Traditionally, the success of Accounts Payable (AP) automation is measured in savings created from headcount reduction. While it is an important metric, there are other metrics that will help determine whether AP automation is benefiting not just AP, but the wider business.
As AP departments and finance shared services mature, they are being looked at not just as transactional centers, but also as a source of business intelligence that can provide strategic insight.
This white paper will examine both traditional cost-based Key Performance Indicators (KPIs) and value-adding KPIs that will help you better align AP with the wider business.
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How do you measure the sucess of AP automation
1. W H I T E PA P E R
How do you
measure the
success of
AP automation?
Traditionally, the success of Accounts Payable (AP) automation is measured in savings created
from headcount reduction. While it is an important metric, there are other metrics that will help
determine whether AP automation is benefitting not just AP, but the wider business.
As AP departments and finance shared services mature, they are being looked at not just as
transactional centres, but also as a source of business intelligence that can provide strategic insight.
This white paper will examine both traditional cost-based Key Performance Indicators (KPIs) and
value-adding KPIs that will help you better align AP with the wider business.
2. KPIs
One very important aspect of benchmarking with other organisations is that KPIs need to be
seen in context. For example, Cost per Invoice is not always useful in isolation – you may
have off-shored your invoicing process to a very low-cost location, but the process may still
continue to be inefficient. Looking at this KPI alone may not give you a rounded view of your
P2P organisation’s health.
While improvements to productivity are a crucial element of measuring the success of
your AP automation efforts, it is also crucial to measure how you are benefiting the wider
business.
The following KPIs explore how to improve productivity, visibility, and profitability.
Insight into productivity
One of the most valuable benchmarks to measure AP is Productivity per FTE – how
effective each Full-Time Equivalent (FTE) employee is when it comes to invoicing.
The Productivity per FTE KPI represents the number of invoices processed over 12 months
per full-time equivalent (or staff member). This KPI gives a rounded view of the efficiency of
an AP operation.
When making this calculation, the generally agreed approach is to take your purchase
invoice volume, including all invoice types (say this totals 500,000), and divide it by the
number of staff in your AP department (say 35 FTEs). This gives you a figure of 14,285. (Some
companies are inclined to make the volume divisible by the number of“keyers”only.)
Calculating Productivity
For this calculation, it is recommended that you include all people in accounts payable,
because the more efficient your process, the fewer people you actually need in your wider
AP organisation.
Productivity under 10,000 per FTE is considered to be below-average. Fair to good
productivity is between 10,000 and 25,000. 25,000 to 50,000 per FTE suggests you have
high PO compliance, great match rate and high automation/electronic levels. Companies
that are at the 50,000 to 100,000 level are deemed to be in the world class bracket, and have
exceedingly high levels of electronic invoicing.
Below Average under 10,000 per FTE
Average 10,000 and 25,000
High performing 25,000 to 50,000
Top tips for improving productivity
This KPI is driven mainly through good
quality, standardised processes and
through automation technology. With
invoices arriving via paper or in PDFs
attached to emails, productivity will be
limited. Process standardisation can improve
the productivity rate only so far. Companies
with high rates of electronic invoicing achieve
levels of 80,000 / invoices per FTE or higher.
Purchase invoice
volume, including all
invoice types
Productivity
per FTE
500,000 invoices
35 FTEs in AP
14,285
Number of staff in AP
department
3. Insight into visibility, traceability
and auditability
Most large organisations have histories of mergers and acquisitions. The complex nature
of these organisations means they often operate off a variety of systems. Multiple legacy
systems and ERPs, for many, lead to poor visibility of finances across the business.
Good visibility helps an organisation in a number of ways:
• Improvements in reporting capabilities
• Access to higher quality data for analysis to drive savings in procurement or to identify
revenue generating opportunities
• Reduced cost related to audit, as the process is easier and less resource-intensive
• More time spent on value-adding activities, not on tracking down documents
• Less time spent fielding calls from suppliers on payment queries
Here are some key areas to measure these key factors.
Improving visibility
Being able to aggregate and analyse corporate spending data is not only a major factor in
cost reduction, but also a significant differentiator in an organisation’s ability to out-think
competitors through more informed sourcing decisions.
A key metric to look at is levels of visibility of spend at the line-item level. According to the
Hackett Group, Top Performers have 73% spend visibility whereas the average peer group
has 38%.
Top performers: 73% spend visibility at line level
Peer group: 38% visibility into line level
When it comes to visibility of spend, as well as visibility for suppliers of when they will
be paid, the rate of invoices arriving electronically is a key metric. Measuring the rates of
e-invoicing will tell you quickly how many invoices are arriving in your system, and these
invoices are traceable, within your organisation and for your suppliers. In addition to
visibility, by increasing the level of automation, the cost of invoice processing is considerably
reduced – reportedly as much as 80%.
Tips for improving spend visibility
Cloud-based automation tools have proven extremely valuable for providing customisable
dashboards displaying KPIs. This AP automation solution allows for 100% visibility into every
action and business process at a glance.
4. By electronic invoices, we mean invoices arriving
as a data file into your system, not via email or PDF.
According to The Hackett Group, Top Performing
organisations achieve around 70% electronic invoicing
rates, however the peer average is around 19%.
sharedserviceslink research has further found that
among organisations with e-invoicing capability, on
average only 24% of invoices arrive electronically.
E-invoicing rate of top performers: 70%
E-invoicing rate of‘peers’: 19%
If your invoice volume is over 100,000 invoices per year, there is probably a very good
business case to build for e-invoicing. And if you are using e-invoicing and rates are low, you
are in the majority.
Improving Profitability
One of the powerful ways AP can improve the profitability of a company is to capture
early payment discounts. Best in class stats tell us that Top Performers take early payment
discounts on .11% of spend. For £1bn of spend, that’s £1.1m. For large organisations, these
are figures that will get the attention of the CFO.
The fruits from an early payment programme or approved invoice financing programme can
be significant. Financially, they can dwarf any other invoicing initiative you are working on.
For a company with significant spend, these are a sizeable annual savings. So it’s in your
interest to make sure that these discounts, having been negotiated by Procurement, are
indeed being captured by Finance.
Best in class organisations save £1.1 million per billion of spend per year by paying early.
Companies with £3bn spend could earn £3.3m in savings.
Measuring to what extent you are capturing the discounts you negotiate reflects the
alignment between Procurement and Finance. Procurement sets up the discount, Finance
makes it happen. It’s a true partnership. Occasionally, a business may want to“dial down”
on the early payments, should working capital be more important than profit, but if your
working capital context remains steady, this KPI is one to track.
Finally, aim for negotiated discounts with all suppliers on all invoices and build on a low
capture rate, rather than negotiating on a slither of invoices and suppliers and for a high
capture rate. Keep in your sights the best in class figure of approximately £1 million savings
per billion of spend, and build your program and KPI plan according to this possibility.
Tips for improving the
rate of e-invoicing
Ensure any technology that
you invest in to process
invoices electronically has
user-friendly technology for
both the buyer and supplier. High
adoption rates are key for success,
so be sure to ask e-invoicing
suppliers about typical adoption
and on-boarding rates.
Top tips for improving profitability
Invoice automation is key for an early payment program to be successful.
Communicate the business case for working capital improvement. There can often be
reluctance from Treasury to release cash earlier than needed.