A Practical Guide to Accounts Payable Outsourcing
Can Your Department Cut Costs and Improve Service Levels by Outsourcing Accounts Payable?
Accounts payable outsourcing has been around for years. But for many companies, the efficiencies gained from outsourcing do not outweigh the associated costs. There are myriad reasons why outsourcing may not make sense, but for most, it is because they have already invested heavily in a robust and efficient shared services center. For others, the reason is a lack of sufficient scale. Still, for some organizations, outsourcing certain aspects of accounts payable is a good fit. Some processes are more suited than others, particularly those that are relatively high-effort and low-value, such as document receipt, data entry, and supplier inquiry response. Companies evaluating outsourcing should consider both its potential advantages, such as increased efficiency and decreased cost, as well as its disadvantages, including increased compliance risk and risk of intellectual property theft.
State of the Accounts Payable Outsourcing Market
Creating efficiency in accounts payable and similar processes is usually a large undertaking. Countless moving parts and stakeholders are involved in what is seemingly a simply process: paying the bills. There are generally two distinct directions that world-class finance organizations go in when transforming accounts payable: establishing a shared services/global business services center internally or outsourcing. For particularly large organizations, the former usually makes the most sense and is a more cost-effective solution. For smaller organizations or those that are growing rapidly, outsourcing may be a good solution.
What Should Be Outsourced?
Generally, processes that are best suited to outsourcing have a high contribution to operational performance but low strategic importance. These processes are often described as “tactical” and require little to no organizational knowledge to execute. Nor do they present a high security risk if data is lost or stolen. Compared to outsourcing, they also require significant cost to build out capabilities internally. But outsourcing, in addition to its benefits, also has drawbacks. These must be understood and feed into any decisions about service placement.
AP processes that would benefit most from being outsourced depends on the size, speed of growth, scale and other attributes of the company. Generally speaking, the most impactful areas to outsource are invoice preparation, receipt, data entry, supplier inquiry response and payment. These tend to be labor-intensive but do not require knowledge specific to the company or include highly sensitive data, meaning there isn’t an intrinsic reason they need to be done internally.
There a several questions organizations should ask themselves to assess the potential benefits and drawbacks of outsourcing AP, including these:
- Would developing a shared services/global business services organization be a better choice?
- Can automation offer the same or similar benefits as outsourcing AP processes to a purchase-to-pay provider?
- Is the company’s AP process already efficient?
- How uniform are the invoices?
- How sensitive is the information contained in the invoices?
Selecting an Outsourcing Partner
When selecting an outsourcing provider, organizations should start with the business case. Every adept provider will be able to present a clear ROI model that shows a return over current internal processes. This will generally take the form of cost-per-invoice or cost-per-payment, before and after. Other considerations are listed below:
- Adequate breadth and experience
- SLA review and negotiation
- Double-blind keying
- Technology integration and IT signoff
- Compliance and legal approval
Conclusion and Recommendations
Organizations considering outsourcing accounts payable should carefully consider the use cases presented in these pages. For very large companies or those whose invoices contain sensitive data, a shared services model likely makes more sense. However, for middle-market organizations or others experiencing rapid growth, outsourcing may be the right choice, at least for paper-invoice receipt, payments and supplier inquiries. Still, it rarely makes sense for organizations to outsource all of accounts payable.
by Jimmy Lefever of The Hackett Group
Available for download with permission.