In the beginning! The evolutionary path of accounts payable
Ever thought about where accounts payable has come from and where it will go next? The past three decades has seen a change in most company operations. But the impact in accounts payable has been notably significant.
One key enabler for this change is technology. Join me, Michael Hyltoft, thought leader in accounts payable, and take this journey from the 1980s to the future state and look at where this pivotal function has come from and the direction it’s heading in.
1980: the beginning
Until the 1980s, accounts payable was a heavily paper based operation co-located with individual business units, which allowed for close collaboration between the finance and operational staff. This was required to address the issue of the very manual processing in most organisations, with most invoices being hand delivered across the organisation for approval. Some organisations had introduced home-grown green screen systems on mainframe by then, but the vast majority still ran AP as a fully manual process. This led to the accounts payable process varying from location to location within the same company. However it provided flexibility to the local business, even if the cost per transaction was high.
1990: the era of reengineering
The 1990s was the start of the ERP era, which also introduced ‘business process re-engineering’, as developments in IT opened up new possibilities. The focus was on standardisation to help streamline the process, as this would not only lead to lower costs, but also improve control and services. Processes were becoming standardised which enabled centralising the operation in one location. Accounts payable was mainly led by the centralisation of procurement, focussing on saving the bottom line results. So on the back of new standard processes and the centralisation of procurement, AP found itself moving to central if not regional locations.
Centralisation continued into the new millennium. But a term was being more widely used for a more exciting version of ‘centralisation: ‘shared services’. As a concept, shared services had been around since the early nineties. But only the few had applied its principles and reaped their rewards. Now, shared services are becoming mainstream. And the difference between centralisation and shared services was generally recognised. Shared services focused on continuous improvement, service delivery and operational excellence. Centralisation just focused on that – centralisation.
At the heart of shared services was its favourite child – accounts payable. And here technology could really be leveraged to change how this function runs. The focus was on automation, control and costs and how a paperless office could become a reality. Attention was turned to SOX2002 and many new technologies that would help deliver it all. IT outsourcing became commonplace in business, followed by the big consulting houses introducing ‘business process outsourcing’ who could take ownership for running IT, Finance and HR.
Within Finance, the AP department was most affected. Operations moved overseas to countries including Poland and India. This was made possible due to the earlier standardisation and centralisation of the processes, but equally important were the new technologies of scanning, (OCR), workflow, automation matching, portals and electronic payments. Accounts payable began working closely with procurement to drive efficiency and control. The new partnership forged ahead with e-invoicing projects with the supplier base and introduced policies like ‘no PO, no pay’. The two departments found that collaborating on more integrated processes provided benefits for both parties. Whether the transformation was done as an internal project or outsourced, ‘end-to-end procure-to-pay processing’ became the goal, and AP started to move away from being a cost centre to being a value-add operation.
2010: value beyond headcount costs
Global standardisation of processes had begun, not just for accounts payable, but the business as a whole. The consolidation of an ERP/single instance meant Finance had to develop a common chart of accounts. This required a ‘single version of the truth’. As part of the global standardisation, many companies introduced global end-to-end process owners, for example for procure-to-pay. Others took the more direct approach of simply merging procurement with accounts payable, with one person responsible for both. There have been examples both of procurement taking ownership (with finance still owning the actual payment of the supplier) and finance taking the ownership with procurement, still responsible for the actual sourcing of goods.
The development of the supplier portal entailed moving from a place where suppliers could merely see their invoices, to one where they can fully manage the procurement process; from agreeing POs to reconciling accounts and everything in between. These changes have led to a need to develop the AP staff skill sets to focus more on adding value and customer service. This is visible in many organisations today, with the important role accounts payable now taking in supporting the optimisation of cash flow working in close partnership with treasury.
Future State: merger and partnership
When reviewing the last three decades, it is evident that AP has been through a massive change, with some departments experiencing the staff numbers reduced by over 80%. It is hard to believe that the focus of accounts payable is going to continue to be on reducing FTE numbers and increasing efficiency. That said, there are still many departments yet to make use of new technology, and they will either have to start the journey or are likely to see themselves being outsourced to third parties that are not only willing to transform the operation, but in many cases also have a proven capability of doing so.
Leading accounts payable departments have numerous opportunities, one of which is chasing labour arbitrage by off-shoring (either setting up themselves or outsourcing to an already established party). Another option could be for AP to “expand” into other areas. In the last decade, the focus has largely been on purchase to pay, but in reality it was AP that was targeted. In order to truly integrate purchase to pay the organisation needs to change too. The technology and processes are available for integrated purchase to pay. In some companies where procurement and AP both report into the finance director, this change can be a fairly managed. However, it is more difficult when a dedicated procurement department reports directly into the CEO. It can be established in many different ways, but here are two principles to keep under consideration which ever approach you use:
- Sourcing and procurement are skills and not an administrative task
- The decision to pay money out of a company account should always sit within the responsibility of the finance director
It is vital that the difference between sourcing goods and services (sometimes called the RFx process) and the administrative burden of managing/drawing down on an already agreed contract is acknowledged. The latter sits neatly within the purchase-to-pay process, and can even be improved by the use of punch-out and internal procurement portals. The sourcing aspect requires professional people that understand the business needs and have the skill set to negotiate the most suitable contract for the company. If this is not recognised internally, the company may result in attempting to save money on “administration”, but end up paying a higher price in overpriced and incorrect contracts. Likewise, procurement should never be responsible for the actual payments, as this requires close cooperation with the treasury. Often procurement’s focus will be the commercial relationship with a specific supplier than with a financial representative in the company. Many larger organisations have already put in place a global purchase-to-pay process owner with responsibility for cross-system reporting, audit, transparency and governance. However, they will not be able to deliver the full value of an integrated purchase-to-pay function, if organisational design is not addressed.
Another area that AP could focus on more (and some departments already do) is working closely with treasury to attain a better cash flow forecast. These days (when cash is more important than profit), analysts do not like it when corporates are not in line with their forecast, both positive and negative. Companies that cannot forecast their cash correctly are considered to be lacking in control and are therefore a higher risk. So by AP taking a firmer position in this area, they will be able to show true shareholder value.
One of the tools AP can take ownership of to help with cash flow forecasting is payables supply chain finance (SCF). Simply put, this is the idea of allowing suppliers to be paid early in exchange for a discount. With the effective AP processes some companies have today, the average time from invoice date to the date the invoice is on the system and approved can be as low as five days. With average payment terms in Europe being around 46 days (REL Consulting, Working Capital Survey 2011), this means that the invoice can sit idle on the buyer’s system for up to 41 days. SCF allows the company to pay their suppliers early in exchange for a discount, and when the company is short on cash they can simply stick to their original payment terms.
For companies that do not have this cash, the financing can be provided by their bank, in what is called an ‘off balance sheet facility’. This means the buying organisation does have to pay a fee for this facility based on utilisation, but this cost will be more than enough covered by the discounts offered by suppliers for an early payment. Roughly speaking the experience in the market at the moment is that for every $100 million of spend, a company can generate $1 million of benefits through SCF models.
A number of companies have taken this a step further and given both AP and AR these kinds of tools. They have then merged the two departments into one “working capital” department. This team tends to be split into two halves. The first half focuses on exception management, sorting out any issues with both outbound and inbound invoices. Simply put, if you have made a short delivery or received a short delivery, it tends to be the same warehouse you need to talk to, so why not let one person handle it?
The other half is then focused purely on working capital – or, to be more precise, cash flow. By having this one team and the right tools the cash flow forecasting is met every month as the department can manage the variables between in- and outbound cash, in exchange for either more profit or less profit depending on that month’s cash position. This allows accounts payable to become not only a truly integrated part of Finance, but also of the business itself.
So regardless of what the next decade will bring for AP, it is clear it will not stand still. But instead of just being about cost control, it will be more a case of re-evaluating the organisation’s design and tools to optimise the value-add. Some companies will embrace these changes and move from a cost-centre structure to a profit-generating structure. Others will fight it for as long as they can, but are likely to have it done to them - or have someone take it over. With the global financial forecast for the next five years not looking so strong, one thing is certain: change is coming.