In the beginning! The evolutionary
path of accounts payable
Ever thought about where accounts payable has come from and where it will
go next? The past three decades has seen a change in most company operations.
But the impact in accounts payable has been notably significant.
One key enabler for this change is technology. Join me, Michael Hyltoft,
thought leader in accounts payable, and take this journey from the 1980s to the
future state and look at where this pivotal function has come from and the
direction it’s heading in.
1980: the beginning
Until the 1980s, accounts payable was a heavily paper based operation
co-located with individual business units, which allowed for close
collaboration between the finance and operational staff. This was required to
address the issue of the very manual processing in most organisations, with
most invoices being hand delivered across the organisation for approval.
Some organisations had introduced home-grown green screen systems on mainframe
by then, but the vast majority still ran AP as a fully manual process. This led
to the accounts payable process varying from location to location within the
same company. However it provided flexibility to the local business, even if
the cost per transaction was high.
1990: the era of reengineering
The 1990s was the start of the ERP era, which also introduced ‘business
process re-engineering’, as developments in IT opened up new possibilities. The
focus was on standardisation to help streamline the process, as this would not
only lead to lower costs, but also improve control and services. Processes were
becoming standardised which enabled centralising the operation in one location.
Accounts payable was mainly led by the centralisation of procurement, focussing
on saving the bottom line results. So on the back of new standard processes and
the centralisation of procurement, AP found itself moving to central if not
regional locations.
2000: piecemeal
Centralisation continued into the new millennium. But a term was being
more widely used for a more exciting version of ‘centralisation: ‘shared
services’. As a concept, shared services had been around since the early
nineties. But only the few had applied its principles and reaped their rewards.
Now, shared services are becoming mainstream. And the difference between
centralisation and shared services was generally recognised. Shared services
focused on continuous improvement, service delivery and operational excellence.
Centralisation just focused on that – centralisation.
At the heart of shared services was its favourite child – accounts
payable. And here technology could really be leveraged to change how this
function runs. The focus was on automation, control and costs and how a
paperless office could become a reality. Attention was turned to SOX2002 and
many new technologies that would help deliver it all. IT outsourcing became
commonplace in business, followed by the big consulting houses introducing ‘business
process outsourcing’ who could take ownership for running IT, Finance and HR.
Within Finance, the AP department was most affected. Operations moved
overseas to countries including Poland and India. This was made possible due to
the earlier standardisation and centralisation of the processes, but equally
important were the new technologies of scanning, (OCR), workflow, automation
matching, portals and electronic payments. Accounts payable began working
closely with procurement to drive efficiency and control. The new partnership
forged ahead with e-invoicing projects with the supplier base and introduced
policies like ‘no PO, no pay’. The two departments found that collaborating on
more integrated processes provided benefits for both parties. Whether the
transformation was done as an internal project or outsourced, ‘end-to-end
procure-to-pay processing’ became the goal, and AP started to move away from
being a cost centre to being a value-add operation.
2010: value beyond headcount costs
Global standardisation of processes had begun, not just for accounts
payable, but the business as a whole. The consolidation of an ERP/single
instance meant Finance had to develop a common chart of accounts. This required
a ‘single version of the truth’. As part of the global standardisation, many
companies introduced global end-to-end process owners, for example for
procure-to-pay. Others took the more direct approach of simply merging
procurement with accounts payable, with one person responsible for both. There
have been examples both of procurement taking ownership (with finance still
owning the actual payment of the supplier) and finance taking the ownership
with procurement, still responsible for the actual sourcing of goods.
The development of the supplier portal entailed moving from a place where
suppliers could merely see their invoices, to one where they can fully manage
the procurement process; from agreeing POs to reconciling accounts and
everything in between. These changes have led to a need to develop the AP staff
skill sets to focus more on adding value and customer service. This is visible
in many organisations today, with the important role accounts payable now
taking in supporting the optimisation of cash flow working in close partnership
with treasury.
Future State: merger and partnership
When reviewing the last three decades, it is evident that AP has been
through a massive change, with some departments experiencing the staff numbers
reduced by over 80%. It is hard to believe that the focus of accounts payable
is going to continue to be on reducing FTE numbers and increasing efficiency.
That said, there are still many departments yet to make use of new technology,
and they will either have to start the journey or are likely to see themselves
being outsourced to third parties that are not only willing to transform the
operation, but in many cases also have a proven capability of doing so.
Leading accounts payable departments have numerous opportunities, one of
which is chasing labour arbitrage by off-shoring (either setting up themselves
or outsourcing to an already established party). Another option could be for AP
to “expand” into other areas. In the last decade, the focus has largely been on
purchase to pay, but in reality it was AP that was targeted. In order to truly
integrate purchase to pay the organisation needs to change too. The technology
and processes are available for integrated purchase to pay. In some companies
where procurement and AP both report into the finance director, this change can
be a fairly managed. However, it is more difficult when a dedicated procurement
department reports directly into the CEO. It can be established in many
different ways, but here are two principles to keep under consideration which
ever approach you use:
- Sourcing and
procurement are skills and not an administrative task
- The decision to
pay money out of a company account should always sit within the
responsibility of the finance director
It is vital that the difference between sourcing goods and services
(sometimes called the RFx process) and the administrative burden of
managing/drawing down on an already agreed contract is acknowledged. The latter
sits neatly within the purchase-to-pay process, and can even be improved by the
use of punch-out and internal procurement portals. The sourcing aspect requires
professional people that understand the business needs and have the skill set
to negotiate the most suitable contract for the company. If this is not
recognised internally, the company may result in attempting to save money on
“administration”, but end up paying a higher price in overpriced and incorrect
contracts. Likewise, procurement should never be responsible for the actual
payments, as this requires close cooperation with the treasury. Often
procurement’s focus will be the commercial relationship with a specific
supplier than with a financial representative in the company. Many larger
organisations have already put in place a global purchase-to-pay process owner
with responsibility for cross-system reporting, audit, transparency and
governance. However, they will not be able to deliver the full value of an
integrated purchase-to-pay function, if organisational design is not addressed.
Another area that AP could focus on more (and some departments already
do) is working closely with treasury to attain a better cash flow forecast.
These days (when cash is more important than profit), analysts do not like it
when corporates are not in line with their forecast, both positive and
negative. Companies that cannot forecast their cash correctly are considered to
be lacking in control and are therefore a higher risk. So by AP taking a firmer
position in this area, they will be able to show true shareholder value.
One of the tools AP can take ownership of to help with cash flow
forecasting is payables supply chain finance (SCF). Simply put, this is the
idea of allowing suppliers to be paid early in exchange for a discount. With
the effective AP processes some companies have today, the average time from
invoice date to the date the invoice is on the system and approved can be as
low as five days. With average payment terms in Europe being around 46 days
(REL Consulting, Working Capital Survey 2011), this means that the
invoice can sit idle on the buyer’s system for up to 41 days. SCF allows the
company to pay their suppliers early in exchange for a discount, and when the
company is short on cash they can simply stick to their original payment terms.
For companies that do not have this cash, the financing can be provided
by their bank, in what is called an ‘off balance sheet facility’. This means
the buying organisation does have to pay a fee for this facility based on
utilisation, but this cost will be more than enough covered by the discounts
offered by suppliers for an early payment. Roughly speaking the experience in
the market at the moment is that for every $100 million of spend, a company can
generate $1 million of benefits through SCF models.
A number of companies have taken this a step further and given both AP
and AR these kinds of tools. They have then merged the two departments into one
“working capital” department. This team tends to be split into two halves. The
first half focuses on exception management, sorting out any issues with both
outbound and inbound invoices. Simply put, if you have made a short delivery or
received a short delivery, it tends to be the same warehouse you need to talk
to, so why not let one person handle it?
The other half is then focused purely on working capital – or, to be more
precise, cash flow. By having this one team and the right tools the cash flow
forecasting is met every month as the department can manage the variables
between in- and outbound cash, in exchange for either more profit or less profit
depending on that month’s cash position. This allows accounts payable to become
not only a truly integrated part of Finance, but also of the business itself.
Conclusion
So regardless of what the next decade will bring for AP, it is clear it
will not stand still. But instead of just being about cost control, it will be
more a case of re-evaluating the organisation’s design and tools to optimise
the value-add. Some companies will embrace these changes and move from a
cost-centre structure to a profit-generating structure. Others will fight it
for as long as they can, but are likely to have it done to them - or have
someone take it over. With the global financial forecast for the next five
years not looking so strong, one thing is certain: change is coming.
