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Ardent Partners ePayables 2014 - The Quest

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Looking to understand the state of accounts payable in 2014? Want to compare your AP performance against the Best-in-Class? …

Looking to understand the state of accounts payable in 2014? Want to compare your AP performance against the Best-in-Class?

This comprehensive market research from Ardent Partners is based on a survey of over 190 enterprises and provides in depth analysis on current trends, strategies and technology usage within the AP and P2P space.

The report outlines the tremendous opportunity that many organizations still have to reduce costs, enhance performance and generate greater value from these processes. For example, according to the research Best-in-Class enterprises process invoices within 3.7 days versus the average of 17 days!

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  • 1. Andrew Bartolini, Chief Research Officer Ardent Partners May, 2014 ePayables 2014: The Quest Underwritten, in part, by
  • 2. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 1 REPORT SPONSORSHIP This independent research effort was sponsored by several companies including the one named below. Sponsoring companies have had no measurable influence on the content and research in this report and Ardent Partners singularly determined the research approach taken and the report’s final content including its ideas, strategies, case studies, and recommendations. The contents of this research report are the exclusive property of Ardent Partners. Please direct any comments or questions regarding this report and/or our research sponsorship policy to Ardent Partners’ Chief Research Officer, Andrew Bartolini at abartolini@ardentpartners.com and 617.752.1620. Sponsor: Tradeshift brings all companies, big and small, together to transact, connect and collaborate with each other. For suppliers, we deliver free electronic invoicing, faster payments and predictable cash flow. For enterprises, we empower them to work more easily and productively with their supplier network, anywhere in the world. www.tradeshift.com Contact: Tradeshift 612 Howard Street, Suite 400
 San Francisco, CA 94105
 + 1.800.381.3585 marketing@tradeshift.com
  • 3. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 2 REPORT OVERVIEW This independent research report seeks to present a comprehensive, industry-wide view into what is happening in the world of accounts payable (AP) today by drawing on the experience, performance, and perspective of more than 190 AP, finance, and other professionals. The report is organized into the following chapters: Chapter One – The State of AP: This chapter looks at the continuing evolution of the role of the accounts payable function and its level of engagement and alignment within the enterprise today as well as the motivations and internal and external drivers that shape AP leaders’ priorities and plans this year and beyond. Chapter Two – The State of ePayables: This chapter offers an assessment of the extent to which accounts payable organizations are leveraging ePayables (AP automation) solutions to improve performance while also detailing the different areas within the enterprise that see and feel AP’s impact. Chapter Three – AP Performance: This chapter provides accounts payable performance and operational benchmark statistics and a profile of Best-in-Class performers and their distinguishing characteristics and strategies. Chapter Four – Strategies for Success: This chapter presents a series of recommended strategies and approaches for finance and accounts payable leaders and their departments who are seeking to improve their operations and their results.
  • 4. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 3 TABLE OF CONTENTS CHAPTER ONE – CURRENT VIEW OF ACCOUNTS PAYABLE..........................................................4 The Quest Begins ..........................................................................................................................................................4 The AP Organization....................................................................................................................................................8 Driving Value with a Connected P2P Process..................................................................................................10 CHAPTER TWO – THE STATE OF EPAYABLES ..............................................................................12 Ardent Partners’ ePayables Framework.............................................................................................................12 Scan, Capture, and Workflow Solutions.............................................................................................................14 eInvoicing Solutions .................................................................................................................................................15 Business Networks.....................................................................................................................................................17 Electronic Payments (ePayments)........................................................................................................................17 Supplier Discount Management ..........................................................................................................................18 CHAPTER THREE: ACCOUNTS PAYABLE PERFORMANCE...........................................................22 Performance Measurement....................................................................................................................................23 AP Metrics Matter.......................................................................................................................................................24 Best-in-Class Performance......................................................................................................................................25 CHAPTER FOUR: STRATEGIES FOR SUCCESS ..............................................................................31 General Recommendations....................................................................................................................................31 Conclusion....................................................................................................................................................................35 APPENDIX......................................................................................................................................36 ABOUT ARDENT PARTNERS....................................................................................................................................36 ABOUT THE AUTHOR................................................................................................................................................36 RESEARCH METHODOLOGY.........................................................................................................37 REPORT DEMOGRAPHICS........................................................................................................................................37
  • 5. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 4 AP's new dawn is here and with it comes a new role as a strategic component of financial operations. So, now what? The question for accounts payable (AP) leaders in 2014 is no longer if accounts payable automation (ePayables) solutions should be deployed, but rather, when they can be deployed and how quickly they can be mastered. For the AP departments drowning in paper, the ability to transform their operations has never been easier and the drive to go digital has never been more appealing or more rewarding. And, while more AP groups automate and transform themselves each year, many more still have only just begun their "quest" for improvement. This report presents a comprehensive, industry-wide view into what is happening in the world of procurement and captures the experience, performance, perspective, and intentions of 190+ AP, finance, and P2P professionals. The report also includes benchmarks, analysis, and recommendations that AP/finance/P2P leaders can use to better understand the "state of AP" today, gain insight into best practices, benchmark their performance against the Best-in-Class, and ultimately improve their operations and performance. CHAPTER ONE – CURRENT VIEW OF ACCOUNTS PAYABLE “More important than the quest for certainty is the quest for clarity.” - Francois Gautier The Quest Begins In the 2013 edition of this report1 For the AP units that have already considered traveling down the path of AP transformation, the question before them is not if AP should be automated but rather when a solution can be deployed and how quickly it can be mastered. The good news for those getting started this year is that while it takes time to prepare for your journey - understanding the current process, presenting a strong business case, defining requirements, selecting the right technology, and , Ardent Partners concluded that a new dawn was rising for the accounts payable (AP) function, where the contribution and value added to the enterprise begins to strike at a strategic level, instead of at a more traditional administrative or tactical one. This new day sees automation playing a critical role in enabling the AP function to dramatically enhance performance and improve the level of visibility and intelligence around invoices and payment. This new day also extends to a point where AP activities can consistently add value to other groups within the enterprise. In 2014, Ardent Partners finds that while select, forward-thinking AP organizations are far along in their quest for operational efficiency, process automation, and strategic importance, many are only now readying to take the first step and commence their journey. 1 ePayables 2013: AP’s New Dawn
  • 6. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 5 deploying it well - it has never been easier to automate part or all of the AP process. Broad improvements in functionality, usability, integration, cost, and general accessibility over the last five years in the ePayables market have combined to provide AP groups that are struggling with the inefficiency and irrelevance with a clear roadmap for improvement. In 2014, the quest to “go digital” has never been more appealing; it has also never been easier. And, the untapped opportunities that exist within many AP operations are causing more and more finance and business executives to look to AP to deliver more value. The potential impact on working capital and the opportunity to generate savings across the larger procure-to-pay (P2P) process stand as two catalysts to launch an AP initiative. Digitizing invoice data and processing invoices in an automated fashion also enables AP to capture valuable transactional, operational, and financial data, without which in-depth reporting, analytics and overall business intelligence around AP would not be readily available. AP's Top Priorities and Challenges Ardent Partners research shows (see Figure 1) that cost reduction remains by far the top priority for AP organizations. This is a warranted priority, as Ardent's research in this report shows that the average cost to process an invoice is approximately $14.21 (see Chapter 3). This figure represents a "fully-loaded" cost of processing an invoice, including costs related to AP staff time, managerial overhead, facilities, and IT support. Automation, as covered later in the report, contributes to processing costs that can be 60-80% less than manual- and paper-based methods. Other top priorities include improving AP reporting and analytics (37%) and visibility into invoice and payment data (31%). These are two important areas if it is to become more strategic within the enterprise. Reporting and analytical capabilities can enable AP to capture intelligence around invoices and payments and help to monitor key performance metrics. Figure 1: Top Priorities for AP in 2014 Accounts payable is a function that is often taken for granted; this mindset contributes to the fact that many AP operations typically underperform in relation to core enterprise expectations. 23% 25% 27% 31% 37% 63% Generate discounts on spend Better link P2P processes and systems Improve collaboration/communication with procurement Improve visibility into invoice and payment data Improve reporting and analytics around AP Reduce processing costs © Ardent Partners - 2014
  • 7. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 6 Leading AP operations have been able to transform their organization in such a way that they are able to provide value to, collaborate with, and support primary stakeholders (including procurement, finance/treasury and key suppliers). The research in this study indicates that AP's priorities are focused on cost reduction and access to data that lies within the AP process. In regards to core AP challenges (see Figure 2), Ardent’s research shows that AP organizations struggle with the speed in which information that enables invoices to be matched to purchase orders (POs) or goods received notes (44%) travels across the enterprise. This one challenge highlights multiple other issues that arise when a procure-to-pay process is both a disconnected and largely manual one. A delay in matching an invoice to its relevant documents translates into a longer invoice-processing time. In an automated environment, invoices can be matched automatically to line items within POs, goods receipt notes and in some cases, with contracts (i.e., a four-way match). If the documents are not available in the automated system, alerts can be triggered to the appropriate people. The other top challenge (as reported by 43% of respondents) concerns obtaining approvals in a timely manner. If invoices are being emailed internally, or worse, printed and physically distributed for approval, the potential for disruption and delay to the process is enormous. Manual approvals are critically dependent on each individual’s attention, interest, and responsiveness. On the other hand, if approvals were obtained using an automated workflow solution, all scenarios can be managed by putting in place relevant business rules. For example, if one approver fails to approve an invoice within a certain timeframe, it is moved to the next appropriate approver. These types of systems use rules and visibility to encourage approves to act promptly. Most solutions now also provide the ability for users to review and approve invoices via their mobile devices. Figure 2: Top Challenges for AP in 2014 The high percentage of exceptions that AP groups deal with is yet another major challenge. If an AP group is dealing with exceptions, by default that means that they have some automation in place that allows invoices to be matched to POs and/or receipts. However, it also means that their processes need to be more standardized (e.g., information required by suppliers on their invoices) and their business rules need to be more refined. 21% 23% 24% 27% 40% 43% 44% Late supplier payments Processingof an invoice takes too long Getting the budget to invest in automation Lack of visibilityinto invoice and payment data High percentage of exceptions Invoice/payment approvals take too long Delay in receiving (or lack of) matching information © Ardent Partners - 2014
  • 8. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 7 Figure 3: Invoice Formats © Ardent Partners - 2014 70% 30% Manual Electronic Sometimes, the challenges are with a subset of invoices or suppliers as the director of a large US- headquartered bank who was interviewed for this study noted, “We do have a significant amount of spend under sourcing influence and have a lot of contracts in place. We have a tight concentration of our total spend with the top 400 suppliers, however, the tail is very long and that’s where the inefficiencies are within our invoicing process.” That Persistent Paper Problem The biggest roadblocks to lower processing costs and enhanced AP performance are paper-based invoices and manual processing. This includes invoices received via mail, fax, PDF, and as an email attachment, all of which make up 70% of the invoices received by the average enterprise today (see Figure 3). AP organizations may be receiving invoices in these formats but many have invested in scanning/imaging and data capture solutions or services to mitigate a flood of paper processing. This alleviates the need for manual data entry because the data is automatically extracted from an image of the invoice. Ardent’s definition of an electronic invoice is one that originates digitally and remains that way without the use of any scanning or data capture support. The average AP organization today receives approximately 30% of its invoices in this manner, which can include eInvoices, EDI or XML, PO-flips or invoices created using web-forms. This research effort was also able to capture organizational goals around eInvoicing over the next two to three years within the enterprise. There is interest in moving to eInvoicing, with 26% seeking to begin an initiative over the next few years while another 36% of AP departments have set target to increased their level of eInvoicing activity. As the Global Payments Director at a large global consumer products company said, “For 2014, one of the biggest initiatives is still our paperless invoicing program, as we have 16 countries live and intend to go after about two million invoices to be converted to paperless in these countries. We are providing suppliers a menu of options including paper, PDF via email, business networks (ours or another one), and there are no mandates. Additionally, there are another 30 countries that represent another one million invoices that we also plan on bringing into the paperless program over the next three years.”
  • 9. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 8 Figure 4: The AP Organization ©Ardent Partners - 2014 52% 28% 13% 7% Centralized Shared Services Center Decentralized Partially/Fully outsourced A/P function The AP Organization In terms of organizational structure, accounts payable groups in 2014 are largely centralized (see Figure 4), either as a centralized AP group (52%) or operating within a shared services center (28%). Centralization of this function typically generates numerous benefits including shorter process cycle times caused by the elimination of fragmented processes and systems and the ability to take a more holistic view of AP. A centralized structure with standardized and automated processes is the foundation upon which the next level of efficiency and visibility within AP is realized. Providing timely and accurate visibility into payables data is a capability that adds tremendous value to the organization and should be a goal for every AP department. Shared services organizations within global enterprises are certainly on the rise and increasingly, AP groups are being rolled into these organizations. Share services centers are able to focus on improving specific business processes, frequently through the use of technology. A great example is the procure-to-pay process, which has traditionally been disconnected from both a process and systems standpoint. In an effort to capture the value within P2P, more and more shared services organizations are introducing specific P2P job functions/teams that are responsible for the end-to- end process – a P2P process owner (more on this on page 10). According a Senior AP Manager at a large global manufacturer who was interviewed for this report, “AP falls within the shared services environment and we are tied to procurement. We work heavily with procurement but unfortunately have four different procurement organizations, which makes it difficult to keep all policies and processes aligned. We are 100% PO-based, so that is a great benefit.” Organizational Capabilities In terms of organizational capabilities, Figure 5 below shares some interesting insights regarding current and future competencies. For example, most AP organizations have matching capabilities (71%), which includes both manual and automated methods and 63% of AP groups follow a standardized process. Both are positive steps but, when utilized independent of other tools and capabilities, have limitations as to the level of performance improvement. Establishing and monitoring key metrics is important to any function, and nearly 47% of AP groups have these capabilities enabled with another 45% planning to implement them. Overall, it seems that many AP groups currently lack capabilities that would enable them to pursue a more strategic course, such as straight-through processing, P2P linkage and discount capture. Not surprisingly, these are some of the very capabilities that respondents show interest in
  • 10. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 9 obtaining in the future. At the top end, 58% report plans to implement a self-service supplier portal, which present a number of benefits to both buyers and suppliers, such as reducing inbound supplier inquiries, faster dispute resolution, up-to-date invoice and payment status, etc. Figure 5: AP's Organizational Capabilities Fifty-four percent (54%) have plans to improve the linkage across the P2P process, which is a theme that comes up with increasing frequency in conversations with finance and procurement executives. The value of a tightly-linked P2P process can be seen not only from a time and cost perspective, but also from a visibility standpoint. Having access to all the information across the P2P process is of tremendous value to AP, procurement and treasury. One of the key metrics in the AP world is (and should be) the percentage of invoices that are processed straight-through, also called “touchless processing”. Touchless processing is one of the benefits of automation with invoice data automatically validated, matched, and posted for payment (assuming all relevant conditions are met). This is a capability that 50% of respondents want to implement within their organizations. According to the Senior Finance Manager at a Multi-billion Retailer, “We had metrics in place before we became 100% electronic and it was a huge help to always know the level of manual versus electronic invoices. Knowing the match rate or touchless processing is important to improving efficiency and effectiveness.” 25% 29% 30% 30% 31% 39% 47% 50% 63% 71% 54% 51% 47% 50% 35% 40% 45% 43% 33% 20% Linkage throughout procure-to-pay process Straight-throughinvoice processing Efficientlycapture early payment discounts Tools/programs to optimize working capital Match invoices to contracts or payment plans Provide suppliers rich-remittanceinformation Measure key AP metrics Automaticallyroute invoices for approval Standardized AP processes Two or three-way matching capabilities Currently Exists Plan to Implement© Ardent Partners - 2014
  • 11. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 10 Changes Expected Within AP While much of this research presents a current state of AP, it is also useful to understand how organizations are evolving over the next two to three years. As such, Figure 6 shows some of the likely changes that AP groups expect to experience within their own organizations over the next couple of years. The top three most likely changes noted are that (1) paper invoices will by significantly reduced (2) the AP process will be largely automated and (3) AP will take on more strategic activities. Not surprisingly, these three are quite closely linked together; if an AP group remains largely manual and paper-based, it will remain very limited in its ability to add real strategic value to its enterprise’s financial operations. A fair amount of respondents also believe that AP's skills will need to evolve and improve, including have the development of more technology-based skills such as reporting and data analysis. Figure 6: Expected Changes, Next 2-3 Years Driving Value with a Connected P2P Process While the AP process is critical to understanding and assessing financial liabilities, validating purchases, ensuring on-time payments, and much more, it is part of a larger process – the P2P process to be exact. P2P encompasses the process that a company utilizes to order goods and services, ensure that they are delivered at the right time, location, and price and ultimately pay for them properly. While this process is often disconnected offering little interaction or collaboration between AP and procurement, leading AP managers know that while their quest for improvement may start within AP, the "promised land" of operational excellence must include procurement and the full P2P process. AP and procurement organizations today both understand the importance of having full visibility into the P2P process and being able to optimize it in order to realize superior performance on 22% 22% 31% 38% 37% 44% 35% 44% 38% 42% 46% 36% Involvement in working capital optimization Skill set required within AP will change Stronger AP & Procurement partnership Less manual tasks, more strategic activities AP process will be largely automated Paper invoices will significantly decline Very Likely Somewhat Likely © Ardent Partners - 2014
  • 12. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 11 multiple fronts. One broader indication of a broader P2P movement is that many organizations, particularly those with a shared services center are creating specific P2P job functions and teams that are responsible for managing the end-to-end process. These positions are quite often centered around process improvement across the entire enterprise and almost always require a strong analytical and technology/systems background. A major responsibility for these roles and teams is ensuring standardization, efficiency, connectivity and optimization of the entire P2P process and creating value across this process. Additional strategic requirements can include collaboration with departments (e.g., procurement, treasury). P2P initiatives frequently start within one of three departments (procurement, AP or finance/treasury) but benefit when it is a collaborative effort between all. In many cases, the goal of introducing the new role is to facilitate better collaboration between the three groups. The P2P process owner is ideally responsible for managing process change (most likely via a technology platform), which is why it is important that they have the authority to make decisions and implement them. A project leader and team that is not biased towards a particular function is ideal and enables decisions to be made for the greater good of the enterprise. One of the most consistent problems organizations face in the P2P process is savings "leakage" which occurs when the savings generated through sourcing and supplier negotiation activities are lost due to non-compliance to contracts. In order to prevent this, the P2P process should be integrated from a process and systems standpoint and there must be some level of collaboration between the AP and procurement teams. A prime example of why the groups need to be well- connected came from a European-based AP Manager who said, “We had a global corporate mandate to move to 100% Purchase Orders allowing for automation of approvals [often referred to as No PO, No Pay], however, the supplier portal did not meet expectations due to lack of adoption by procurement and its suppliers.” Overall, Ardent's research has found that P2P operations that are streamlined and well-connected can drive significant benefits from process efficiencies, process improvements and specific cash management strategies tied to the timing and execution of supplier payments. The potential value that exists within a well-connected P2P process signals that technology deployments in this area are likely to take either a suite or "tightly-integrated" approach where technology is used to join and harmonize the groups and processes.
  • 13. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 12 CHAPTER TWO – THE STATE OF EPAYABLES "If AP is going to improve, we have to continue to invest in tools. This is not the AP of the old day; there is a lot of technology that can make people more effective and this requires more technically-savvy people. AP has to build analytical strength as opposed to just processing [invoices].”- Director of P2P at a Global Chemicals Co. The role that technology will play in the future of the accounts payable function is unquestionable: technology and process automation are here to stay. The majority of AP operations will eventually rely heavily on automated solutions to perform their duties. And, they will focus on analytical insights and gathering intelligence around invoices and payment as opposed to data entry, scanning, and responding to inquiries. In order to help AP operations visualize and evaluate their processes and identify improvement opportunities, Ardent Partners developed the ePayables Framework (see Figure 7). Ardent Partners’ ePayables Framework Ardent Partners defines "ePayables" as the solutions and services that automate all or part of the accounts payable process. Ardent Partners developed the ePayables Framework (Figure 8) to help AP departments evaluate their various processes by dividing invoice processing into smaller, more manageable segments. By doing so, AP departments can establish a clear view into the current state of their operations — “what is happening today”— and then take the opportunity to clearly define new AP processes for a superior future state — “what should happen tomorrow”. By developing a clear view into the scope of activities that occurs within each phase, what resources and systems are utilized, and what processes are followed, AP departments will be better able to set standard practices and work to develop best practices. Figure 7: Ardent Partners’ ePayables Framework ©Ardent Partners - 2014
  • 14. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 13 Ardent's framework organizes the AP process into three major phases: 1. Receive – How the enterprise receives invoices. 2. Process – How the enterprise validates and approves the invoices. 3. Pay – How the enterprise schedules and makes payments. The first two phases of the AP process (“Receive” and “Process”) include the methods and platforms that suppliers use to submit invoices and the tools and processes that the AP ( or buying) organization use to receive, validate, match, approve, and process the invoice information before scheduling the payment. Of course, there are many other steps across these two phases that can differ from one enterprise to the next, often depending on the maturity level of the operation and the degree of automation in place. If suppliers are sending paper invoices and the department's "receive" process is largely manual, the time to process an invoice will take considerable time due to the need for a staffer to either manually enter invoice information into a system and begin matching and validation or reviewing it and logging it before sending it across the company for approvals by stakeholders and other AP staff. On the other hand, if the AP group has an automated solution in place (e.g., eInvoicing), the supplier would be submitting invoices digitally. This allows for AP to use pre-configured business rules to automatically validate and match the invoice against other back-end system data (e.g., against purchase orders, goods received notes, and/or contracts) and process the invoice straight- through or automatically route it through an approval workflow system. In the event a supplier continues to send paper or PDF invoices, an AP group that has a scan and capture solution can convert these invoices into a digital format. Using the scanned image of an invoice, a data capture solution uses OCR (optical character recognition) and self-learning algorithms to conduct document classification, separation, and data extraction. This process converts data into a digital format, which can then be processed more effectively and used to gain more intelligence around AP activities. The following shows current and planned usage of various types of solutions that enable the automation of AP.
  • 15. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 14 Figure 8: Scan, Capture and Workflow ©Ardent Partners - 2014 29% 36% 20% Automated data capture and extraction Automatedrouting and approval workflow Document imaging/scanning Currently Use Plan to use in Next 12- 24 Months Scan, Capture, and Workflow Solutions The role of scan, capture, and workflow solutions/services in an AP environment is to take paper-based invoices and supporting documents and transform the data that lies within them into a usable electronic format that can then be processed in a more automated and efficient manner. The three solutions in Figure 9 are often used in combination as these technologies are generally complementary to each other. When used in concert, the solutions combine to add greater value to the AP process. It should be noted that data capture and workflow solutions will often exist or be packaged as a single offering. Document imaging is simply the scanning of an invoice to produce an image. Oftentimes, businesses will already have equipment to perform scanning in-house and use either high-speed, large-scale equipment or desktop scanners. According to Ardent research, imaging is widely-used today (68%). However, simply producing an image of an invoice for archiving does not add much value to invoice processing process because the information within the invoice still has to be manually entered into a system. Data capture solutions (or OCR solutions) improve upon simple imaging by automatically extracting the key data from the invoice and placing it into a system so that it can be more efficiently processed. Currently, 40% of enterprises report usage of data capture solutions, with an additional 29% planning to implement this technology over the next couple of years. One of the challenges with the scan and capture methodology is that the capture rates tend to be below 100%, therefore, AP staff does need to review the instances when data is not captured accurately or when errors in capture occur. In addition to the above, automated routing and approval workflow is a key element for most leading AP organizations. The ability to route invoices electronically for approval is critical for improving efficiency within the AP process. Routing and approval workflow solutions allow organizations to establish business rules to manage the approval process. PO-based invoices that match all of the pre-configured business rules can be processed “straight-through” without any human intervention and scheduled for payment (note: straight-through processing is a highly- desired capability, according to Figure 6 on page 8). If there are exceptions that need to be managed, they are routed to the appropriate users for resolution. Almost half the respondents to this study currently utilize automated routing and approval workflow solutions, with strong future demand reported by 36%.
  • 16. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 15 Figure 9: eInvoicing & Business Networks © Ardent Partners - 2014 57% 41% 55% 13% 19% 29% Supplier portal Business Network (including Payment Networks) eInvoicing solution Currently Use Plan to use in Next 12- 24 Months eInvoicing Solutions For many AP organizations, eInvoicing is an end goal and more enterprises are planning to adopt these solutions than at any time over the last five years (see Figure 9). Receiving and processing invoices electronically and being connected to suppliers (via a network) are ongoing objectives for many and it is not hard to see why. When successfully deployed, eInvoicing alleviates most manual inefficiencies, costly process work and a lack of visibility that is rampant among many AP operations. The solutions shown in Figure 9, eInvoicing, business networks and supplier portals can be used in unison and frequently are. It makes little sense to persuade suppliers to submit eInvoices without providing access to a portal or network dashboard where they can view invoice status and communicate with the AP person to quickly clarify issues and resolve disputes. A business network provides the backbone or infrastructure to the business process and enables many-to-many connectivity. A supplier portal is the web-based solution that allows suppliers to link to their partners (directly or via a network). These three solutions are quite different, but each is effective in connecting trading partners electronically and allowing them to share information and collaborate. While current usage of the three solutions shown in Figure 9 above is consistent with usage in earlier years, there is significantly larger projected demand for all three solutions when compared to 2013. This is particularly true of eInvoicing, which 55% state they plan to implement over the next few years and supplier portals, with 57% planed for future implementation. eInvoicing Benefits to Suppliers eInvoicing solutions, when deployed correctly and adopted well by a buying organization and the majority of its suppliers, offer tremendous value. One of the keys to successful eInvoicing lies in the level of value delivered to the supplier (in addition to the buyer) because this will directly impact the percentage of suppliers that submit eInvoices as opposed to paper or PDF invoices. Suppliers that agree to participate in a customer's eInvoicing initiative go through an enablement process that allows them to access the system and begin managing customer transactions (like the creation and submission of invoices) and customer communications (like managing exceptions). Once enabled, suppliers can see a host of benefits from eInvoicing, including:
  • 17. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 16 • Reduced costs – Being able to electronically submit invoices to customers can deliver significant savings, such as a reduction in printing and mailing costs, savings from not having to print invoices, fewer inquiry calls, etc. • Fewer errors and disputes – Suppliers can flip POs into invoices, create non-PO invoices using web forms or in some cases (with the right integration) submit invoices straight- through from their AR systems. All in all, eInvoicing eliminates the buyer’s need to manually create an invoice, reducing the potential for errors. As a result, invoices are less likely to be rejected and customers can start processing them without delay. In the event a dispute does occur, it can easily and quickly be resolved online as opposed to over the phone. • On-time payments – eInvoicing can significantly speed invoice processing and approval cycles on the buyer side, which presents greater opportunities for improved payment performance. When combined with an ePayments solution, suppliers can also gain visibility into the timing of their customers' payments. • Improved ability to forecast - Having access to real-time data around submitted invoices, invoice status, payments, and more adds a level of predictability and visibility to a supplier’s AR process, and as a result, they are better able to forecast cash flow. This also depends on how many customers are being invoiced via the same platform. • Accelerated payment - If suppliers are able to receive payments earlier via a simple and effective tool that does not require heavy investment of time and resources, significant value is created. Submitting eInvoices will certainly impact the buyer’s processing time, as they are more likely to approve an invoice in time to accept or offer an early payment discount. Additionally, if a dynamic discounting program or supply chain finance program is available, the faster an invoice is approved, the greater number of options are available, increasing the likelihood of improved results for both trading partners. eInvoicing Barriers for Suppliers eInvoicing is not without its challenges as there are some barriers that suppliers can encounter depending on their size, industry, and volume of business with particular buying organizations. • Different standards and formats – It is not uncommon for a supplier to utilize multiple portals or networks to connect to their customers. This can present cost, resource, and expertise challenges, as quite often the formats and standards of different customer platforms are different across a global customer base. Numerous systems can add layers of complexity and cost to the supplier’s accounts receivable processes and may also require the involvement of IT. • Integration challenges – Since the ePayables solutions are designed for the buy-side, integration with some supplier systems can be a challenge.
  • 18. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 17 Figure 10: Payment Formats ©Ardent Partners - 2014 44% 56% Manual Electronic • Cost – The cost to participate on a customer's eInvoicing platform or network can include the resources required for enablement, training, and the ongoing management of the system. It can also include direct costs in the form of access or transaction fees. Due to the differing pricing models, those that transact with customers through multiple platforms have the added burden of managing different pricing structures. Business Networks Traditionally, supplier enablement and participation has been the biggest hurdle to advancing B2B connectivity. As a result, many enterprises find themselves connected to a relatively small percentage of their suppliers. This age-old challenge has given rise to the business networks that are centered on connecting businesses to each other and enabling easier and more efficient communication and interaction across entire supply chains. Ardent defines a "business network" (including supplier or payment networks) as a web-based platform that enables interconnected buyers and sellers to trade, communicate, and collaborate with each other. This market is in its early stages so, as networks continue to grow, and as more business processes and activities flow through them, this definition will surely evolve. The success of cloud-based technology and the desire for enterprises to transact, communicate and collaborate digitally (rather than manually) have contributed to the growth of these networks and more P2P leaders' interest in using them (see Figure 9 above). And since enterprises of all sizes will continue to develop more complex webs of interdependent supplier and partner relationships (to ensure greater competiveness and results, better product development and customer satisfaction and faster and more concrete innovation), Ardent expects the business network marketplace and those in it to continue to grow. Electronic Payments (ePayments) For the last decade, the analysts at Ardent Partners have been researching and benchmarking technologies, processes, and performance within accounts payable including electronic or B2B payments. In this time, use of electronic payments (including ACH, wire, card, and networks) has remained consistently ahead the use of electronic invoices on an overall percentage basis. In 2014, use of electronic payments continues to advance slowly but steadily, now comprising 44% of all payments (see Figure 10). The payments market is an area that has seen significant innovation in the last few years and is one that should continue to see significant change. Ardent's research has indicated strong interest in converting more paper
  • 19. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 18 Figure 11: Discount Management Solutions ©Ardent Partners - 2014 22% 30% 11% 13% Supply chain finance solution Dynamic discounting solution Currently Use Plan to use in Next 12- 24 Months checks to ePayments even if the actual numbers have not shifted significantly. AP is increasingly under pressure to become a more strategic component of the enterprise’s financial operations. To gain in prominence, it must be better positioned to impact and support working capital optimization strategies which it can do by attaining the visibility needed to better understand and share expected liabilities with treasury or finance leaders so supplier/B2B payment strategies can that align with treasury's needs can be developed. When it comes to B2B payments, if an AP group is looking to be more strategic and add more value as a business function, the migration away from checks towards electronic forms of payment is a necessity. Supplier Discount Management Capturing more early payment discounts has been on the minds of many organizations lately and Ardent believes that recent innovations in this area of the ePayables market are driving this increased interest. First, it is important to note that early payment discounts or accelerated payments serve a specific purpose for the buyer and the supplier. For the buyer, the main objective is to lower the cost of goods and/or to earn a return on available cash. For the supplier, it is to access low-cost credit when it is needed (which is not necessarily all the time). One method of capturing discounts is by using a dynamic discounting solution. Dynamic discounting is the name for both the process and the technology platforms that allow buyers and sellers to dynamically alter the standard terms of payment. Dynamic discounting solutions allow AP departments to set rules to make discount offers based on certain requirements or allow suppliers to negotiate a discount based upon payment timing. The more mature solutions in the space allow AP/finance teams to change their offers in a "dynamic" or real-time manner allowing them to incorporate their often fast-changing cash positions and needs into their analysis and offers. While dynamic discounting solutions are typically sold to buying organizations, the returns on investment in these solutions will be directly linked to their internal usage and the level of supplier participation. Although current usage of dynamic discounting is on the lower side (see Figure 11), there is strong interest in the coming years (30%). Additionally, the increase in ePayables solutions that promote visibility and faster processing will enable more buyers and suppliers to manage these opportunities more programmatically and develop nuanced strategies to drive greater discount volumes and overall value.
  • 20. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 19 Supply chain finance (SCF) is another method of capturing early payment discounts, except in this case, third-party funds are used to allow a supplier to sell an invoice to a bank or other financial institution at a discount as soon as they are approved by the buyer. This allows the buyer to pay later and the supplier to secure its money earlier. Instead of relying on the creditworthiness of the supplier, the financial institution relies on payment from the buyer, often a less risky entity than the supplier. SCF is an innovative way for enterprises to help their supply chains access credit and improve cash-flow at a lower cost than might be otherwise available in the credit market. SCF becomes an increasingly important source of credit to suppliers when banks tighten lending standards due to increased pressure from regulators or changes in underwriting/lending standards over the arc of a business cycle. Supply Chain Finance in 2014 Supply Chain Finance (SCF) has been around in one form or another for quite some time, but it has only been in the last few years that this market has shown sustainable. While banks have been the traditional investors in this area, new sources are rapidly emerging to chase the relatively high yields available to lenders. Additionally, there has been a rise in more sophisticated offerings from technology providers, many of whom now partner directly with the third-party funders. Ardent Partners research has shown that benefits do accrue to both buyers and suppliers. Benefits to the Buyer • Improved cash flow (DPO) due to extended payment terms • Optimization of working capital and improved liquidity management • Potential early payment discounts resulting in reduced COGS • Reduced risk with more a financially stable and reliable supply chain • Streamlined and automated payments, reconciliation and forecasting Benefits to the Suppliers • Accelerated receipt of payments and improved forecasting ability • Improved cash flow and reduced working capital requirement • Better financing rates and terms • Automated payment process • Reduction of client credit risk Of course some challenges also remain including (1) Poor or costly supplier on-boarding (2) “Know Your Customer” regulations that require banks to investigate new customers, potentially inhibiting them from participating due to the cost and effort of compliance (3) Suppliers may not want to be dependent on their buyer’s balance sheet and (4) The possibility that extended payment terms (within an SCF initiative) has an adverse impact on suppliers that are not participating.
  • 21. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 20 Finding the Right Solution When it comes to selecting the right solution, there are certain interests, factors, and requirements that are going to be more specific to one enterprise versus another. Nonetheless, commonalities also exist and should be evaluated. The most important factors in selecting an AP automation solution are discussed below: • Solution Price – As with any technology investment, price is one of the main decision criteria in selecting the best solution. Frequently an initial project budget will serve as the primary means to identify a shortlist of providers. ePayables solutions may have license or subscription fees as well as access and transaction fees. Ardent recommends that AP groups use a total cost of ownership approach in making their selection • Delivery Method - The budget may impact whether the enterprise prefers a solution that is installed on-premise (usually charges a one-time license fee) versus one that is cloud-based. Additionally, the IT department may have certain hard requirements that will impact the solution selection criteria; therefore, it is important to involve them from the beginning. Some key differentiators between the two methods: o Installed On-Premise – In this model, software is usually installed on the servers at the user's site. Doing so typically involves heavier involvement from the user’s IT department and/or a third-party systems integrators. There is typically a larger one- time upfront license fee with installed software which allows for the perpetual usage of the solution. Maintenance fees are usually charged and there may be ongoing transaction-based fees. With installed software, implementation periods can be longer due to the need to develop the entire site/instance infrastructure including hardware configuration and possibly a higher level of software customization. o Cloud-Based - Software delivered in the cloud (also referred to as “on-demand” or SaaS) is typically hosted, managed, and maintained (on the application and hardware infrastructure sides) by the cloud solution provider. They generally follow either a subscription-based fee structure, a usage-based model or some combination of the two. • Integration – With AP solutions, integration to internal ERP systems is critical due to the transactional and financial nature of the activities. Invoices must be appropriately coded to the correct GL account, validated against vendor master data and matched to POs, goods received notes and/or contracts. All of this requires seamless integration of the solutions in as short a timeframe as possible due to the impact on the investment. In general, custom- installed solutions take a longer time to implement than cloud-based solutions. It may be helpful to note that certain solution providers have pre-built integrations to certain ERP systems, which allows for a much quicker and easier integration process.
  • 22. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 21 • Reporting and Analytics – The ability to quickly and easily gain visibility into key AP metrics and perform analysis on invoice and payment data makes AP very valuable. Therefore, the solution that is chosen should have advanced reporting capabilities, including a dashboard with dynamic charts and the ability to drill-down into line-item detail. Reporting should also include operational or productivity metrics, which allow AP to identify bottlenecks in processing and keep the group aware of its performance. When working towards certain goals (e.g., reductions in invoice cycle time, increases in eInvoices received or touchless processing) advanced reporting can be a great motivator and enabler. • Automation of the entire AP process – Processes must be aligned and well-defined to maximize the return on technology investments. Ardent’s research shows that enterprises are increasingly looking for solutions that automate the entire AP process, from invoice receipt and processing to payment management and settlement. From a reporting perspective, having an aggregated view of invoices and payments can provide intelligence that is useful to treasury in its cash management objectives and to procurement in its quest to optimize supplier relationships and P2P processes. Whether budgets and stakeholder allow for an end-to-end transformation, projects begun in 2014 and beyond should contemplate an eventual future state with full AP automation and make initial decisions with the end-game in mind. Additionally, Ardent believes there are additional areas that should be evaluated when selecting a solution. The following are likely to have significant impact on the adoption of the solution by internal users (e.g., AP, line-of-business users, executives, etc.) as well as suppliers. According to one Shared Services Director at a Global Manufacturer, “The ease-of-use for those approving invoices via our workflow and the general user-friendliness of the tool really helped in encouraging users to participate.” • Usability – As with any technology solution, the easier to use and more intuitive the user interface is, the more the tool will be used and the impactful it can be. The level of usability is also likely to have an impact on the amount of training that will be needed which impacts the solution's return on investment. • Mobile capabilities – Mobile devices today are incredibly popular in the business world and their usage has drastically increased over the last few years. The ability to access solutions via a mobile device can improve invoice-processing times and overall efficiency by providing immediate access to remote or field staff and frequent travelers.
  • 23. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 22 CHAPTER THREE: ACCOUNTS PAYABLE PERFORMANCE This chapter is designed to enable the reader to do the following: 1. Benchmark their AP performance to industry averages and understand how they are performing relative to the average AP department in the marketplace. 2. Understand which metrics AP leaders should use to measure their department’s performance. 3. Understand the operational and performance metrics that define Best-in-Class performance levels for AP departments. 4. Understand the people, process, and technology levers that Best-in-Class procurement departments use to outperform the market. In today’s competitive business environment, having access to accurate and real-time metrics can be a necessity. Establishing and measuring relevant metrics allows an organization to understand "where it is" today so that it can chart the most practical, impactful, and strategic course for its quest to the future. Simply, if a group is unclear on where it stands today, it cannot begin to make lasting enhancements that improve tomorrow's performance. Tracking metrics enables continuous improvement programs to take hold and provides organizations with a better opportunity to set proper goals and objectives and "course correct" when achieving them is in doubt. AP, finance, and P2P groups can use the metrics presented in Table 1 (next page) to understand the performance of the average AP operation in the market today and benchmark their performance against these measures. Doing so will help establish a good understanding of relative performance and maturity. According to Ardent’s research (see Table 1, next page), the average enterprise has a significant opportunity to improve the performance and overall value of their AP group. With an average cost to process an invoice of $14.21, significant opportunities remain for AP departments of all shapes and sizes to drive efficiencies and streamline their processes. The cost presented here is a "fully- loaded" cost, which typically includes staff payroll (including benefits), operating expenses, amortization/depreciation on investments, overhead, and third-party fees like temp labor and document storage. One reason the average cost to process an invoice remains fairly high is an exception rate above 13%. With more than one exception for every eight invoices received, AP departments are spending significant time and resources resolving them. In a manual AP environment, teams are constrained in their ability to properly perform root-cause analysis of exceptions. As a result, they spend time more time repeatedly resolving exceptions from the same sources instead of eliminating them. Exception rates are important to track given their impact on processing costs and timing, so the combined 24.3% of AP departments that do not (12.6%) or cannot (11.7%) track this number would be wise to reprioritize their focus and resources.
  • 24. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 23 The average time it takes for an AP operation to process an invoice from the time of receipt to payment scheduling now sits at 12.4 days. The time to process an invoice is of particular importance in impacting cash management decisions because if the time to process an invoice takes longer than the window available to earn a payment discount, an opportunity to save money is lost. With only 9.9% of an enterprise's suppliers participating in a discount program, today however, the lost opportunities are not as great as they soon will be. Finally, the percentage of suppliers participating in eInvoicing is approaching 15% in the total market, still far from the an industry 'tipping point.' For many on the quest for AP transformation, eInvoicing has been viewed as the holy grail; and while many AP departments have driven efficiencies and value by using other solutions and strategies, the ability to process invoices straight-through (as happens with 27% of invoices today) is a real game-changer. Table 1: The AP Benchmarks - Market Averages Metrics Average Cost per Invoice $14.21 Invoices Processed per FTE (per month) 2,308 Invoice Processing Cycle Time 12.4 days Invoice Exception Rate 13.1% Straight-through Processing 27.0% % of Suppliers Submitting eInvoices 14.8% % of Supplier Participating in Discounting Program 9.9% © Ardent Partners – 2014 Nearly a decade ago, Ardent's analysts coined the term "20/20" when it came to invoice- processing as the average time to process an invoice was roughly 20 days and the average cost to process an invoice was approximately $20. In those days, the concept of "touchless processing" was just beginning to emerge. Now, it is widely recognized as a desired end-state. As an industry, clear advances have been made, but the journey forward must continue. Performance Measurement While more AP departments are succeeding in their quest for relevance, value, and impact, performance measurement is one area that continues to present steep challenges for many AP teams. In this year's survey, the selections "Don't Measure (this is not a priority for my organization)" and "Can't Measure (interested in the metric, but lack visibility)" were added to the benchmark questions and the results were astounding. Across the key metrics captured in this study, up to 22.8% of all AP departments lack the ability to track key performance metrics. For an industry that has struggled for years to gain executive awareness, engagement, and investment, this comes as no surprise. However, the fact that up to 16.1% of all AP departments have chosen
  • 25. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 24 not to measure and thus, not understand how they are performing in key areas is both surprising and unfortunate. In recent years, many AP groups have taken positive strides forward; many have even gained significant momentum. But, this metrics or knowledge gap indicates that the transformation driven by many AP, P2P, and finance professionals as it relates to invoice processing may not be nearly as broad-based as once thought. These gaps are caused by, among other things, a failure borne of limited systems and poor processes, but above all else, it is a failure of leadership that allows a situation like this. Attempting to improve operations without understanding the current state baseline (caused by an inability to capture key operational and performance metrics) is like starting a trip to an unknown destination when you are already lost – if you do not know where you are going, any road will take you there. Enterprise functions must be smarter than that. As such, any AP groups struggling in this area should pay special notice to the AP "metrics that matter" below – use them as a "GPS" guide to Best-in-Class performance. AP Metrics Matter To get better results, it is important that AP groups measure the right things. Ardent Partners developed a list of AP Department "Metrics that Matter" in Table 2 (next page) for AP and finance leaders to use as a means to establish a performance and business impact baseline and then improve upon them. The list is not intended as an all-inclusive list of metrics, but rather a starting point for organizations who have not yet emphasized capturing and reporting metrics. The four drivers bulleted below can and should have associated metrics that enable organizations to monitor activities and measure and/or improve performance of the overall P2P process. • Efficiency – From a cost, productivity, resource allocation and time perspective. • Connectivity- To suppliers but also other internal organizations (e.g., finance, treasury). • Cash management- Optimal use of enterprise working capital. • Compliance – To policies, negotiated contracts, terms, etc. There is one additional driver that is also important to optimizing this process: visibility. Visibility into real-time, accurate data across the P2P process is invaluable to all stakeholders. Visibility is created through the establishment of metrics, reporting and analytical tools, dashboards and access to data. Some organizations may place more importance on one of the above drivers and that will determine the metrics they utilize to monitor, track and continuously improve performance. It is important to note that when establishing metrics, each one should have a definition or purpose, an achievable target, and clear ownership by and involvement from AP, finance, treasury, procurement, suppliers, and business users.
  • 26. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 25 But be forewarned, too many metrics can muddle performance measurement. Therefore, it is crucial to use the ones that are best-aligned to business goals and objectives. Metrics can be developed and deployed in phases. For example, in phase one of a transformation, it may be more important to focus on efficiency and reducing costs while phase two can focus on improving connectivity to suppliers, etc. The following is a list of AP metrics that Ardent Partners believes matter: Table 2: AP Metrics that Matter Efficiency Cost per invoice, purchase order and/or transaction Invoice cycle time – Average length of time from receipt of an invoice up to payment approval Purchase order cycle time Number of invoices processed per FTE per defined period (hour, day, week, etc.) Percentage of invoices processed straight-through First-time match rate Number of supplier inquiries Paid on-time percentage Connectivity Percentage of invoices received electronically (not including email attachments, PDF, paper or fax) Percentage of suppliers submitting electronic invoices Percentage of suppliers accepting electronic payment Percentage of payments made via Check/ACH/Card/Wire Cash management Early payment discounts captured – Dollar amount or as a percentage of total opportunity Percentage of suppliers participating in early payment program Days Payable Outstanding Compliance Purchase Order compliance eInvoicing compliance Contract compliant spend Non-compliant spend or Off-contract spend (often called “maverick spend”) Percentage of spend compliant to contracts Percentage of compliant transactions Best-in-Class Performance Ardent Partners defines Best-in-Class performance in this research effort as the 20% of enterprises with the lowest average invoice-processing costs and shortest average invoice process cycle times. Top-performing enterprises have taken their AP operations to the next level by leveraging technology to streamline the AP process, make it more efficient, and enable more strategic activities to be carried out. These leading AP operations are able to add significant value and
  • 27. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 26 intelligence to the greater enterprise and aid their internal partners' performance and objectives. This group presents very clearly that an AP operation can move itself out from its administrative and back-office roots into the more strategic quarters of progressive and valued business functions. The Best-in-Class Advantage As shown in Table 3, Best-in-Class enterprises are able to perform at a much higher level than their peers. The average cost to process an invoice for Best-in-Class operations ($2.42 per invoice) is more than seven times lower than "all other" enterprises. The Best-in-Class processing cost advantage is extreme, particularly when it is applied to potentially tens or even hundreds of thousands of invoices that AP operations process each month. For the majority of the market, the opportunity to reduce costs is extraordinary and the Best-in-Class performers prove that the opportunity is realizable. The Best-in-Class' efficiencies enable them to process more than 3,000 invoices more per staff member each month than their competitors. This large volume gap is largely explained by the use of ePayables (AP automation) tools which enable the digital processing of invoices often using sophisticated business rules to match and validate invoices to ultimately process a large percentage of invoices without ever “seeing” or touching them. In fact, the average Best-in-Class company processes half (50.3%) of its invoices in a touchless manner, compared to their peers who see this happen on slightly more than 10% of their invoices. Another key metric that exemplifies the efficiency (or lack thereof) of an AP department is the amount of time taken to process an invoice. Best-in-Class AP departments take just 3.3 days to process an invoice, which is more than four and a half times faster than it takes their competitors. Here too, the Best-in-Class' results are directly impacted by the level of automation in place. For example, an AP staff member that has to manually enter invoice data into a system or manually validate and match information is bound to take much longer than an automated system that runs on business rules, processing many invoices straight-through and highlighting errors and kicking out exceptions. But systems alone do not win the day, AP initiatives succeed, in no small part, due to the level of supplier engagement, enablement, and participation in a transformation initiative. Leading AP organizations have enabled more than 40% of their suppliers able to submit invoices electronically. Another supplier area where the Best-in-Class truly outperform the competition is in the level of supplier involvement in discounting programs (17.2%). In 2014, cash is still king within the enterprise and the Best-in-Class are making an impact on cash with their significantly lower costs and much larger opportunities to drive returns via early payment discounts.
  • 28. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 27 Table 3: Ardent Partners' 2014 Best-in-Class Framework for Accounts Payable Metrics Best-in-Class All Others Cost per Invoice $2.42 $17.61 Invoices Processed per FTE (per month) 4,814 1,408 Invoice Processing Cycle Time 3.7 days 17.1 days Invoice Exception Rate 8.0% 16.4% Straight-through Processing 50.3% 12.3% % of Suppliers Submitting eInvoices 40.3% 8.5% % of Supplier Participating in Discounting Program 17.2% 2.4% ©Ardent Partners – 2014 Best-in-Class Levers for Success Best-in-Class enterprises have shown that investments in improving internal systems and processes and improving their relationships with suppliers and key stakeholders are proven paths to better performance. The Best-in-Class have differentiated themselves with superior performance across the primary AP metrics above (see Table 3) and have utilized the specific levers for success noted below to a greater degree and impact to gain their advantage in the marketplace. AP leaders with an interest of leading their own incredible journey would be wise to place the following Best-in-Class strategies and characteristics on their packing checklists. Best-in-Class Capabilities - Upon assessing the capabilities that a Best-in-Class AP operation has at its disposal, the reasons for their superior performance become quite clear across both invoice processing and supplier payments and engagement. Best-in-Class AP performance starts with robust and agile invoice processing capabilities (see Figure 13, next page). A majority (83%) of top- performing AP operations have a standardized AP process across the enterprise. Additionally, 70% of leading AP groups can process invoices in a straight-through manner, as opposed to only 23% of all other AP groups, giving them a significant advantage. Almost three quarters of the Best-in- Class have the ability to automatically route invoices for approval, meaning that their invoices go through the various processing stages in a more efficient manner than those that lack this capability. The ability for an AP group to measure and keep track of key metrics is critical in helping to improve performance and in sharing key information and intelligence around invoices and payments. Approximately, 76% of leading AP groups have this ability versus 47% of "All Other" enterprises. Furthermore, the percentage of Best-in-Class enterprises that have a linked P2P process is almost double than that of "All Other" companies, providing them with a more holistic view of the entire process. Also, slightly more than half of the top-performing enterprises provide their suppliers with access to a supplier portal (see Figure 14, next page). Supplier portals offer tremendous value to both the buyer and the supplier by sharing invoice and payment status,
  • 29. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 28 allowing suppliers to submit eInvoices and enabling the settlement of disputes online. A portal's value is enhanced significantly when it is attached to a network. For an AP group, supplier portals provide relief as they often drastically reduce the number of inbound calls from suppliers. Figure 13: Best-in-Class Processing Advantage Managing internal processes, systems, and stakeholders are critical elements to the advantages the Best-in-Class hold over all others, but the speed of business today requires a different level of engagement and alignment with trading partners than what was once required. Leveraging the collective strength of a supply chain to the benefit of all participants has become the hallmark of the agile and progressive businesses who understand that an increasing dependence on third- party partners and suppliers is not just an inevitability, but a pre-condition of success. Not surprisingly, the Best-in-Class are leading the way with significantly greater levels of electronic interactions and collaboration with suppliers. Table 3 above highlights several areas of superior supplier participation, while Figure 14 below shows that the Best-in-Class have both the tools (46%) and opportunity (49% can capture early payment discounts) to better manage cash and strategically run supplier payment programs. Figure 14: Best-in-Class Supplier Payment and Engagement Advantage 12% 25% 23% 49% 47% 63% 71% 35% 51% 70% 73% 76% 83% 87% Match invoices to contracts or payment plans Linkage throughout the P2P process Process invoices straight-through Automatically route invoices for approval Measure key AP metrics Standardized AP processes Two or three-way matching capabilities Best-in-Class All Others ©Ardent Partners - 2014 16% 10% 30% 30% 12% 25% 28% 46% 49% 53% Supply chain finance program Suppliers update all their information online Tools/programs to optimize working capital Efficiently capture early payment discounts Access to web-based supplier portal Best-in-Class All Others ©Ardent Partners - 2014
  • 30. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 29 Best-in-Class Technology Usage - Adoption of technology is another area where the Best-in- Class clearly differentiate themselves from the rest of the market. These leading groups not only deploy solutions by a much greater degree (see Figure 15), but just as important, their users and suppliers adopt and use them more actively. The differences in technology usage manifest themselves in the large metrics gaps shown in Table 3 above. The most widely-adopted solutions are admittedly the most tactical, focused on capturing data and images from paper invoices. As the level of automation and strategic value of the solutions increases, the Best-in-Class are two to four times more likely to be using them. Of note, eInvoicing, is now in place at more than 40% of Best-in-Class AP departments and is a key solution that helps these leaders to process half of their invoices straight-through. Business networks continue to capture the attention of the larger market, but it is the Best-in-Class organizations (33%) that are driving huge transaction volumes and gaining the most value from them. More than any other solution, dynamic discounting has grown the fastest when compared to Ardent's last ePayables report, driven in part by new innovative approaches and the enterprise's unquenchable thirst for cash. Figure 15: ePayables Adoption - Best-in-Class vs. All Others AP’s ability to provide easy access to accurate and up-to-date invoice and payment data can be a powerful tool that enables internal and external stakeholders to improve their performance and ultimately improve collaboration with these groups. Internally, the AP groups that collaborate successfully with other groups, such as treasury and procurement, credit their visibility into AP processes and invoice data as the key to establishing good working relationships with their functional partners. These AP groups also report that they have been able to make an impact in areas that fall beyond their oversight like cash management and supplier performance management. All of this starts with the solutions listed above. 5% 16% 8% 17% 35% 57% 22% 26% 33% 41% 61% 85% Dynamic discounting solution Complete Procure-to-Pay solution Supplier Network (B2B network or payment network) eInvoicing solution Automated routing and approval workflow Document imaging/scanning Best-in-Class All Others © Ardent Partners - 2014
  • 31. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 30 Accounts Payable's Convergence with Procurement The level and quality of procurement and AP convergence varies dramatically among enterprises in the marketplace today which means that more agile organizations are effectively using their P2P operations as a competitive weapon to gain advantage over their rivals. Organizations that lack a seamless procure-to-pay (P2P) process typically see an erosion of value as they move across the entire process. As one Global P2P Director interviewed for this study said, “60% of our invoice exceptions are not related to accounts payable and so it is important to partner with our colleagues in procurement and have full visibility into the broader process.” Those that are more successful in combining processes, systems and organizations report a series of benefits, including: - An ability to optimize working capital across the P2P process by developing proactive payment strategies and pursuing dynamic discounting opportunities - Improved supplier relationships aided by an ability to pay suppliers on time (or early) and accurately as well as better data to support improved inquiry response times - Better identification of sourcing opportunities through more accurate spend data from invoices (and payments) - Improved contract compliance and reduction of maverick spend by linking invoices and payments to contracts - Better success with supplier enablement by leveraging a ‘one-time’ on-boarding process for procurement and AP systems The potential P2P performance gap that can exist between competitors warrants the attention of the CFO and the CPO as well as other AP and finance leaders. For the typical P2P organization, the immediate opportunities are to drive efficiencies quickly, to become more operationally effective, to expand the scope of those operations for the greatest possible impact, and to ultimately become more strategically aligned with the business. A seamless P2P process should not be the "road less traveled" by business leaders.
  • 32. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 31 CHAPTER FOUR: STRATEGIES FOR SUCCESS Business transformation is not easy work. It is not like turning on a light switch and you’re done. You really need to understand the business requirements and having a technology vendor that understands the detailed stuff is important.” ~ AP Director, Fortune 500 Company General Recommendations Over the next few years, AP groups must continue their quest for improvement by developing and executing strategies to transform their operations from a typically inefficient and clunky function to a strategic, automated, and well-oiled machine that sits at an important business intersection. The level of performance that Best-in-Class enterprises have been able to achieve is a testament to the potential available to other AP operations. Beyond utilizing the Best-in-Class’ "Levers for Success" (see Chapter 3), Ardent recommends the following strategies and approaches for AP departments seeking to improve their performance and transform their organization’s value and standing within the enterprise: • Create a roadmap for AP transformation – The days where the AP department has to manually enter an invoice or answer a phone call from a supplier asking about an invoice are numbered; for many, they are gone for good. The value AP can add to the enterprise as an analytical and data-driven function far outweighs the investment needed to reasonably achieve it. Given the opportunity and the means, AP can add real value to treasury and its quest to optimize working capital, as well as to procurement and the entire P2P process. However, to get to that point AP must streamline its operations and ensure optimal efficiency and visibility through the use of automation. An AP operation that consistently deals with high exception rates, numerous discrepancies and delays in invoice approval, erroneous payments, and a general lack of visibility does a disservice to the enterprise at-large. • Vision, Quest: Have the right marketing and execution plans to drive widespread adoption - As Peter Drucker once said, “Plans are only good intentions unless they immediately degenerate into hard work.” An AP transformation is a major change management initiative and one that will be met with significant resistance if the plan to drive adoption is lacking or unclear. Whether that plan is focused on selling a vision or mandating behavior, it must be fine-tuned to the unique culture and practices of the AP department and larger enterprise. Offering recognition and rewards for star performers and early adopters (including suppliers) makes sense, no matter the overall strategy. Remember, suppliers are less like to proactively invest in customer relationships that are problematic or costly. • Establish or enhance key performance indicators (aka "metrics that matter") - In order to improve performance in AP, it is necessary to establish the right metrics and continuously
  • 33. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 32 measure and improve upon them. Key performance indicators are critical to understanding AP’s current state and evaluating progress. Metrics can be an effective way for AP groups to communicate their value to business executives; it is important, however, to ensure that the metrics "matter" in that they are actionable, relevant, and aligned with the goals and objectives of the larger enterprise. Additionally, these metrics should be clearly defined and effectively communicated to all relevant stakeholders. Some metrics should carry multi-year milestones. • Map AP metrics to top business objectives - Improvements in metrics like invoice- processing times or volumes of straight-through invoices indicate significant success within an AP operation. However, it is important to be able to link AP's improvements to larger business objectives. Without the ability to actually track and monitor the impact of AP on those objectives, year-end reviews may be unfruitful. AP organizations must develop and utilize a series of metrics that are well-aligned to the goals of the business. Work with finance leaders and other stakeholders to draw a map that clearly links AP performance to enterprise-level results. • Think globally (P2P), act locally (AP) – Once transformed or even during the transformation process, AP must put on a P2P hat, understand the underlying process, and become comfortable with it. AP leaders must better assess their group’s value from an overall P2P perspective. Today, many enterprises still persist with a procure-to-pay process that is disconnected from a process, systems, and organizational standpoint, making it difficult to obtain a clear and comprehensive view of the current state. AP leaders, together with their procurement counterparts and Chief Procurement Officers, should re-evaluate the current P2P processes, systems, and organizations and identify the best opportunities to streamline and improve the P2P process and better align it with top enterprise objectives. A more cohesive P2P process has a whole host of benefits, including improved spend visibility (and spend data), prevention of savings leakage (e.g., matching contracts to invoices), and better use of working capital (e.g., paying faster or slower, capturing early-pay discounts, etc.). • Develop regular and proactive supplier communication and engagement plans - Today, more than ever before, suppliers are being viewed as partners and an important part of the extended enterprise. Over the last decade, companies of all sizes have become more dependent on their suppliers in order to successfully deliver goods and services to their customers. Global supply chains have evolved into highly-complex and interdependent businesses relationships that necessitate closer connectivity between trading partners. Managing these partnerships in a manual manner is inefficient and AP is responsible for a critical part of the relationship with a supplier – invoicing and payment. Communication, visibility, and connectivity between buyers and suppliers are becoming extremely valuable and serve as the keys to ensuring a cost-effective and streamlined process. What happens during this process, however, also has an impact on procurement and its supplier relationship/information management objectives, and treasury on its cash management
  • 34. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 33 objectives. As such, AP groups need to evaluate technologies, such as B2B networks and supplier portals, which can help to improve communication and interaction with suppliers. • Track staff productivity from the bottom up – While measuring department-level metrics is the key to assessing and improving overall invoice processing efficiency and effectiveness, there is also value in taking a "bottoms up" approach to performance improvement. Tracking productivity at the line level helps AP departments improve overall performance by establishing performance standards and expectations for staffers at all levels. By measuring specific staff tasks/activities for both time and accuracy and providing a feedback loop, AP staffers will be better able to understand how they are performing in general and as compared to their peers. Poor staff performers will have the awareness and opportunity to initiate a self- improvement plan or seek the necessary support and guidance to meet performance standards. Line-level metrics will also help AP leaders identify bottlenecks as well as process and/or training gaps and take corrective action to drive better performance. • Consider outsourcing tactical, low value activities - Within AP, low value-added activities include things such as scanning (or imaging) and manual data entry which is often where a large chunk of staff resources are used. For example, scanning is not a core AP competency and there are many third-party providers who specialize in this business. In point of fact, scanning an invoice does not add much value since that the process still requires manual data entry. Capturing the data and converting it into an electronic format (data capture) is what adds true value. Even though OCR is not 100% accurate, using it to capture information and automatically pull it into a system saves sizable time and effort, which can enable more AP staff to focus on managing (and reducing) exceptions, improving straight-through or touchless processing, enhancing data for use in procurement or treasury, and other value- added activities. • Develop a strategy to capture supplier discounts – Being able to capture a higher percentage of discounts can help reduce the price paid for goods and services; it can also generate a sizable return on available capital. Perhaps more importantly, by accelerating payments to suppliers, a buying organization can help to strengthen a supplier’s financials and in turn, show support for their business. This creates the often elusive "win-win" business scenario and in any case, should do well in strengthening supplier relationships. The more effective discounting strategies are those that are uniquely tailored to different groupings or subsets of suppliers versus those that are standardized across the entire supply base. A more nuanced program will likely attract greater supplier participation.
  • 35. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 34 Business Networks in 2014 and Beyond Ardent's research has shown an increased interest in business networks and an increase in overall business network adoption and usage. As a result, competition in the business network arena is heating up with different networks adopting different strategies and developing different capabilities in an attempt to win market share. The value that the leading networks are delivering today is significant, but, Ardent Partners believes that even larger opportunities exist as networks expand their scope and capabilities while still continuing to grow their core businesses aggressively. Specifically, Ardent expects that over the next few years the leading networks will leverage partner ecosystems and organic development to: 1. Aggressively expand the number and type of business processes, documents, and information that they support including: * Complementary process areas like supply chain (logistics, inventory management, etc.) and more complex financial areas like trade finance and financial risk management * New process areas that could fall under a shared services center or business process outsourcing (HR, IT, accounting, payroll, etc.) * Complex spend categories like contingent workforce management and real estate and facilities * Deeper and more robust data capture with more analytical and predictive capabilities 2. Begin to achieve a true network effect in their core P2P and supply management process areas as evidenced by: * Fast growth in transaction volumes * A flourishing ecosystem of third-party service providers that drive innovation and value across the network (similar concept to Apple's App store) * The availability of network participant performance and operational benchmark statistics * Advanced sales and marketing capabilities designed to accelerate new customer acquisition * Build more social networking features into their existing offerings to close the gap between the way consumers communicate, collaborate, and share information and the way that businesses do these things with other businesses. The investment by existing networks in these areas and the development of new capabilities and networks is what will make this space an interesting and important one to watch over the next few years. The speed of business and innovation will propel network growth causing many new and expanded capabilities to reach the market much sooner than otherwise expected. This means that consideration of a network's ability to scale and advance, as well as its road map, become important considerations in the network selection process.
  • 36. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 35 Conclusion In mythology and literature, a quest is a device often used to challenge the story's hero and then set them on a course for adventure. The hero's journey can be difficult and challenging, but if the pursuit is noble and the hero's actions true, a successful quest brings great rewards and fulfillment. Accounts payable in 2014 is a modern tale of a band of professionals banded together by process and goals. The quest for excellence in this business function will take time, resources, and dedication, but it is wholly worthwhile; better still, it is achievable. Each AP transformation journey begins with a single step. Start today.
  • 37. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 36 APPENDIX ABOUT ARDENT PARTNERS Ardent Partners is a Boston-based research and advisory firm focused on defining and advancing, the accounts payable, procurement, and supply management strategies, processes, and technologies that drive business value and accelerate organizational transformation within the enterprise. Founded by Andrew Bartolini, Ardent also publishes the CPO Rising and Payables Place websites. Register for access to Ardent Partners research at ardentpartners.com/newsletter- registration/. ABOUT THE AUTHOR Andrew Bartolini, Chief Research Officer, Ardent Partners Andrew Bartolini is a globally-recognized expert in accounts payable, sourcing, procurement, and supply management. Andrew focuses his research and efforts on helping enterprises develop and execute strategies to achieve operational excellence within their finance and procurement departments. Andrew is also the publisher of Payables Place, the leading global source for ePayables news, research, and analysis (www.payablesplace.com). Advisor to corporate executives and leading solution providers alike, Andrew is a sought-after presenter, having lectured and presented more than 150 times in seven different countries. Over the past decade, Andrew has benchmarked thousands of enterprises across all facets of their accounts payable, sourcing, procurement, and supply management operations and his research is currently part of the Supply Chain/Management curriculum at several US universities. He actively covers the technology marketplace as well as trends in sourcing, procurement, supply management, and accounts payable and has been published or quoted in leading business publications including The Wall Street Journal, Business Week, Investor’s Business Daily, Forbes, and Fortune, as well as the major trade publications focused on accounts payable and supply management. Prior to becoming an industry analyst, Andrew developed, packaged, deployed, and used supply management solutions on behalf of enterprises in the Global 2000 while working for Ariba and Commerce One. Additionally, his experience in strategic sourcing (where he managed sourcing projects totaling more than $500 million in aggregate client spend), business process transformation, and software implementation provides a ‘real-world’ context for his research and writing. Andrew has been named a “Pro to Know” by Supply and Demand Chain Executive three times and holds a B.A. in Economics from The College of the Holy Cross and an M.B.A in Finance from Indiana University. He welcomes your comments at abartolini@ardentpartners.com or 617.752.1620.
  • 38. ePayables 2014: The Quest ©2014 Ardent Partners, Ltd. www.ardentpartners.com 37 RESEARCH METHODOLOGY Ardent follows a rigorous research process born from years of market research experience conducted in the accounts payable (“AP”) market. The research in this report represents the web- based survey responses of 192 business professionals and includes interviews from several accounts payable and finance executives. These 192 participants shared their strategies and intentions, as well as their operational and performance results to help us define Best-in-Class AP performance and understand what levers the leading groups use to obtain their advantage. This primary research effort is based upon the survey responses, interviews, and the experience and analysis of the report author. Complete respondent demographics are included below. To purchase reprints of this report, please email research@ardentpartners.com. For more information on this and similar topics, please visit the research library at www.ardentpartners.com. REPORT DEMOGRAPHICS The research in this report is drawn from respondents representing the following demographics: • Job Function: 61% accounts payable; 19% finance/treasury; 15% procurement; 5% other • Job Role: 20% VP-level or higher; 19% director-level; 34% manager-level; 27% other • Company Revenue: 56% Large (revenue > $1 billion); 22% Mid-market (revenue between $250 million and $1 billion); 22% Small (revenue < $250 million) • Region: 69% North America; 19% EMEA; 10% Asia-Pacific; 2% South America • Industry: More than 25 distinct industries are represented. Public Sector, Health Care, Financial Services, Education, and Manufacturing are the largest industries in the survey pool; no industry represents more than 15% of the overall survey respondents. Industry Standard “Fine Print:” The information contained herein has been obtained from sources believed to be reliable. Ardent Partners, Ltd. disclaims all warranties as to the accuracy, completeness or adequacy of such information. Ardent Partners, Ltd. shall have no liability for errors, omissions, or inadequacies in the information contained herein or for interpretations thereof. The contents expressed herein represent Ardent Partners’ best analysis at the time and are subject to change without notice. © 2014 Ardent Partners, Ltd. All rights reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. Solution providers and consultancies should take special note that Ardent Partners reserves the right to seek legal remedies including injunctions, impoundment, destruction, damages, and fees for any copyright infringement (which includes but is not limited to usage in company collateral, presentations, and websites) in accordance with the laws of the Commonwealth of Massachusetts and the United States.

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