We added purchasing, sourcing and payments to our core Office of Finance focus areas this year to reflect new and important opportunities to use technology to gain effectiveness through greater efficiency. Doing a better job of record-keeping and organizing paperwork – especially in a minutiae-laden process like source-to-pay – may seem trivial. Yet digitally transforming core business processes became essential as the pandemic required organizations to lock down in early 2020, and the need to operate remotely presented a new set of challenges best addressed by software. Moreover, accounts payable work can be done remotely, and organizations that go this route find that digitizing the process works best.
Businesses are increasingly recognizing the value provided by technology – and not simply because it helps mitigate turbulent times. Digitizing AP should be a priority because it:
- Eliminates the root cause of process frictions that create unnecessary work and reduce productivity.
- Cuts costs directly related to executing these processes, including making it possible to optimize the use of early payment discounts.
- Provides intelligence to enhance forward financial visibility and identify ways to cut costs.
- Improves overall departmental performance and achieves the best possible relations with suppliers.
Although there are numerous advantages to digitizing accounts payable, Ventana Research expects the transition will be slow. This creates a competitive opportunity: We assert that by 2027, only one-fourth of larger organizations will consistently manage source-to-pay end-to-end. Those that do will outperform competitors.
AP process frictions stem from three main factors. One is the use of paper and facsimile documents that require manual data entry, rather than having digitized data immediately available. A second, which can be related to the first, is data that is not immediately accessible by those who need it to quickly resolve internal or vendor-related issues. A third is inconsistent AP processes across an organization that make it difficult to improve process management and visibility.
Frictions reduce profitability by creating inefficiencies, leading to higher than necessary costs. Aside from headcount expense, one common example is not being able to negotiate and collect early payment discounts because the department cannot reliably process invoices within the discount period. For most organizations, early payment can provide a far higher return on cash than can be earned in interest. Slow processing also leads to late payments and associated fees, while a lack of visibility can cause duplicate payments.
Technology is now available to substantially reduce the need for manual data entry, thereby eliminating a major source of errors. Sharing data electronically and using optical character recognition to scan paper or electronic documents captures purchasing data at the source. Artificial intelligence has played an early role in making the extraction of information from these scans more accurate with less effort.
Once the information is captured, reducing process frictions through better data management also contributes to greater operational and financial control. For example, being able to determine the amount and timing of future outlays for items provides visibility into future cash requirements. Having a central view on purchases from vendors facilitates supervision of contract compliance, especially in ensuring that volume discounts are respected. Indeed, having historical data readily available facilitates negotiating those sorts of contractual terms as well as determining how to optimize early payment discounts.
A more complete and effective approach to AP management also enhances relationships with suppliers. Unless your organization is a dominant buyer (and therefore thinks it can dictate terms and not care about the vendor’s perspective), being easy to do business with – especially in making timely payments and adapting quickly to changing conditions – can have benefits.
The ability to easily capture accounts payable data as early as possible in the process is essential. While purchase orders and invoices are key documents, there’s a lot of minutiae beyond these required for full visibility into AP processes. Other sources of data include packing slips, credit memos and remittances. For vendor management, this includes contract terms and conditions, including discount structures, contact information and email communications. Finance and accounting organizations can benefit from having easy access to all AP-related data either captured directly by the department or from authoritative source systems.
Depending on an organization’s circumstances, deciding whether the right approach to acquiring and implementing the technology is dedicated, best-in-class software or a core enterprise resource planning or financial management system can be an obvious choice or a toss-up. If the current financial system can deliver all of the capabilities needed for a fully transformed set of processes, it is likely to be the right choice. It’s important, however, to assess the ability of that system to provide a full set of benefits to those responsible for the processes rather than what might be convenient for the IT department. In some cases, even though the ERP system may have all the necessary capabilities, licensing and other costs may be such that the all-in cost of implementation and ownership for a dedicated application may be less than the existing core ERP system. There may also be add-on software that increases the usability of the core ERP system in supporting source-to-pay processes.
In evaluating AP automation software, it's important to assess the usability of the system by AP clerks and whether and how easily the system adapts to the needs of suppliers. Some systems may be perfectly adequate for handling a manual AP environment but have not transitioned to support digital needs. It’s worth noting that simply buying software does not fully address AP process issues. Providing training to AP workers is essential to achieve full value, and it may be necessary to work with suppliers to ensure smooth adoption of technologies such as self-service portals and payment cards.
I recommend that finance department executives with manual or largely manual AP processes consider using technology to improve performance and lower costs. I also recommend that companies with AP automation software evaluate how well these systems are working and identify and address issues that limit their effectiveness. Perhaps better training is needed, or perhaps another vendor might be able to provide better results.