The cost-savings that can be realized by going paperless in A/P make electronic solutions compelling to companies that want to trim the bottom line.
Written by Mike Rooney
Editor's note: This article introduces the white paper "Paperless Accounts Payable—Streamlining the Purchase-to-Pay Process," which is available for free download from the MC Press White Paper Center.
At the 30-thousand-foot level, Accounts Payable looks trivial: an invoice comes in and a check is sent out. However, the details are never that simple. As it happens with most processes, A/P is bound by paper, including invoices, receiving documents, purchase orders, the actual checks, and a myriad of other reports, statements, and more that permeate the company and eventually make their way to A/P's filing cabinet.
Hidden Costs in A/P
A/P is often seen as a non-core function as it doesn't generate revenue (quite the contrary, it sends out cash); it doesn't make, market, or sell products, and it doesn't directly impact customer satisfaction. Yet A/P deserves much more respect. It can be a tremendous drain on profitability when performed inefficiently. What's more, inept A/P processing jeopardizes vendor relationships, which may tip the balance toward a competitor in times of supply shortages.
Paper is a major source of A/P inefficiency. The vast majority of companies have not implemented fully electronic supply-chain communications, nor will they in the immediate future. Instead, invoices arrive from suppliers via a variety of media, including fax, email, and regular mail. These invoices are then matched with other pieces of paper, such as purchase orders, order confirmation documents, receiving documents, and payment authorizations issued by the appropriate levels of management before a check is issued.
The receiving, shuffling, filing, retrieving, copying and processing of paper takes a tremendous bite out of a company's profitability. Estimates of the average cost of processing a paper invoice range to as much as $8 or more—and that assumes that everything goes perfectly. Industry analysts suggest that, when things go wrong, the average cost to search for a misfiled document is $120.
Because paper is the problem, eliminating paper is the solution. This is often not entirely possible as moving to all-electronic communications for all business interactions is beyond the technical and/or financial capabilities of many purchasers and vendors. Nonetheless, significant value can be derived from converting physical media to bits and bytes as soon as possible after paper enters the organization and by keeping it electronic for as much of the A/P process as possible.
Benefits can be maximized by looking beyond A/P to include the full Purchase-to-Pay cycle. Data can be passed and documents can be matched across the various phases in this cycle much more cost-effectively and with far fewer errors when these tasks are done electronically rather than physically. This is not to say that your first paper eradication project needs to be an all-or-nothing affair. Processes can be digitized in phases, but the initial planning should consider the whole Purchase-to-Pay cycle to ensure that integration is seamless as the various phases are brought online. In moving from paper to bits and bytes, the most important consideration is not technology: it is business processes. Before making any decisions or taking any actions, analyze your business processes and the information flows—paper and otherwise—that underlie them. Then, and only then, can you map out a path to optimize operational efficiencies through Paperless Process Management (PPM).
How Dependent on Paper Are You?
An interesting test to measure how paper is affecting your company is to go to the A/P department and ask if you could take a look at that invoice from vendor ABC that was paid last month. Typically, this kind of request is followed by a sigh from the A/P staff member as he or she looks over to the row of filing cabinets sitting at the back of the room. The process involves going to those filing cabinets, trying to locate the vendor file, and hoping it wasn't misfiled. If the invoice is not in the vendor file, then it needs to be looked up in the financial system or ERP to locate the purchase order; maybe it was filed with the original PO in the wrong place. Or it may have been filed under a different letter altogether in the invoice cabinet. Whatever the case may be, a simple request to pull up an invoice can take anywhere between 5 and 35 minutes. That's why every year there is something called the "audit week," which is when auditors come in to verify the books, and the whole A/P department tries frantically to get the paperwork requested. All this time and labor is a big portion of increasing costs your A/P department has to face due to its reliance on paper. For public companies, it becomes even more critical since not being able to reproduce requested documentation for the auditors can translate into hundreds of thousands of dollars in fines.
How to Untangle Your Processes
"When I looked at the size and scope of the business process we had become slaves to, I decided we had to develop a paperless business model," reported John C. Schmidt, the Group Manager for Landoll Corporation's Purchasing, OEM/Government, and Transportation businesses. This is a common thread among companies that want to get rid of their paper: one day the costs and the pain of processing paper is hard to ignore and something has to be done about it.
The first step is to understand your processes. Elaine Handley, Accounts Payable Manager for High Point Furniture Industries, recommends, "Make sure before you start the project that you really know and understand what your processes are. Know where you are today and where you want to be in the future and how you want to get there." When HPFI decided to eliminate paper in its A/P operations, the first step was to fully map out the flow of tasks and of the paper process and identify bottlenecks. Once they had it all drawn out, they involved key employees to work on improving the process flow and to identify "what if" scenarios.
As you work your way through the process diagrams and pinpoint where paper should be eliminated (usually via document imaging and workflow), everyone needs to agree as to what the new process will look like. Involvement of the users of the system helps decrease the stress level and makes the change easier.
In order to guide you through this process of paper elimination from your A/P operations we have written a comprehensive white paper titled "Paperless Accounts Payable—Streamlining the Purchase-to-Pay Process" that you can download for free from the MC Press White Paper Center. It shows you which areas to analyze, discusses case studies from companies that went paperless, and helps you calculate the return on investment (ROI) for your own paperless project.