For firms struggling with a mountain of unprocessed invoices there is a question that is top of mind:
Should we pursue accounts payable outsourcing services?
As back-office and administrative tasks pile up due to either an increase in invoice volume or business growth, financial leaders will have to outline the stumbling blocks holding the business back and define what success looks like. If there are limited resources within your accounts payable (AP) department, it’s key to identify how the function can scale to better process invoices when volume increases. This is in addition to all of the other financial tasks you need to take on to keep the business growing.
For many firms, the AP personnel tasks are not always as integrated into the business as another function such as operations, so it can be an attractive offering to outsource some of the paperwork. Of course, there are some downsides to using third-party accounts payable outsourcing services.
In this post, we’ll define and add detail to the practice of accounts payable outsourcing, but also examine the alternatives to accurately and efficiently manage a backlog of unpaid invoices, including AP Automation.
Let’s get started.
What is accounts payable outsourcing?
Accounts payable outsourcing is the business practice of using a third-party vendor to administer invoice or bill related processes. The list of services varies but the vendor will generally perform functions such as invoice capture, purchase order (PO) matching, and processing, payments, archiving records, and reporting.
With that in mind, there are pros and cons of using third-party AP services, and it’s of the foremost importance to weigh the benefits of outsourcing to the potential vulnerabilities depending on the context of your unique situation.
Most companies looking to outsource accounts payable are dealing with one (or many) of the following issues:
Your AP team is overwhelmed with their workload
It’s not at all uncommon for AP departments to become completely overwhelmed by their workload. This is especially prevalent when businesses experience periods of rapid growth, which is often accompanied by an increase in invoice volume. While this is great for sales, it also puts additional pressure on your AP staff. This is especially the case for paper-based processes and those manually entering data, chasing down approvals, and heavy PO-based processes. Every additional invoice adds further load and over time, dampens AP productivity.
Related reading: See how Renova Energy reduced invoice processing time by 50%.
Your invoice processing costs are too high
In an earlier blog post, we explained that manually processing a single invoice can cost as much as $30. If you have an inefficient workflow that is misappropriating valuable time and resources, dealing with uncooperative vendors, or just a lot of back-and-forth communications between departments to verify invoices, the costs can add up quickly.
When upper management is looking at these costs from a high level, they will likely be interested in exploring all options for reducing those costs, including outsourcing.
Your AP process lacks controls
While mistakes are inevitable with any manual process, duplicate payments cost businesses money; a lot of money in fact. In one report, “on average, approximately 0.1% to 0.05% of invoices paid are typically duplicate payments.” Depending on the size of the business, this can mean hundreds, thousands, or even millions of dollars lost in duplicate payments when controls are not in place.
Additionally, missed or late payments cost your staff time when they have to right the wrong by recovering erroneous spend, which in turn, reduces time available for other AP functions.
Your vendor relationships are suffering
Vendor relations should be taken as a customer service approach, because vendors can (and will) pull contracts from your company if they find it difficult to work with your business. From missed due dates or non-payments, vendors will be in touch with the AP department to track down the status of their payment which again, takes away valuable time from accounts payable. No matter the circumstance, when a vendor is missing a payment, it’s always your fault. Vendors will sometimes resend the same invoice and through multiple mediums to ensure they are paid, which as mentioned in the previous listed issue, can result in double-paying an invoice.
You would rather pay for an AP service rather than hire more AP staff
Oftentimes financial leaders are concerned with the increased overhead that comes with hiring additional full-time employees, or they don’t have time in their day-to-day obligations to vet recruits, or are simply concerned about staff turnover. These concerns can make it very appealing to outsource some (or all) of the accounts payable function, which ironically, becomes another invoice.
Do any of these sound familiar? So do you solve these problems with outsourcing or automation? Let’s explore.
How to Solve Accounts Payable Issues: Outsource or Automate?
As we mentioned, there are pros and cons of outsourcing your AP tasks. Let’s break them down.
The benefits of outsourcing accounts payable
Potentially reduced costs – It’s possible that outsourcing your AP duties will be more cost-effective than hiring and training your own team. You won’t have insurance, pensions, or office space and equipment to worry about, so depending on your situation, outsourcing may save you money.
Increased resources – Outsourced AP solutions are generally going to come equipped with technology (i.e. AP Automation platforms) to handle their workflows. This means that they’ll have systems in place to handle both a PO-backed or non-PO process, discrepancy resolution, vendor management and sometimes administrative support.
Administrative, tracking & reporting – Since you’ll be paying this vendor a fee to manage your AP, they’ll often provide reporting among other administrative functions. Managed AP services can offer reporting on cost per invoice and time to payment among others, and routines such as analysis, month and year-end close, reconciliation, and AP document management.
Uptime and accountability – Given that this is their sole purpose, your AP needs will receive a lot of attention. It’s not as if the vendor is a mix of roles from CFO and Controller, to AP Manager and AP Processor, which can happen at smaller firms—one person wearing many hats. Depending on where the vendor is located or if they have a distributed staff, you may find one with near-constant uptime when they are utilizing technology like AP Automation.
The drawbacks of outsourcing accounts payable
Loss of control – It goes without saying that anytime something is happening outside your building, you’ll have less control, and outsourced AP vendors are no exception. If an emergency happens, they likely won’t spend the weekend making it up. Additionally, it’s unlikely that they’ll be able to conform to your AP workflows exactly, so you’ll be doing things their way. Also don’t be disconcerted when outsourcing AP and they have eyes into your financials, loss of privacy is one drawback and a vulnerability when it comes to internal controls.
Flexibility – If you’ve worked in AP long, you know that things don’t always go perfectly. All companies have exceptions processing, but depending on the contract with your AP vendor, they may not. Since their business model is built on low processing costs for invoices, they may kick exceptions processing back over to you or your team. Or at minimum, require a touch-point to provide direction.
Dependency – While it’s great to be able to hand off a responsibility you don’t like or can’t fulfill, it also makes you rely on that vendor. If they experience any issues that interrupt service for you, there’s little you can do to make sure your own vendors are still getting paid on time. This is especially true for overseas vendors.
Errors – While an outsourced vendor should have better controls and, theoretically, make fewer errors than an overwhelmed AP department, errors will still happen. And when it’s time for you to go back and audit the trail of documents, you may have limited access to be able to find where something went wrong. If this is the case, a small error can quickly turn into a huge hassle that goes unresolved for days or weeks. It would be wise to identify if the outsourced solution is leveraging complete AP Automation or manually keying in data for any step in the process.
Communication – Every reputable outsourced AP vendor will have some sort of live customer support, but how they communicate with you will be on their terms. There’s unlikely to be a lot of deep insights that may help your business run better, smoother, and more efficiently from a financial perspective the same way a rockstar AP department would. It’s also worthwhile to take note of their office/staff locations as outsourced AP services can be hosted overseas, which can be a communication barrier.
So is outsourcing right for your organization?
If you truly just don’t want the headache of accounts payable and you’re willing to accept some of the limitations listed above, then outsourcing may be a good fit for you.
If you’re just looking to solve some of the common issues organizations have with accounts payable—the ones we listed in the first section—we urge you to look at AP Automation.
For instance, you can implement Stampli’s best-in-class AP Automation software and train your team in as little as one day. It would take you a week just to set up introductory calls with outsourced vendors.
If you’re concerned about still not having enough time to process all your invoices in house, consider the fact that Family Allergy and Asthma, a Stampli customer, reduced their invoice processing time by 90%. If you could reduce your time to process invoices by 90%, do you still think you’d have to add employees to get through your backlog? Likely not!
Additionally, when you own your own AP process you can turn accounts payable into a strategic partner for your business. As opposed to your staff spending hours on manual data entry, you can automate that and have them spend their time combing through vendor contracts looking for early payment discounts since you’re no longer missing deadlines.
If you have any questions about outsourcing vs. automation, one of our AP Heroes would be happy to talk with you.