Accounting With the Lights Out
Accounts Payable would be easy if it wasn’t for all the paper, as anyone who works in the area will tell you. Paper-based, manual accounting systems have been the bugbear of corporate AP departments for decades.
Even the most rigorously organised AP system has plenty of opportunities for problems, including lost or misplaced invoices; incorrect manual data entry; time lost sorting and filing paper, or trying to locate matching purchase orders. All of which leads to slow processing, which can impact directly on the organisation’s financial reputation with partners and suppliers. What’s more, manual AP systems make it almost impossible to meet the regulatory and compliance demands of Sarbanes Oxley, IFRS and others for complete document traceability and auditability.
All in all, it’s a recipe for a fruitless paper chase. Throwing manpower at the problem isn’t a viable solution. More people means more invoices processed – but employment and labour costs are significant for such skilled staff, which limits expansion in the AP function. On average, a full time AP employee can process around 8500 invoices per year using manual processes. Yet world-class companies can process upward of 80,000 invoices per person per year – a quantum leap in efficiency.
Flicking the switch
So how is a ten-fold boost in productivity possible? It’s simply a question of automating as many aspects of the AP function as possible. The real costs involved in AP are the man-hours involved in manual tasks, including: finding purchase orders and good received notes; checking and matching these; manual data entry into core business systems such as ERP; manual validation; processing complex invoices which may involve checking against service level agreements, and more.
Even more costs are incurred in tasks such as long-term filing and storage of documents, staff turnover and teaching systems to new staff. If these tasks can be automated, then accounting staff can be redeployed in more strategic roles such as data analysis, and not be involved in time-consuming paper trails.
The ultimate aim is sometimes referred to as “lights-out accounting [http://www.dvtl.co.uk/index.pl?art=14]” – in other words, switching off the lights while the work proceeds automatically. And although it’s not yet possible to flick off the light switch all the time, the latest-generation invoice data capture and processing solutions really do deliver gains in productivity of up to 1000%, helping to turn AP into a profit centre, not a cost centre.
Let’s take a close look at exactly how this can be achieved. We will use a real-life example of the AP department of a large business in the licensed trade, which undertook a phased migration from paper-based manual processing to fully automated invoice processing.
Raising a glass to automation
DrinkCo is a UK-based business that owns several well-known pub chains. As one of the largest pub operators in the UK, the company processes 600,000 invoices per year. As a Peoplesoft (now Oracle) Accounts user, DrinkCo wanted to deploy an invoice capture [http://www.dvtl.co.uk/index.pl?art=31] solution to bring key financial data directly into the Peoplesoft solution and accelerate processing.
With ROI being a key factor in the decision to deploy, DrinkCo undertook a proof-of-concept exercise with Digital Vision [http://www.dvtl.co.uk] that demonstrated that ROI was possible within months, rather than years.
The proof-of-concept was based around an invoice capture solution from Paradatec, integrated with data extracts from the Peoplesoft system so that invoices can be matched with purchase orders and goods received notes. This demonstrated that high levels of accuracy were possible with data capture on the majority of invoices received.
Before optimisation of the capture process, data capture on general invoices was 73%. By focusing on invoices from large-volume suppliers, this was raised close to 100%. Furthermore, the process proved that the artificial intelligence system performed regardless of invoice layout, and that that the invoice capture engine’s AI rules could be adapted to handle different invoice layouts, or those from new suppliers.
On completing the proof of concept, Digital Vision gave a detailed specification to DrinkCo to integrate the Paradatec capture solution, SpeedKey validation and Contempus invoice processing with Peoplesoft Accounts, with invoice images stored in an IBM Content Manager repository.
When the green light was given to proceed with the automation project, additional pressures reared their head. One of DrinkCo’s offices was to be closed and the work transferred to its Midlands HQ. This also meant redundancies amongst AP staff – which applied additional pressure to get the automated invoice processing system live as quickly as possible. As staff was leaving, a backlog of invoices was building up.
The solution was deployed in just 8 weeks. The backlog of 4500 invoices built up while staff were leaving was dealt with by just four staff, who validated and corrected the backlog in less than three days. Under its previous system, clearing a similar-sized backlog would have taken 12 staff over 10 days – clearly demonstrating the savings in time and manpower possible with the automated solution, and immediately delivering ROI. The AP team continues with four validation staff, and the project achieved full return on the original investment in just 8 months.
Planning for lights-out accounting
As well as showing the ROI possible from automation, the process followed by DrinkCo is an excellent example of how businesses can plan their move toward lights-out accounting. First, evaluate the invoice capture solution, and if possible, conduct a pilot to ensure that invoices can be captured ready for processing with near-100% accuracy and with high levels of automation. This builds the ‘funnel’ for automated processing and helps in defining subsequent workflow paths.
Second, integrate capture with core business systems to automate invoice matching with supporting documentation such as purchase orders, and to highlight any exceptions (e.g. invoices without orders) which need to be escalated into the workflow of an authorised member of staff. This workflow should be governed by customised, business-specific rules, to enable AP staff to manage invoice processing by exception rather than hands-on – freeing staff to perform more strategic tasks.
Third, use an invoice automation system which ensures that every transaction, amendment and movement of data is fully audit trailed, providing irrefutable evidence of any work-around and non-sanctioned processes. The log should be stored with the electronic version of the invoice to give complete visibility of the invoice’s path through the organisation. This evidence eases audit pressures that, in turn, can be converted to reduced audit costs.
Given the compelling evidence of ROI from AP automation, it’s not a case of if you’ll ever be able to turn the lights out, but whether you can afford not to.
Written by: Bob Goodwin