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Beyond Offshoring and Automation for Accounts Payable

For nearly a decade businesses both in the United States and abroad have been exploring ways to increase efficiency and reduce costs in their accounts payable systems, with two primary approaches prevailing: offshoring and automation.

Both solutions have their benefits, although offshoring on its own offers dubious value, but according to John Stetak, CEO of AcceLIM, Inc., and several of his clients, the conversation about whether to go with an offshore approach, in-house automation, or an automated service completely misses the boat.

“We shouldn’t be focused so much on where the work takes place or whether it’s a good idea to automate in-house or use a service,” says Stetak. “We need to be talking instead about how these systems are set up. Are the processes as efficient as possible? Is the system set up to drive continuous improvement?”

Stetak advocates what he calls an “exception based” approach to automating accounts payable, a service which his company provides and which his clients use as a tool for facilitating and tracking improvement. A primary feature of this approach is that transactions with error-free documentation flow straight through the automated system for payment while those with exceptions are routed automatically to the person responsible for correcting them, along with images of all related documents and alerts about what’s wrong with the transaction.

According to Stetak and his clients, this is an ideal allocation of resources because employee time isn’t wasted processing piles of routine paperwork; their attention is focused only on transactions with discrepancies. This naturally drives ongoing improvement, and the reporting available in the system supports that. It’s easy to see what the top discrepancy types are, which suppliers or approvers have the most problem transactions, and dig deeper to uncover root causes.

One of AcceLIM’s clients, an international pharmaceutical company, uses specific metrics they track with their automated A/P system to identify issues that otherwise might not be revealed as quickly. For example, they track the number of days from when an invoice enters the system to the point when it’s been approved, and if there are certain suppliers or approvers that consistently have longer approval times for their transactions, that’s a trigger for further investigation. “They’ll ask themselves, ‘Is there something in our process we didn’t do correctly? Is there something within that supplier’s contract that’s not clear to people, that’s creating repeated errors? Or is there some other issue?’, and then they address whatever the issue is that they discover,” says Stetak.

Integrated Device Technology, Inc., provider of mixed-signal semiconductor solutions, also uses the exception-based approach to drive improvement, according to Tom Mumby, Director of Worldwide Purchasing. “The specific tool that’s very useful to us is the ability to look at the category of frequently occurring exceptions, look for the cause, and correct the cause. It’s a learning tool for us to say, ‘How do we do it better?’ Those exceptions are continuously going down for us.”

Another AcceLIM client, Silicon Valley-based custom cable manufacturer, DC Electronics, has found a direct correlation between the reduced number of transactions their A/P and purchasing staff reviews and the company’s reduction in discrepancy rates. “By taking thousands and thousands of transactions out of the field of what you’re analyzing, when you’re just down to the exception base, you can discern patterns much more easily,” says CEO, Dave Cianciulli. “Anyone looking at the data should be able to continue driving continuous improvement; it’s that simple.”

This all sounds like common sense, but Stetak says it’s still far from common practice. “Most prospects, when I talk to them, don’t understand what their top discrepancies really are,” he says. “They know they have a high rate, and might sense at a surface level who their problem supplier is, but they don’t have enough empirical information to go to a specific supplier and say, ‘Can we work on these two things?’ This is powerful information. I’ve seen customers go from 30% discrepancy rates to single digits within a quarter after moving to an exception based approach.”

Why is this emphasis on discrepancy rates and approval times important? Quicker approval times and fewer exceptions provide a more accurate, real-time picture of what’s in the accounts payable queue, eliminating surprises and allowing for better cash management. They also strengthen supplier relationships. As IDT’s Mumby notes, “We make a contract with a supplier based on expectations that they’ll provide high quality goods as contracted on time, and we expect our side of the obligation to be handled as quickly and efficiently as theirs; our reputation and future dealings depend on it.”

Another benefit of reducing discrepancy rates is the “compounding improvement” effect that happens naturally with an exception-based system. Accounts payable staff, purchasing staff, and other approvers are looking at fewer transactions, so they more quickly identify root causes of the discrepancies, resulting in fewer problem transactions to spend their time on, and ultimately allowing for growth without increased A/P headcount.

It’s important for any organization to keep error rates as low as possible and know how long it is taking to process invoices, but in a period of rapid growth it becomes even more important. This is a key reason Cianciulli embraces the exception-based approach for DC Electronics. “My goal to move DC forward is more growth and to be competitive on every level,” Cianciulli says. “Every broken process adds time, waste and money. For us, those (accounts payable) functions are now streamlined, automated and done. Our volume can double, and we don’t have to throw staff at it because it’s not doubling with a broken process.”

Is offshoring or simply automating an existing system likely to achieve that? According to those who favor the exception-based approach, it all depends on how the system is set up. “Taking an inefficient process offshore or automating it represents a huge missed opportunity for improvement,” says Stetak. “Even if you’re temporarily lowering costs through offshoring or automation, a bad process is a bad process and will ultimately cost a company in the long run.”