The AP function is the most frequently outsourced process in the finance and accounting departments of organizations. While it is an essential part of operations, it is a non-core business activity that requires extensive and expensive work. This is why outsourcing this part of an organization’s operations will be not only a tactical move but a strategic one.
Why Companies Outsource AP Operations
The biggest factors that motivate organizations to outsource AP functions are the pains and increased chances for errors from receipt to invoice processing particularly when using manual entries, the desire for an efficient and streamlined operational performance and the need to optimize technology to help them strategically improve their operations.
Basically, companies choose accounts payable outsourcing (APO) providers because they want to improve operations without necessarily investing on technology, particularly automation, in-house.
Technology plays a big role in most organizations’ decision to outsource. Once a process is automated, productivity is increased and overall operational costs lowered. However, most organizations cannot invest on technology and more importantly, sustain it. When they outsource, they don’t need to put up capital for IT resources, implementation and maintenance of automation.
For example, the front end of AP operations – the invoice receipt and conversion to ERP formatted data – is usually the first and commonly outsourced part of operations since this process is universal across all organizations but requires extensive work – scanning, OCR (optical character recognition), data extraction and digital workflow expertise. Even if it is considered a critical part of operations, it is still a non-value added activity in a sense that it isn’t part of an organization’s core business. Outsourcing this process to an expert provider eliminates the burden of investing on human resources and technology and gives an organization access to a more efficient paperless process.
Commonly Outsourced AP Functions
When an organization considers APO, it is important to know that you can outsource several aspects of AP services. If manual data entry of invoices creates a huge backlog, they can outsource the invoice receipt-to-ERP process (Enterprise Resource Planning). If productivity and rising costs are the problems, they can outsource processing to gain automation at a reduced cost.
The AP process actually has three phases and organizations can outsource operations by phase.
1. The Front-End or Receipt to ERP
This phase is primarily paper and labor-intensive, requiring manual entries from data across paper, fax and e-mail transactions. Outsourcing this phase is usually driven by the need for automation to avoid tedious, error-prone and manual data entry. The greatest advantage of outsourcing this phase is the centralization and automated data conversion for both paper and digital invoices.
2. Approval, Discrepancy and Resolution, and AP Administration
Usually, when an APO provider proves to be an excellent partner for the first phase, organizations gradually offload more operations to them – including handling all the AP department’s non-PO approval, PO matching, travel and expense, special invoice processing, discrepancy resolution (auditing) and even administrative support needs.
AP administrative tasks may include vendor/supplier inquiries, assisting with vendor maintenance, and assisting with regulatory compliance, month-end and year-end routines, tax support, account reconciliation, and special projects.
3. Invoice Automation
Organizations choose outsourced systems because they deploy much faster with less cost than an internally developed in-house system, which takes years to evaluate, develop and install. APO automation does not require intensive testing and training, since the system is already in use across many clients, and it can go live immediately. APO technology is quick and virtually painless, and buyers are not left responsible for maintenance, training, or upgrade costs.
Benefits of Outsourcing AP
While some organizations prefer to keep this operation in-house, APO is actually a better and more strategic alternative.
First, it doesn’t require an organization to invest, maintain and continuously upgrade infrastructure or equipment related to technology ownership required because of automation. Second, the training of manpower to operate such technology is eliminated when an organization relinquishes this function to APO.
Lastly, the AP structure has activities that are ideal for outsourcing because it is based purely on transactions and are driven by rules not really related to core operations but are unfortunately driven by high costs and requires extensive supervision to prevent errors and ensure efficiency.
Organizations that are wary of outsourcing should note that APO providers are driven by fierce competition, motivating them to have the best global standards when it comes to AP functions. This means their work is structured according to a Service Level Agreement (SLA). SLAs enforce consistent performance and management by agreed upon metrics, such as entering all invoices into workflow within 24 hours of receipt. These guidelines ensure that APO providers offer process management practices that enhance overall performance as measured by time, cost, error rate, quality of work, and internal control metrics.
AP Outsourcing is Best for Strategic AP Management
When an organization shifts its vision for its accounts payable department from just being part of operations into being a strategic part of management, it will realize that outsourcing AP will be perfect for the organization.
You will be consistently assured of high performance because of contracted SLAs, operate on reduced costs because of shared service efficiency with your APO provider, eliminate manual data entry operations, go through paperless processes because of automation without needing to commit to long-term liabilities brought about by using technology.