How does your AP measure up?

by Ramit Arora

The accelerating growth in outsourcing the accounts payable function has created significant opportunities for process improvements, standardized procedures, and the application of accounting best practices. One critical element that is often unrecognized is the importance for companies to measure the performance of their outsourced accounts payable outsourcing engagements. In measuring outsourcing relationships, it is essential that an organization establishes the appropriate baseline metrics or benchmarks to supplement the service level agreements established during contract negotiation with the outsourcing provider.

This baselining or benchmarking should compare the provider performance against industry standards in order to measure the achievement of baseline metrics and set the starting point that the client is experiencing today. Another advantage of benchmarking is that it enables the identification of best practices. In a survey of clients conducted by a leading FAO service provider, the provider found that the implementation of a comprehensive workflow system resulted in a more efficient payables processing framework.

The survey results consistently demonstrated that in processes where workflow was used to automate the matching and approval process, the time involved in routing and resolving exceptions to the right personnel within the organization was considerably reduced. Improving the cycle time had a direct impact on a clients discount capture ability and resulted in millions of dollars in cash flow and increased profitability. The workflow tool also serves as a great spend analysis resource, consolidating accounting records and data from all types of client applications, thus enabling procurement to identify the spend on various categories and increasing the visibility and leverage to negotiate with the organizations supplier base. Clearly, benchmarking identified workflow as a best practice and identified the extent by which the performance was improved by deploying the workflow solution.

The American Productivity and Quality Center (APQC) is conducting an extensive accounts payable benchmarking study to establish a performance metrics database and provide commonly used measures and individual benchmarks to help companies assess the effectiveness of accounts payable processing. The purpose of this study is to help participants measure their performance relative to external peer groups, establish key accounts payable performance metrics, and discover methods for process improvement. According to APQC, some of the key performance drivers for the top performers in accounts payable processing are:

Centralized processing operations

High transaction volume that results in cost effectiveness and staff productivity

Some of the best practices that have been derived from this study include:

Outsourcing is periodically evaluated as an alternative or supplemental model

Conduct external benchmarking and report benchmarking results to customers

The benchmarking survey has shown some interesting results. It was found that implementation of new technology, such as electronic invoicing, can have conflicting results. At one end, it can lower the cost of processing an invoice, but at the other end, it can increase the cycle time. The extensive benchmarking survey is also helping companies in comparing their costs and other important performance elements with external peer groups. Benchmarking is certainly an important tool for companies to configure internal processes for external comparisons. According to a study done by the Finance and Accounting Shared Service Benchmarking Exchange (FASSBEX) in Europe, the starting point for some finance organizations is so far off the mark that a shared services center cannot be expected to deliver even average performance for process- ing finance and accounting transactions. This might happen because the internal labor cost structure is very high compared to industry standards, the technology infrastructure is extremely high, or the organization is structured in a way that more internal process reengineering is unable to improve process efficiency. According to FASSBEX, in such a case, there might be need for radical thinking where processes would need to be outsourced completely to achieve parity with the industry standards.

Another area where benchmarking is being aggressively practiced is in measuring the performance of outsourced service providers. This might be done through innovative dashboard tools or through simple measurements against service level agreements. Some companies have developed measurement tools that integrate a dashboard with a balanced scorecard approach to measure the effectiveness of an outsourcers performance across various dimensions of the balanced scorecard.

External organizations such as The Hackett Group, APQC, and Score Research offer organizations access to industry benchmarks and a process for evaluation. It is evident that benchmarking can be used not only to measure outsourced performance but also to measure an organizations internal performance against an external peer group. Benchmarking is another way to identify the suitability of outsourcing and to continuously drive the deployment of best practices in outsourced operations.