95% of companies listed on the NASDAQ have outsourced part or all processes associated with Accounts Payable(AP), while in Spain, currently only 17% of companies in the IBEX have adopt this strategy of outsourcing. Many AP departments use outsourcing as a way to improve the operation of its processes, but outsourcing does not have to be complete, hence, depending on what is not outsourced, and to what extent, benefits arising are different.
Outsourcing Accounts Payable
Companies are under constant pressure to reduce costs, and back-office operations that do not generate revenue are the first to be put in the spotlight for cost reduction. At the same time, legislation such as the Sarbanes-Oxley Act - which although only affects listed companies in the US has become a reference throughout the world -require more processing time due to increased internal controls.
These two reasons have been an important factor in the centralization of back-office functions, including most finance and accounting operations, and it is at this point that outsourcing is increasingly seen as an option that can offer significant advantages while reducing costs and increasing efficiency.
Usually, AP is part of a large outsourcing strategy in an organization. AP is usually one of the first functions to be outsourced because it is an "internal activity", ie that it is not an activity that is seen by clients, which is why outsourcing AP is perceived as a very limited risk, if a risk at all, for the brand and image.
The 10 drivers of outsourcing AP in companies
Here are the main reasons why CFOs should consider fully or partially outsourcing AP activities.
- Cost Optimization
The number one reason for outsourcing is to reduce AP costs. Shareholders put pressure on large organizations to increase their margins, outsourcing strategies allow them to focus on the core activity of the companies , and the advantages achieved by outsourcing in terms of cost reduction offer an interesting margin to compete effectively in the market.
However, we must always consider that reducing costs resulting from outsourcing AP depends on the level of efficiency that an organization has already achieved. For example, if an AP department already has an efficient automated supplier invoices strategy, cost reduction will be less than another company that does not have one. - Process Automation
While many organizations adopt paperless processes in general, the AP department remains largely inundated by paper. Document management, therefore, is a key challenge for organizations, and outsourcing allows them to free up significant time and resources, and shift the burden of paper on outsourcing service supplier. Simplification and standardization of AP processes and underlying business rules through the use of new technologies helps reduce paperwork and, therefore, the cost involved in manual processes.
An AP outsourcing service provider usually has some sort of automation in the assigned AP process . Automation greatly enhances the accuracy of data entry and helps avoid errors such as overpayments, duplicate payments, payments to incorrect suppliers, loss of discounts, late fees ... which indirectly reduces operating costs and helps to improve profit margins. For example, outsourcing would enable authorizations, in many cases via the web, which drastically reduces the time cycle of invoice payment, thus increasing the ability to access cash discounts, if applicable.
The rise of electronic communication has made possible the ability to remotely carry out AP activities. In addition, the increasingly widespread adoption of workflow solutions, document management and imaging technologies, are enabling electronic transactions, and eliminating the need for paper - Latest Technologies and Workflow applications
In addition to document management and automation, another key challenge for most AP departments is the workflow -the routing and approval process that can involve the interaction and follow up with several employees of the organization. A low level of workflow automation has a negative impact on efficiency, which is affected significantly. AP outsourcing service providers invest in the latest technologies for both document management, and workflow and are able to leverage these advantages and transfer them to their clients. - Flexibility of costs.
Outsourcing provides flexibility to organizations in terms of working with a variety of different models. For example, the fixed cost of the AP function can be converted into variable cost when a pricing model based on transaction is adopted. On this basis, the number of full-time employees (FTE) required can be increased or decreased depending on the level of workload. In addition, organizations have the opportunity to work with a group of professionals employed by the outsourcing service provider without the need to deal with the cost of hiring, attrition, training, and the like. - Standardization - Normalization.
In large organizations, AP departments are mostly decentralized, located in several places, and therefore, do not enjoy the benefits of normalisation. This is especially true with global operations because AP processes are often defined differently in different countries. Therefore, there is no "standard" way of doing things.
Outsourcing forces organizations to centralize the AP process and apply standard methodologies and processes adapted to each region. For example, an organization with global operations will have to negotiate with the banks standard applicable rates and services in all its locations. Before doing this, the organization must standardize their processes (such as frequency of payments, cash-flow management, standard credit conditions, and the like) so that can get a better deal with the banks.
So that is the motivations of outsourcing AP for this week. Next week we will continue with an additional 5 reasons as interesting as or even more interesting than those presented here. However, if you cannot wait, please contact us and we can discuss them personally.
