20 Sep 2011 AP automation – What is the cost of inefficiency?
You have a set of accounts payable processes that would be comfortable in a 19th century setting. Pieces of parchment passed from from the vendor documenting the agreed transaction. An original signature scrawled with indelible ink pen proving the authenticity of the document. And the legislation surrounding the processes – the laws that allow the authorities to be sure that they’re getting their slice of the commercial cake, rely on these paper processes.
This is why AP is so inefficient? It’s not because finance people are stupid. It’s not because they’re technophobes. It’s because they have their hands tied by laws crafted centuries ago. And this inefficiency is costly. There’s the cost of paper, there’s the cost of transferring paper based data to an ERP and there’s the cost of archiving. But these costs are insignificant. The real cost of inefficiency is the opportunity cost of not being able to manage AP the way a 21st century organization can.
You could count the cost of processing invoices. You could count the cost of late payment penalties. You could count the cost of contingent labor. All of these cost would improve if AP is automated but to concentrate on these metrics is missing the point. Dynamic discounting for example, gives you a return on capital in excess of 20%. Reverse factoring allows you to double your DPO. Who cares about reducing the cost of your transactions when you can make transformational improvements like that?
AP automaton isn’t about getting better at the paper process – do it right and you can completely reinvent the way AP operates moving away from being a transaction based operational department to a truly strategic function..