The Time Has Come to Make Accounts Payable Processing Intelligent

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1 Executive Brief The Time Has Come to Make Accounts Payable Processing Intelligent Sponsored by: Perceptive Software Bo Lykkegaard August 2014 IDC OPINION Large organizations and their shared services operations are continually focused on efficiency gains and automation, and this is especially true in accounts payable processing. Using high volume scanners, optical character recognition (OCR), workflow software, electronic data interchange (EDI), and other technologies, accounts payable (AP) departments have been able to bring down the cost of processing vendor invoices dramatically. The quest for automation and cost reduction continues, and as the new technologies are rolled out in remote geographies to cover new business units and document workflows, new business priorities are emerging for the AP department. What is next for AP processing? As the most immediate automation goals have been achieved, further cost savings are getting harder to exploit. Organizations are turning to new areas of improvement, such as optimizing the timing of payments to take advantage of early payment discounts and avoid late payment penalties, and using operational analytics to understand future cash flows for external reporting and to continuously improve efficiencies. Other areas of improvement involve vendor portals for better vendor relations and vendor negotiation and e- invoice portals for a higher percentage of electronic invoices. This shift in AP priorities from efficiency to visibility and intelligence has a number of implications for AP departments: AP processes will transition from a state of big bang automation to a continuous improvement process, driven by operational analytics. Visibility into operational statistics will enable AP management to find clusters of exceptions and errors and work with affected staff and suppliers to find and correct the source of the problem. Such a continuous improvement process will also enable an ongoing improvement in the configuration of scanning devices, OCR systems, routing and workflow software, and so on. Suppliers, customers, and internal stakeholders such as finance can gain insight into the state of individual invoices, cash outlay forecast, and accounts payable statistics such as invoices due for payment and average days outstanding. For this information sharing to happen, the AP department must expose such information via dedicated portals for each targeted type of recipient. A supplier could receive links to a supplier portal containing all paid and outstanding invoices as well as related statistics and key performance indicators. Procurement can improve vendor negotiations as a result of better processes and information visibility, such as actual unit prices, actual payment terms, and so on. Invoice payments can be optimized to seek attractive early payment discounts and to avoid expensive penalties. AP employee profiles with skills in system configuration, analysis, and continuous improvement methodologies are needed, either via recruitment or training and upskilling. August 2014, IDC #IDCEB11W

2 IN THIS EXECUTIVE BRIEF This executive brief examines the state of accounts payable (AP) processing today, what lessons were learned through implementation, and where large organizations in Europe and the U.S. are looking to go in the future. This document is based on six in-depth interviews with AP executives among Perceptive Software customers during August TABLE 1 Study Participants Organization Anixter Global media organization Kuwait Petroleum Ministry of Justice Shared Services Siemens The Church of Jesus Christ of Latter-day Saints Industry Distribution Media Process manufacturing Government Discrete manufacturing Not-for-profit organization Source: IDC, 2014 ACCOUNTS PAYABLE AUTOMATION TODAY During recent financial uncertainty and budget cutbacks, many large organizations have turned their attention to internal processes to reduce the costs of processing paper-based, scanned, and electronic invoices. At the same time, the cost of scanning and optical character recognition solutions has declined as the underlying technologies have matured. Most organizations have, as a result, invested in automating invoice processing and reaped impressive efficiency gains. AP automation requires a scanning solution for paper-based invoices, a fax and solution for electronically submitted invoices, and an optical character recognition (OCR) solution for reading and classifying the invoices. Furthermore, a workflow solution is needed to manage invoice approvals, G/L coding, and exceptions. Finally, integration to the accounting or ERP system is needed to retrieve and validate supplier data, purchase orders and goods receipts, and for posting invoices, vouchers, and payments. A simplified AP automation workflow is shown in Figure IDC #IDCEB11W 2

3 FIGURE 1 AP Automation Workflow Source: IDC, 2014 A number of trends are impacting AP processing: e-invoicing. e-invoicing refers to the submission of an invoice electronically, as an attachment to an , via a web front end in a supplier portal, or in specialized document formats. The adoption of e-invoicing initiatives in the Nordics, Portugal, Italy, and Austria have been boosted by government mandates for e-invoices to all public sector suppliers as well as banking sector initiatives to support consumer e-invoicing. Although e-invoicing is a clear trend in Europe and can yield significant cost savings, it is not a simple cure for AP problems. Supplier networks are notoriously challenging from a supplier onboarding perspective, and EDI is very expensive to set up and maintain. Supplier portals that require vendors to submit their invoices in a certain format or template do not work for many large suppliers. is ubiquitous and inexpensive, but without technology that can read the PDF and capture the data, AP employees are forced to print and then scan and enter. Budgetary cutbacks. Many AP departments continue to experience declining budgets as efficiency is expected to increase further. IDC has found that many organizations are expected to produce annual cost reductions in the range of 5% 15% in the AP department in the coming years. This forces AP departments to drive automation and simplification further. Regulatory requirements. For public sector organizations, disclosure and reporting requirements related to accounts payable have increased dramatically over the past two years, according to Jacqueline Ingleson, Head of Finance Service, Ministry of Justice Shared Services. e-invoicing compliance is another example of regulatory compliance that requires investments in AP automation, storage, and analytics technologies IDC #IDCEB11W 3

4 BENEFITS OF ACCOUNTS PAYABLE AUTOMATION Among the six interviewees for this study, all experienced dramatic productivity improvements and associated cost savings as a result of implementing an accounts payable automation solution from Perceptive Software. Productivity improvements ranged from 100% to 400%, and in all cases, efficiency and cost savings were the main objectives of the implementation. Furthermore, all interviewees reported additional business benefits apart from pure cost savings. Among the key benefits experienced were: Paid on time improvement from below 30% to 80% of received invoices Reduction in errors Reduction in procure-to-pay cycle times Improved supplier relations Information collection and real-time visibility Improved governance, traceability, and control Empowerment of local staff and ability to work remotely In the words of an executive at a global media organization: "We've seen a reduction in the resources required to support invoice processing by 80% as a result of implementing invoice scanning and processing solutions. This was our sole purpose for the project. However, we have also seen additional benefits, such as a clear reduction of defects because we have taken the human error out. Cycle times have also been reduced." Jacqueline Ingleson also experienced significant benefits: "Our department has been able to double the volume of processed invoices with the same number of staff. In addition, we have seen other gains, such as better reporting and predictive analytic capabilities, which are very important for public sector institutions, and our staff can work remotely as all processing is digital and not paper-based." According to Mark Seethaler, Global Payments Manager, The Church of Jesus Christ of the Latterday Saints: "Our AP processing is now digital, either as straight e-invoices or scanned images. Productivity is up significantly as a service center processor can deal with 500 invoices per day as opposed to 200 previously. Governance is also much better, because local church workers can scan invoices remotely; submit to the correct budget owner who might reside in a different location for approval and submission to payment. We have fewer people doing processing and more people doing exceptions management and analytics." Once the main efficiency goals had been achieved, the AP automation projects typically changed in nature and shifted to a continuous process of improvements. The organizations used analytics to pinpoint clusters of exceptions related to particular suppliers, purchasers, or accounts payable employees, find the sources of errors, and work to eliminate those sources. Darla Shor, Global Director of Accounts Payable and Travel Management, Anixter, explained: "We do real-time invoice data analysis and our staff can see how they are doing and use it for problem solving and process improvement. Our managers have visibility to identify where workload is at and shift human resources around to match the needs." CHALLENGES OF ACCOUNTS PAYABLE AUTOMATION The key business documents for invoice matching and automation are the purchase order, goods receipt, and invoice. Purchase order and goods receipt are typically generated by and reside in an ERP system. The vendor invoice is either received electronically (special e-invoice format, PDF, Word, Excel, etc.) or as a scanned paper invoice IDC #IDCEB11W 4

5 In the perfect scenario, the company completes a successful three-way match. The invoice goes through an optical character recognition (OCR), data extraction, and validation process with all required fields being identified and captured correctly; the invoice data is then matched to one or more corresponding purchase orders as well as the relevant goods receipt documents, and all things match. In this scenario, straight-through processing is possible, which implies no human involvement at all. What are the barriers to straight through processing, the nirvana state of accounts payable? Among the key barriers, we found: No purchase order. Ton Jongen, Project Manager, Kuwait Petroleum North-West Europe stated: "Only 40% of our received invoices relate to a purchase order, so 60% of invoices require some sort of manual processing. Here, we need to identify and find the purchaser as well as budget holders to get the approvals." No goods receipt. Ton Jongen elaborated: "Late, missing, or inadequately filled out goods receipt documents is an issue blocking successful three-way matching. It is a process issue for us as this document is not always perceived as important in a busy work environment." Unreadable invoice or non-matched invoice. Darla Shor explained: "An average of 4% 6% of data fields are either unreadable or do not match and this kicks off an exception workflow. We have a lot of business and routing rules for these exception workflows to maximize efficiency, but ultimately someone needs to look at the document and make a decision." Jacqueline Ingleson added: "We get, believe it or not, a lot of handwritten invoices. We are impressed with how far OCR technologies can read handwriting but these types of invoices often require human intervention." Remote locations of non-automated AP processing. David Mottram, Head of Business Development and Strategy for Global Shared Services Finance, Siemens, explained: "Our large markets such as Germany are done in terms of system rollout. Currently, we are rolling out across North Western Europe and Eastern Europe is in the planning phase. Time and resources are the key inhibitors for worldwide coverage of AP automation." Mark Seethaler added: "We are expanding our use of AP automation software to the smaller countries so they can scan and submit invoices. We are active in 170 countries of which about 60 countries have low invoice volumes. The Church is experiencing strong growth and we have to be able to cover smaller, remote countries as well with invoice automation." Most of these barriers to straight through processing are behavioral in nature. Employees need to fill out goods receipts; suppliers should not get paid unless they can refer to a purchase order; handwritten invoices are not acceptable. In order to make people change behavior, change management and other management approaches are called for. System improvements can be part of the answer, such as a better user experience when filling out a goods receipt document, but software alone cannot secure successful business processes. LESSONS LEARNED IN ACCOUNTS PAYABLE AUTOMATION All six interviewees shared what they saw as their lessons learned after completing AP automation projects. The most critical lessons learned in order of importance were: Understand the business processes and business requirements before attempting to automate AP processes. David Mottram explained: "Our main lesson learned: to get a better understanding of our internal AP processes before looking at solutions." Jacqueline Ingleson added: "You need a joint understanding of business rules and procedures upfront. That is a key lesson learned from our AP automation project." 2014 IDC #IDCEB11W 5

6 Optimize AP processing before you automate. According to Ton Jongen: "Our first step was to break vicious circles and fix the process. Once cycle times were reduced, we could greatly simplify our processes and then automate those." Involve affected key stakeholders, including suppliers, early in the automation project. In the words of Darla Shor: "Before buying software, you need to identify the business requirements and separate the must-haves from the nice-to-haves. When you involve key users and suppliers, they will challenge your assumptions and ideas! And when stakeholders are involved, likelihood of project buy-in is increased." Integrate AP processes with legacy applications, most importantly the ERP system(s). Mark Seethaler elaborated: "You need to leverage your existing legacy systems. Replacing an ERP suite is not an option, so working with what you have is critical." The other lessons learned mentioned by the AP executives interviewed for this brief included the importance of securing top management buy-in for the project, selecting a stepwise implementation over a big bang approach due to the complexities of business rules involved, realizing the importance of testing before going live, and finally securing sufficiently experienced and capable software and process experts for the project. FUTURE OF ACCOUNTS PAYABLE The roadmaps for AP within the organizations that IDC interviewed typically involve global rollouts of the AP automation solution and the establishment of global coverage for the AP automation systems. Planned rollouts to smaller, remote countries will be virtual rollouts, which simply involve user setups and country configuration for web-based access to a central system. Other planned initiatives will involve integration between the AP automation solutions and existing systems, incorporating inventory management systems, facility management systems, and production systems. This will enable higher degrees of straight through processing and eliminate any manual data entry. Organizations are continuing to seek further refinements and improvements to their AP automation solution. There are plans to identify and extract additional invoice fields as well as further automate the routing of exceptions so that notifications and requests can be sent to the correct person without human involvement. Refinement will involve the broader use of e-billing standards for higher levels of automatic payments and straight through processing. Looking beyond the internal organization, others have plans to establish interactive supplier portals with dashboards for key performance indicators, trend analysis, and AP metrics as well as query functionality for investigating the status of individual invoices. The AP automation process has potential use outside of accounts payable. Some organizations are proposing to take the automation know-how from AP into the wider organization, moving the processes to other document-intensive departments, such as human resources and accounts receivables. Longer term plans for AP revolve around using AP data for business analytics for better cost control and cash flow management, and to empower local offices with analytical tools IDC #IDCEB11W 6

7 APPENDIX Interviewees The following accounts payable executives in the organizations currently using AP automation solutions from Perceptive Software were interviewed for this study during July and August 2014: Darla Shor, Global Director of Accounts Payable and Travel Management, Anixter David Mottram, Head of Business Development and Strategy for Global Shared Services Finance, Siemens Jacqueline Ingleson, Head of Finance Service, Ministry of Justice Shared Services Mark Seethaler, Global Payments Manager, The Church of Jesus Christ of Latter-day Saints Ton Jongen, Project Manager, Kuwait Petroleum North-West Europe Vice President, global media organization 2014 IDC #IDCEB11W 7

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