Driving Performance in Accounts Payable

DRIVING PERFORMANCE IN ACCOUNTS PAYABLEThe opportunity for AP Change Makers.

WHITE PAPER

November 2013

© Basware Corporation 2013 www.basware.com 2

TABLE OF CONTENTS

3. EXECUTIVE SUMMARY: THE IMPACT OF AP CHANGE MAKERS

5. ACCOUNTS PAYABLE EVOLUTION

6. BENCHMARKING PERFORMANCE

8. ACCESSING PERFORMANCE

10. MEASURING BEST-IN-CLASS

12. DRIVING CHANGE

14. WHEN YOU’RE LEADING THE CHANGE CHOOSE A PARTNER WITH EXPERIENCE

15. 4 STEPS TO AP AUTOMATION

20. WHAT TO DO NEXT

21. ABOUT BASWARE


Forward thinking finance and procurement leaders are harnessing maturing technologies to drive out complexity and inefficiency from core processes. In turn transforming the business impact of their functions.

The evidence is unequivocal. As we’ll see in this paper, these Accounts Payable Change Makers are delivering a step-change in operating performance compared to their peers:

- More invoices processed by each Full-time equivalent (FTE) - More invoices processed straight through - Dramatically reduced times to process invoices- Greater accuracy and fewer errors

Plus, by cutting the cost of processing each invoice from $19.10 to just $2.20, they’re contributing huge upside to the bottom-line of their businesses.

THE IMPACT OF AP CHANGE MAKERS EXECUTIVE SUMMARY

ACCOUNTS PAYABLE IS CHANGING


The key is in their vision to adopt automation solutions, e-invoicing and open commerce networks. The latest industry research demonstrates a causal link between best-in-class AP performance and an investment in new technologies and processes.

This evidence is driving the next wave of Change Makers to step forward and make their own impact. More and more AP leaders see 2014 as the year when they will automate more processes and shift-up to do more business through smarter electronic systems.

Of course AP Change Makers aren’t just valued within their own businesses. They are also sought after elsewhere, with increased demand now seen in the finance talent market for AP professionals capable of leading change.

As this paper explains, Basware can help you understand, plan and deliver your automation objectives. Our personal “best-in-class” assessments enable you to benchmark your current performance against peers and create a roadmap for transformation of your Accounts Payable function.

To take your first step towards delivering best-in-class performance for your business read on.

The opportunity is clear. Is now the time for you to become an AP Change Maker too?

SO HOW ARE THEY DOING IT?


Recent macro-economic challenges have hit the world of business dramatically and irrevocably. Although there are signs that global economies are returning to growth, there is more emphasis than ever on operational efficiency.

Since the downturn, stringent operational capability and risk control have become key routes for healthy businesses to compete. The elimination of unnecessary complexity is now of the utmost importance.

Nowhere are these new paradigms more keenly felt than in finance departments. As new solutions become increasingly accessible and affordable, Accounts Payable departments which use inefficient paper-based invoicing processes will become the exception, rather than the rule. Those ‘exceptions’ will find themselves less able to compete as their cost-base will be higher than their more process-mature competitors.

Forward thinking finance and procurement leaders are shaping the evolution of AP departments by investing in transformation initiatives and providing healthy internal drivers for change, to meet external demands for efficiency.

Given the maturing technologies and proven models available today, AP leaders should ask themselves what kind of operation do they want to lead?

A high performing department which uses the latest technology to minimize inefficiency, deliver value to internal stakeholders, and create wealth for the business?

Or, one that carries on operating in the dark, as a tactical, administrative function that leaks money and adds little value to the wider business.

ACCOUNTS PAYABLE EVOLUTIONACCOUNTS PAYABLE IS CHANGING

The majority of AP leaders are poised, finally, to take control of their department’s destiny.

Whether you join them is up to you.


Knowing how to accurately measure a business function is key to understanding how leading companies ‘achieve best-in-class’.

Let’s take a look at the research paper published by Ardent in 2013 to gain insight into bridging the performance gap between the best performing AP departments and all the others.

Using benchmark data in Table 1, AP and finance leaders can understand how they measure up against a list of typical KPIs. As painful as it may be to admit you are bottom of the class, it’s also the first step on the road to improvement.Table 1 shows how the top 20% of businesses are performing significantly better across a series of Key Performance Indicators (KPIs).

As we’ll see in detail later, the best performers haven’t just adopted technology. They’ve mastered it. They understand how the various pieces come together to provide complementary and exponential opportunities to positively change both processes and the bottom line results.

That’s why they deserve to be called ‘Change Makers’. By capitalizing on a mix of mature technologies (SaaS, OCR, workflow, etc.) and cutting edge solutions (mobile, collaboration, business networks), they’re driving a step-change in the performance of their accounts payable departments.

COST TO PROCESS AN INVOICE:

BENCHMARKING PERFORMANCE

AP CHANGE MAKERS ARE DELIVERING A STEP-CHANGE IN OPERATING PERFORMANCE, AS SHOWN BY THEIR KPIS COMPARED TO ALL OTHERS.

Number invoices processed per FTE per month

Best-in-Class All others

3559

44.2%

91.4%

18.4%

70.8%

7.7%

3.3 days

1335

14.5%

3.12%

41.8%

1.07%

16.1%

13.5 days

% of invoices processed straight-through, with zero manual touch

% of suppliers that submit electronic invoices

Average time to process an invoice

Invoice exception rate

Paid on time %

% of duplicate or overpayments

Best-in-Class

All others

$2.20

$19.10

UNDERSTANDING HOW LEADING BUSINESSES PERFORM


Key metrics include the number of invoices processed per FTE per month and the percentage of invoices processed straight-through. These are indicative metrics which help to understand the cost per invoice; the higher the number, the more efficient the operation and the lower the cost per invoice.

Also, reducing the amount of time taken to process an invoice (10 days) can have a significant and strategic impact on a business. With the shortening workflows of ‘Best-in-Class’ performers and their ability to pre-book invoices the moment they arrive, cash management becomes more predictable and supplier relationships are improved as different payment options become available.

AP MANAGER, MID-MARKET ONLINE MEDIA COMPANY

“The biggest change recently for AP has been the use of KPIs, this really helped us to evaluate our processes and performance.”


SO, HOW IS BEST-IN-CLASS PERFORMANCE ACHIEVED?

It’s probably no surprise to anyone reading this paper that there’s a proven causal link between high performance and the adoption of automation technologies and solutions.

However, technology alone can’t do everything – the organization must adopt a holistic approach, with people, processes and policies all serving the common pursuit.

The ability to measure key metrics is often the catalyst for AP Change Makers to take performance to new levels. Technology enables new levels of insight into data. Forward thinkers are using this new intelligence to further improve their processes – a virtuous circle of measurement and improvement.

INTELLIGENT STRATEGY IS IMPOSSIBLE WITHOUT GOOD DATA

The Best-in-Class are 74% more likely to have the capability to measure both productivity (for example, invoice processing cycle time or invoices processed straight-through) and financial metrics (such as invoices coming due, discounts coming due, goods received not invoiced). This is an important characteristic.

After all – and as Robert Kaplan famously said - “if you can’t measure it, you can’t manage it!”

Also, Best-in-Class AP groups are 90% more likely to link the P2P process, which begins with spend analysis and sourcing and includes contract management, procurement and accounts payable.

As a group, they are also 64% more likely than other companies to have working capital optimization controls in place. These are achieved through the implementation of comprehensive processes and measures that are applied across all operational areas of a company, especially AP, due to its essential role in managing payments.

For instance, in the case of a single invoice, Change Makers know that the cost of processing changes as the percentage of electronic invoices received increases.

• Companies receiving less than 10% of their invoices electronically have an average cost per invoice of $18.

• Those receiving over 60% have an average processing cost of just $6.

ACCESSING PERFORMANCEBEST PRACTICE PERFORMANCE LEVELS ARE NOW WITHIN EVERYONE’S REACH


ELECTRONIC INVOICE IMPACT ON COST

$18.07

$10.55

$8.30$6.08A

vera

ge

Cos

t p

er In

voic

e

% of Electronic Invoices Received

$20

$18

$16

$14

$12

$10

$8

$6

$4

< 10% 10-30% 30-60% > 60%

Receiving more invoices electronically lets AP Change Makers do a lot less data entering, manual validation and matching. As Chart 1 shows, this has a significant impact on the average cost per invoice.

Greater ‘straight-through’ processing makes the whole process more efficient, dramatically increasing the number of invoices processed per full time employee, thus slashing operational costs.


MEASURING BEST-IN-CLASS

BEST-IN-CLASS CHARACTERISTICS

When we compare how the Best-in-Class performers use technology, versus ‘All Others’, the results are dramatic.

From the leading class, 87% use technology for document imaging and scanning, but only 52% of the rest.

Although technology is the way to be Best-in-Class, it’s only the means to an end. An investment in technology by itself (without contemplation of other factors such as people, processes, and policies) is unlikely to yield a high return.

One aspect where Best-in-Class AP groups show significant maturity is in linking the P2P process. Top performing enterprises are 90% more likely to effectively link the various P2P processes which begin with spend analysis and sourcing and include contract management, eProcurement and AP. Linking these processes allows for a more holistic approach to enterprise spend management and supplier relationship management. It also gives greater accuracy and intelligence throughout the entire process.

Document imaging/scanning

Best-in-Class All Others

27%

52%

17%

45%

59%

87%

21%

38%

31%

10%

Automated routing & approval workflow

e-invoicing solutions

Automated data capture & extraction

Supplier/B2B/Payment network

BEST-IN-CLASS VS. ALL OTHER TECHNOLOGY USAGE:

MEASURABLE CHARACTERISTICS OF BEST-IN-CLASS PERFORMERS


The other area where Best-in-Class enterprises excel is in their ability to measure key metrics. They are 74% more likely to have the capability to measure both productivity (e.g. invoice processing cycle time, invoices processed straight-through) and financial metrics (e.g. cost per invoice, discounts captured, goods received not invoiced). This is an important characteristic as performance can only be improved if it is measured.

When it comes to establishing working capital optimization policies and procedures, Best-in-Class companies are certainly ahead of the curve. As a group, they are 64% more likely to have these controls in place as compared to other enterprises. Working capital optimization is only achieved through the implementation of comprehensive processes and measures that are applied across all operational areas of a company, especially AP, due to its essential role in managing payments. Establishing procedures and controls that are designed to optimize working capital should be a top priority for enterprises.


DRIVING CHANGE

The merits of successfully switching over to automated AP are no longer up for debate. But, AP Change Makers still need to stand up and drive the change through their organizations to make it happen. After all, automation doesn’t happen by itself.

Boardroom ammunition is easy to supply – automation gives Change Makers the opportunity to enhance their businesses in a host of ways:

Increased productivity in the AP department. As we’ve seen in figure 1, the more invoices are processed, the greater the savings that can be made.

The Best-in-Class can process invoices at a cost of just $2.20 each (vs. $19.10 for organizations at the other side of the spectrum). A large part of their superior efficiency is based on using technology to complete the most time-consuming and costly manual AP activities. On average, Best-in-Class organizations process over 2,000 invoices more per FTE, per month, than competing AP operations, for two reasons. Firstly, the Best-in-Class AP have almost three times as many suppliers submitting invoices electronically. Secondly, Best-in-Class enterprises process 44.2% of their invoices without any human intervention, compared to only 18.4% in other enterprises.

Automation lets you enjoy increased visibility and access to accurate, real-time invoice and payment data.

This lets businesses come up with better cash management strategies. Also, the increasing use of ePayables technology yields tangible benefits in accounts payable productivity and results in improvements that can impact the treasury and procurement organizations.

With automation comes more optimized working.

Receiving more invoices electronically reduces the need for data entry or manual validation and approval. Digital formats are the single biggest contributing factor to straight-through processing, which makes the approval process highly efficient and greatly increases the number of invoices processed per FTE, thereby reducing operational costs.

Best-in-Class invoice processing cost of $2.20 compared to $19.10 for all others.

Best-in-Class process 44.2% of invoices straight through compared to 18.4% for all others.

SEIZE THE OPPORTUNITY. BE AN AP CHANGE MAKER


Change Makers aren’t just valued within their businesses. They are also more sought after elsewhere, with increased demand in the finance talent market for AP professionals capable of leading the Change.

ADDING VALUE TO PROCUREMENTAs it moves away from tactical duties to strategic objectives, AP can add value to other departments. Recent research showed that 61% of businesses were seeing procurement and AP working together towards shared goals.

EXECUTING TREASURY STRATEGIESSlow and unpredictable invoice handling processes coupled with a lack of present and forward cash flow requirements, does the treasury function no favors. By automating the process, AP Change Makers can add real value to their treasury’s working capital optimization strategies.

THE OPPORTUNITY IS CLEAR. ISN’T IT TIME FOR YOU TO DRIVE THE CHANGE?

Greater visibility ensures AP Managers can proactively work with those invoices that most require their attention.

Process and invoice task visibility ultimately gives AP the ability to better manage payments within specified parameters (i.e. before the due date or earlier if there is a discount involved) and is a hallmark of efficient AP operations. Payment performance is a key metric that AP groups and suppliers track, but one that can also be important to procurement, since having a high ‘paid on-time’ percentage is always good for supplier relationships and something that can be leveraged during future negotiations. Best-in-Class organizations have a much higher paid on-time percentage (91.4%). Other AP departments execute 70.8% of their payments on-time. Conversely, if not addressed appropriately, a low on-time payment rate can create discontent and tension with the suppliers affected - not to mention the potential of incurring late payment fees and the complete inability to realize any early payment discount opportunities which might exist.

Once automation has been implemented, CFOs can expect AP to be more of a strategic business enabler.

AP has the potential to improve efficiency, reduce costs and strengthen compliance and controls, instead of staying a back-office cost center. Overpayments and duplicate payments are a problem - an entire industry of AP audit recovery firms exists solely to identify and recover erroneous payments. Best-in-Class AP departments have a very low percentage of duplicate and overpayments (just over 1%) whilst all other AP groups are at approximately 3%.


Our experience means we understand the key areas to be considered when seeking to transform your AP department’s value and standing within the business:

HOW BASWARE CAN HELP YOU LEAD THE CHANGE

• Basware can help you develop a broad initiative to remove paper-based invoices. We can establish a strategy to onboard all your suppliers to send you invoices electronically. • We can establish key performance indicators (KPIs) to help you monitor and improve your processes over time. • We consider the larger procure-to- pay process in any AP transformation initiative and can help you roadmap your automation goals to represent a more holistic long-term strategy. • We will work with your Payment Manager or Treasury to support working capital and payment strategies are optimized • We will immediately connect you to the largest global open commerce network of buyers and suppliers.

WHEN YOU’RE LEADING THE CHANGE, CHOOSE A PARTNER WITH EXPERIENCE

WHY BASWARE? We are a world leader in AP automation solutions. Our experience in working with AP Change Makers like you means we’re the ideal partners to bring Best-in-Class performance to your business.


4 STEPS TO AP AUTOMATION

As a global leader in AP Automation and E-invoicing solutions, Basware has unparalleled knowledge and expertise to help AP leaders transform the performance of their departments and the impact they have on their businesses.

Here we share four key steps any AP Change Maker should follow to begin the process of modernization for their company.


Understanding the current accounts payable process down to the root causes of your current bottlenecks is crucial for improvement and standardization. New processes should be articulated and the goals should be set in the context of the entire business (i.e. avoid replicating the diverse, existing processes with new technology). Centralization is typically well understood as a means of reducing duplication of effort and improving organizational alignment, but standardization is really where a large organization can gain big wins. Standardization in conjunction with automation ensures lower total costs of ownership over time and makes rolling out best practices easier and faster.

Once the new P2P process has been scoped and the goals identified and approved within the organization, the AP department is well placed to initiate the change from a manual to an electronic process immediately and not wait for the other units to change their processes first. According to our experience, AP automation often serves as a catalyst and an example that helps the other P2P stakeholders to carry out their own process transformation.

1. AUDIT YOUR CURRENT PROCESS. SET YOUR GOALS AND START THE TRANSFORMATION

As a recent study conducted by a leading independent research company showed clearly, it is the centralization of the AP responsibility that enables the process improvement and not, as often believed, transplanting of low-cost AP clerks into a shared service centre in a low cost country.


2. DEFINE YOUR SELECTION PROCESS. ONLY CONSIDER SOLUTIONS THAT SUPPORT THE ENTIRE P2P PROCESS

Don’t try to re-invent the wheel when purchasing an electronic invoice processing system. Instead, ask around, listen to your peers and their experiences from AP or P2P automation projects. Notice how the successful tend to have gone with industry best practices and highly packaged Best-of-Breed solutions. Standard packaged applications are widely adopted and are usually the best options, as they contain the built-in best practices. Best practices come from broad industry and regional experience all of which combines to ensure your organization has all the visibility and control required to painlessly, quickly and effectively manage your AP automation project and see value sooner.

Integration between the ERPs and the new P2P solution is a prerequisite when trying to build visibility and control across the entire organization. Companies with multiple backend systems will be pleasantly surprised at how a good AP Automation solution can consolidate, order, invoice and payment (spend) data into one place.

Multiple ERP systems are commonplace – Basware has encountered as many as 75 in one company, making it difficult, if not impossible, to get a single consistent view over the P2P process (much less a consolidated, live, view of spend).


3. AIM FOR A FULLY ELECTRONIC PROCESS. UNDERSTAND INVOICE AUTOMATION AND INVOICE TO ORDER MATCHING

Automated, errorless data validation, coding and approval (straight-through-processing) lets your AP Managers spend their time on more value adding tasks rather than the highly routine efforts required to process many invoices. Invoice scanning and validation is often the most time-consuming and error-prone step of the AP process. It should be no surprise that many companies are putting in place clear strategies for onboarding their suppliers to send only e-invoices. Your goal of course is to receive as many e-invoices as possible and for that to happen it makes sense to ensure your suppliers have a variety of flexible solutions for shifting away from paper to e-invoices.

E-invoicing should make it much easier for a single shared service center to support an entire global organization. Validating local suppliers’ invoices usually requires language skills - this could be automated with a multi-currency, multi-company, multi-language solution. A good e-invoicing solution will also handle format conversions automatically and this is pretty much essential when operating a regional SSC. It’s hard to overstate the value driver that is e-invoicing. As well as those benefits stated above, e-invoices immediately provide line level data which is then available for invoice line to PO line matching - another best practice.


4. PLAN THE SHIFT TO ELECTRONIC SUPPLIER COLLABORATION

A great benefit of automated P2P solutions is that they include the suppliers much more dynamically to the process. The big picture includes sourcing, vendor selection, contract creation and utilization as well as catalog exchange and management - and that’s just on the eProcurement side. Requisitions and orders are made from contracts and catalogs, orders and invoices exchanged as well as shipment notes, credit notes and other related documentation - all via a B2B network such as Basware’s Commerce Network.

For Accounts Payable, this holistic approach including automation of the invoice handling process ensures a full audit trail, all the way from the purchase requisition, through to the order, the eventual goods receipt, the invoice handling (whether automatic or manual) and finally payment. Within this process, AP has a great opportunity to outsource the many time-consuming, routine tasks by offering both the suppliers and the company’s employees a self-service options for invoice entry, order viewing, order-to invoice flip and basic reporting.

Suppliers may already be providing e-invoices, but through a different service provider than a company’s AP is planning to use. Therefore, it’s important to select a solution provider who has interoperability agreements with other e-invoicing service providers and an open network which can reach all its own (and its partners’) AP customers and suppliers. Without interoperability and an open network, suppliers are often faced with having to pay to join multiple networks and the result is that it’s simply cheaper for them to continue sending paper invoices - which are the most expensive for you to process.

Supplier integration is clearly a mutual benefit for both Accounts Payable and Procurement. Giving your suppliers a reason to support your AP strategy and provide electronic invoices is the key. Suppliers gain in many ways with e-invoices. E-invoices are ultimately much easier to create and send - think Supplier Portals and PO flip or xml e-invoicing directly connected to Accounts Receivable - both of which ensure an immediate transfer of the invoice from the supplier to the buyer. The e-invoice also is largely error free and much more detailed ensuring immediate validation and entry into the buyer’s AP system - and an improved opportunity for a rapid approval which opens the door to an early payment. Also, via the Portal both parties can collaborate around any invoice, order or any other topic. Lastly, the Supplier has visibility into the process status of their invoices which reduces and/or eliminates the majority of supplier inquiries - freeing up your AP Managers for other tasks.

One Basware customer had over 1,500 marketing suppliers, accounting for 25% of total indirect spend. By introducing the P2P automation, the customer ended up saving 20% of that cost by rationalizing their supplier base.


By understanding where you are today and how you compare to your peers, you can begin to capitalize on the opportunities that high performance automation in AP can offer.

Basware can help you to lead this change in your business, because we have experience in helping businesses like yours, and people like you, all over the world.

As a first step, Basware is offering personal ‘Best-in-Class’ AP assessments. Get in touch with us and we’ll be happy to give you our view of your present opportunity as well as a roadmap to a Best-in-Class Accounts Payable Department.

Be part of the worldwide movement of AP Change Makers, by taking steps to transform your Accounts Payable function - take the first step today.

To arrange your personal assessment, contact Basware on www.basware.com/contact

WHAT TO DO NEXT


Basware provides open, secure, cloud-based purchase-to-pay and e-invoicing solutions to organizations of all sizes, resulting in greater efficiencies in Procurement, Accounts Payable and Accounts Receivable.

Companies across all industries, from small businesses to corporate giants use Basware solutions to drive sustainable cost savings, proactive insight to cash flows and improved buyer–supplier relationships.

The Basware Commerce Network is founded on the principle of openness, where all types of organizations can collaborate and trade, making it the largest in the world.

Today we connect millions of business users in 900,000 companies across over 100 countries.

Basware is the global leader in providing solutions for better buying, better selling and connected commerce.

Find out how Basware boosts financial performance and profitability at www.basware.com

ABOUT BASWARE

Basware Corporation

www.basware.com

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© Copyright 2013Basware Corporation

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Driving Performance in Accounts Payable