The E-Payables Benchmark Series: A/P Strategies for Success September 2008 Andrew Bartolini, Amit Gupta
The 2008 E-Payables Benchmark Series: A/P Strategies for Success Page 2
Executive Summary Accounts Payable is coming of age. Though paper persists as the format of choice for 80% of all invoices, and manual checks are used for 60% of all payments, Aberdeen research over the past two years has seen strong indications that broader change for the function is underway. And while Best-in-Class enterprises have begun to realize the impact of their A/P transformations, significant work remains for the majority as the average A/P department continues to lack automation, executive focus, and general alignment with the enterprise.
Research Benchmark Aberdeen’s Research Benchmarks provide an indepth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations
Best-in-Class Performance Aberdeen evaluated over 450 enterprises between July and September of 2008 and distinguished Best-in-Class enterprises by the following two key performance criteria: overall cost to process a single invoice (from receipt through settlement), and overall time to process a single invoice (from receipt until payment is scheduled). Best-in-Class enterprises in this study are notable for their superior performance and credit their strategies for success, among them their usage of e-payables solutions and their focus on visibility for helping them to achieve the following advantages: •
Invoice processing costs that are, on average, 94% below their peers
•
Invoice processing cycle times that are, on average, 88% faster than their peers
E-Payables definition Aberdeen utilizes the term "epayables" as an allencompassing term to refer to the automated processes associated with the Accounts Payable (A/P) function, including invoice receipt and handling, reconciliation and approvals, disbursement scheduling, settlement (including confirmation and reporting), and internal and external service support.
Competitive Maturity Assessment Best-in-Class performers shared many common characteristics with respect to their organizational structures and strategies. 70% of the Best-in-Class have enterprise-level visibility into their A/P operations. They are also: •
Twice as likely to take a formal approach in segmenting suppliers for electronic payments and other automated communications.
•
3.6 times more likely to have online reporting and analytical capabilities.
Required Actions In addition to the specific recommendations in Chapter Three of this report, to achieve Best-in-Class performance, companies should: •
Strive for enterprise-level visibility into A/P processes and A/P data
•
Reference the "Strategies for Success" case studies included throughout the report as potential approaches to each of the main A/P sub-process areas
© 2008 Aberdeen Group. www.aberdeen.com
"While we do well in the routine/repetitive tasks in the A/P department, we need to focus on providing value added services to our business partners." ~ Director of Finance, Large Utilities Company
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Table of Contents Executive Summary....................................................................................................... 2 Best-in-Class Performance..................................................................................... 2 Competitive Maturity Assessment....................................................................... 2 Required Actions...................................................................................................... 2 Chapter One: Benchmarking the Best-in-Class ..................................................... 4 E-Payables Framework............................................................................................ 4 Becoming a More Strategic Function .................................................................. 5 Top Business Pressures .......................................................................................... 6 The Maturity Class Framework............................................................................ 7 The Best-in-Class PACE Model ............................................................................ 8 Chapter Two: Benchmarking Requirements for Success .................................... 9 Competitive Assessment......................................................................................10 Capabilities and Enablers......................................................................................11 Chapter Three: Required Actions .........................................................................16 Laggard Steps to Success......................................................................................16 Industry Average Steps to Success ....................................................................17 Best-in-Class Steps to Success ............................................................................17 Appendix A: Research Methodology.....................................................................19 Appendix B: Related Aberdeen Research............................................................21
Figures Figure 1: Aberdeen's E-Payables Framework ......................................................... 4 Figure 2: Key Drivers for A/P Makeover - Time and Money.............................. 6 Figure 3: The A/P Hub: A Convergence of Interests............................................ 9 Figure 4: Real-Time Visibility - Best-in-Class vs. All Others .............................12 Figure 5: Fully Automated A/P Activities: Best-in-Class vs. All Others .........15 Figure 6: Level of Priority Assigned to Improving Payment Processes .........15
Tables Table 1: Top Performers Earn Best-in-Class Status.............................................. 7 Table 2: The Best-in-Class PACE Framework ....................................................... 8 Table 3: The Competitive Framework...................................................................11 Table 4: The PACE Framework Key ......................................................................20 Table 5: The Competitive Framework Key ..........................................................20 Table 6: The Relationship Between PACE and the Competitive Framework .........................................................................................................................................20
© 2008 Aberdeen Group. www.aberdeen.com
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Chapter One: Benchmarking the Best-in-Class In 2004, Aberdeen research on E-Payables introduced the typical accounts payable (A/P) department as a quintessential back-office function that lacked alignment with both process partners and general business operations. While most departments had centralized operations, they remained awash in paper, spending more than $34, on average, to process an invoice, and were frustrated by both a lack of process standards and a lack of visibility into its key operations. The concept of A/P transformation was just beginning to take shape and process automation, where it did exist, was generally fragmented and rudimentary. More than four years later, the A/P function is coming of age. And, like a large group of boisterous teenagers, A/P departments continue to develop at unique and varied paces. A few Best-in-Class models warrant 'teen idol' status while the vast majority of departments lack polish and betray a rapidly changing, but still awkward appearance.
Fast Facts A/P departments in this study report the following overall averages: Key Performance Metrics: √ $13.85 - Average cost to process an invoice √ 19.6 days - Average time to process an invoice (from receipt to payment scheduling) Key Operational Metrics: √ 21% - Percentage of invoices received electronically
E-Payables Framework In 2005, Aberdeen research introduced what we now refer to as the EPayables Framework seen in Figure 1 below. The framework was initially designed to help A/P leaders define and refine their sub-processes as they began to consider making wholesale changes to their operations. Aberdeen has expanded upon the initial framework to include Reporting/Analytics capabilities and Integration Strategy as primary components to the framework. The framework remains highly relevant and useful in developing an approach to improving the A/P function.
√ 37% - Percentage of payments made electronically
Figure 1: Aberdeen's E-Payables Framework
Approval & Inquiry Invoice & Expense Report
Department Receipt A/PBlack Settlement Hole
Pay
Validation & Reconciliation • Reporting & Analytics • Integration
"The greatest impact on our AP department has been the implementation of an invoice imaging and workflow solution. This has given us visibility into invoice status, as well as given us the ability to assign accountability to the processes that are holding up payment. We need to have an automated payment solution put in place." ~ A/P Operations Manager, Mid-market Company
Source: Aberdeen Group, September 2008
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But as A/P departments continue to advance, the purpose of the framework has expanded beyond its initial, more tactical purpose to not only serve as a mechanism to help organize all A/P activities within a distinct sub-process area but to also serve as the foundation upon which A/P departments should holistically view the entirety of their operations, linking each subprocess area into a single, clearly-defined, and seamless workflow. While the framework is summarized at a high-level below, it is presented in great detail and analysis in the E-Payables Solution Selection Report. Note that each sub-process description assumes it has full automation.
I. Invoice Receipt Invoice receipt may occur in any one of numerous paper or electronic formats – EDI, XML, or other file formats including credit card statements, evaluated receipt settlement, web-based order / invoice creation, or PO flip.
II. Approval and Inquiry
"Manual processing is a key component of our current employee base. Getting employees to think beyond current capabilities and technologies on ways to improve processes is a key area for improvement." ~ VP, Technology, Large Financial Services Firm
Once received, an invoice may be processed utilizing rule-based logic that analyzes certain invoice attributes (supplier, amount, buying entity, etc.) to define the proper routing and approval workflow. Notification and alert capabilities as well as direct integration to transactional systems are used to track invoice status and identify issues.
III. Validation and Reconciliation The verification of invoice accuracy and the resolution of any errors, discrepancies, or disputes prior to payment are accomplished by automated matching engines, collaboration with suppliers and internal end users, and integration to transactional systems. The information captured in this segment is used for audits (internal and external) as well as spend analysis.
IV. Settlement After the efficient capture, tracking, and approval of enterprise liabilities, the next step is payment processing, utilizing a payment method that may include wire transfer, ACH, card or supplier / trading networks. Capabilities like dynamic discounting, rebates, tax management, and trade financing are available in advanced solutions to optimize the management of cash flow.
Becoming a More Strategic Function While A/P departments have typically lagged other functional areas in their use of automation to streamline processes and enable more broad-based changes, leading enterprises have been able to make the case for an investment in e-payables solutions and execute a strategy for success. As more A/P departments continue to drive significant performance improvement while gaining a greater ability to evaluate their operations and the overall impact they can have on the larger enterprise, momentum for A/P transformation will continue. © 2008 Aberdeen Group. www.aberdeen.com
"[Our] imaging and workflow solution has made the greatest impact on the department. [Our] electronic payment systems need improvement." ~ Karen Apps, Finance Manager, Gate Petroleum, North America Telephone: 617 854 5200 Fax: 617 723 7897
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More Strategic? Yes. Chief Payables Officer? Not Just Yet.
Areas for Improvement
The A/P function is viewed as more strategic today than 2 years ago by 56% of all enterprises. This compares to only 40% who viewed Accounts Payable as more strategic 18 months ago and speaks to the broad organizational benefits that process improvement can have on the department. While, Aberdeen does not expect the head of Accounts Payable to ascend to the C-level anytime soon, we expect the Accounts Payable function to continue to steadily improve its image within the enterprise.
Aberdeen asked survey respondents to highlight areas that need improvement. A few responses are included below:
Top Business Pressures As seen in Figure 1 below, the top two pressures driving enterprises to reassess their A/P function are to lower invoice-processing costs (71%) and improve and/or standardize A/P processes (67%). Figure 2: Key Drivers for A/P Makeover - Time and Money Need to reduce invoice processing costs
71%
Need to improve/standardize processes
Need to reduce payment errors
~ Director of Finance, Large Utilities Company √ "We need to pay more attention to detail to avoid loss of discounts and duplicate/overpayments." ~ Business Process Manager, U.S.-based Energy Company √ "Our work is efficient but does not provide the need for greater visibility and auditability required by public sector clients."
67%
Need to improve overall payment performance
√ "While we do well in the routine/repetitive work, we need to focus on providing value added services to business partners."
43%
~ Patrick Crehan, CEO International Services Firm
32%
Source: Aberdeen Group, September 2008
In response, enterprises plan to take key actions to automate and/or standardize processes. 57% of A/P organizations plan to leverage e-payables solutions to help lower transaction costs and improve process cycle times while 45% plan to standardize their processes. The average enterprise in this study reported transactional savings of between 32% and 46% when processing electronic invoices versus manual or paper-based ones.
√ "They can improve in recognizing non-standard issues sooner, rather then just passing them along. They need to improve their strategic thinking." ~ Sharon Warmboe, Finance Manager, Pharmaceutical Industry
Strategy for Success: Invoice Receipt The Goodyear Tire and Rubber Company, with more than 60 plants located across 26 countries, is one of the world's largest tire manufacturers. Its largest business unit, North American Tire, receives approximately 500,000 paper-based invoices each year. Historically, all invoices were received by A/P staffers who would manually key the detail from each invoice into the appropriate ERP system and then manually route each invoice across the organization for supervisor review, management approval, and/or return to vendor. continued © 2008 Aberdeen Group. www.aberdeen.com
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Strategy for Success: Invoice Receipt In 2007, Goodyear's A/P department developed and executed a strategy for success designed to improve its invoice receipt capabilities. The specific business objectives of the project were to (1) consolidate A/P functions throughout North America and (2) deploy an automated invoice capture solution. The initial deployment took approximately 4 months after the initial process design work was completed. To minimize change management issues, Goodyear's A/P department decided on a deployment plan which phased in different types of paper invoices. They started with raw material invoices, followed by a region (Canada) before attacking servicebased invoices and finishing with all other remaining invoice types. Today, Goodyear has consolidated the processing of all North American paper-based invoices at a shared services center in Akron. This center supports the entire North American Tire Division and captures the images of all paper-based invoices that it receives, and auto-populates key invoice information directly into its systems of record. While the center is still rolling the solution out to capture all types of invoices, it is on track to achieve its targeted efficiency gains. "We're very happy with our progress-to-date," states Jami Dunphy, Manager of Accounts Payable.
The Maturity Class Framework Aberdeen evaluated over 450 enterprises in July and September of 2008 and distinguished Best-in-Class enterprises by the average cost and speed of their invoice processing as seen in Table 1. Table 1: Top Performers Earn Best-in-Class Status Definition of Maturity Class
Mean Class Performance
Best-in-Class: Top 20% of aggregate performance scorers
$2.18 cost to process an invoice 2.8 days to process an invoice
Industry Average: Middle 50% of aggregate performance scorers
$9.38 cost to process an invoice 15.8 days to process an invoice
Laggard: Bottom 30% of aggregate performance scorers
$34.11 cost to process an invoice 35.1 days to process an invoice Source: Aberdeen Group, September 2008
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The Best-in-Class PACE Model Aberdeen has shown that there is a clear relationship between the pressures companies identify and the actions they take, and their subsequent competitive performance. All participants should examine their prioritized Pressures, Actions, Capabilities, and Enablers (PACE) selections and determine whether there are valuable perspectives to be gleaned by comparison with the PACE priorities of Best-in-Class companies (Table2). Table 2: The Best-in-Class PACE Framework Pressures
Actions
Capabilities
Enablers
Lower invoiceprocessing costs (e.g. labor, admin, IT support)
Invest in e-payables (accounts payable automation) solution Secure executive support for A/P transformation
Enterprise-level visibility into A/P processes Supplier base segmented for electronic and manual payments Cross-functional coordination (collaboration) amongst procurement, finance, treasury and IT Working cash flow optimization policies and procedures Robust audit controls Online / web-based reporting Ability to measure process cycle time
Comprehensive A/P automation (single solution) Automated imaging and workflow solution Supplier networks, XML, or EDI for invoicing and remittance exchange Spend analysis solution for invoices Electronic payment system (including ACH, wire transfer, and commercial cards) Supply chain finance solution Supplier portal Automated disbursement tool
Source: Aberdeen Group, September 2008
Strategy for Success - Approval and Inquiry In 1998, Exel Transportation Services (ETS), a leading provider of logistics solutions, deployed an e-payables solution that captured the images of its paper-based carrier invoices and supporting documentation. ETS' document processing steps included manual bar coding of each document, segmentation of various invoices and related documents for scanning, and the manual entry of data from an image into the sub-ledger system. By 2007, with the firm receiving 126,000 carrier invoices and supporting documents in an average month, ETS faced processing challenges driven by the sheer volume of invoices. In response, ETS deployed an e-payables solution that automatically recognized and extracted data from imaged invoice files before using a series of pre-defined rules to route invoices to the appropriate reviewer(s). ETS has realized significant benefits from this solution as 85% of its invoices receive "touchless" processing and the average invoice processing cycle time was reduced by 50%. Additionally, ETS reduced its invoice image and data entry processing headcount from 24 to 10. In total, ETS projects a 5-year return on investment of 218%. © 2008 Aberdeen Group. www.aberdeen.com
"The automation of the invoice scanning, data retrieval and entry has allowed our A/P function to concentrate its resources on the exception process rather than data entry. It handles the wide range of invoices that we receive from over 5 thousand carriers with very little problem." ~ David Bailey, Controller, Exel Transportation Services
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The 2008 E-Payables Benchmark Series: A/P Strategies for Success Page 9
Chapter Two: Benchmarking Requirements for Success Despite significant strides made by A/P departments over the last few years to drive value and improve how they are viewed, paper persists as the format of choice for inbound invoices, and manual checks remain the primary payment type. Accordingly, A/P operations continue to present one of the most compelling opportunities for improvement through process automation within the typical enterprise. And, much as other functions have risen to prominence after a process makeover, a larger transformation of A/P operations would appear to be in the offing for many of the more progressive departments. Best-in-Class A/P departments, who hold a 94% advantage in invoicing processing costs over their peers, credit e-payables solutions and a resolute focus on process improvement for their efficiency gains. These leaders also stand poised to drive greater value across the enterprise by leveraging stronger collaborative ties with their internal and external stakeholders.
Fast Facts √ Best-in-Class enterprises have invoice processing costs that are 94% lower than their peers √ Best-in-Class enterprises have average invoice processing cycle times that 88% faster than their peers √ 82% of Best-in-Class firms utilize electronic payment methods such as ACH and commercial cards
Figure 3: The A/P Hub: A Convergence of Interests Best-in-Class A/P Departments cite higher levels of collaboration with Procurement, Finance, and Suppliers.
Procurement
Finance
Invoice receipt & handling
Contracts
Financial Spend under SOX Reporting Management Compliance Cash Flow Mgmt. Source to Settle Process Visibility A/P Supplier Perf. Department Mgmt.
Approvals & Inquiry Key A/P Processes
Validation & Reconciliation
Settlement
Suppliers Deliver goods and services Invoice & receive payment
Internal & external service support
Source: Aberdeen Group, September 2008
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Case Study: Validation & Reconciliation A large natural gas producer in North America, faced the challenge of processing thousands of charges every month for goods and services received at widely dispersed drilling and completion sites. These charges had to be manually entered in the reporting system, which led to large discrepancies between estimated and actual costs and significant delays in posting accruals. A heavy burden was also placed on field engineers who were required to verify invoices against field receipts, a time-intensive diversion from the key value-add tasks that were central to their role. The A/P leadership determined that this process could not continue and began to gather requirements for an e-payables solution that would (1) automate line item matching for invoices (2) help improve the accuracy of field estimates and project actuals; and (3) provide real-time visibility. The company ended up requiring a custom solution from its current epayables solution provider. The custom solution offered a touch-screen field kiosk that allowed field ticket information to be entered quickly, and a simple web-based interface that automatically transferred the information into the company's back-end system. The solution was deployed after an extensive pilot to verify acceptance with the company's largest suppliers and internal stakeholders. The new solution streamlined the field ticket (receipt) management and validation process while improving accrual accuracy and providing realtime visibility. Today the solution is used for approximately 70% of field tickets at drilling sites, and nearly 40% of field tickets at completion sites and the company continues its expansion plans.
Competitive Assessment Aberdeen Group analyzed the aggregated metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (the approaches they take to execute their daily operations); (2) organization (corporate focus and collaboration among stakeholders); (3) knowledge management (contextualizing data and exposing it to key stakeholders); (4) technology (the selection of appropriate tools and effective deployment of those tools); and (5) performance management (the ability of the organization to measure their results to improve their business). These characteristics (identified in Table 3) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics.
© 2008 Aberdeen Group. www.aberdeen.com
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Table 3: The Competitive Framework Best-in-Class
Average
Laggards
Enterprise-level visibility into A/P processes
Process
70%
53%
42%
Cross-functional coordination between procurement, treasury, finance, and IT 55%
Organization
37%
32%
Supplier base segmented for electronic and manual payments 80%
Knowledge Management
47%
35%
Online / web-based reporting 50%
14%
5%
Account Payable Automation technologies / enablers currently in use:
Technology
82% utilize electronic payment system (including ACH, wire transfer, and commercial cards) 55% use automated imaging and workflow solutions 45% utilize supply chain finance solutions 44% have comprehensive A/P automation (single solution) 40% utilize supplier networks, XML, or EDI for invoicing and remittance exchange 40% use spend analysis solutions for invoices
Performance
69% utilize electronic payment system (including ACH, wire transfer, and commercial cards) 49% have automated imaging and workflow solutions 14% utilize supply chain finance solutions 34% have comprehensive A/P automation (single solution) 29% utilize supplier networks, XML, or EDI for invoicing and remittance exchange 31% use spend analysis solutions for invoices
53% utilize electronic payment system (including ACH, wire transfer, and commercial cards) 26% have automated imaging and workflow solutions 11% utilize supply chain finance solutions 26% have comprehensive A/P automation (single solution) 26% utilize supplier networks, XML, or EDI for invoicing and remittance exchange 16% use spend analysis solutions for invoices
Ability to measure process cycle time 44%
39%
32% Source: Aberdeen Group, September 2008
Capabilities and Enablers Aberdeen's analysis of the Competitive Framework reveals that Best-inClass enterprises leverage a range of solutions and strategies for success across the scope of process, organization, knowledge management, technology, and performance monitoring, all in an effort to drive A/P success. These strategies and solutions have four primary components: visibility, collaboration, control, and automation.
Process: Visibility
"The greatest impact of automation solutions on the A/P department has been visibility into workflow processes." ~ A/P Staffer, European-based Small enterprise
Best-in-Class enterprises are 43% more likely than their peers to have enterprise-level visibility into A/P processes. Such visibility is critical for companies to assess operations and develop strategies for transformation © 2008 Aberdeen Group. www.aberdeen.com
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and performance improvement. Conversely, a lack of visibility is the underlying cause for higher transaction costs and longer cycle times. It also increases operational and financial risk, manifested in an inability to readily identify billing discrepancies, overpayments, unclaimed discounts, and other transactional information that impacts an income statement. Additionally, the lack of visibility into material liabilities that have not yet been entered impact the timing and accuracy of closing the period. This lack of visibility also cascades into lost opportunities across other parts of the enterprise including Treasury and Procurement. Figure 4 contrasts the percentage of Best-in-Class enterprises that have real-time visibility into specific A/P areas against their peers. Figure 4: Real-Time Visibility - Best-in-Class vs. All Others All Others Liabilities/credits by vendor
44% 26%
Line item detail of PO invoice
44%
30%
44%
Status of POs
27%
Avoidance of missing bills and late pmts.
40% 12%
Line item detail of non-PO invoice
40%
13%
Discounts, rebates, and other terms Supplier performance
Best-in-Class
36% 12% 32% 9%
Contracted payment terms
16%
Status of non-PO invoice
16%
31% 27%
Source: Aberdeen Group, September 2008
Best-in-Class enterprises are twice as likely as their peers to establish working cash flow optimization policies and procedures in an effort to gain greater control over and manage their operational liquidity. Effective management of the cash outflows by A/P departments can have a significant impact on the working capital of an enterprise and provide flexibility to finance leaders to utilize these resources strategically.
"While we do well in tactical execution, we need to focus on becoming more strategic by partnering with Procurement to become an end to end process."
Organization: Collaboration
~ Finance Manager, Large retail enterprise in North America
Cross-functional coordination among key stakeholders such as accounts payable, procurement, finance, treasury, and suppliers establishes an environment where key information flows easily between these © 2008 Aberdeen Group. www.aberdeen.com
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The 2008 E-Payables Benchmark Series: A/P Strategies for Success Page 13
stakeholders and facilitates achievement of corporate goals. Aberdeen's current research found that Best-in-Class enterprises are 56% more likely than their competitors to have established a platform for collaboration between enterprise groups and functions that are impacted by A/P operations. Additionally, Aberdeen's April 2008 report on Supplier Enablement found that collaborative enterprises employ practices and technologies that better facilitate exchange of information between different departments than noncollaborative firms and, as a result, demonstrate lower invoice receipt and approval costs. Furthermore, Aberdeen's June 2008 report on Electronic Payments and Fraud Prevention discovered that enterprises that have developed a collaborative framework, on average, process more than twice the number of payments electronically than All Others, realizing significant savings in the payment/settlement costs as a result. Strategy for Success: Approval & Inquiry Two years ago, the North American A/P operations of a large global motor manufacturer was literally buried under the weight of its vendor invoices. With a fully manual process for data entry of invoice information into its back-end systems and an offline approval process, the department struggled to manage the 25,000 paper invoices it received each month. Data quality and visibility were extremely poor while processing costs and cycle times were unsatisfactory. To overcome these challenges, the manufacturer implemented an epayables solution to process the high volume of paper invoices and automate the approval process. After two years, approximately 60% of the invoices received are automatically processed by the e-payables solution, which images, indexes, captures data, and exports the data into the back-end system for three-way matching. Unless there are exceptions, the A/P staff no longer handles these invoices. In a year's time, the company expects to utilize its e-payables solution for 100% of its invoices. "Our process has become significantly more efficient, and within a year, our goal is to only manage exceptions," said the A/P manager.
"We excel at data entry and exceptions. Our major problem is lack of system training on our ERP System." ~ Director of Finance, Large Global Consumer Packaged Goods Company
Knowledge Management & Performance Management: Control Robust audit controls, employed by the Best-in-Class 46% more often than their peers, help enterprises enforce corporate policies and achieve contract compliance. Audit controls ensure that A/P transactions are processed in a manner that is compliant with applicable policies, procedures, and regulations, as well as promote reduction in late payment fees, capture of negotiated discounts and early payment discounts, elimination of © 2008 Aberdeen Group. www.aberdeen.com
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The 2008 E-Payables Benchmark Series: A/P Strategies for Success Page 14
duplicate invoice payments, and prevention of fraudulent payments. As a direct result of audit controls, Aberdeen research found the exception rates in top performing firms to be 85% lower than that in all other enterprises. Additionally, Aberdeen’s November 2007 report, The CFO’s View of Procurement: Same Page, Different Language Report, found that the average enterprise is only able to book 23% of the total savings it identifies at the time of contract award. This savings leakage occurs at various levels in the source-to-settle process, including the inability of the A/P department to ensure invoices and payments adhere to negotiated contractual terms.
Technology: E-Payables In the current A/P world, automation is a critical foundation to lowering costs and streamlining each of the four A/P sub-processes: invoice receipt, approval & inquiry, validation & reconciliation, and settlements. Technology solutions to manage invoices and workflow, and electronic payment methods reduce the muck of manual and paper-based processes. In addition, Best-in-Class firms are 43% more likely to utilize supplier networks for invoicing and/or the exchange of remittance information. Like other electronic connections, a supplier network enables an enterprise to share information with its trading partners. These networks can be an efficient way to increase electronic invoicing since they offer a unique ability to scale connections across partners.
"A/P automation has increased hands-free processing, and put human focus on our most critical business functions (audit & compliance)." ~ Finance manager, Large IT Services Firm
While 44% of Best-in-Class enterprises utilize a single e-payables solution to fully automate their entire A/P process, the majority of A/P departments utilize a patchwork of solutions to automate certain processes. Full A/P automation is advancing in the marketplace but continues to be the exception; future buying trends indicate that the momentum of full automation will continue to accelerate over the next 12 months. Figure 5 highlights the key areas that the Best-in-Class and its peers have fully automated.
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Figure 5: Fully Automated A/P Activities: Best-in-Class vs. All Others Payment status tracking
64%
22%
Electronic receipt of invoices
55%
13%
Payment scheduling
55%
25%
Electronic payment processing
56%
16%
PO matching E-documents for invoice approval
49%
19%
Duplicate invoice verification
27%
GL policy-based coding of invoices
14%
All Others
44%
14%
Best-in-Class
40%
22%
Source: Aberdeen Group, September 2008
Analyst Insight: Electronic Payments The efforts across receipt, approval and inquiry, and validation and reconciliation will all be for naught if payments are unable to be exchanged in an efficient manner. As shown above, nearly two-thirds of all enterprises have placed a critical or high-level of importance on improving their payments processes. Notably, all of our surveyed respondents saw a need for improvement. The top barriers to adopting electronic payments are quite real supplier resistance (42%) and integration challenges (38%) - and necessitate collaboration with the suppliers and with the IT department to help bridge the current gap. IT and Treasury should also be engaged to offer feedback and support in the streamlining of current payment operations which are viewed by 44% of all enterprises as highly complex and challenging. Figure 6: Level of Priority Assigned to Improving Payment Processes Critical/High
8%
Moderate Low Not important (0%)
27%
65%
Source: Aberdeen Group, September 2008
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Chapter Three: Required Actions Whether a company is trying to move its performance in A/P from Laggard to Industry Average, or Industry Average to Best-in-Class, the following actions will help spur the necessary performance improvements:
Laggard Steps to Success •
•
•
Adopt the shared services model for A/P. While shared services have become the default structure for Accounts Payable departments, one-third of all Laggard enterprises continue to manage A/P in a decentralized manner. A centralized or shared services approach will ensure that A/P tasks are streamlined and standardized through a single unit. This structure will also enable best practices to be developed and shared and may allow enterprises to consolidate A/P technology budgets to more quickly attain e-payables solutions. Utilize Aberdeen's E-Payables Framework to define A/P activities. As a first step, the framework can be used to help A/P leaders define and refine their sub-processes as they begin to consider making wholesale changes to their operations. Once operations are defined and standardized, the framework can be used to help link all sub-process areas into a single, clearly-defined, and seamless workflow process. If the case for full A/P automation cannot be made, start with the most labor-heavy tasks. Start by automating the most labor-intensive activities such as invoice receipt, data entry, and approval workflow. Aberdeen research found that Best-in-Class are 92% more likely to automate imaging and workflow processes than Laggards. Additionally, Best-in-Class are three-times more likely to utilize OCR to automate data entry than Laggards. Strategy for Success: Settlement
With the primary goal of reducing their payment processing costs, a North American manufacturer decided to move away from paper-based checks, and adopt electronic payment methods, specifically commercial cards. The top barrier to utilizing commercial cards was resistance from the enterprise's suppliers in accepting card payments. To overcome supplier resistance, the firm mandated the usage of cards for payment with many of its suppliers. As a result, in the past two years, the firm has reduced its paper-based checks by over 20% and increased the number of card transactions by over 15%. More importantly, the firm has reduced its payment processing costs by over 75%. "By adopting electronic payments, we have reduced cost and improved the capture of negotiated discounts," said the Manager of Procurement of the North American manufacturer. © 2008 Aberdeen Group. www.aberdeen.com
Fast Facts √ Best-in-Class enterprises are 43% more likely to have enterprise-level visibility into all A/P operations √ Best-in-Class enterprises are 56% more likely to display internal collaboration amongst finance, procurement, treasury, and IT than the Industry Average √ Only 44% of Best-in-Class enterprises display complete A/P solution.
"Currently, we are working on multiple automation efforts including imaging, workflow, OCR, and XML/EDI. We will have massive transformation over the next 4-8 months. Everything needs improvement!" ~ EVP, Large U.S. Enterprise
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The 2008 E-Payables Benchmark Series: A/P Strategies for Success Page 17
Industry Average Steps to Success •
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Drive for enterprise-level visibility across A/P operations. Work to close the A/P visibility gap. Lack of visibility is an underlying cause of high processing costs and long processing cycle times. Lack of visibility within A/P limits any ability to drive process improvement initiatives and limits the department's ability to raise its profile within the enterprise. This report shows that Best-inClass are 32% more likely to have enterprise-level visibility into A/P processes than Industry Average. Develop a comprehensive supplier enablement strategy Best in Class supplier enablement consists of strong use of technology like online tools for collection of data, the self-service entry of information, and use of XML protocols for enriched communication as well as engaging suppliers directly to improve the strategic relationship in order to gain increased visibility and control of supplier enablement activities. Best in Class enterprises approach supplier enablement holistically and understand the critical element that it plays in fully automating their processes They are rigorous in their processes and they document them and share them by taking a much more collaborative approach - collaborating internally to ensure the sharing of best practices across departments as well as externally with suppliers. The scope of their supplier enablement programs includes accounts payable, but extends across the sourceto-settle process. Promote cross-functional collaboration among key internal stakeholders. What happens in accounts payable does not have to stay in accounts payable. Aligning A/P operations with the business and with functional partners may expose current flaws, but will present numerous opportunities over the long-term to improve performance within A/P and within procurement and treasury As an example, Best-in-Class enterprises are 2.6 times more likely to have working cash flow optimization policies and procedures than their peers.
Best-in-Class Steps to Success •
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Integrate e-payables solutions with transactional systems. A/P relies on interaction with, and information from, other business functions within the enterprise, including procurement, accounting, and treasury. These groups also rely on A/P to provide them with the necessary level of accurate and timely information about the status of their purchases and subsequent payments. It is therefore important that e-payables solutions integrate with ERP, accounting, procurement, or other transactional systems in such a way that usable data can be exchanged in a timely manner.
The CFO's View of A/P Aberdeen asked the survey participants to describe their CFO's view of A/P. A few responses are included below √ "A/P is a low priority compared to overall corporate objectives" ~ VP, Financial Services Industry (U.S.) √ "Our CFO fully supports the P2P department." ~ Manager, Large Manufacturing Company (Europe) √ "The A/P Department is increasing its visibility and performance. Significant executive support is growing for a combined procurement and A/P relationship." ~ Manager, Large Retail Company (U.S.) √ "[They have] no real interaction with our CFO. Our department reports to the COO via a Director, Shared Services who also is responsible for Sourcing & Supply Management and Property Services." ~ Procurement Analyst, Financial Services (Latin America) √ "Our CFO wants us to maximize cash flow by deferring payments." ~ Director, Large CPG Company (U.S.)
Set aggressive goals to convert a significant percentage of manual payments to electronic. The success of this initiative
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requires the cooperation of your suppliers. Accordingly, be prepared to utilize both carrot and stick approaches to converting suppliers to use electronic formats. Consider mandating that certain new suppliers receive electronic payments and communicate these requirements during the sourcing process (a "stick" approach). Consider offering certain suppliers more favorable payment terms in exchange for receiving electronic payments (a "carrot" approach).
"Our CFO would like to maximize cash flow by deferring payments." ~ Finance director, Large North American enterprise
Analyst Insight - A/P Strategies for Success In the first nine months of 2008, Aberdeen benchmarked the performance of nearly 1,000 A/P departments as part of three distinct research efforts. This research builds upon a body of work that began a half-decade ago and will continue with an ongoing research agenda focused on identifying Best-in-Class performance across all aspects of the A/P function. Across Aberdeen's body of E-Payables research certain Best-in-Class characteristics (or "Strategies for Success") remain constant. A few are highlighted here. The Best-in-Class place a significant emphasis on gaining clear visibility into A/P operations (process and data). Once an enterprise captures the cost and process efficiencies gained through process automation, the longer-term benefits of visibility into process to continue to drive improvement and into data to help functional stakeholders like treasury make informed disbursement decisions to improve working capital or like procurement to help them evaluate supplier performance and ensure contract compliance. The Best-in-Class leverage e-payables solutions to a significant advantage. While the initial benefits of automating A/P processes are seen in lower processing costs and faster processing cycle times, the Best-in-Class use e-payables solutions as a key driver of a larger transformation strategy. The Best-in-Class generally enjoy significant cost and efficiency advantages over their peers, but it is the holistic approach to improving their A/P operations that place them in position for continued success. The Best-in-Class are strong collaborative partners with their internal and external stakeholders. The Best-in-Class work aggressively to bridge the process, communication, and general organizational gaps that exist between the A/P department and other parts of the enterprise. The benefits of a Best-in-Class A/P performance should extend to other functions and drive value across the enterprise. The Best-in-Class also take a more collaborative approach in their engagement with suppliers, often leveraging the experiences and preferences of key suppliers to drive greater adoption of solutions that can drive value for both parties.
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Appendix A: Research Methodology Between July and September 2008, Aberdeen examined the use, experiences, and intentions of more than 450 distinct accounts payable departments. We should note however, that during the survey process, a technical glitch caused us to lose some responses from approximately 240 of these participants. This means that while the majority of findings throughout the report are based upon more than 450 respondents, the main findings in chapter 2, are drawn from a total of slightly more than 200 respondents. Aberdeen has written hundred of benchmark reports based upon fewer than 200 responses so we are fully confident in the entirety of this report and that the technical glitch did not have a material impact on it. This benchmark report utilized Aberdeen’s fact-based research approach to provide a comprehensive framework for business executives and other stakeholders to benchmark the effectiveness of their current A/P operations, quantify the impact of the department on overall enterprise performance, and identify actionable strategies for improvement. Aberdeen supplemented this online survey effort with telephone interviews with select survey respondents, gathering additional information on invoice receipt, imaging and workflow strategies, experiences, and results. Responding enterprises included the following: •
Job title / function: The research sample included respondents with the following job titles: manager (47%); director (14%); senior management (7%); staff (3%); and other (29%).
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Industry: The research sample included respondents from the following industries: general manufacturing (9%), finance (8%), IT consulting / services (6%), government (5%), software / hardware supplier (5%), retail (5%), mining / oil / gas (5%), education (4%), and others (53%).
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Geography: The majority of respondents (72%) were from North America. Remaining respondents were from the Europe (16%), Asia / Pacific region (8%), and rest of world (4%).
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Company size: Forty-five percent (45%) of respondents were from large enterprises (annual revenues above US $1 billion); 44% were from midsize enterprises (annual revenues between $50 million and $1 billion); and 11% of respondents were from small businesses (annual revenues of $50 million or less).
Study Focus Responding A/P executives completed an online survey that included questions designed to determine the following: √ The maturity and scope of their Accounts Payable (A/P) departments √ The role of people, process, and technology in their course of business operations √ The degree to which A/P’s role has changed over the past few years √ How A/P supports enterprise financial and operational performance goals √ Leading strategies that A/P departments are employing to drive efficiencies and create value √ The benefits, if any, that have been derived from these strategies to date
Solution providers recognized as sponsors had no substantive influence on the direction of this report. Their sponsorship has made it possible for Aberdeen Group to make these findings available to readers at no charge.
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Table 4: The PACE Framework Key Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management) Source: Aberdeen Group, September 2008
Table 5: The Competitive Framework Key Overview The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) — Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) — Practices that represent the average or norm, and result in average industry performance. Laggards (30%) — Practices that are significantly behind the average of the industry, and result in below average performance.
In the following categories: Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization — How is your company currently organized to manage and optimize this particular process? Knowledge — What visibility do you have into key data and intelligence required to manage this process? Technology — What level of automation have you used to support this process? How is this automation integrated and aligned? Performance — What do you measure? How frequently? What’s your actual performance? Source: Aberdeen Group, September 2008
Table 6: The Relationship Between PACE and the Competitive Framework PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions. Source: Aberdeen Group, September 2008
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The 2008 E-Payables Benchmark Series: A/P Strategies for Success Page 21
Appendix B: Related Aberdeen Research Related Aberdeen research that forms a companion or reference to this report includes: •
E-Payables Solution Selection (September 2007)
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The E-Payables Benchmark Series: Electronic Payments and Fraud Prevention (June 2008)
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The E-Payables Benchmark Series: Imaging and Workflow (March 2008)
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E-Payables: Advancing Accounts Payable Automation (March 2007)
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Supplier Enablement: Converging Procurement and Accounts Payable (April 2008)
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Accounts Payable Transformation (December 2007)
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Global Trade Compliance Priorities (March 2008)
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The 2008 State of the Market in Supply Chain Finance (January 2008)
Information on these and any other Aberdeen publications can be found at www.aberdeen.com.
Authors: Andrew Bartolini, Vice President & Group Director, Global Supply Management,
[email protected] Amit Gupta, Research Analyst, Global Supply Management,
[email protected] Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of HarteHanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.
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