How Account Payable Automation helps in tracking the critical Process KPIs?
How Account Payable Automation helps in tracking the critical Process KPIs?
Glad to see that you are exploring what are the critical KPIs you should track and how you can maximize your gain post your Account Payable Automation Solution implementation.
Once I was in a weekly team meeting and discussing about identifying and measuring some KPIs for one of our existing processes, I observed that I could classify three categories of employees in the room: one category comprised of employees who tend to say that what is the need for change as things seems to be going on well, second category seems to be sitting on the fence and waiting to be convinced, the third category I would like to call the enthusiasts as if they were waiting for this to arrive. Well, I had to do lot of campaigning for the coming two weeks to turn more people into enthusiasts by showing them what’s in for them in this change and how it links up to the organizational benefit.
Let me get back to the context of measuring KPIs for an AP Processes. Before the AP process was automated it would have been difficult to track and measure KPIs. Even if you wanted to do it, it was a manual tracking are reporting process. I have observed that a manual tracking and measuring of KPIs is time consuming, inaccurate and biased. Now if you have automated your AP process then you are creating digital data at every step of the process which you can use it to track, measure and report timely and accurately.
Why should you track accounts payable KPIs?
Tracking your Accounts Payable (AP) metrics is beneficial in many ways, but the ultimate aim is to measure and analyse results for improvement. Without tracking, measuring, and analysing your metrics on a regular basis, it will be difficult to identify AP areas that require change. Also measuring AP metrics will let you know if you are continuing to get the ROI which you had envisaged initially.
“ What gets measured, gets improved.”
~ Peter Drucker, Management Guru
What are the broad level AP Automation KPIs
Often we measure KPIs related to Cost, Time, Quality but sometimes ignore Supplier Relations related KPIs
Accounts Payable(AP) team being a cost centre, management expects the functional head to reduce cost of operations and further do more with less. Hence most of the KPIs are generally derivatives of Cost, Time or Quality. However sometimes we ignore to measure the health of Supplier Relationship. I will try to give it a bit more attention in this blog than it normally gets.
Below I am recommending to track and measure the following seven critical process KPIs for your automated AP process.
KPI #1: Cost Per Invoice Processed
Here you calculate all your costs like people cost, hardware cost, software cost, infrastructure cost and then divide by the total number of invoices processed.
KPI #2: Average Cycle Time of Invoice Processed
Here you consider the time span of when an invoice comes into your system till payment is made to the supplier against the invoice. You take an average of this time span of all the invoices which comes in for a specific week, month or quarter.
KPI #3: Early Payment Discount Missed
Once you have automated your AP process it is easy for you to electronically access the early payment discount for each of the invoice under process and in some cases it may automatically appear in the console of the AP staff. Hence, if your organization has made a decision to avail the early payment discount, in that case there should not be any missed opportunity. In other words the missed opportunity should be zero.
KPI #4: Wrong Payments against invoices
This generally happens by two means- payment against duplicate invoices, more or less payment against invoices. Before AP automation the number of wrong payments done surely existed but after AP automation these cases are expected to reduce significantly. But still it should be tracked and reported.
KPI #5: Hardcopy invoices received as a percentage of electronic invoices
One of the basic goals of any digital transformation initiative is to reduce paper document based processes. This can be achieved by diligently working towards reducing the handling of paper, storing and archiving of paper, retrieval of paper when required. Unless we track the source of hardcopy invoices we cannot reduce it eventually. Our data capture will show that some specific suppliers send paper invoices more than others. Work with those specific suppliers to reduce the number of paper invoices in the coming months.
KPI #6: Volume of Invoices Processed
Tracking of volume of invoice processed is important from a capacity planning perspective. This is specially important for businesses whose nature of business is cyclical or seasonal. One may argue that after automation this may not be important as capacity to process invoice is inherently increased. However, I would agree to it only if the level of automation achieved is close to 100%. Till then this KPI is still important.
KPI #7: Supplier Relations- Number of supplier enquiries, discrepancies and disputes
If you agree that your success is dependent on your suppliers and partners then why not measure it and improve it. Hosting Annual Supplier Conferences to recognize a few Suppliers may be necessary but not sufficient to keep them motivated so that they continue to support you in your success.
I agree that measuring the health of “relationship” is not as easy to measure parameters like “cost” and “time” as these parameters can be easily hardcoded.
I would suggest to take up two initiatives to measure “indicators” which will give you a good idea of your state of Supplier Relations. Have a bi-annual written feedback (preferably anonymous) on key parameters and work on them to improve upon. I chose to leave it at that for now as it is beyond the scope of this Blog title.
Let me come back to the context of AP Automation. AP automation helps you to reduce number of supplier enquiries, discrepancies and disputes. Obviously, the lower this figure, the better.
Handling supplier enquiries, discrepancies and disputes ties up valuable resources which will impact AP efficiency negatively. If you consider the suppliers calling you repeatedly to know the status of their invoice payment as an irritant then it is an irritant for the supplier as well. A research by IDC shows that there is a reduction of 45-50% in the number of questions from suppliers to the AP department post implementation of AP automation.
Beyond the Basics
Recently I was reading an article on the use of Artificial Intelligence(AI) in Business Strategy. What it said was that the companies who will use AI better will be better placed in devising their business strategy. However, we all know that one of the key pillars of AI is collection of data: structured and un-structured.
When it comes to measuring AP performance, automation allows for the centralised data collection of all your payment data. The more you automate, the more data the system collects. Then advanced and predictive analytics gives you a full view of your organisation’s entire spend profile, meaning you get total insight, oversight, and hindsight into your AP operations.
Pro Tip #1:
Using AP automation application, design your “Approval Work-flow” judiciously. You don’t need to have the same number and level of approvals for an invoice value of Rupees 10,000 and Rupees 100,000. Remember that waiting for approval is often a show stopper in any business process.
Pro Tip #2:
Using AP automation application, configure your “Business Rules” judiciously. Don’t raise an error report and route it for special approval for a PO to Invoice value mismatch of one Rupee or less. I have talked to AP executives who have been instructed by their management to do it and hence they have been doing it for years. This increases the cycle-time of invoice processed and effort hours. If this is not “penny wise pound foolish”, then what is?
Pro Tip #3:
Ensure that your AP automation application has a robust mobile approval feature. I have observed that approvers often travel and hence help them to provide their approvals faster and reduce the cycle-time.