Leveraging automation to tap the strategic insight of your AP/AR staff

For CFOs, the accounts payable (AP) and accounts receivable (AR) functions have always played a central role in managing cash flow and working capital, but automation and outsourcing will increase the strategic value of AP/AR by enabling them to reduce costs and increase efficiencies.

Prompted to a great extent by COVID, finance leaders have turned to automated, cloud-based technologies to manage repetitive processes. The three dominant touchless tools have been intelligent document processing (IDP), robotic process automation (RPA) and artificial intelligence (AI) powered digital assistants, all of which have application in AP and AR functions.

“We’re particularly seeing a lot more automation on the AP side,” according to Jess Scheer, executive editor at The Institute of Finance and Management (IOFM). “It was roughly 50-50 before COVID in terms of companies that were automated versus those that were paying their bills 100% manually. Now 77% of companies have some form of automation in place.”

In a recent study, IOFM calculates automation has reduced processing costs per AP invoice from $6.30 to $1.45, and that AP teams could process twice the number of invoices in the same amount of time.

Strategic shift

The higher capacity is helping AP teams turn to more consequential work. “Finance is becoming more strategic,” Scheer said. “AP aren’t just the people that are paying the bills any more, but they’re regulatory experts. They’re cash managers. They’re being asked to do more big data analytics, and they’re often the last line of defense of fraud.”

Automation also enables AP to have greater transparency into the future cash position of the company, marking a shift from operations to strategy, Scheer said.

Accounts receivable is getting a similar strategic facelift, according to Bryan DeGraw, senior business advisor and program manager, customer-to-cash and purchase-to-pay, at The Hackett Group.

COVID shone a light on AR processes for many companies, particularly those whose business thrived as people worked and shopped from home. “These companies were previously getting by with sub-par technology tools, but if they wanted to continue to service the new level of demand, they had to invest in the tools to support it,” DeGraw said. 

Research into the AR automation market suggests this investment trend is likely to continue. 

The global AR automation market is set to grow by 12.6% a year, from roughly $1.9 billion to $3.9 billion in 2026, according to estimates from Mordor Intelligence LLP.

Although AR is often perceived as a strictly operational activity, poor AR processes, the Mordor report says, have strategic impacts by affecting credit and borrowing decisions, liquidity management, and the status of a company’s financial position at any given point in time, among other things. Its growing strategic role also relates to customer service.

“For AR, automation has streamlined customer service,” DeGraw said. That’s “a big factor, because even though you may have a great product, if you're difficult to do business with, or you can't resolve issues, then the customer may look to the competition.”

Operational trends

In addition to turning to automation, finance leaders are increasingly comfortable having their staff work remotely, which could push further changes in AP/AR operations. 

“Going forward, AP directors are going to have an increasingly hard time convincing staff that they can't work from home,” Scheer said. 

Meanwhile, other options are becoming available for AP/AR processing, including offshoring, which promises further efficiencies by reducing the need to attract and retain staff.

“Most of our customers are anxious to reduce the total costs of hiring, including recruiting and wages,” according to Jamie Stewart, CFO of Cloudstaff, a business process outsourcing service in the Philippines. “Or [they] need to scale their businesses quickly, thereby avoiding the long process of attracting and on-boarding AP/AR staff.” 

Most AP/AR tools now offer automation, DeGraw said, but next level strategic wins in the area will come with digital transformation. Digital tools are taking AP/AR to the next level by integrating with business intelligence and analytics, he says, and since staff can be located anywhere, it opens up a world of opportunity to hire the best talent. 

“COVID and the uptake of AP/AR technology has shown us that we’re no longer anchored to an office or certain location,” he said. “It comes down to how we need to be connected to our customers, either internal or external, and ultimately what insights AP/AR can brings to the table, regardless of where they’re located.”

The CFO at one of your key suppliers is on the phone. She wants to know why your payments have slowed, with some invoices going unpaid for long periods. Your accounts payable (AP) team previously managed invoices efficiently to capture early payment discounts—what’s going on?

Automated AP systems are designed to prevent invoice management problems like this and reduce risk by increasing compliance with a company’s fraud-prevention guidelines and rules. It’s a booming market, with investment in AP technology expected to increase from $1.9 billion in 2019 to more than $3 billion by 2024, according to PYMNTS.com. 

Different systems take different approaches to achieve beneficial ends, but they operate on the common idea that the more the process is automated, the fewer opportunities for human error and the better the company’s compliance performance, say specialists in the sector. 

Automated compliance

From a high-level perspective, a state-of-the-art AP solution allows an organization to receive and process invoices in all formats from suppliers around the world, automatically and in a compliant manner, says Martti Nurminen, CFO of Basware, an AP automation developer. 

“With 100% invoice data available, in good quality, a company has a great foundation for an automated AP process. Ideally, the entire process, from receiving invoices to processing them, is automated,” he said. “That means less human intervention, more accuracy and, ultimately, more compliance. Indeed, one can call this process automated compliance in AP.”

Input predictions

Rajeev Subramanyam, senior vice-president and general manager at Emburse Pay, cites the increased use of machine learning and artificial intelligence within the compliance process for improving compliance. 

These capabilities include predicting key fields within an invoice to minimize the number of touches required from receipt to payments. “The lower the amount of human interactions needed to process an invoice, the less chance there is of compliance issues being introduced,” he said.

Data checks

Another trend that Subramanyam cites is the establishment of deeper levels of connectivity and collaboration between suppliers and buyers within the AP system. “Of course, this means more interactivity between the two parties,” he said. “But it can also increase the level of automation, and provides checks to ensure that transaction data and supplier information is up-to-date and accurate, improving compliance.” 

Incorrect applications

Ideally, increasing the level of AP automation shouldn’t create new problems, Subramanyam said. Compliance issues generally stem from problems in approval routing and compliance rules being incorrectly applied to an invoice. “Given that these rules are created by the finance department when the AP solution is being set up, if they’re done correctly, there should be no ongoing issues,” he said. “If any compliance issues are detected, it should be a relatively straightforward process to adjust the rules within the system.”

Dashboard fatigue

To the extent the introduction of automation creates problems, it could stem from what Sanjay Champaneri, director analyst with Gartner, calls dashboard fatigue — employees not learning or making mistakes using new workflows or new dashboards. 

Should that fatigue set in, it “slows the entire work queue down,” he said. Consequently, it’s important that AP tools be “built to still interact with the humans in a user-friendly way, with things like approvals being an example,” he said. 

Metadata benefits

CFOs can select from a range of AP automation solutions in what Champaneri calls an extremely fragmented market. 

In just the API (application programming interface) accounts payable market, for example, vendors can offer three functional areas: invoice capture, processing and payment with compliance and analytic features.

Given this fragmentation, CFOs can start the selection process by determining which capabilities and features are most important to their organization’s requirements and make a shortlist of vendors meeting those needs. “Features could include the ability to handle complex routing rules, making vendor payments directly within the solution and the type of integrations offered with the corporate ERP (enterprise resource planning system),” said Subramanyam. 

Jason Boyles, director of product management for GEP’s AP solution, believes that having a data-driven AP system is critical, particularly one that makes use of metadata. Paper invoices provide basic billing information. Those documents can be scanned but working with digital invoices offers multiple advantages from a data collection and management perspective because they can include additional metadata. For example, a digital invoice’s metadata can help route invoices, add accounting codes or provide other information to aid processing. 

“Most of it is printed on the invoice, but there could be additional things that could be passed along from the supplier.” Boyles said. “That will help transition from just the electronic version to a digital version, which is truly the automation of the metadata.”

The typical company leaves hundreds of thousands of dollars on the table each year by retaining its manual processes for paying invoices, Chris Happ, CEO of automated payments company Goby, said in a CFO.com webinar.

The typical company pays up to $20 in administrative costs per invoice when the AP function is manual, compared to about $5 per invoice with an automated system, Happ said.

Larger companies leveraging partial automation and economies of scale probably pay closer to $9 per invoice, but the business case based on the available savings remain compelling, he said. 

In addition to the reduction in staff costs you can realize through automation, by better using your existing staff and reducing your need to hire temporary staff or otherwise outsourcing rote payment tasks, you can generate savings in a number of ways, he said. Among them: 

• Avoid paying late fees. Invoices will inevitably fall between the cracks in a manual system, especially when it comes to utility invoices, which Happ said are notoriously complicated and often take a long time to process.
• Generate early-payment discounts. The typical discount is 2%, so if you can regularly generate these discounts, the savings can add up quickly.
• Negotiate reduced prices. Separate from discounts generated on a case-by-case basis, you can build reduced prices into your agreements for recurring purchases based on an early-payment system you create.
• Reduced fraud and errors. Based on how you set parameters in your system, you can flag questionable invoices and reduce keying and other payment errors. Happ said large companies that process tens of thousands of invoices a year can be susceptible to fraud just because of the sheer number that goes through their system. In one type of fraud that’s bedeviled large companies, fraudsters submit hundreds of invoices with small dollar amounts that AP staff routinely pay because to pull them aside to check each one individually is cost prohibitive. 

Happ said it’s not unusual for staff to be reluctant to shine a spotlight on the number of invoices that have payment errors in them, but they should know that payment errors are not unusual and they shouldn’t let that stop them from exposing problems as part of the justification for automating the system. “I don’t think there’s any shame in having those,” he said.

Another reason for automating the AP function is the rich data you can generate. In a manual process, it’s typically only the payment total that gets keyed in and stored in a database for recordkeeping and reporting. In an automated system, Happ said, every line item in an invoice is captured digitally, creating “data lakes and troves of information” that finance executives can analyze for operational insight that can lead to more informed purchase decisions.   

In polls conducted during the webinar, about 40% of attendees said they automate less than 10% of their payment processes, and about 30% said they’re only now starting to learn about automation. Given the typical business can save about $230,000 a year using an automated process, it might be time to change those numbers. Goby is a sponsor of the webinar.

Your accounts payable function is due for automation if you haven’t already undertaken that process, accounting consultants say. The potential to turn it from a back-office cost center to a money maker can attract young finance professionals who have little interest in joining a company that still does manual processing. 

Automating AP becomes a profit center by enabling you to systematically speed payments to vendors, reduce the cost of paper checks and late-payment fees, and earn early-payment discounts that today you’re not always getting, Joseph Dworak, business development manager at software company Esker, said in a CFO.com webinar. “AP is not just a back-office function,” he said. Esker is a sponsor of the webinar.

You can also reduce losses from duplicate payments, catch more instances of fraud or incorrect payments, and free up staff to do work that adds value to the finance function, said Jess Scheer, executive editor at the Institute of Finance & Management.

What's more, you can get more visibility into your payments pipeline, reduce approval bottlenecks and improve vendor relationships by speeding up payments. Scheer said he works with a large company in western Canada in which invoices sit for three months before being approved and a check is cut. “The payment just sits on the executive’s desk,” he said.  

Impact on staff

Scheer called it a mistake to think of automation as a way to manage the AP function with fewer staff, because the real value comes from freeing up staff from manual tasks so they can concentrate on higher-value work. 

“Organizations think if they’re more efficient they can reduce people, but you add more value if you apply people to higher tasks,” he said. 

He recently worked with the medical center at the University of Maryland to automate its AP function and after the transition the finance department increased the team from 10 to 15 people. Automation had cut the amount of time the team was spending on lower-value functions in half, creating so much demand for them to do analytical work for other departments that more staff were needed.

“That’s at the heart of what digital transformation means for AP,” he said. 

Given today’s tight job market, having your AP staff do higher-value work will also enable you to compete for accounting graduates in the job market as older staff retire. 

“The new generation has a totally different mindset,” Scheer said. “Not a lot of people say they want to sign up for manual tasks. But if you give those people a higher-level task it will be more attractive.”

Until recently, the skincare company Lush printed out the 120,000 invoices it received each year for its North America division. Someone put the invoice in a paper folder and routed it to the correct person to approve. The invoice might sit at the person's desk for a day — or three months. Or maybe it got lost in the shuffle, and the process started over again when a vendor inquired about its status.

"Lush was struggling with the volume of paper coming in, and being able to keep track of those documents," Blanca McGrory, Lush’s accounts payable (AP) manager, said.

The company, now at 250 stores in North America, grew so quickly that its processes could not catch up, said McGrory. Poised to continue adding stores, Lush needed to rework its internal processes like accounts payable.

In mid-2017, Lush implemented a Medius invoice automation system. Now when an invoice is sent via email, it’s routed electronically. An audit trail helps AP track where the invoice is in the process and any levels of approval.

The company knows if someone is sitting on the invoice, who changes an invoice cost code (and what it was changed from or to), and it can run a report at any time to determine what invoices still need approvals — helpful especially at the end of the month.

What automation tells you

Like at Lush, Johnson & Johnson's mail room was overrun with paper invoices and phone inquiries to track the unpaid bills before implementing automation. Judy Bicking, now an Institute of Finance & Management (IOFM) consultant and trainer, formerly was the global director of shared services at J&J.

"We looked like we didn’t know what we were doing," Bicking said. "Anything people asked us, our response was 'send me another copy.'"

J&J automated AP more than two decades ago. As Bicking got her feet wet in accounts payable, she realized there was no way to get accurate AP information without automation. She had a hard time diagnosing problems in the invoice process, finding out what the company was paying for items, determining the payment cycle time, whether invoices were paid on time and whether the company reaped discounting benefits.

Bicking transitioned all of J&J’s shared service center's AP department, which handled approximately 1.3 million invoices annually for 104 business units, ranging from small companies to larger manufacturing sites.

When she began automating J&J’s AP system, she saw the biggest bottleneck was the company often had a purchase order but no documented receiver. Those suppliers were not paid on time. "The data helped break down the silo," she said, and J&J brought in the requisitioners and receiving department to help solve the problem.

When procurement and AP operate in silos, they may not be working together, she said, and that can cost the company money.

Managing the paper to automation transition

At J&J, changing over to automation wasn’t easy. "Giving up paper is harder than quitting smoking. In order to gain control, you have to give up paper," Bicking said.

Giving up paper was one of the benefits McGrory cited, as one of Lush’s values is decreasing its environmental impact. Lush’s invoices come via email. Some are in PDF format, which is most desirable for the optical character recognition (OCR) scanner. Some are in Excel or Word files, which have to be converted. And some are a manually completed form. 

The Medius system is cloud-based, and therefore accessible to Lush employees who need access. Most manual approvals are completed within one or two hours, and 92% of the invoices are touchless, meaning they’re automated. When McGrory started at Lush in fall 2017, the company was at 67% touchless processing. The current goal is 95%.

 

Companies have different touchless goals, Tanja Kannisto, Medius’ North American vice president of marketing, said. If the invoice can be matched with a purchase requisition form, the automation levels are higher.

Lush uses machine learning and logic to teach the Medius system how to route the invoices. It sometimes needs manual intervention to add a cost center code for new suppliers. The validation process allows the system to learn how to process invoices going to specific vendors and to increase the system’s confidence levels and speed the touchless processing rate.

Savings: It’s not about layoffs

Bicking learned a lesson when automating AP at J&J. "In the past we all focused on headcount reduction," she said. But basing the anticipated return on investment (ROI) for automation on headcount is the wrong move, because a company can lose institutional knowledge, she found. "Hire for the ultimate job, not for the job you’re giving them today," she said. That includes hiring for discounting, procurement and spend management roles. While there may be some AP roles that are no longer needed after automation, those positions can be redeployed to save the company money in other ways.

Most companies recoup their automation costs in six to 12 months, said Kannisto.

The first stage in AP automation might be getting a handle on invoices and making the process smoother, adding visibility. Bicking recommends departments iron out and optimize bill cycle time. Procurement can then use the information to gain insights into what it's paying, and how quickly, and use that to improve discounts and get better pricing.

"Most people in a paper environment have no idea what that discount number could be," Bicking said. Using a tiered approach, the company should first take advantage of discounts suppliers offer each other for paying early or on time. The procurement department can then ask other vendors for payment discount rates as well, even if not initially offered.

Bicking said after working at J&J, she owned a small retail gift shop and tested this approach with her suppliers. She asked for a 2% discount to pay the vendors two weeks earlier, and no one turned her down. "Taking 2% off the invoice will get an executive’s attention," she said.

Companies can also transition to more preferred suppliers offering better negotiated rates, which helps bring costs down further.

Automation brought other benefits to Lush, said McGrory. Auditors have limited access to the system, so they can review invoices themselves rather than Lush pulling paper copies of the requested invoices.

To be sure, some staff people find automation threatening, but they should find other companies' experience reassuring. The Lush staff has been happier since the change, said McGrory. Staff members are using the time saved for personal development and other business improvements. They’re having conversations about creating meaningful work for people, rather than staff complaining about doing the same thing repetitively, doing a job anyone could do.

"With Millennials in the workforce, they’re expecting a level of automation," said Kannisto.

Deciding if and when to convert

There are different philosophies of when it makes sense to convert from manual to automated AP. Kannisto said it makes more business sense if the organization processes 30,000 to 40,000 invoices a year. However, smaller companies processing fewer invoices may still want to automate if they are poised for growth and want to optimize their systems before growth happens.

Bicking, though, said it doesn’t matter how many invoices a company processes, because automation will positively affect the bottom line. "My retail store was proof of that," she said, even though she received only 10 invoices a week. She outsourced her invoice scanning automation and payment process, and found it helpful to have the information available at her fingertips.

Before converting, though, Bicking said it’s important to know what a company wants to achieve and to consider what key metrics to monitor. That might include invoices paid on time, invoices paid with purchase order versus non-purchase order and cost per invoice. She’s seen statistics for medium size companies where processing manual invoices cost the company $7.50 per invoice when automation can reduce that to $1.25. "It’s not that people are working faster and harder. It’s the automation," she said.