Creating an Automation Business Case for Accounts Payable

Creating an Automation Business Case for Accounts Payable

Intro

In the previous post, “Creating Process efficiency in Accounts Payable with Process Automation, we demonstrated a digital transformation to improve Accounts Payable (AP) using process automation.   Automation is a type of transformative process solution enabling shorter cycle times, a higher level of data quality, and fewer human resources to create efficiency.  

For example, assume you reduce the cost per AP invoice by $1.00 and you process 500 invoices per day. This translates to cost savings around $1M/year.  Furthermore, if you reduce the number of AP invoices requiring correction by 1%, the subsequent amount of rework is reduced by 10,000 invoices per year.

Let’s assume your cost to process an invoice is around the median of $6 per invoice and the cost of correction is twice the original entry cost. Higher quality results in an additional cost savings of $120,000/year. It starts to become easy to see opportunities on realizing payment discounts, avoiding penalties, and doing more with less headcount.  

Let’s review in a little more detail how automation in AP can translate to business value. There are several metrics that can be used to establish a business case, depending on your organization’s goals. APQC provides a list of benchmarked metrics in their “About APQC’s Open Standards Benchmarking Measure List”. Here are a few of them:


  • Total cost to perform the AP process, per invoice processed
    This metric is defined as the total cost to perform the process “process accounts payable (AP)” / Number of invoices processed.

    This efficiency metric states that the more invoices processed at a given cost, the greater the efficiency. Alternatively, the lower the cost for a given number of invoices, the greater the efficiency. The metric also begs the question of how well your AP process will scale with business growth.

    Manual AP processes can cost businesses from $2.00 to $10.00 per invoice with a median just under $6, i.e. 300% higher cost than top performers (it can vary by industry).[i] Some surveys indicate the metric can be as high as $13 per invoice. [ii]

    For example, assume you reduce this metric by $1.00 and process 1000 invoices per day. This translates to a potential direct cost savings around $1M/year.
Cost/ Invoice (Manual) Inv. Processed / Day Annual Cost/ Invoice Savings/ Inv. Savings/ Year ($/invoice)
$2.00 1000 ~ $520k $0
$5.00 1000 ~ $1.3M $1 ~ $260k
$10.00 1000 ~ $2.6M $2 ~ $520k
$10.00 1000 ~ $2.6M $5 ~ $1.3M


There is also an indirect cost savings by reducing the number of invoice errors.


  • Cycle time, in days, to resolve an invoice error
    This metric is defined as the cycle time in calendar days from discovering an invoice error to its resolution.

    This metrics has value in several areas. The first is that improved quality reduces the number of invoices requiring correction. If we increase quality, i.e. fewer invoice errors, FTES are redirected to resolve invoice errors, thus we improve cycle time.  In addition, each invoice error creates the potential to incur a payment penalty or miss a payment discount for timely payment.

    Those AP functions that have fully implemented electronic invoice matching systems take advantage of 80% (at the median level) of available discounts compares to 62% of those who do not.[iii]

    According to APQC benchmarks, top performing organizations clear invoice errors in 3 days compared to the median of 5 days, i.e. 166% longer vs top performers. The lowest performers clear errors in 7 days, i.e. 233% longer than top performers.[iv][v]

    A survey by IOFM, indicates 3% to 10% of PO invoices require correction. [v]

Quality Improvement and Reduction in Errors

Inv. Err
Rate (%)
Inv.
Processed/ Day
No. of Inv.
Errors/ Day
No. of Inv.
Errors/ Year
Cost Avoidance –
Errors/ Inv. /Year
10% 500 50 ~100,000  
5% 500 25 ~50,000 ~ 50,000
3% 500 15 ~32,000 ~ 70,000


Assuming corrections are more costly (1-10-100 rule), a reduction in corrections reduces the workload, and improves cycle times. A reduction in corrections from 10% to 5% decreases corrections by 50,000. At an average hourly cost is $12/hr (~ $25k/year), and it takes two hours over several days, it avoids $1-1.2M/year in wasted efficiency. 


  • Number of invoices processed per FTE
    Number of invoices processed / Number of FTEs who perform the process “process accounts payable (AP)”

    This metric ties a direct correlation between the number of invoices, data entry, and validation. For primarily manual efforts, this greatly increases the data entry and validation time.  Greater speed of entry and validation improves efficiency and improves quality.

    An organization with limited to no automation, processes around 2,000 invoices/FTE per year. With moderate automation, that number increases to 10,939 invoices/FTE/year. At a high level of automation, it can reach over 22,500 invoices/FTE/year.[vi] Another survey indicates the average time to process an invoice is 8.6 days.


A Sample Business Case for AP Automation

The primary value for AP automation is the opportunity execute 5x to 10x faster than a human, at a fraction of the cost. In addition, the elimination of human copy/paste or manual entry improves the quality, reducing rework.  In an AQPC Survey on AP automation, organizations that leverage process automation process 11,000 more invoices per AP FTE.[vii]

Let’s look at a high-level business case. Let’s assume that for an AP item entry:

  • Data entry is an average of 15 minutes per item.
  • Daily volume is processing 500 invoices per day.
  • Assume a bot can perform 5x faster than a human, processing an invoice in 3 minutes.  

Note, this can vary greatly depending on the distribution of paper vs. electronic invoices. Variation is also based on the organization size and industry. Furthermore, based on exceptions requiring more time, we try to find an average. According to research by PayStream, for SMB sized organizations, paper can be around 45%. Large organizations can still have paper invoices upwards of 28% or more. [viii]

Example: AP Efficiency with Process Automation

Avg.
Manual
Entry
Time
(min.)
AP
Items/ Day
FTE
Required
per 8-hr
Day
(Manual)
Speed
Multiplier
(5 = 5x)
Bots
Avail.
Bot
Entry
Time
Items
per Day
Bots
Required*
15 min. 500 items 16 FTE5 24 hrs/ day 3 min. 576 items 2

* ”Bots” are virtual agents performing the automated task.

Based on an 8-hour day, a single clerk can process 32 items per day.  This process would require 16 clerks to process 500 items/day. A typical AP clerk can have a payroll cost of $25k to $35k per year.  Assuming the lower salary, this amounts to $400k in payroll cost.  In this example, automation could be 25% to 50% of the payroll cost. This enables personnel to focus on higher value tasks as opposed to rote data entry.

  • Total Cost to Perform the AP Process, per invoice Processed
    Automation lowers the total cost by leveraging automation at a lower cost point to process invoices. This also scales at a cost of < 50% of a new FTE. Running 24 hours/day, 2 “bots” can process more invoices than 15 FTEs.

  • Cycle Time, in Days, to Resolve an Invoice Error
    Cycle time decreases because we reduce errors through improved quality, thus require less time and resources to correct. Secondary benefit is paying fewer penalties and increasing the % of payment discounts.

  • Number of Invoice Processed per FTE
    This metric improves by reducing the number of FTE’s required for AP processing. This provides a metric directly between effort and output measuring efficiency in processing, improved quality. Each automated invoice also improves cycle time.

Finance executives are seeking ways to improve their operational cost while reducing non-value added effort (manual data entry, correcting errors). This leaves more time to address less mundane tasks to drive value in the organization. According to a AQPC study, Financial Management executives have identified the following key activities for the year: [ix]

  • Implementing process automation: 66%
  • Improving process performance: 65%
  • Implementing new tools and technologies: 64%

Technologies such as Robotic Process Automation (RPA) implementation are a fraction of this payroll cost. In addition, automation can be applied to any rules-based process in the organization, at an smaller incremental cost. This creates the opportunity for a much larger Return-on-Investment (ROI), as opposed to using a more narrowly focused, AP specific automation technology.

What are your priorities in the finance function? What are your digital transformation goals in finance? What is your Intelligent Automation strategy?

Contact Votum to understand how we can help in your Intelligent Automation Journey.

info@votumtg.com


[i]Metric of the Month: Accounts Payable Cost”, Perry D. Wiggins, CFO.com, 5 February 2018

[ii] “Key Benchmarks to Measure the Effectiveness of your Accounts Payable”, Acom Solutions, Nov 2017

[iii] “The Benefits of Automating Accounts Payable”, APQC, May 2018

[iv]AP Process Issues: Symptoms, Root Causes, And Risks”, Mary Driscoll, Digitalistmag.com, 31 August 2016

[v] “Ardent Partners’ Accounts Payable Metrics that Matter in 2019”, Ardent Partners, February 2019

[vi]How to Use Key Metrics to Chart your AP Improvement”, Institute of Finance & Management, Fall 2017

[vii] “Robotic Process Automation (RPA) and Accounts Payable”, APQC, May 2018

[viii] “2018 Payables Insight Report”, PayStream Advisors, Q1 2018.

[ix] “Top Priorities for the Finance Function in 2019”, APQC, January 2019