A Special Report from
The Accounts Payable Network
Improving the
Procure-to-Pay Process:
A Transformational Approach
Sponsored By:
Improving the
Procure-to-Pay Process:
A Transformational Approach
A Special Report from The Accounts Payable Network
By David Hay
Senior Consultant with The Accounts Payable Network Former Director, Shared Services, Hewlett-Packard Company
© 2012 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
Table of Contents
The Accounts Payable Network Advisory Board ... 4
Introduction ... 5
Outsourcing ... 7
Achieving Effective Procure-to-Pay Processing ... 10
Preparation for Outsourcing ... 14
Summary ... 21
Appendix — BPO Services — Case Study ... 23
About The Accounts Payable Network ... 25
About David Hay ... 26
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 V.P., 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
Introduction
Introduction
Into the second decade of the twenty-fi rst century, a precedent has been set by leading organizations: effi cient and value-adding fi nancial operations are an important aspect of competitive and successful businesses. Through use of metrics, “best practices” and automation, fi nancial operations processes like procure-to-pay can be executed more effi ciently at lower cost, achieving operational objectives of on-time payments, lower cost, positive vendor relations and relatively secure supply. Best practice procure-to-pay operations also benefi t organizations through early-payment discount capture, and vis-ibility that facilitates better cash management and enables spend analysis, which feeds back to better contracts and pricing.
Some organizations have improved processes and implemented automation in-house, while some have mixed in-house efforts with outsourcing of particular discrete func-tions. Still others have elected to outsource most or all functions in either accounts pay-able or procure-to-pay operations.
This often heralded third approach, outsourcing, has not necessarily incorporated best practices or state-of-the-art automation, however. Rather, it has often simply shifted paper-based and manual processes to regions where, due to cheaper labor, the cost was reduced. Business process outsourcers promised to take over processing at lower cost, essentially offering to “do your mess for less.”
However, just as technology continues to evolve and improve, some business process outsourcing (BPO) service providers have improved the BPO model. They offer what is termed “transformational” outsourcing, which adds value to BPO through process anal-ysis and improvement, process automation via SaaS in the cloud, and strong customer service that includes day-to-day operational support. This report examines options for procure-to-pay operations with a focus on what transformational outsource service providers offer versus traditional outsource serve providers for a successful venture that meets an organization’s procure-to-pay operations objectives.
Outsourcing
Outsourcing
In the early 1990s a major U.S. manufacturer had a strategy that was called simply “95 by 95.” Their goal was to reach a point by 1995 where 95 percent of their manufactur-ing was outsourced. They had made the decision that they would focus on the areas that they felt gave them an advantage over their competition, such as the software than runs their products and the after-sale service they supply.
For an ever-increasing group of companies outsourcing has become a key component of business strategy. Initially only non-core processes, such as printing or cafeterias, were outsourced. As the benefi ts of outsourcing became more apparent, outsourcing expanded to include core processes, such as manufacturing and distribution, until today companies like Apple Computer have become virtual manufacturers, outsourcing all of their manufacturing to allow them to focus on their key-value activities such as design and software development.
One of the last areas to be outsourced was fi nance and accounting (F&A). There were a number of reasons for this including political and security concerns. However, this changed as cost savings and benefi ts became apparent. According to a recent study by Alsbridge, an outsourcing advisory company, F&A outsourcing costs decreased between six and eight percent per year in 2010 and 2011 (CFO Magazine 2011). One outcome of lower costs is that it is now possible for smaller companies to consider out-sourcing as an option. Although penetration rates are lower with smaller companies (see fi gure 1 below) the potential market is large.
Figure 1
Companies outsource for a number of reasons, cost cutting being the one most often given. Some outsource to focus on their core business while others do it to become more competitive or to gain access to new technology. Regardless of the reasons, it is important for any company contemplating outsourcing to focus on the overall strat-egy. In addition, C-suite support is critical if the project is to succeed. Upper manage-ment must be involved in making sure the strategy is fully understood and all stake-holders are involved, both within the company and within the outsourcing provider’s organization.
The traditional approach to outsourcing is to put the project out to bid, accept the low-est offer, then transfer the function virtually “as is” to the outsource provider. This may work well in some areas, such as certain manufacturing, but not well in others. One area where this approach does not work well is in fi nancial operations. Often the approach is what has been termed “lift and shift,” where what is often a bad process is simply moved as is to an offshore outsourcer in order to benefi t from lower wage rates. All too often this approach fails in the long run.
A better approach is to outsource to a “transformational” outsourcer. In this model the outsourcer becomes a strategic partner to help the company transform a process from an ineffi cient and costly manual operation to one that utilizes process improvements and technology to develop a low-cost, highly effi cient system.
Achieving Effective Procure-to-Pay Processing
Achieving Effective Procure-to-Pay Processing
Why do some companies achieve better results than others? Take a step back to look at an example of how some companies deliver very low cost, effi cient payables processing.
Studies show that the best performers obtain substantially lower costs than the bulk of the market. One key reason for this disparity is due to automation. The two charts below show the invoice processing costs, in fi gure 2, and the penetration of automation, in fi gure 3.
Figure 2
The above-displayed costs are median fi gures. The very best companies achieve a cost below $1.25 for a complete set of documents, PO through payment. They achieve this through automation of the complete process. A transformational BPO provider reports cycle times of one day and a cost of $1 per invoice.
Figure 3
Automation tools such as ERPs and EDI have been on the market for over 30 years. In the last several years these have been joined by other tools, including web invoicing, e-invoicing, and effective data capture technologies that convert paper and PDF invoices to electronic invoice data fi les. It is now possible to capture invoices in virtually any format and integrate the data into your own accounting or ERP system.
Despite this, as can be seen from fi gure 3, the number of companies with a high level of automation remains low. So how can the “laggards” catch up with the best in class?
In the more common licensed software model companies might utilize a combination of internal and external resources, though increasingly they implement licensed software. Though most often easier and more affordable than in-house-developed programs, there is a cost to third-party licensed software.
Hybrid – Selective Outsourcing
Another approach is a hybrid of licensed software implemented in-house, such as an ERP and workfl ow system, with systems such as EDI or portals that require outside providers such as the VANs in the case of EDI, or use of banks for payment/check issuance.
Often the staff and ERP remain in-house, while the transactional software and systems are outsourced to providers such as VANs or software as a service (SaaS) providers. In some cases the entire systems including the ERP are outsourced to SaaS or cloud providers.
One reason why only 15 percent of companies have reached a high level of automation is that only they have the time, money and resources to build or acquire and maintain the systems as required by these options to make it work.
Outsourcing – Traditional vs. Transformational
Traditional outsourcing usually has the operation moved to the outsourcer “as is.” In this model cost reductions are centered on utilizing lower-cost labor in countries such as India and the Philippines. In this model there has been little emphasis on transforma-tion. The result is that there is little improvement in costs over the life of the contract.
The main drawback to this approach is the rising cost of offshore labor. Even in manu-facturing rising costs are leading some companies to repatriate jobs to the U.S.
A better approach is to utilize the services of a “transformational outsourcer.” In this model the outsourcer combines a number of key elements:
• The consulting staff helps redesign and implement a better process, whether it is a complete procure-to-pay system, or just core AP processing. The key here is up-front consulting and process reengineering with a plan of continuous improvement, including automation, from the start of the contract.
• The technology to handle all transaction types from PO or RFQ through e-payments
• The right mix of onshore and offshore facilities to fully meet the needs of the client
• The staff needed to implement and run the systems and handle a high level of client support
• Multiple centers, both on- and offshore to handle data capture and support and for redundancy, backed by a disaster recovery plan that includes people, as well as systems
• Provide higher regulatory and audit compliance for SE16 and SOX perspectives for not only the cloud infrastructure, but also for the entire P2P process and the underlying technology solution. The provider takes the responsibility to keep the process, technology solution and cloud infrastructure compliant at all the times, and is audited by independent accounting fi rms for accountability
Preparation for Outsourcing
Preparation for Outsourcing
Before deciding on the particular approach, it is important to understand the existing system. Otherwise it would be like a traveler trying to pick a route to his goal on a map when he has no clue as to what his current position is.
Understand the existing operation. Fully understand the costs, services and quality of the existing operation to be able to fully compare with the offerings of potential out-source providers. One of the biggest reasons projects fail is because costs were under-estimated. Keep in mind that a good part of the existing cost may be in cost centers not under the control of AP; these could include mail room, scanning, or the time spent by requestors/buyers and their administrators in handling invoices, etc.
Put a team in place with the strategic view and authority to manage the process. This is a multi-part role. Initially the team may be tasked with managing the RFQ process, then with the selection of the outsource provider. Once a provider has been selected the team shifts focus to managing the transition. One key element of transition often overlooked is the people issue.
Don’t forget the other stakeholders, both internal departments such as treasury and sourcing, and external partners such as the vendors, auditors, and banks.
Any change of this magnitude will affect the employees. Some will remain in their current positions, some will be reassigned, and others may be let go. Keep in mind that some employees may be required for the transition period and then let go. A plan should be in place to manage this process to make sure the transition takes place smoothly. One way companies have handled this situation is to give bonuses at the end of the transition phase for those who are retained only for this process.
Don’t underestimate the need for ongoing management. Many companies underesti-mate this requirement. Ultiunderesti-mately the company is still responsible for the functions
car-ried out by the outsourcer, for example SOX and OFAC requirements must still be met. The transition phase is the perfect time to put into place changes to make the process more effi cient, for example the introduction of electronic invoicing or more robust workfl ow rules.
Selecting an Outsource Supplier
If the decision is to outsource the process, there are important considerations. Outsourc-ing is one area where the price should be lower on the list of critical items in the pro-posal. The key area is how the outsourcer is going to help you meet your goals. Avoid a potential vendor who offers “lift and shift,” only offering lower-cost employees. A few years ago a major European company did a study of Indian labor rates for AP employ-ees and forecast that within 8 years Indian costs would equal U.S. costs.
A transformational BPO vendor should be able to provide:
• Upfront consulting to help design and reengineer operations prior to moving them
• A sound plan for the transformation that includes process and technology improvements that can be incorporated in the transfer
• Multiple services, not just AP or AR processing. These services could include catalog management, PO handling, preparation of tax documents such as 1099s, payments both by check or electronically, and ongoing process-improve-ment consulting.
— An added benefi t would be to fi nd an outsourcer that can and will assist with tasks such as vendor master clean up and spend analysis.
• The ability to meet all accounting standards, and laws such as SOX, OFAC and FCPA; in addition the outsourcer should assist in the preparation for new legislation on the horizon such as FATCA (due to become effective January 1, 2014).
• Compliance responsibility is shared by the service provider, which ensures com-pliance at all levels—process, technology solution and cloud infrastructure— through regular audits onsite conducted by independent accounting fi rms. • In-country as well as offshore facilities – many fi nance managers are
wor-ried about offshoring fi nancial operations. The reasons are mainly for political, security, and control reasons. A CFO Magazine study of 150 fi nance executives showed only one- third outsource any fi nance work, and of those, 83 percent keep it onshore. One way to alleviate these concerns is to opt for an outsourcer that offers both onshore and offshore processing, preferably through multiple centers.
• A good measurement process – measurement is essential to management; the outsource provider must share metrics with the client company as well as use them to manage its processes.
• Full multi-site backup and recovery capabilities
• Activity-based costing and transaction-based pricing, as opposed to a model that charges by the headcount. The most effi cient, low-cost AP operations are those that use transaction pricing. Internally, transaction pricing can be used as a method of changing behavior within a company’s business units. For example, one major corporation charges back depending on the makeup of the transaction and technology used. The lowest charge ($1.50) was for complete transaction sets, PO to payment, that are completely electronic—in this case a combination of EDI and Web. The most expensive ($25.00) was for non-PO-based transac-tions with paper invoices and payment by wire.
Automation Technology
Key to successful outsourcing is having a partner that utilizes the most up-to-date tools to allow for continuous improvement to take place. These tools include:
• Scanning – In-country scanning. Paper will be with us for the foreseeable future and scanning is critical to get the invoice information into the AP system as quickly and accurately as possible. Once scanned, the document is available for processing onshore or offshore as needed. There are several key reasons to scan in-country; fi rst threre is time and cost. It can take weeks for mail to cross some borders and even a delay of a few days for mail to cross borders can make discount capture impossible. In addition suppliers may not take kindly to the requirement that they separate cross-border mailings to add the additional post-age. Another reason is political—in some countries it is illegal to send original invoices out of the country for processing; for other countries, the invoices have to be returned to the home country for storage and access by tax authorities.
• OCR – Once scanned, the document can be “read” by an OCR system, auto-matically capturing the data and transferring it immediately into the AP system for workfl ow or matching.
• Workfl ow – Once received by AP, the invoice has to be routed for approval, GL and CC codes added, and then the invoice is matched with the vendor fi le and any POs or receiving documents or contracts that may exist. Once this step has been completed, the invoice can be sent to the payment fi le for payment on the due date.
The most common method used to distribute invoice information approval is through e-mail, which is sent to the buyer or requester alerting them that an invoice has been received and requesting action. The e-mail might contain a link directly to the relevant invoice, or the invoice could be attached as a fi le.
Workfl ow can also be utilized for matching with PO and/or receiving to elimi-nate manual intervention.
• Integration – the provider’s systems must be capable of integration with your ERP or accounting system.
• E-Invoicing – The provider should be able to receive and handle multiple electronic invoice formats, including:
— EDI (ANSI X12 for North America and Australia and UN/EDIFACT for Europe and the rest of the world)
— Web-based Invoices – Similar to EDI, but utilizing XML instead of the standard EDI languages
— File Based – Usually EXCEL or similar type fi les
— E-Mail Based – This is probably the fastest growing method of distributing invoices, particularly with small- and medium-sized businesses. The invoice is usually created as a PDF and sent as an attached fi le. Many small account-ing systems, such as QuickBooks, automatically generate both the invoice and the e-mail for immediate distribution.
— Portal Based – A portal can be multi-functional. It can be used to distribute POs, which can be “fl ipped” or the data extracted from the PO to create an invoice. Invoices can be uploaded or created, and fi nally, invoice status and payment information can be made available to the vendors.
The above mentioned technologies can all be delivered as a service from the outsourcer as SaaS, or “the cloud.” Today, forward-looking outsource providers as well as many fi nancial software providers from Intuit to Oracle offer their applications in the cloud. This has a number of advantages, but a key advantage is the low level of IT support required of the client company. In most organizations, fi nancial operations process improvements are very low on the information technology (IT) department’s priority list. This can be circumvented through transformational BPO and implementation of procure-to-pay or accounts payable SaaS via the cloud.
Another important consideration in any technology that relies on vendor cooperation or participation is the on-boarding process—gaining the acceptance of and providing the
necessary support for participation of the vendors. Transformational BPOs provide the staff and services to handle this for clients.
Figure 4
expertise and can back it up with the best technology solution to signifi cantly bring value upfront and help with activities that goes way beyond what you call traditional outsourcing.”
Summary
Summary
Traditionally companies had two main paths to cost reduction in P2P operations, one was through in-house reengineering and automation, and the second was through sourcing existing processes. Today there is a third option: the transformational out-sourcer. This option combines a number of key disciplines into a single offering:
• Pre-contract consulting to analyze and improve processes before outsourcing • Reengineering: the redesign of the process to eliminate unnecessary steps and
employ best practices into a streamlined operation • Process automation, including SaaS
• Transaction-driven pricing as opposed to head-count-driven pricing • Qualifi ed staff to handle tasks such as discrepancy resolution
• Value-added customer support services, such vendor onboarding and spend analysis
• The ability to implement strategic goals, to transform a fi nancial operations team from being processors to a department capable handling the complete order-to-payment cycle
• Continuous improvement in process and cost during the complete contract cycle.
Further, no longer is F&A outsourcing an option only for large global companies. The market is growing, with over 800 contracts signed in last year; furthermore the costs are coming down. The result is that smaller companies can now receive benefi ts that were once only available to the largest companies. “The price point doesn’t change
tremen-term goals, utilizing all the available tools including technology, consulting and servic-es. Transformational outsourcing provides this complete approach, making P2P a center for continuous improvement.
Industry
Industry
Hospitality
Overview
Overview
Organizati ons globally are facing
mul-ti ple challenges to track invoices for payment procedures. The common problems faced by the accounts pay-able departments are lost invoices, a tedious payment authorizati on process and the problem of dealing with paper and electronic invoices.
Automated Accounts Payable
Automated Accounts Payable
Process
Process
Client
The client is one of the largest operators of limited-service hotels in the United States with over 80,000 rooms. The orga-nizati on Operates and provides franchise services to more than 800 hotels in the U.S., Canada and Mexico. Headquartered in Dallas, it has 9,000 employees nati on-wide.
Business need
• Timely and effi cient end-to-end invoice processing
• Deploy a user friendly soluti on with enhanced process off erings
• Highly responsive customer service and support
• Obtain cost eff ecti ve AP outsource services
Challenge
• Highly manual, paper intensive and people-dependent AP process resulti ng in higher cost of operati ons
• Absence of partnering mindset with current vendor, required to meet client’s ongoing needs
• Unable to meet defi ned SLAs and deliver all contracted services
• Lack of domain experti se and experience of the current vendor, which required the client’s Accounts Payable team to fi ll the gaps
Datamati cs’ Soluti on
• Customizable and confi gured as per client business rules to achieve client objecti ves
• Real ti me visibility and comprehensive reporti ng tools ensure a more effi cient and accountable AP process
• Built-in automated invoice coding procedures in the soluti on to reduce the burden of the approvers
• Quality vendor management services (in-clusive of W-9 collecti on, vendor inquiry, excepti onal handling, helpdesk)
• Measurable Service Level Agreements in support of ti mely, effi cient processing of accounts payable services
• Best of class workfl ow soluti on with elec-tronic invoicing & PeopleSoft integrati on
Appendix — BPO Services — Case Study
Appendix — BPO Services — Case Study
Datamatics
Datamatics
Advantage
Advantage
• Global Informati on Technology (IT) & Knowledge Process Outsoucing (KPO) organizati on
• Delivers smart, next-generati on business soluti ons
• Trusted partner to several Fortune 500 companies
• Capabiliti es built around technol-ogy, domain experti se & knowledge of business processes
• Featured amongst the Global Ser-vices 100 List in 2010 & 2011 • Decades of global experience
hav-ing executed projects across 60 countries
• Alliances with global technology leaders such as Microsoft , IBM & EMC2
• Certifi ed for SEI CMMI Level 3 V1.3, ISO 27001:2005 ISO 9001:2008 • SSAE 16 compliant processes • Global presence: U.S., UK,
Germa-ny, Switzerland, Bosnia, Australia, Singapore & India
Approach
• A well-defi ned transiti on methodology to ensure complete knowledge sharing • Deployed next generati on soluti ons
[e-Payables Manager and IQ - intelligent data capture] to automate the end to end AP Process
• Adopted phase-wise implementati on plan to be in sync with client roadmap • Formed a core team with domain and
soluti on experts
• Conti nuous-feedback sessions with client
Process
Result
Benefi ts
• Invoice processing cycle reduced from 4 days to 2 days
• Reducti on of excepti ons & supplier inqui-ries by 50%
• Reducti on in reclassifi cati on GL entries by 97% due to automated invoice coding process
• Reduced operati onal costs
• Shorten approval cycles and improve producti vity
• Enhance visibility & reporti ng for approvers and general managers
• Dynamic dashboards, to both accounts payable and approvers, to have visibility into approvals, aging, payments, rejected invoices and more
• Suppliers are enabled to use automated supplier enablement tools and connecti vity opti ons
• Higher volume management with reduced eff ort
About The Accounts Payable Network
The Accounts Payable Network (TAPN) is the complete resource for accounts payable, helping more than 50,000 accounting and fi nance 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, fl owcharts, templates and internal-control checklists.
TAPN’s highly popular AP tools help compare technologies and AP solution providers, fi nd 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 affi liated with any industry supplier, nor does it endorse any suppliers. For further
About David Hay
About David Hay
David has recently retired from a 40-year career spanning International Banking, Finance and Computer Services and Outsourcing. Most recently, David served as the Director of Shared Services Business Services Outsourcing, for Hewlett-Packard. He was formerly marketing manager for e-payments and fi nancial services for Global eXchange Services (GXS), where he was responsible for the strategic direction and development of GXS’s online invoicing and payment solutions for B2B e-commerce on a worldwide basis and has served on GE Capital’s initiative to create a GE Center of Excellence for e-billing.
David has worked with GE Capital, GE Medical Systems and GE Industrial Systems. As a member of key focus groups and task forces, he helped the GE businesses with their EDI and e-commerce initiatives. In his 24 years of GE experience, he has held several key management positions in fi nancial services, e-commerce and sales & marketing. A former international banker, David has over 35 years of experience in the fi nancial and e-commerce industries.
David now provides consulting services in payables improvement and procure-to-pay process; he works closely with The Accounts Payable Network as a part of TAPN’s advisory board; he is a regular speaker at accounts payable and payment conferences; and he is CFO of Atlantis Divers in Richmond, Virginia. (Dave is an accomplished diver, and his CEO son a top-rated dive instructor.)
About Datamatics
Datamatics is an established IT Solutions and BPO
Services organization offering a wide range of solutions helping deliver superior business value through its Transformation approach to outsourcing. We conceptualize and develop industry—specifi c technology solutions that are tailored to our customers’ requirements. We are deeply committed to our philosophy “Next-Generation
Solutions” and our track record bears testimony to this.
The Datamatics Group was established in 1975 and has over 30 years of experience in adding value to leading corporations worldwide. Our clients include 6 of the top 10 Fortune 500 corporations. We have delivered over 1,500 projects across 58 countries and continue to be strategic partners to some of our key clients. Anchored by a strong workforce of over 4,500 employees worldwide and a network of 1,500 knowledge associates, we have created an organization that strives for excellence. Our achievements have been endorsed by several awards from leading institutions around the world.
Datamatics has worked with various organizations to lead the transformation in the Finance and Accounting functions by bring in its deep domain expertise, process rigor and world class cloud solutions specifi cally designed Finance and accounting processes including Procure to Pay. Datamatics has been instrumental in removing the ineffi ciencies, bringing in best in class practices, improving the sourcing, enhancing supplier collaboration, invoice processing and engaging stakeholders throughout the
