How to Make Purchase-to-Pay Automation, Pay
By: Jason Howard, ITESOFT
Accounts Payable would be easy if it wasn't for all the paper, as anyone who works in the area will tell you. Any stage in the accounts process that involves manual processing is a drag on efficiency and profitability.
According to The Byline Research Group, 96% of invoice processing involves keying data from paper, and that it takes an average of 12 days to process a single invoice. 25% of invoices are paid late. The average AP clerk handles just 70 invoices per day.
And there's more. As well as the labour costs of manual front-end handling, slow processing of invoices often means that organisations can't take advantage of early payment discounts. Paystream Advisors have shown that the average organisation is unable to capture 50% to 60% of early payment discounts because the Accounts Payable department cannot process and pay the invoice within the discount window.[1]
The Aberdeen Group identified that many organisations still manually processing invoices don't have clear visibility in the AP process. This presents a challenge, as organisations try to mitigate risk in an increasingly complex and rapidly changing environment: they cannot readily identify billing errors, over-payments, unclaimed discounts and other transactional information.
Manual processing can also bring about other issues and inefficiencies, with organisations experiencing a number of pain points. The top four offenders are: handling discrepancy resolution (price, quantity); approval processing; data capture and matching to Purchase Orders or Goods Received Notes.[2]
Many organisations are considering automation to solve the issues associated with manual invoice processing and, ultimately, to improve efficiency. Automation can bring about cost savings of 60%, a compelling proposition for any accounts department.[3]
Leading and misleading questions
But there's a right way and a wrong way to approach automation. So what are the questions that organisations should be asking when considering an automated data capture solution?
The most frequently asked question when evaluating a capture solution that involves Optical Character Recognition (OCR) is "What is the OCR recognition rate achievable with your system?" The answer to this is invariably: "Better than 99%".
What does that answer reveal? Very little, because the vast majority of OCR scanning solutions available today use the same, basic algorithms from the two leading vendors of OCR engines, Abbyy (FineReader) & OmniPage.
This means the majority of ‘intelligent' systems can recognise most fonts with a high degree of accuracy. Some can even reproduce formatted output that approximates the original scanned page including images, columns and other non-text components.
So OCR accuracy is not the key issue to question when choosing between automated capture solutions. All solutions do OCR well. So what else do they need to do, and how do they do it? Here are the simple questions that really help to identify the ideal automated capture solution are explored below.
Accuracy Matters
The first question to ask is: "How accurate is the captured data going to be when entering my business solution?" Let's look at the example of an accounts payable function within a finance department, where the volume of invoices received is in excess of 50,000 pages per annum.
Here, the issue is not the capturing of the data, but the validation of data against the user's ERP solution, and the matching of data with supplier details, VAT number, purchase order and so on, to minimise the need for correction and validation once the data is imported.
So in this case, if capture has an accuracy of better than 99%, the validation step is the one that determines efficiency, and this should be the focus for an organisation's questions. ITESOFT have found in numerous benchmarks, that the accuracy achievable is above 94% at the field level on any given invoice, taking into account font and print type, whether the document is printed by laser or dot matrix printer, the page orientation, and the layout of the line-item detail.
Seeking Validation
Looking more closely at the validation step, there are two types that help to ensure the highest level of data accuracy. Firstly, ‘internal' validation checks on the data captured from the document—date format and range, unit price and quantity, accuracy of line totals equalling the sub total, and so on.
The second type of validation is external: checking the captured data against the organisation's ERP system to avoid introducing further discrepancies. Examples include ensuring that a supplier actually exists, or validating a specific purchase order or VAT number for a given supplier.
Efficiency Gains
Once the validation question is answered, the remaining question is simply this: "What percentage efficiency saving I can expect to achieve?" In other words, "how will this solution pay for itself?" Experience shows that customers are typically able to save up to 60% of the manual effort in invoice processing. So if a client has 10 AP clerks performing manual entry and validation of invoices, the right automated solution means that 6 clerks could be reassigned to more strategic activities.
In a survey of customers using ITESOFT.FreeMind For Invoices, average cost reductions of 60% are achieved after implementing the solution. The biggest savings can be made in the validation step, due to the automatic matching of invoices with purchase orders and delivery notes. For example, one customer, AAH Pharmaceuticals, re-deployed 75% of its AP employees, due to saving time that had been spent processing invoices manually. Similarly, customers such as the Metropolitan Police and Crest Nicholson, re-deployed between 50 and 60% of their AP employees.
Customers also experienced an improvement in cycle times of approximately 50%. General Electric reduced their overall invoice processing time from 18.6 days to 4.6 days, and reduced their overall cost per invoice from £6 to £2.50—a 60% cost reduction, and a very real return on investment. Another customer, Marston's, reduced their invoice processing time by 50%, whilst managing a two-fold increase in volume (through acquisition), without having to increase the number of AP staff.
Final analysis
It's clear that automation not only delivers benefits at an operational level, but also at strategic level. It lowers invoice processing costs, cuts manual effort and the time taken to process invoices, reduces storage and retrieval costs, helps capture early payment discounts, and drives down processing errors.
Increased visibility of AP data across the organisation can also drive performance improvement in supplier contract negotiations, ensure proper receipt of volume discounts and rebates, and provide a basis for making working capital decisions. With further benefits such as increased supply-chain visibility, improved working-capital requirements and better supplier relationships also available when it's done the right way, purchase-to-pay automation really does pay dividends.
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[1] Strategic Impact of Accounts Payable Automation, Sush Koka, Paystream Advisors, 22 April 2008.
[2] Buyer's Guide: Imaging and Workflow: A Buyers Guide to Accounts Payable Automation Solutions, Paystream Advisors, June 2004.
[3] Adding invoice automation to SAP adds up, Computer Weekly, 17 March 2008.
