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AP Matters article: Technology and Expertise Drive Outsourcing
Lower wages play smaller role in AP outsourcing
It's not surprising that the term “outsourcing” tends to raise hackles. In the 1980s and '90s, many outsourcing arrangements consisted of what's referred to as a “lift and shift” of operations. That is, the process would stay pretty much the same but move to another region or country to take advantage of cheaper labor costs.

“It wasn't real successful,” says Stan Brewer, founder of Scan One, a Portland, Ore.-based provider of automated AP and AR outsourcing solutions. “There was a loss of accountability and responsibility, and a lot of hidden costs in chasing down [unresolved] issues.” Moreover, employees left behind often lost their jobs.

Today, technology is the driver behind many outsourcing agreements. “We win business because we bring our expertise and technology to the table,” Brewer says.

Although systems such as electronic invoicing or billing can streamline the accounts payable and receivables functions, it can be difficult for even large companies to justify the investment in them, says David Schnitt, president of IQ BackOffice of Encino, Calif. “Most AP and AR departments suffer from a lack a economies of scale” that would enable them to recoup their investments within a reasonable time. The outsource provider, by spreading its investment over numerous clients, can recover costs more quickly.

In addition, many outsourcing arrangements can be up and running in a matter of months, rather than the years it could take to implement a new system, says Gary Halleen, president and chief executive officer with API Outsourcing Inc. of St. Paul, Minn.

At the same time, many accounts payable and receivables managers recognize that their employees spend a lot of time doing data entry work, which fails to take advantage of their knowledge of the company, its purchasing processes, or its vendors. As a result, they pursue outsourcing programs that free employees from lower-value work and allow them to use their expertise to handle more complicated functions, such as managing vendor discounts or exceptions. That's not to say that no layoffs will occur when outsourcing enters the picture, but some employees can end up with greater job responsibilities.

Moreover, the emergence of software-as-a-service (SaaS) and use of the Internet means that suppliers of outsource services can cost-effectively bring their solutions to the middle market, says Henry Ijams, managing director with PayStream Advisors of Charlotte, N.C.

Outsourcing in the accounts payable area is growing at about 17 percent annually, PayStream reports. The most commonly outsourced functions are data capture and payment processing.

AP departments are finding other ways to work with outsourcers, too. Since 2005, flooring company Mohawk Industries of Calhoun, Ga., has persuaded many of its vendors to switch from paper invoices to electronic ones that flow through OB10, says Tracy Bryant, accounts payable manager. OB10, with U.S. headquarters in Atlanta, is a global business-to-business electronic invoicing network.

“OB10 is an electronic mailbox,” Bryant says. About 540,000 of the 1 million invoices Mohawk processes each year come through OB10's Web-based system. The suppliers, rather than sending their invoices to Mohawk, send them to OB10.

Once they arrive, OB10 converts the invoices to a format approved by Mohawk and transmits them to Mohawk's ERP system, where they're checked against purchase orders and receipts. Assuming everything matches, Mohawk automatically vouchers the invoices, Bryant says. If the documents don't match, they're dropped into an AP workflow to be manually processed.

Mohawk's shift to OB10 resulted from a mandate issued by senior management to cut costs and streamline, Bryant says. To do that, Bryant knew that the company needed to change its paper-based invoice process, rather than just replace one set of employees with another. Even if the new employees were paid less, keeping them in the process would maintain the potential for error.

Bryant continues to focus on converting more invoices to OB10 to reduce errors and contain costs, she says. Since Mohawk moved onto the OB10 platform five years ago, the number of employees in Bryant's area has dropped from 55 to 28. That's a result largely of the efficiencies gained through the use of OB10, although the number of invoices has dropped as the economy has declined, as well.

Looking for expertise
Along with technology, gaining access to outside expertise also drives many outsourcing arrangements. Mohawk Fine Papers Inc. in Cohoes, N.Y. (no relation to Mohawk Industries) is a case in point. The company outsources several specialized functions within accounts payable, such as the processing of freight payments, sales tax audits, and 1099s, says Mike Ruhm, CPP and manager of treasury compliance.

With each of these outsourcing arrangements, the company was looking for specific expertise, Ruhm says. For instance, in engaging a sales-tax audit firm, management wanted to check whether the company was paying more sales tax than was required. Because the company is a manufacturer, many of its purchases are exempt from sales tax. After hiring an expert to audit their returns and apply for state sales-tax credits where applicable, Mohawk was able to capture about $750,000 in credits. The audit firm also was able to suggest improvements to Mohawk's process.

By intelligently using Mohawk's outsource providers, Ruhm has been able to keep the AP department to only two full-time individuals; they handle the 20,000 invoices Mohawk receives each year. That's been the case even as the company's size nearly doubled in 2005, when it acquired the Fine Papers brands from International Papers.

Keys to success
Although Mohawk Fine Papers and Mohawk Industries have seen the benefits of their outsourcing programs, success and cost savings are not guaranteed. “It's not a given that you'll save money. There are plenty of trips and traps,” says Ijams of PayStream. To obtain the 24-to-36-month payback that Ijams says is possible, a few steps are critical.

The accounts payable manager needs to nail down the reason for outsourcing in the first place. For instance, is the goal to obtain outside expertise or to move low-value work out of the department? Achieving either objective probably will require different steps. It also helps to clearly understand your own process, so you can accurately explain it to the outsourcing firm, Ruhm notes.

The outsource solutions provider should use standard, rather than proprietary, computer systems, says Kathryn Spencer, manager of disbursements and controls with Thermo King Corporation, a Minneapolis-based manufacturer of temperature control systems. That way, the information that flows from its system can move directly and electronically into your system, with little or no manual data entry. For the past five years, Thermo King has used an outsource provider to scan and enter into its system the 120,000-some invoices the company handles each year.

What about perfecting your own system before embarking on an outsourcing arrangement? Here, the thinking has shifted a bit. To be sure, simply handing a broken process to an outsource provider will do little to improve it, notes Sushmitha Koka, research director at PayStream.

On the other hand, many outsource providers have seen a range of accounts payable and receivable systems and processes and can apply the best practices they've encountered to your processes, says Halleen with API Outsourcing. “Your outsourcing partner can help you fix the process.”

Once you're ready to work with an outsource provider, a solid contract with service levels agreements is key. It should spell out how performance will be measured and who will do the measuring. If the outsource provider does it, you will want some way to double-check the provider's calculations and assumptions, Spencer says. The contract also should nail down the data flow and identify the people who will have access to it. In addition, it should include a calculation showing how fees will be assessed.

The new model of outsourcing is likely to become even more prevalent given the emphasis on containing costs at many companies. As it does, the role of many AP and AR managers will shift from a focus on managing people to an emphasis on managing the process, Ijams says. “They'll be less worried about who is doing the process, and more about how it's being done.”

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