pay, but through settlement. Utilizing a combination of disbursement methods including virtual card and trade finance, a financial services partner can optimize the payor s cash position by applying its understanding of financing to the buyer/seller tug-of-war for cash. In an increasingly global economy with supply chains that cross borders and oceans, the right partner also can bring requisite expertise to the AP team. Financial services partners bring an understanding of the varying laws, taxes and regulations of trade-partner countries, as well as of currencies and exchange, and the different mechanisms for crossborder transactions Financial Operations Networks LLC 17

19 Summary Accounts payable is undergoing a transformation that can significantly impact companies, saving cost, improving cash management, and contributing to the bottom line. In the face of continued economic uncertainty and challenge, companies must find ways to remove cost from, and add value through operations in order to enhance margins. Accounts payable has the potential to do both. Advances in process and technology, notably cloud computing, can transform the AP cost center into an operation that adds measurable value. An automated and analytic accounts payable department can help to: Remove manual tasks to free up resources for more strategic tasks such as spend analysis Reduce cycle times to allow for discount capture Eliminate off-contract expenditures Consolidate information to allow for better buying decisions through contract management Provide information to sourcing to make better buying decisions through spend analysis Give financial management the information needed to manage cash flow Replace simple payment with a disbursement strategy to optimize working capital Achieve all of this at a greatly reduced cost per transaction Technology solutions have advanced, though historically, full AP automation has required assembly of many components to address all the variables confronting AP. Generously resourced companies can build or buy and implement a third-party solution in-house, but there are now other options. Solution providers offer cloud-based computing for individual components of AP processing without a large investment up front. Some of these providers combine a consultative knowledge with all of the necessary technical components to deliver complete process automation more readily. Even fewer financial services providers go further, offering the tools and expertise to assist all the way through 2013 Financial Operations Networks LLC 18

20 settlement with a variety of cash-management strategies and tools. These providers offer the way to achieve full transformation of AP to a more efficient analytical and managerial group that can control payables, reduce cost, and facilitate better working-capital management. i Benchmarks: The State of Accounts Payable, The Accounts Payable Network, April 2013 ii Global SaaS Revenue to Touch $22.1 bn by 2015: Gartner, The Economic Times (India), March 27, 2012 iii Carol Baroudi, Business Adoption of Cloud Computing, Aberdeen, September Financial Operations Networks LLC 19

21 About The Accounts Payable Network The Accounts Payable Network (TAPN) is the complete resource for accounts payable, helping more than 50,000 accounting and finance executives at organizations worldwide meet their commitments to accounts payable business-process performance. TAPN provides in one easy-to-access, cost-effective, online location insights, analysis, guidance, advice and best practices for AP strategies, technologies, controls, compliance, people and processes. Members have unrestricted access to critical information guaranteed to help them make smart accounts payable business decisions. Focus areas include all AP functions, AP metrics and benchmarking; tax and regulatory compliance; proven solutions to real-world problems; AP automation; case studies; member Q&A networking forums and more than 250 downloadable, customizable AP policies, flowcharts, templates and internal-control checklists. TAPN s highly popular AP tools help compare technologies and AP solution providers, find new ways to streamline operations and enhance controls, and take advantage of extensive educational opportunities. Additional networking opportunities allow members to share problems and solutions with peers in the trenches through the public and private forums and discussion groups. The Accounts Payable Network is completely independent and is not owned by or affiliated with any industry supplier, nor does it endorse any suppliers. For further information, please contact The Accounts Payable Network, 2100 RiverEdge Parkway, Suite 1010, Atlanta, GA 30328, , Financial Operations Networks LLC 20

22 About Commerce Bank With more than 40 years in the commercial card industry, Commerce Bank is a national leader in automated accounts payable solutions. We combine forward-thinking technology with responsive customer service to help you simplify, automate and control your payment processes. With ControlPay, a full suite of high-tech, innovative accounts payable solutions, you can streamline your accounts payable process and create new revenue for your department without changing your current banking relationships. ControlPay AP Payments allows you to pay invoices electronically through the Visa Network, which reduces check-writing costs and earns you monthly revenue share. This flexible solution requires no software, and the Commerce Bank Vendor Enrollment team will contact and enroll suppliers on your behalf. ControlPay EIPP (Electronic Invoice Presentment & Payment) automates invoice receipt, workflow, coding and payment processes within a single solution. You can eliminate paper invoices, enhance process efficiencies and gain real-time visibility to your payment process and financial information. Commerce Bank is a subsidiary of Commerce Bancshares, Inc., a publicly traded holding company (NASDAQ:CBSH), ranked ninth on Forbes Magazine list of America s Best Banks.* *Forbes Magazine, December 18, Financial Operations Networks LLC 21