By Jim Arnold, President, APEX Analytix
If you want your accounts payable organization to stand out from the pack and deliver a strategic advantage to your business, try playing by the numbers. Experience shows that's what the major players do. They develop a vision of where they want to be, establish key performance metrics for getting there and focus on the kinds of continuous improvements they need to make in order to become best-in-class.
Each year APEX Analytix conducts an accounts payable benchmark survey that offers tantalizing insights into where the best in the industry are headed. The October 2008 results are based on responses from 73 early adopters of financial best practices — including the world's largest airline and the world's largest retailer. Participants span a variety of industries, including automotive; banking, insurance and finance; manufacturing; business and consumer services; energy and utilities; health care and pharmaceuticals; high tech; retail; and telecommunications. Collectively these organizations process in excess of 247 million invoices annually, representing $832 billion in disbursements. The APEX Analytix survey measures their performance in five critical categories:
The underlying processes and systems an organization uses can make a major impact on the support delivered to customers – including external vendors, internal business units and members of a senior management team. An effective infrastructure helps an accounts payable team do its work and keep customers well-informed, whether they need information on the status of a specific payment or want monthly performance metrics.
Shared services organizations are here to stay. More than eight out of 10 organizations in the survey have established a shared services infrastructure to achieve economies of scale, lower costs and improve the quality of service delivered.
Service-level agreements are on the rise. Between 2005 and 2008, the survey shows a 23 percent increase in the number of companies negotiating service-level agreements with their customers that define performance parameters, such as the cost of service, processing speed, on-time reporting and responsiveness. Today service-level agreements are used by six out of every 10 firms according to the APEX Analytix benchmarking survey.
The Web is transforming access to information. Increasingly organizations are putting information online for ready access. Between 2005 and 2008, the survey shows a double-digit increase in the number of accounts payable organizations using the Web to post policies and procedures, and to answer frequently asked questions. Now a full eight out of 10 respondents are doing so. In addition, nearly half say they use the Web for employee surveys.
Dashboards are on the fast track. In 2005, less than a third of the organizations in the APEX benchmark used a dashboard of metrics to track their performance by business unit. By 2008, nearly half were doing so – giving them a ready snapshot of the data they need for informed decision making. Dashboard software shows several graphs at once, each depicting a different metric, much like the dashboard of a car shows a driver key indicators such as fuel, temperature and oil all at once. Nearly eight out of 10 organizations in the survey say they submit metrics to senior managers at least monthly. Using dashboard software means they can do so easily and cost-effectively - a \plus during tough economic times.
This benchmark category probes the "meat and potatoes" aspects of an accounts payable shop, including how efficiently and cost-effectively it makes payments. Companies who excel in the process and automation category are able to minimize their overhead, reduce costs, and increase profi ts flowing to the bottom line.
Electronic payments and processing are now a given. Fully 95 percent of those in the benchmark group pay electronically, representing an increase of seven percent since 2005. In addition, 85 percent now process employee travel and expense reports electronically, compared to 74 percent in 2005.
E-mail prevails. Two out of three organizations in the benchmark use e-mail remittances to confirm electronic payments, which eliminates the time and expense involved in mailing a hard copy.
Use of evaluated receipts settlement soars. Organizations that use "evaluated receipts settlement" assume a purchase order constitutes approval for payment once goods are received. So they make payment based on receiving reports. This eliminates the significant work involved in logging and handling vendor invoices and resolving discrepancies. Today more than half the organizations in the benchmark rely on evaluated receipts settlement as a best practice, representing an increase of nearly 20 percent since 2005.
Because accounts payable shops handle a lot of money, it's important to optimize how that money is managed. The objective is to hold onto cash for as long as possible, while still complying with contracts and paying vendors on time. Cash management also involves the effective use of any cash discounts vendors offer for early payment. Best-in-class organizations capture several times the cash discounts of laggards in this category - $5.9 million versus $700,000.
The use of on-time performance reports is soaring. Comparing 2005 and 2008 data, the survey shows a double digit increase in the number of organizations using reports to evaluate the timeliness of their payments. Today 42 percent track when payments are made and the percentage of invoices paid according to negotiated terms.
Tracking credit balances is standard. The benchmark shows more organizations than ever are generating monthly reports of vendor credit balances so they can track and recover what they're owed. Three out of four respondents now do so.
Days payable outstanding reports are on the rise. Nearly 60 percent of the organizations in APEX Analytix benchmark track "days payable outstanding" so they can develop accurate cash forecasts. This represents a seven percent increase since 2005.
The internal controls governing accounts payable have received significant emphasis in recent years, especially in the wake of corporate scandals and the passage of Sarbanes Oxley. But controls also make good business sense. Because accounts payable manages an organization's "checkbook," it's important to make certain the right vendor is paid at the right price and that sales and use taxes, freight charges and other costs are captured and managed appropriately.
Compliance is considered part and parcel of the accounts payable function. Nearly nine out of 10 benchmark survey participants house the compliance function within the accounts payables team.
Recovery audits are commonplace. More than six out of 10 organizations in the survey audit their operations annually.
Vendor statement reviews are standard operating procedure. Seven out of 10 companies conduct them to flag credits that likely represent processing flaws and incorrect payments.
Accounts payable is a fertile target for fraudsters, and that's Accounts payable is a fertile target for fraudsters, and that's especially true during tough economic times. So it's important especially true during tough economic times. So it's important to shore up risk controls and mitigate unnecessary losses by to shore up risk controls and mitigate unnecessary losses by assuring that only bona fide vendors are paid.
Upfront authentication is getting more attention. The APEX benchmark shows that today 18 percent more organizations are authenticating vendors prior to setting them up in their accounts payable system than just three years ago.
Standards are the name of the game. Nearly nine out of 10 organizations have adopted standard protocols for vendor names and addresses. This reduces the potential for duplicate payments and delivers spending information to enable procurement teams to generate large savings from sourcing leverage.
Employees are considered an important defense against fraud. More than nine out of 10 organizations in the survey have a fraud hotline, and nearly 100 percent have a code of ethics.
To manage by the numbers, it's important to begin by measuring the gap between where your organization is today and where you want it to be. Performance metrics become signposts along the path to world-class performance and provide the data you need to keep top management informed.
For example, if you run a small to mid-sized accounts payable shop, it may not be cost-effective to invest in imaging technology or other sophisticated infrastructure solutions used by large firms to trim the cost of processing massive volumes of invoices. But it MAY make sense to implement Web invoicing, electronic payments and P-cards. So cherry-pick those measures that will give you the best payback. Finally, remember that achieving and maintaining best-in-class performance requires an ongoing commitment. Conduct a checkup at least annually to see how you stack up against your colleagues in the marketplace. It can help you focus your efforts and marshal the internal support you need to invest in your operations.
