By James Tucker, Director of Marketing and Financial Solutions, Ariba.
Finance and accounting functions in shared service organisations continue to rely on outsourcing to reduce costs and generate operational support. Demand is still heavy for the service, but the rationale for choosing F&A outsourcing has changed.
While cost containment remains a key driver for outsourcing decisions, global organisations today are looking to move beyond labour arbitrage to optimise their business processes to achieve the next wave of cost savings. Clients expect transformational outcomes, better business alignment and improved efficiencies from their outsourced operations and are increasingly open to shared services models and risk-reward pricing.
In response, business process transformation has moved front and centre for leading F&A outsourcing providers. Going forward, the business case for F&A outsourcing will be more broadly defined. Above and beyond lowering hourly rates for manual invoice processing, F&A outsourcers will be measured by how they can contribute to a reduction in invoice errors and supplier inquiries, higher straight-through processing rates, and an improved working capital position. Factors such as end-to-end invoice processing costs, increased compliance and improved discount capture are the new yardsticks for measuring F&A outsourcing effectiveness.
In this new era of F&A outsourcing, traditional outsourcing models, especially those that emphasize legacy technologies such as scanning, will no longer thrive. As F&A outsourcers strive to bridge the gap between expectations and capabilities, the ability to leverage electronic invoicing will be key.
Traditional F&A outsourcing engagements have emphasized a “lift-and-shift” approach, transitioning accounts payable (AP) processes such as paper invoice handling, scanning, indexing, and loading into a workflow tool to lower-cost locales.
While labour arbitrage has reduced accounts payable processing costs, the savings are limited to paper scanning and indexing. Activities such as invoice matching and exception handling, responding to supplier inquiries, and early payment discount capture
remain in-house, managed by the business units and higher-cost AP resources. Moreover, a scan and index focus perpetuates the flow of paper invoices. AP continues to manage the exceptions because the source of the problem—paper—has not been addressed.
Studies show that companies on average have invoice error rates of 11 percent, while 17 percent of invoices must be reviewed by management due to errors and exceptions. These issues are not resolved by F&A outsourcing, they are simply transferred to the outsourcing provider. This perpetuates a string of inefficiencies ranging from a higher cost of procurement to heavy discount leakage to late payments, creating friction between the buyer and the supplier.
The mounting costs of managing invoice exceptions and approvals have offset much of the cost savings from traditional F&A outsourcing. In response, a new generation of F&A outsourcers now focuses on driving transformational change and, in the process, improving collaboration between buyers and sellers.
The Rise of the Networked Enterprise
In its study, “The Rise of the Networked Enterprise: Web 2.0 Finds Its Payday,” consulting firm McKinsey & Company predicted the emergence of a new breed of companies. It defined these companies as those that employ collaborative Web 2.0 technologies to extend their ERP and back office systems to connect with customers, partners, and suppliers. According to the report, these fully networked enterprises are more likely to be market leaders, gain market share, enjoy higher margins and outperform those organisations that are not using network technology.
The trend is clear: Improving organisational productivity requires collaboration outside the enterprise, and F&A outsourcers are rushing to support this trend. Electronic invoicing (e-invoicing) is the catalyst for change, enabling the electronic exchange of information relating to the purchase and sale of goods and services between buyers and sellers. The ability to capture this vital data electronically from the source is a game changer. It shifts the perception of accounts payable as a tactical organisation that pays the bill to a strategic resource that helps manage cash.
In this new world of F&A outsourcing, the accounts payable function is no longer concerned only with transaction processing. AP becomes a key partner with IT to help streamline business processing, with treasury to help manage cash better, and with procurement to help enforce compliance to contracts and preferred suppliers.
E-invoicing provides the technology foundation to drive this transformation.
F&A Outsourcing 2.0
The big change in F&A outsourcing is the new focus on transformation-led outsourcing engagements.
Specifically, F&A outsourcing engagements are being driven by the outsourcing service provider’s ability to:
- Satisfy the client/market push for innovation
- Shift from tactical to strategic capabilities
- Drive productivity through FTE reduction
- Enable rapid scalability
These imperatives are pushing outsourced operations to embrace proven technologies such as e-invoicing to deliver greater client value. E-invoicing fosters the shift from a full-time equivalent (FTE)-heavy engagement to a business model where increased invoice volumes do not proportionally increase the resources required to handle them. As BPO engagements reach performance thresholds, e-invoicing ensures cost containment that an FTE-dependent model can’t support.
E-invoicing automates the low-value, manual activities associated with invoice processing. In the process, it frees critical resources for higher-value tasks. Elimination of errors, increased supplier collaboration, and lower processing times translate
to reduced invoice processing and supplier management efforts.
Real-time responsiveness to volume fluctuations in the business side is addressed through flexible ramp-up and ramp-down of operations. By supporting the deployment of transformational technology like e-invoicing, F&A outsourcers save on resource requirements and training, thus facilitating rapid transitions. The net result is more predictable costs, reduced resource dependency, and a greater return on the investment.
A New Pricing Model
To support these changing requirements, F&A outsourcing is shifting from a static, time and materials and FTE-based pricing model to more dynamic and mutually rewarding risk-reward pricing. When executed as fixed price contracts, traditional F&A outsourcing models provide few incentives for process enhancements or SLA improvements. With the adoption of e-invoicing, service providers can deliver more with less and also promote other best practice behaviour such as catalogue-based spending, improved discount capture, and supplier rationalisation. Clients are responding favourably to these expanded capabilities and to the innovative output-based and outcome-based pricing models.
F&A outsourcing anchored by e-invoicing ensures sustainable process efficiency gains for the service provider as well as its customers. Results can be monitored by metrics such as touchless transaction processing rates. As e-invoicing replaces paper invoice processing, best-in-class companies are achieving touchless invoice processing rates above 90 percent.
As labour savings normalise, process transformation is becoming the new focus of F&A outsourcing. Organisations today are looking to optimise their processes as a precursor to a fully outsourced F&A model. While legacy technologies like EDI and OCR provide incremental business process improvements, F&A outsourcing models are moving beyond them. Those that incorporate the power of a smart invoice network with on-demand applications for procure-to-pay automation are poised to deliver new standards of innovation. Organisations that align with this new generation of F&A outsourcing providers will realise a greater return on their investment.