The Anatomy of AP Automation

Published July 2013. Copyright © 2013 by The Institute of Financial Operations All rights reserved. Reproduction or transmission of this publication in any form without the express permission of the copyright holder is prohibited and is a violation of federal copyright law. The information contained herein has been diligently obtained from sources believed to be reliable and has been prepared with care. The Institute and the authors disclaim any and all warranties as to the accuracy and completeness of this information. The Institute and the authors, their directors, employees, or assistants can accept no liability for any damages or loss occasioned to any person, company, or entity due to errors or omissions in the information contained herein or in the interpretation thereof. The opinions expressed herein were developed from a global survey of users, and the analyses may contain the opinions of the author and may change at any time without notice. This publication is designed to provide authoritative information at the time of publication in regard to the subject matter covered. It is not intended to offer accounting, legal, or other professional advice. If accounting, legal, or other professional advice is required, or if expert assistance is needed, the services of a competent professional person should be sought. This document or any part thereof may not be reproduced in any form without the express written permission of the publisher.

The Anatomy of AP Automation About The Institute of Financial Operations The Institute of Financial Operations is a membership-based professional association serving the entire financial operations ecosystem, with a particular focus on the accounts payable and accounts receivable disciplines and the related fields of information management and data capture. The Institute grew out of the merger of four associations: International Accounts Payable Professionals (IAPP), International Accounts Receivable Professionals (IARP), the National Association of Purchasing and Payables (NAPP), and The Association for Work Process Improvement (TAWPI). Based in Orlando, Fla., with affiliates in the U.S., Canada, and the UK, The Institute serves as a global voice, chief advocate, recognized authority, acknowledged leader, and principal educator for people in financial operations. The Institute has a community of nearly 100,000, which includes 5,000 members, 17,000 customers, and an additional 75,000 financial operations professionals. The Institute’s members have access to benefits and leading-edge resources such as the award-winning Financial Ops magazine, a dynamic, content-rich website, educational and networking events, online educational offerings, certification and certificate programs, career resources, and volunteer opportunities.

About Anybill Built on the premise that all payments are critical, Anybill was created in 2001 to transition any AP transaction to an automated solution. Combining proprietary technology with unmatched customer service, Anybill delivers a complete software-as-a-service solution. Clients retain efficient workflows while gaining greater visibility and control, better cash flow management, streamlined approval processes, 24/7 accessibility, and increased auditor confidence. Anybill’s SSAE 16 SOC-compliant solution works for clients ranging from nonprofit associations to some of the largest multinationals. The company is headquartered in Washington, D.C. For more information, visit anybill.com or email [email protected].

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Table of Contents Overview .................................................................................................. 5 Receive.................................................................................. 6 Process.................................................................................. 7 Pay.......................................................................................... 8 AP Automation Outsourcing — Business Case Considerations...... 10 Conclusion..............................................................................................11

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Overview Accounts payable (AP) automation increases productivity, reduces errors, improves compliance, and allows buyers to reap high, double-digit returns on available cash by capitalizing on early payment discounts. Those are just a few of the benefits. So why, after 40 years of technological innovation, are most companies still shuffling paper? More often than not, it’s because that’s the way they’ve always done things. In fact, only about 15 percent — the largest 15 percent — consider themselves to be highly automated. Change is scary. But the case for AP automation and third-party invoice processing is strong and getting more compelling all the time, with the growth of affordable, easy-to-implement cloud-based software and profit-enhancing cash-management tools that reward end-to-end automation. This paper examines the three basic pieces of AP automation — receive, process, and pay — and explains how they fit together to streamline operations and improve profitability.

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Receive Current challenges

• Most invoices arrive on paper. • Electronic data arrives in different formats. • Emailed invoices require manual processing.

Automation advantage

• Staff can handle the same workload at a higher productivity rate. • Standardized invoice data integrates with the enterprise resource planning system. • Invoices can be processed with little to no human intervention.

The earlier in the payment process a company can convert paper to data, the greater the financial and strategic benefit to the organization. According to the most recent survey data from The Institute of Financial Operations, almost half of respondents are using some kind of front-end imaging, although only a fraction of those have progressed to the point of being able to extract data from those scanned images. As is often the case when it comes to automation of any kind, respondents to the IFO survey cited a lack of internal resources to support the project. That may explain the growing popularity of outsourced AP automation, using secure Web-based services and third parties to convert paper to data in a format compatible with current ERP systems, without a significant implementation or maintenance burden on IT resources.

Figure 1: What AP processing functions are your organization outsourcing or considering outsourcing? Document receipt/sorting

No plans to outsource Considering outsourcing Already outsource

Document imaging Document archiving Data capture/data entry Payment processing PO and/or goods receipt matching 0

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Process Current challenges

• Paper documents are hard to gather, match, and verify. • Discrepancy resolution is time-consuming. • There is top-down pressure to reduce headcount.

Automation advantage

• • • • •

Electronic data allows for instant matching/straight-through processing. Discrepancies are flagged and corrected at invoice receipt. Straight-through processing increases AP productivity. The organization gains increased visibility into spend. There is no need to purchase hardware or software; IT involvement is minimal.

To paraphrase comedian Jeff Foxworthy: If you’ve ever spent money on finger wax to help you thumb through endless stacks of paper . . . you may be an AP professional. Anyone who has ever witnessed the ballet of practitioners pushing carts of files and stacks of mail to a backbeat of constantly opening and closing file drawers will understand the challenges of manual invoice processing. Imagine all of the things that can, and do, go wrong in a dance that requires purchase orders, receipts, and invoices to travel — by plane, train, boat, truck, and email — from various points of origin, both internal and external, to accounts payable, where they are sorted and matched like single socks on laundry day. Think of all the hand-offs — from purchaser to mailroom, from vendor to mail carrier, from receiving to mailroom, from branch to central processing. Think of all the waiting. Think of all the chances for paper to go missing. Think of the opportunity for fraud. And when those documents don’t agree, somebody has to figure out why and get all the parties to agree. It is here, in this vast middle piece, where companies reap the biggest operational benefits of AP automation. With paper converted to data in an end-to-end automated process, all of those handoffs occur instantaneously. Exceptions can be flagged as they are being submitted, pushing the burden of discrepancy resolution back on the vendor to fix before it ever has a chance to become an “unmatched sock.” Latin American countries, led by Brazil and Mexico, are making end-to-end AP automation mandatory as a deterrent to fraud. Although such government intrusion runs counter to capitalist sensibilities, U.S. companies doing business in Latin America have reported savings of more than 70 percent on AP processing.

Figure 2: What do you see as the biggest benefit of cloud services?

34.1%

4.5% 12.9%

22% 18.2% 6.1%

Fast startup No capital investment Lower cost per invoice Reduced operational risk Rapid return on expense No software or hardware Minimal IT involvement

2.3%

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Pay Current challenges

• Checks are still the most popular payment method. • Potential early payment discounts are missed.

Automation advantage

• • • •

Centralized processing is faster. Transaction costs are lower. The organization gains increased control and visibility. The organization can improve its cash management.

Although checks still account for more than half of all business-to-business payments, a majority of businesses polled by The Institute of Financial Operations expect to be paying electronically within three years. Payments are a popular starting point for AP automation because payment solutions are easy to implement and offer a high return on investment that can be tapped to fund additional procure-topay automation projects. Payment solutions may be user-hosted, but they are often provided online by third parties, particularly banks and commercial card providers with established electronic payment networks. Whether processed in-house or through cloud-based AP automation providers, automated payments typically fall into one of three types.

1. Automated Clearing House/electronic funds transfer Automated Clearing House (ACH) is an electronic network for financial transactions that process large volumes of both credit and debit transactions, which are originated in batches. Also known as direct deposit or direct debit, ACH is increasingly used by vendors to collect from customers online as an alternative to accepting credit or debit cards. Although traditionally this has required buyers to provide vendors with bank account information, buyers tend to favor a “push” approach that allows them to initiate the transaction without sharing account information.

2. Buyer-initiated “push” payments Part ACH/part procurement card, buyer-initiated payments allow buyers to use their procurement card relationships to pay vendors directly, capturing early payment discounts, earning card volume rebates, and taking advantage of the grace period between the purchase and the monthly statement date. Vendors benefit not only from early payment, but also from the reduced collection cost of not having to prepare and present an invoice or process a check.

3. Commercial/P-cards Used to purchase business-related goods and services, and pay for fleet, travel, and entertainment expenses, these cards not only eliminate paper, but also improve controls, increase management visibility over spend, and earn rebates from card issuers, who are trying to encourage usage.

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Pay

Figure 3: Payments by type Check ACH Purchasing card Wire Accounts payable card EDI Debit card 0

10% 20% 30% 40% 50% 60%

Automated payments enable companies to accelerate the entire approval process. A recent IFO survey found that the majority of companies typically take between three and 10 days to process a single invoice. Automating payments can cut days off that process. That in itself can cut per-invoice processing costs significantly. Electronic payments also enable companies to take advantage of early payment discounts. Although nominally small — typically 2 percent for a payment within 10 days — that translates to an annualized return of more than 37 percent. That return can be increased even more through rebates currently offered by card issuers.

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AP Automation Outsourcing — Business Case Considerations With implementation cost and IT resource constraints consistently topping the list of roadblocks to in-house AP automation, many companies, particularly in the small and midsize enterprise categories, are outsourcing AP to service bureaus and cloud-based software, which deliver robust functionality at affordable rates. Outsourced AP automation solutions allow companies of all sizes to reap the benefits of AP automation — end-to-end, or a piece at a time. As is often the case when it comes to change, however, some common concerns must be addressed, with control and security topping the list. Here’s how service providers respond:

Control Outsourcing AP automation shifts only the mechanical process, not the responsibility for approvals. The outsourcing process can actually enhance control by codifying rules and procedures that may have previously existed only in the heads of staff members. Rules-driven workflows in an outsourced process ensure that established guidelines are followed. An outsourcing agreement will also require your provider to meet a contracted service level not provided in most internal AP processes.

Security Because a data breach could put an outsourced solution provider out of business, providers make security a top priority, including physical data center safeguards, application-level security, and data transfer infrastructure with controls that equal or exceed typical firewall defenses. A good AP service provider should be able to provide SSAE 16, SOC, and other data security documentation for regulators and auditors.

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Conclusion Although few would argue that the manual processing of paper invoices holds any advantage over automated AP processes, old habits die hard. Automation was once considered an option only for large companies with the time, talent, and treasure to implement and maintain an in-house solution, but the advent of cloud-based software has put the technology within reach of midsize and even some small businesses. Automating and centralizing accounts payable functions can streamline processing, increase responsiveness, and add professionalism. It also can impact the bottom line by allowing more earned early payment discounts and preventing late payment fees. Automated processing, virtual invoicing, and ACH payments add efficiency and certainty to the process. Momentum is building, with two-thirds of all businesses surveyed by The Institute of Financial Operations reporting that they processed more B2B payments electronically than they did three years ago. In Latin America, governments are mandating AP automation as a way to recoup tax leakage. And there is a growing awareness among CFOs and treasurers of the strategic potential for increased control over spend, improved cash management, and high returns on available cash, in addition to the operational efficiencies created by AP automation.

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