Benchmarking report on Invoice Payments for PAC

Appendix 2

Invoice Payments

Benchmarking report on Invoice Payments for PAC

The benchmarking work undertaken for this report highlights key performance findings:

• Payment performance is in line with neighbouring boroughs, who have all been set a target of 100% by the Government for the prompt payment of invoices;

• The cost of processing invoices is approximately 15% less than the average cost within an international benchmark dataset; however, it is still three times greater than best-performing organisations. It is our conclusion that:

• Continued work is required to develop low-cost incremental process improvements;

• Good practice would suggest greater centralisation of AP activity;

• Investment in electronic purchase order processing and invoice management may be justified (e.g. to support centralisation), and business cases to support this investment should be developed. 2. Description of service

The Central Payments Team (CPT) is responsible for processing and payment of Council invoices (except specialist care payments made by Social Care & Health Directorate). Directorate finance functions had responsibility for invoice payments up until April 2002 when a decision was taken to centralise the Accounts Payable (AP) function for the non-specialist payments on the basis that it would achieve improved system control functions, enhance performance and generate efficiency

savings. At the same time the Council was implementing the Oracle 11i AP system and a new accounting code structure to comply with the Best Value Accounting Code of Practice.

The Resources Directorate is responsible for developing policies and procedures to improve this area of work but performance is also dependent on managers across the Authority being timely in their approval processes of invoices. This message was clearly relayed in briefing notes to managers. In October 2002 an action plan was agreed to bring about a series of improvements which included a number of measures designed to improve management practices, systems and processes.

3. Benchmarking team

For the Council, the project was lead by Glen Trew (Payments Manager, Resources Directorate) and Karen Donovan (Performance Officer, Resources Directorate), with support from the members of the Payment Improvement Group (Strategic Finance, Systems and

Finance managers from each Directorate).

AP is a universal business activity, so officers have sought advice from the private sector: the Hackett Group (international benchmarking specialists, to provide access to a database of AP performance metrics, and to assess Lewisham’s performance against world-class commercial standards) and Hedra plc (management consultants specialising in performance improvement in the public sector, to provide project management).

3. Activities being benchmarked

Two benchmarking exercise were undertaken:

(a) World-class benchmarking exercise – a detailed data collection exercise to populate the Hackett database with cost, volume and staff activity data, plus information on business processes and systems;

(b) Local authority benchmarking exercise – a telephone/email survey of neighbouring boroughs by Hedra to identify how Lewisham’s business processes compare to its neighbours.

4. Performance data

At the start of this study, performance data was already available from two sources:

BVPI 8

The key performance indicator for this AP is the Audit Commission’s Best Value Performance Indicator 8 (BVPI 8). Although performance is dependent upon managers across the Council, it is the responsibility of the Directorate for Resources and the statutory target is 100%. The Audit Commission definition for this indicator is:

“The number of undisputed invoices for commercial goods and services paid to external contractors and suppliers during the year by the authority within mutually agreed terms or 30 days if such terms do not exist”.

Audited performance levels since 2000/01 are as follows:

Financial year Performance Quartile

2000/2001 72.0% Bottom 2001/2002 72.8% Bottom 2002/2003 65.1% Bottom 2003/2004 66.0% Bottom Problems with the introduction of the new AP system, the new Oracle

11i accounting code structure and the creation of the central AP team, together with a backlog of invoices from 2001/02, were factors towards the 2002/03 outturn being ‘way off’ target (65%). The backlog was cleared, but in 2003/04 BVPI 8 performance remained ‘way off’ target (66%), partly because of more accurate recording of the date of receipt of the invoice by the Council.

A cross-directorate Payment Improvement Group was set up to

address many of the issues previously identified as contributing to poor performance and remedial actions were implemented, including:

• Reducing the volume of invoices received (for example, new billing arrangements for mobile phone bills, the piloting of the e-purchasing card and review of billing arrangements for services from utilities);

• Placing more electronic orders for low value items (for example, piloting of the Lloyds/TSB e-procurement marketplace);

• Identifying and eliminating process bottlenecks.

By November 2004, the implementation of improvement actions had raised the performance level to 90% (upper quartile). This is in line with the performance of neighbouring boroughs upper quartile performance (see section 7 below).

CIPFA benchmarks

The CIPFA Benchmarking Club collected the following performance data in 2003/04 (Lewisham was one of nine London Boroughs to participate):

Cost data Lewisham London Boroughs

Average Cost per invoice, £ 1.59 2.28

• Staff costs 1.31 1.34

• IT costs 0.14 0.20

• Overhead/other costs 0.14 0.74 Cost per FTE, £ pa 20,527 23,253

Performance data Lewisham London Boroughs Average % invoices paid on time 70 84 % invoices entered

centrally

69 43 % invoices entered locally 25 41

% invoices from feeder systems

4 13 % purchase cards 1 3

% payments by BACS 78 50 This analysis indicated that in 2003/04, relative to this subset of London Boroughs, Lewisham:

• Was low cost (although this is due to lower overheads which could be calculated differently at each borough – ignoring overheads, Lewisham’s costs were inline with the average);

• Had a more centralised AP function;

• Made more payments electronically. 5. Overlaps with other services

Invoices are generated and authorised within all service areas. However, all invoices are processed and paid by the CPT (except for foster carers).

The Resources Directorate monitors performance against BVPI 8, and produces monthly data on payment performance by Directorate. Process improvement activity is focused on those Directorates with the worst payment record.

6. Benchmarking comparators

This benchmarking activity has allowed the Council to update the performance data previously available. Specifically, the Hackett data provides the opportunity to compare against a wider reference set and against a more detailed set of activity and cost definitions (e.g.

including all AP activity not just the central team). Hackett

The Hackett data set contains information from hundreds of the world’s leading companies and some public sector organisations, although the data set is largely American. Companies in the AP database include: Allied Domecq, Colgate-Palmolive, DaimlerChrysler, Ford, IBM, Lockheed Martin, Pfizer, Prudential, Scandinavian Airlines, T-Mobile and Walt Disney. Follow up to this initial study will include identifying a subset of Hackett data that includes organisations of a similar size or character to Lewisham.

Hackett also has an extensive database of best practice accessible to the Council to help it to understand how to improve its performance. The Hackett benchmarks represent international commercial best practice. This may not be attainable for a UK local authority because of the nature of the business transacted and the legal duties that apply to a public sector body. However, the gap between Lewisham and the best performers in the Hackett data shows the potential for

improvement that exists. All data in the Hackett database conforms to strict definitions and terminology, and is therefore directly comparable. The Council collected data against the Hackett definitions during December 2004, for the period October 2003 to September 2004. Hackett processed the numbers in January 2005. The Hackett database is in $, and cost data was translated into £ at the average exchange rate over the period. A sensitivity analysis has been undertaken and the conclusions from the report are not effected by fluctuation in exchange rate.

London boroughs

Data from neighbouring boroughs excludes Greenwich and Lambeth (who could not return the data within the timescales requested) but include an inner city borough from north London for which Hedra was able to obtain the data. This data is descriptive rather quantitative because other boroughs were not prepared to participate in the collection of data to the detail required by Hackett. However, it indicates which good practices or technologies are common across a number of comparable organisations.

7. Benchmarking data Hackett

A summary of the Hackett data is provided as Appendix A. For key cost and volume parameters, the Hackett data shows:

Lewisham Average Best

performers Cost per invoice

processed, £

6.68 7.71 2.19 Invoices processed

per FTE pa

5,175 11,814 20,067 Cost per payment

processed, £

15.06 15.39 5.60 % of FTEs in

central location

The Hackett data suggests the full cost of AP activity across the Council is £1.6m. This compares to the budget for the CPT of just £394k and reveals a 'hidden' cost to the Council of £1.2m.

In crude terms, reducing the cost of paying an invoice to the level of the best performing organisations in the data set could generate an annual saving of £1.1m (£6.68 - £2.19, times 245,000 invoices pa). However, whilst it is unrealistic to expect Lewisham to be able to achieve this level to savings, a cost reduction of £1 per invoice would generate a total saving of £245k and could be a reasonable target.

More time is required to analyse the full detail available from Hackett, but this data is consistent with:

• Lewisham is one of the smaller organisations in the data set (the average cost of the AP function of organisations in the Hackett database is £3.2m, twice the size of Lewisham), and with relatively low levels of centralisation of its AP function, therefore there are fewer opportunities for economies of scale to apply;

• There are costs that apply to public sector organisations arising from the high standards of probity required, e.g. to comply with Standing Orders and procurement regulations;

• The Hackett data is skewed towards US companies, where most AP investment effort is in reducing the volume of paper invoices through widespread use of credit cards, electronic invoicing and payment on delivery or against statements rather than individual invoices. This is easier to achieve in a private sector manufacturing environment with high levels of repeat purchases from a relatively small group of suppliers. However, this is an area where Lewisham can apply best practice through supplier rationalisation and

targeting its invoice reduction efforts on its top suppliers;

• In Lewisham, a relatively large amount of officer effort is spent in pre-processing activity i.e. preparing invoices for entry by the CPT. This takes place across the council in a number of offices, and will continue to do so whilst responsibility for AP is devolved to budget holders. A key conclusion from this data is the need to focus improvement effort on this cost area.

However, the data does show Lewisham with a higher than average % of invoices paid electronically (i.e. by BACS). This is an area where Europe generally leads the US.

London boroughs

Responses from the boroughs are shown as Appendix B. These show a variety of approaches to invoice payment.

BVPI 8 data was:

• Lewisham – 90%

• Other boroughs – 91%, 87%, 90% and 70% (the impact of implementing a new system).

The key lessons from this analysis are:

• There is no standard set of processes, organisational design or systems in use;

• Many councils are struggling to achieve 100% for BVPI 8 – Lewisham’s performance is in line with its neighbours. However, some Councils are achieving 100%, and it would be worthwhile for Lewisham to discuss how this performance is achieved;

• With the increasing use of technology, more councils are creating centralised payment teams. This is because modern finance systems allow better monitoring of invoice payment by registering invoices on receipt, scanning them, and sending an electronic copy to officers for approval. In this way, the invoice can be tracked and reminders sent before it becomes overdue;

• Lewisham is less advanced than its neighbours in developing purchase order processing (POP) systems in order to permit online ordering and automatic matching of invoices to purchase requests. 8. Conclusions

Our conclusions are:

• There is the potential for cost savings through more efficient processes. Specifically, greater centralisation is possible and may yield efficiency savings by reducing the cost of pre-processing;

• Savings may require additional investment to automate existing processes;

• Existing service improvement projects (e.g. e-invoicing, purchase cards, e-procurement) should continue, addressing known

problems, and allowing the Council’s BVPI 8 score to continue to rise.

The next steps arising from this exercise are:

• Detailed review of the Hackett data and best practices database, to understand where and how Lewisham’s performance can be

improved;

• Re-run the benchmark against a modified data set to compare Lewisham against organisations of similar size and complexity;

• Action planning (to include the CPT and the Payment Improvement Group), to prioritise existing projects and identify other areas for improvement. This will include related AP issues, such as the accuracy of invoice coding and the management of CIS1 invoices;

• Business case preparation, to develop recommendations for the implementation of further modules of the Oracle financial system in order to increase the level of automation of AP processing.

9. Acting Executive Director’s Commentary

The Acting Executive Director of Resources agrees with the conclusions and recommendations of the report. Work is already underway with existing projects:

(i) electronic payments (ii) roll-out of procurement cards;

Consideration now needs to be given to how best to further improve

performance which needs to include the potential for delivering efficiencies. The work needs to be developed with regard to the e-procurement project.

1

CIS is the Construction Industry Scheme – a complicated process whereby the Council collects tax on behalf of the Inland Revenue for specific types of invoice related to construction.

APPENDIX A – Hackett data summary

This is a sub-set of the data provided by Hackett, focusing on the most significant activity, cost and performance elements.

In the tables below:

• ‘Best performers’ value represents the performance of the top 25% i.e. the cheapest, largest or most efficient organisations in the data set;

• ‘Average’ is the arithmetic mean, unless stated;

• FTE = full time equivalent (measure of staff numbers). Cost data

Costs include the full cost of the AP function, including overheads, IT systems and staff across the Council (i.e. not just the central AP team).

Unit costs Lewisham Average Best

performers Cost per invoice

processed

6.68 7.71 2.19 Cost per payment made 15.06 15.39 5.60

The following table shows that Lewisham’s costs, in comparison to the data set, are more weighted towards staff than IT or overhead costs.

Cost type Lewisham Average Best

performers

Staff costs 84.1 55.1 44.5

Systems costs 8.5 27.4 14.7 Overheads/other costs 7.4 17.5 9.6

Total 100 100 N/a*

* This column shows the best performer in each cost category, so the total is below 100%.

The table below shows that Lewisham’s costs per FTE are amongst the lowest in the sample, particularly for IT development and operating costs:

Cost per FTE pa Lewisham Average Best

performers

Staff costs 25,454 26,182 21,810 Systems costs 2,568 15,908 5,686

Overheads/other costs 2,243 7,780 3,600

Activity data

Centralisation Lewisham Average Best

performers % of FTEs in central

location

66 88 100

The table below shows levels of AP outputs – invoices received for processing, and subsequent payments made:

Volumes, pa Lewisham Average* Best

performers Total invoices processed 245,000 454,463 1,104,557 Invoices processed per

FTE

5,175 11,814 20,067 Total payments made 108,698 183,096 415,988

Payments made per FTE 4,842 5,182 8,263 Number of invoices paid

per payment

2.25 2.48 2.66

* These values are the median (i.e. middle) value – the values of the arithmetic means are 1,705,321 invoices, 21,164 invoices per FTE, 346,024 payments and 7,096 payments per FTE. The median is a more representative ‘average’ figure for comparison against Lewisham data because the means have been skewed by a few large organisations.

Electronic processing

Lewisham Average Best

performers % of invoices received on paper 99.4 60.8 30.5 % electronic payments (e.g. BACS) 85.3 22.0 28.1 Activity by sub-process

Hackett defines nine sub-processes within AP. These are listed in the tables below broadly in the sequence in which they occur. Every Directorate across the Council reviewed its AP activity and allocated a percentage of officer time to a sub-process. The figures below are the total for the Council as a whole. This table shows the % of total activity in each sub-process. This indicates the relatively high level of effort within Lewisham on pre-processing activity i.e. tasks undertaken before invoices are received by the CPT:

% FTE effort Lewisham Average Best performers Supplier set-up 4.9 4.5 1.2 Pre-processing 32.6 7.6 3.4 Verification/approval 17.5 6.8 1.7 Processing 22.2 39.8 28.0 Discrepancy resolution 6.3 13.7 5.7 Payments 0.6 5.7 2.4 Enquiry response 14.0 10.7 5.9 File/store/retrieve 0.6 5 1.5 Reconciliation/compliance 1.4 6.3 2.3 Total 100 100 N/a*

* This column shows the best performer in each sub-process, so the total is below 100%.

This table shows the cost of each activity per line item (there may be multiple line items per invoice). This shows the relatively high cost of pre-processing at Lewisham, and below-average costs of processing activity:

Cost per line item Lewisham Average Best

performers Supplier set-up 0.17 0.11 0.01 Pre-processing 1.08 0.25 0.02 Verification/approval 0.59 0.27 0.02 Processing 0.73 1.11 0.28 Discrepancy resolution 0.22 0.39 0.06 Payments 0.02 0.29 0.02 Enquiry response 0.47 0.26 0.06 File/store/retrieve 0.02 0.18 0.02 Reconciliation/compliance 0.05 0.21 0.02 Total 3.35 3.07 0.51

APPENDIX B – AP best practices – London Boroughs survey General

Lewisham 1 2 3 4

Approximately, how many invoices are paid each year?

332,348 270,000 385,000 250,000 140,000

Approximately, what value of invoices are paid each year?

£568m £470m £514m £700m £300m

BVPI 8 performance

• Target for this FY?

• Performance for this FY? 100% 90% 90% 91% 100% 87% 86% 90% 85% 70% (impact of new AP system) Do you have a central AP

team? If so, how many staff?

Yes – Payments Team – 18 FTEs; Control Team 3.5

FTEs

Yes – 4.5 FTEs Yes – 9 FTEs Yes – 2.5 FTEs

(only for vendor creation, CIS and creating payments, cheques and BACS

files) No – multiple AP teams; moving towards centralisation within directorates How many departmental

AP sections are there? Approx total staff?

None Not known Seven AP sections,

with ten FTEs each – approx 70 FTEs in

total

None, all business units enter their own POs, goods receipts

and invoices. Approx 400 staff as

part of their normal jobs which could be

Finance, admin or HR support

Currently 11 – to be one per directorate (six in total). Employ

50 people (no. of FTEs not known), to

reduce once efficiency gains have been realised

from the new system.

What activities are undertaken by the central and departmental teams (yes, no, n/a):

Lewisham 1 2 3 4

Invoice receipt Dept Business Units Dept AP teams Dept AP teams Business units Dept AP teams

Invoice approval/batching Central AP Team Dept AP teams Dept AP teams In business units,

but approval is done at PO stage not

invoice.

Approval online by budget holder (no

batching).

Supplier set-up Central Control

Team

Central AP team Central AP team Central AP team,

based on form completed by business unit. Procurement manages the Supplier File. Requests for new Suppliers are made

on the corporate Intranet.

Invoice entry Central AP Team Central and Dept AP

teams

Dept AP teams Business units Dept AP teams

Payment processing Central Control

Team

Payment control team

Central AP team Central AP team Automatic process

completed off-site. Overseen by Finance Systems team. Processes Lewisham 1 2 3 4

Who is responsible for AP?

Finance Finance Finance Finance Finance

Who is responsible for supplier set-up?

Finance - Central Control Team

Finance Finance Finance but

currently discussing move to Procurement.

Lewisham 1 2 3 4 Is there a council-wide AP process manual/handbook? Yes – In Financial Regs

Yes Yes No, rules covered in

Financial Regs, Business manager’s

handbook and SAP process guides.

Yes, and also local processes for directorate specific

issues. How many contact points

are there for suppliers wishing to query an unpaid invoice?

Every Business Unit responsible for ordering goods &

services. Approx 100 local AP teams – contact number is printed on remittance advices according to the department/section indicator submitted to

the system when the invoice is input. Several e.g. AP teams Many – enquiries are made to business unit requesting the goods or service. Central AP department – email address and phone number provided on BACS and cheque

remittances. Requisitioner’s name and email details are supplied

on the PO. Specific email accounts have been

set up for AP and Procurement

functions for queries. Is there a simplified

process for setting up a small value/one time only supplier?

No No, though some

interfaces from other systems are allowed to set up the supplier

automatically.

No No Yes – use Sundry

Supplier function.

Are authorisation or scheme of delegation levels coded into the AP system?

No Yes, in a limited way. Yes Yes but managers

have rights to set special limits for certain activity which they have to monitor outside the system.

Yes – limits and cost centres can be

attached to authorised signatories.

Systems

Lewisham 1 2 3 4

What is your main financial system?

Oracle Financials version 11.5.9

AP – Northgate Creditors

SSA Global finance Masterpiece Net

1.2.1

SAP v4.7 CedAr E5 v5.0

Do you have any plans to replace/upgrade it? If so, what/when? No - System upgraded July 04 Yes, by June 2006 – at Functional Specification stage. Version 1.3, in May 2005.

No, system was upgraded in Jan

2004.

No, system was upgraded in Apr

2004. (NB. ASP delivery

model, system hosted off-site.) Which of the following do you use, and to what extent?

Lewisham 1 2 3 4

e-tendering Yes – Limited to one

Directorate at present No No No No (out to tender 2005/06). e-procurement No No (under consideration). Yes – approx 4% of spend. No No (out to tender 2005/06).

Purchase order processing No Yes (local systems

only).

Yes – but Chief Execs Dept only.

Yes (on SAP and local systems).

Yes – approx 40% of spend.

e-invoices Some e.g. stationery

suppliers

No (under consideration).

No No Functionality

available but no suppliers use it.

Invoice registration No No No No Yes – all invoices.

Invoice scanning Yes No Yes – all invoices No No (under

consideration).

Workflow No No No Yes (all POs entered

directly into SAP use workflow for approval process).

Yes (applies to all POP and AP functionality).

BACS 85% Yes – 87% of spend. Yes – 66% of spend. Yes – 95% of spend. Yes – 90% by value,

Lewisham 1 2 3 4 Electronic (fax/email) remittance advice No No (under consideration). No No Yes – 70% of all BACS payments by value and volume.

Purchasing cards Yes – in pilot No (under

consideration).

Yes – approx 5% of spend.

No Yes – approx 2% of