Benchmarking report on Invoice Payments for PAC

Transcription

1 Appendix 2 Invoice Payments Benchmarking report on Invoice Payments for PAC 1. Executive Summary 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 nonspecialist 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. APbenchmarking-PACReport Page 1 of 16

2 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/ 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. APbenchmarking-PACReport Page 2 of 16

3 Audited performance levels since 2000/01 are as follows: Financial year Performance Quartile 2000/ % Bottom 2001/ % Bottom 2002/ % Bottom 2003/ % 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 e- 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, Staff costs IT costs Overhead/other costs Cost per FTE, pa 20,527 23,253 APbenchmarking-PACReport Page 3 of 16

4 Performance data Lewisham London Boroughs Average % invoices paid on time % invoices entered centrally % invoices entered locally % invoices from feeder 4 13 systems % purchase cards 1 3 % payments by BACS 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. APbenchmarking-PACReport Page 4 of 16

5 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 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 Hackett processed the numbers in January 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: Cost per invoice processed, Invoices processed per FTE pa Cost per payment processed, % of FTEs in central location Lewisham Average Best ,175 11,814 20, APbenchmarking-PACReport Page 5 of 16

6 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 ( , 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. APbenchmarking-PACReport Page 6 of 16

7 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; APbenchmarking-PACReport Page 7 of 16

8 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 CIS 1 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) (ii) electronic payments 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. APbenchmarking-PACReport Page 8 of 16

9 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 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 Cost per invoice processed Cost per payment made 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 Staff costs Systems costs Overheads/other costs Total 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 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 Total cost per FTE 30,265 49,870 31,096 APbenchmarking-PACReport Page 9 of 16

10 Activity data Centralisation Lewisham Average Best % of FTEs in central location The table below shows levels of AP outputs invoices received for processing, and subsequent payments made: Volumes, pa Lewisham Average* Best Total invoices processed 245, ,463 1,104,557 Invoices processed per 5,175 11,814 20,067 FTE Total payments made 108, , ,988 Payments made per FTE 4,842 5,182 8,263 Number of invoices paid per payment * 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 % of invoices received on paper % electronic payments (e.g. BACS) Lewisham Average Best 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: APbenchmarking-PACReport Page 10 of 16

11 % FTE effort Lewisham Average Best Supplier set-up Pre-processing Verification/approval Processing Discrepancy resolution Payments Enquiry response File/store/retrieve Reconciliation/compliance Total 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 Supplier set-up Pre-processing Verification/approval Processing Discrepancy resolution Payments Enquiry response File/store/retrieve Reconciliation/compliance Total APbenchmarking-PACReport Page 11 of 16

12 APPENDIX B AP best practices London Boroughs survey General Approximately, how many invoices are paid each year? Approximately, what value of invoices are paid each year? BVPI 8 performance Target for this FY? Performance for this FY? Do you have a central AP team? If so, how many staff? How many departmental AP sections are there? Approx total staff? Lewisham , , , , , m 100% 90% Yes Payments Team 18 FTEs; Control Team 3.5 FTEs 470m 514m 700m 300m 90% 91% 100% 87% 86% 90% Yes 4.5 FTEs Yes 9 FTEs Yes 2.5 FTEs (only for vendor creation, CIS and creating payments, cheques and BACS files) 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 85% 70% (impact of new AP system) No multiple AP teams; moving towards centralisation within directorates 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. APbenchmarking-PACReport Page 12 of 16

13 What activities are undertaken by the central and departmental teams (yes, no, n/a): Lewisham 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 Invoice entry Central AP Team Central and Dept AP teams Payment processing Central Control Payment control Team team Processes 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. Dept AP teams Business units Dept AP teams Central AP team Central AP team Automatic process completed off-site. Overseen by Finance Systems team. Who is responsible for AP? Who is responsible for supplier set-up? Lewisham Finance Finance Finance Finance Finance Finance - Central Control Team Finance Finance Finance but currently discussing move to Procurement. Procurement APbenchmarking-PACReport Page 13 of 16

14 Is there a council-wide AP process manual/handbook? How many contact points are there for suppliers wishing to query an unpaid invoice? Is there a simplified process for setting up a small value/one time only supplier? Are authorisation or scheme of delegation levels coded into the AP system? Lewisham Yes In Financial Regs Every Business Unit responsible for ordering goods & services. No Yes Yes No, rules covered in Financial Regs, Business manager s handbook and SAP process guides. 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. No, though some interfaces from other systems are allowed to set up the supplier automatically. Several e.g. AP teams Many enquiries are made to business unit requesting the goods or service. Yes, and also local processes for directorate specific issues. Central AP department address and phone number provided on BACS and cheque remittances. Requisitioner s name and details are supplied on the PO. Specific accounts have been set up for AP and Procurement functions for queries. No No Yes use Sundry Supplier function. 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. APbenchmarking-PACReport Page 14 of 16

15 Systems What is your main financial system? Do you have any plans to replace/upgrade it? If so, what/when? Lewisham Oracle Financials AP Northgate SSA Global finance SAP v4.7 CedAr E5 v5.0 version Creditors Masterpiece Net No - System upgraded July 04 Yes, by June 2006 at Functional Specification stage Version 1.3, in May No, system was upgraded in Jan No, system was upgraded in Apr (NB. ASP delivery model, system hosted off-site.) Which of the following do you use, and to what extent? Lewisham e-tendering Yes Limited to one Directorate at No No No No (out to tender 2005/06). present 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 Yes but Chief Yes (on SAP and Yes approx 40% e-invoices Some e.g. stationery suppliers only). No (under consideration). Execs Dept only. No local systems). No of spend. 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, 70% by volume. APbenchmarking-PACReport Page 15 of 16

16 Electronic (fax/ ) remittance advice Lewisham No No (under No No Yes 70% of all consideration). BACS payments by Purchasing cards Yes in pilot No (under consideration). Yes approx 5% of spend. No value and volume. Yes approx 2% of spend. APbenchmarking-PACReport Page 16 of 16