Accounts Payable Outsourcing Solutions: Pros and Cons

July 10, 2022
6:00 pm
BPO Insights
Accounts Payable Outsourcing, Finance and Accounting Services

If you’re having trouble handling your Accounts Payable processes, it’s easy to think about Accounts Payable Outsourcing services.

Before you can decide, you must balance the advantages and disadvantages of hiring outside assistance against the potential benefits of automating your own Accounts Payable process to maintain your payments, data, and paperwork in-house.

We will guide you through selecting an outsourcing option, from explaining what Accounts Payable Outsourcing solutions are, to discussing Accounts Payable automation’s benefits and drawbacks.

What is Accounts Payable Outsourcing?

Accounts Payable Outsourcing involves outsourcing a company’s financial processes to a qualified third-party provider. The in-house financial burden is lowered by employing an expert third party to electronically capture and process vendor invoices, accounts payable, and payments for the firm.

See more» [Webinar Report] Accounts Payable Outsourcing Best Practices

When should businesses outsource Accounts Payable?

Many business owners are dealing with one (or more) of the following problems when they consider outsourcing their accounts payable operations.

Their workload is overwhelmed

When businesses experience rapid expansion, it is frequently accompanied by an increase in invoice volume. While it’s excellent for revenue, it also puts more pressure on your Accounts Payable staff. This is especially the case for paperwork processes and those who manually enter data, seek approvals, and have heavy PO-based procedures. Every new invoice adds additional strain and gradually reduces Accounts Payable efficiency.

Their budget is overspent

Suppose your procedure is inefficient and misappropriates time and resources. In that case, the expenditures may mount up if you have uncooperative suppliers or simply a lot of back-and-forth communications between departments to confirm invoices.

When senior management is looking at these expenditures from a high level, they will certainly be interested in investigating all alternatives for lowering those expenses for invoice processing, including outsourcing.

They have weak controls of the Accounts Payable process

Duplicate payments are costly for businesses. Depending on the company’s size, this might represent hundreds of dollars, thousands of dollars, or even millions of dollars in lost, duplicate payments when controls aren’t in place.

Missing or late payments consume time for your staff when they have to correct the mistake by recovering faulty spending, reducing their time for other Accounts Payable duties.

They have problems with their vendor

Vendors should be treated as if they were customers because they can (and will) withdraw contracts from your firm if they have problems working with you. Vendors will contact the Accounts Payable department when payments are late or non-payers to see what’s going on with their money, which takes away time that could be spent solving accounts payable issues.

It’s always your fault, regardless of the situation. Vendors will occasionally resend the same invoice to ensure payment, which can lead to double-paying an invoice, as previously stated.

The benefits of Accounts Payable Outsourcing

The advantages of Accounts Payable Outsourcing are:

1. Save time and increase efficiency

The best providers of account payable outsourcing have developed effective procedures that enable businesses to pay their vendor invoices sooner or on time. Faster payment of bills increases the likelihood of good vendor and supplier connections and obtaining early payment discounts.

Accounts payable processes are rules-driven, making them ideal for third-party administration. The accounts payables systems are solely focused on the business’s operations.

2. Avoid double payments

Duplicate invoices may also result in duplicate payments, higher expenses, and decreased profitability and cash, all of which can severely limit cash flow management.

3. Reduce errors and fraud and comply with global rules

Outsourced companies that provide Accounts Payable solutions employ specialists who use automated methods to minimize Accounts Payable mistakes. These errors include vendor bills that may be lost or overlooked, which can lead to late or duplicate payments.

Outsourcing to an Accounts Payable solution can assist you in avoiding payment fraud by providing capabilities and tools.

Many organizations choose to outsource accounts payable activities to avoid dealing with complicated legal obligations. Delegating these responsibilities to an Accounts Payable outsourcing firm allows a company to focus on other pressing issues while still giving the work a professional touch.

4. Reduce hiring costs

To handle the demands of a developing firm, an increasing number of accounts payable department personnel may be required. Accounts payable outsourcing providers can help businesses that want to improve their service levels while reducing expenses.

An Accounts Payable department’s efficiency may necessitate organizations hiring and training additional Accounts Payable personnel. However, when your firm relies on manual processes, outsourcing pricing for accounts payable might be more cost-effective and profitable than the overhead costs needed to acquire and train new employees.

5. Benefit from good resources

When a firm hires accounts payable providers, it pays for the services of skilled individuals who don’t require internal training.

6. Transform processing costs

If accounts payable solutions pricing is cost-effective for these external bookkeeping and accounting services, using outsourcing firms for automated Accounts Payable tasks may boost your company’s profitability. Accounts payable outsourcing companies frequently charge per invoice processed at around $1.50 to $2.00 per invoice rather than by the hour for time-consuming accounts payable processes.

7. Level up your employees’ skills and tasks

Suppose a third party is in charge of Accounts Payable functions. In that case, in-house staff might be able to focus on other core activities such as budgeting, analysis, decision-making improvement, and vendor management.

8. Cut down on backup costs

Outsourcing Accounts Payable firms will help you cut down on backup cost by utilizing cross-trained staff under strict criteria to cover absences.

9. Take advantage of automated accounts payable process tracking

Many outsourcing services have automated tracking capabilities, allowing partner organizations to track the accounting procedure as needed.

10. Benefit from Accounts Payable automation software

Accounts payable outsourcing firms frequently use Accounts Payable automation software to increase their efficiency. Many businesses choose to outsource in order to gain access to these software at a fraction of the cost instead of going through the trouble of obtaining them themselves.

The risks of inefficient Accounts Payable Outsourcing

The following are some of the risks of Accounts Payable Outsourcing:

1. Encounter some negative business impacts

Ineffective Accounts Payable systems can jeopardize a firm’s supply chain, which is the pathway between a company and its suppliers.

2. Limited control over Accounts Payable processes

The best benefit of in-house accounts payable departments is that they allow organizations to manage procedures and systems. In-house personnel is more approachable, so concerns and queries may be addressed immediately to the relevant parties.

3. Have error-reporting issues

Outsourced Accounts Payable departments are not readily available. They might be doing a company’s bookkeeping from a thousand miles away, possibly in a different nation such as India. Outsourcing firms do not always imply more effective communication and transparency.

Businesses that work with outsourced Accounts Payable service providers may have problems validating issues or mistakes with an external firm. An outsourced Accounts Payable department does not ensure transparency when reporting errors and difficulties.

Separate Accounts Payable departments are also unaware of system adjustments, such as vendor transaction updates, which might produce future problems or duplications.

4. Risk a business crisis

A company that outsources accounts payable services may rely on a third party. This dependency might be hazardous, especially if the outsourcing firm of a business’s outsourcing partner faces bankruptcy or data breaches.

Incidents like these might put a firm’s accounting payment procedures at risk. Moving to another outsourcing accounting services provider may be time-consuming and expensive. As a result, it is critical to partner with a reputable outsourcing partner.

5. Lack of data privacy

Accounts Payable outsourcing companies may get access to sensitive financial data. These outsourcing firms track a company’s information on their internal servers and cloud storage.

However, these data storage methods make critical and sensitive information more vulnerable to security breaches and unauthorized access.

See more» Top 10 common Accounts Payable Challenges and Solutions

Distinguish between Accounts Payable Outsourcing and Accounts Payable Automation

When a company decides to outsource its Accounts Payable, it hands over responsibility for the accounting staff to a third-party business. Many third-party accounts payable outsourcing organizations employ Accounts Payable automation software to achieve efficiency.

Accounts payable automation software, which may be used in-house, is a SaaS add-on to your ERP or accounting system that automates back-office payables processes and international mass payments procedures.

Accounts Payable automation software provides:

Self-service supplier onboarding and tax reporting through a portal
Online collection and matching of bills
Document management might be improved through OCR scanning or uploading
Checking for fraud and duplicate payments
Automating approvals
Making cross-border transactions and U.S. dollar payments
Creating real-time payments reconciliation reports and checks

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10 steps to implement an Accounts Payable migration

To implement an Accounts Payable migration, it would be better if you could apply the 10 steps below:

Step 1: Draw your vision

Too many outsourcing projects fail because they lack a clear vision. The greatest value is provided by identifying your company’s most important business drivers at the outset – and aligning your leadership team and BPO provider behind them.

While cost saving is a common outsourcing incentive, it isn’t always the only reason for doing so. COVID challenges have most businesses focusing on “standardization and process efficiency” as their top strategic objective in 2021, according to Deloitte. Expanding quality and automation, lowering costs, gaining access to a more consistent pool of skilled workers, and freeing up internal resources for higher-value activities are all frequent AP outsourcing motivators.

However, whether your goal is to improve efficiency or cut costs, you must define it clearly at the start so that you may measure the performance of your outsourcer and set appropriate expectations for your company.

Step 2: Guide your improvement strategy by benchmarking

Benchmarking your Accounts Payable department against its peers can assist you in finding the most profitable outsourcing possibilities. Using industry standards to evaluate your team’s performance provides a clear picture of your operations’ current health and quality, allowing for a strategic approach to optimizing your end-to-end process.

Benchmarking firms often evaluate businesses in terms of Top Performer (75th percentile or above), Median Performer (50th percentile), and Bottom Performer (25th percentile and below). Knowing where you fall validates the business case for AP outsourcing by revealing the return on investment that may be expected if you move from one performance level to another.

According to American Productivity & Quality Center (APQC) benchmarking data, top-performing AP teams handle nearly four times the amount of invoices as bottom performers. The cost per invoice processed is also approximately five times greater in a bottoming organization.

While turning a bottom-performing organization into a top performer may appear like an obvious goal, the hefty investment that comes with it might make it an unattainable short-term objective. An excellent outsourcer can assist you in establishing a feasible performance target based on your company’s drivers and ratings.

Typically, bottom performers can achieve large improvements and ROI by first focusing on the median performance level. Then you may evaluate whether attaining top-level performance, in the long run, justifies the costs and difficulties.

To establish a strategic approach to optimizing your end-to-end process, here are key benchmarking metrics every Accounts Payable organization should be monitoring:

Cost-effectiveness (cost per unit)
Staff productivity (invoices processed per FTE)
Process efficiency (number of FTEs relative to revenue)
Cycle time (The number of days it takes to pay an invoice from the time it is received till payment is transmitted into your account)

Step 3: Decide your model: full or hybrid outsourcing

Back office execution isn’t the core competence of your business, but it is BPO providers’ center strength. Exceptional outsourcers have the know-how, technology, and process structures to execute transactional work at the highest level.

Even more so, the desire to improve customer connections and meet performance goals drives them to develop new methods for improving performance continuously. Many finance executives completely outsource their end-to-end Accounts Payable functions to fully take advantage of BPO providers’ cost savings and efficiencies.

Don’t see outsourcing as an all-or-nothing proposition, especially at the beginning of a journey. Exceptional BPO partners will also develop a hybrid strategy that allows CEOs to maintain control of processes they consider essential for business success.

For example, a CFO may outsource exceptions and vendor queries from their automated Accounts Payable procedure to retain vendor master data.

Because they run independently and are self-sufficient, several critical processes such as vendor master data setup and updates, invoice processing, and vendor queries emerge as good starting points for an Accounts Payable outsourcing journey.

Step 4: Choose location (nearshore, offshore, or onshore)

An AP outsourcing project is sure to include labor arbitrage. However, organizations must go beyond the lowest-cost option to ensure that their partner provides significant cost savings while boosting productivity and performance.

Over the last decade, nearshoring has emerged as a popular alternative for North American businesses. The P2P offshoring market alone is expected to grow at a compound annual growth rate of 2.6% over the next five years.

Executives understand that working with an outsourcer in the same region of the globe minimizes problems caused by geographical and cultural or language differences by eliminating difficulties due to distant time zones and language barriers.

Onshore solutions have the greatest costs and an extremely high turnover rate among workers who view transactional activities as beneath them. On the other hand, many US businesses initially attracted to offshore locations like India and the Philippines by low-cost pricing are reconsidering their strategy.

Overcome time zone hindrances

Communication and reactivity suffer as a result of significant time zone disparities. Top performers in offshore locations are seldom ready to work overnight shifts that conform to American work hours. North American company executives must frequently compromise on internal and BPO teams working different schedules to avoid high turnover and lower quality.

The most well-known nearshore locations are in the United States, Egypt, and India. In contrast to Parisian nearshoring, nearshore outsourcing to Latin America enables agile real-time communication with American teams. Shared or comparable time zones, a westernized culture, direct flights from many major cities, and solid English fluency are all available.

Because many North American businesses have operations in these locations, they also have a large pool of talent familiar with U.S. standards, deadlines, and speed.

Without sacrificing quality, nearshoring saves businesses money. For example, Costa Rica – consistently ranked as the top nearshore location in Latin America – offers highly qualified people at a labor arbitrage of 30-50% lower than North American companies.

Costa Rica’s successful pandemic response and modernized infrastructure, including world-class epidemic preparedness, have reduced outsourcing risk. The disease highlighted the inadequate infrastructure and subpar healthcare systems that affect service delivery in offshore places like India.

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Step 5: Choose your Accounts Payable partner

Look for an Accounts Payable Partner who has:

Proven automation capabilities
Deep knowledge of financial
The mindset of real-time analytics & performance improvement
A smart approach to processing documentation
Good talent pool with strong recruiting & retention
Flexible contract terms & “Spirit of the Agreement”
Strong contractual SLAs
Extension of your team mentality

The basic expectations are apparent and demand documented methods to ensure that bills are paid on time and correctly. However, an outstanding partner should also have the tools and skills to help you work smarter in a post-pandemic world.

Automation has a significant impact on your ROI. Business-critical processes that generate data, such as pre-and post-sales support, marketing automation, and sales order processing, need to be automated. Intelligent Data Capture (IDC), Workflow, and Robotic Process Automation (RPA) are essential technology solutions for optimizing operations.

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The best outsourcers are not only adept at the technical details of their sector but also able to identify and solve problems in the entire Accounts Payable lifecycle. The greatest partners can readily identify issues throughout the Accounts Payable lifecycle, as well as know-how on implementing process improvements and using best-in-class technology to address them.

Other qualities to consider

Look for an outsourcer that wants to develop a long-term alliance with your company. Commitment to continuous improvement, as well as tangible business benefits, should be priorities.

Regular communication and transparency are essential to maintain an “extension of your team” mentality.

Exceptional outsourcers won’t pressure you for services that aren’t explicitly covered by the contract. Instead, seek out providers who keep the “spirit of the agreement,” giving operational flexibility to guarantee that the service they provide delivers desired outcomes without additional cost.

Another importance is finding partners that have worked with businesses of a similar size in the past. Smaller firms, which require more adaptability than big corporations, are an essential consideration. Larger outsourcers are less willing to customize solutions because they have operations set up for high volumes.

Step 6: Maximize workflow automation

Automating time-consuming, monotonous activities is critical to optimizing the entire AP function: reducing manual efforts, detecting fraud signals, and lowering Accounts Payable processes’ time and cost by an average of 73% and 88%, respectively.

Automation allows businesses to expand without increasing the workforce while reducing the past pain points that plagued Accounts Payable.

Creating a paperless environment is easier for every department to use automated reminders to expedite approvals from active personnel or alleviate the complexity that comes with complex approval matrices with system rules that pick the proper approver based on payment levels, user, or expense.

Gartner reports that 89% of accounting operations will be automatable, and approximately 75% of CEOs plan to use automation to address major issues. However, implementing AP automation isn’t as simple as it appears, and most businesses struggle to realize expected gains without the assistance of knowledgeable staff.

For example, automation without improving the Accounts Payable process just makes a poor process go faster. Inexperienced teams also face challenges in identifying and resolving process exceptions that might break automation.

Look for outsourcing partners with the tools and functional skills to fully take advantage of Accounts Payable automation. Exceptional suppliers are also experienced in assisting you in determining which technology options are most appropriate for your firm, and they are skilled at putting effective automation solutions into place.

The excellent partners should be able to adapt to your company’s current ERP system, for example, utilizing automation capabilities. They have significant expertise in the use of RPA in finance processes. They can also assess and recommend new tools and apply ones that they have successfully used at other organizations.

Step 7: Establish a robust transition plan

Outsourcers who outsource transition as an afterthought may jeopardize fure results. Changes are essential because they lay the groundwork for long-term success. To avoid service gaps, you must adequately transfer knowledge from one team to another and maintain up-to-date documentation.

Promoting transparency among your team, other significant players, and important stakeholders is also critical for success. Challenge prospective partners to provide a detailed transition process that includes documentation, practical training, change management, and a planned solution for automated tools.

You should check to see if the company has a track record of delivering on time. If they don’t, be sure they’ll agree to stick with you if things go wrong.

Step 8: Define SLAs

The most efficient SLAs focus on one or two carefully chosen metrics for each function in a contract to evaluate an outsourcer’s performance. This ensures that the areas you care about most are always the top priority.

The majority of AP SLAs focus on efficiency and impact. Business priorities determine how these more general categories are addressed.

An Accounts Payable SLA might demand that the BPO provider achieve an accuracy rate of 98% when processing bills. Another customer may prioritize performance to avoid delays.

To guarantee that the work is of high quality, top providers will track a broader range of Accounts Payable key performance indicators (KPIs) like as many invoices processed per FTE.

Failing to achieve KPIs isn’t a breach of contract, yet these measures are navigation tools that give insight into operations and help keep outsourcers on track to meet service-level agreements.

See more» What is a Service Level Agreement (SLA)? How to use it in Business Process Outsourcing?

Step 9: Build an efficient approach

The greatest Accounts Payable providers employ real-time analytics to examine team effectiveness regularly, looking for trends to detect issues and opportunities before they become significant problems. The outsourcer can then flag areas heading off course and address difficulties as soon as possible.

For example, if recurrent errors are tracked, proactive analytics usage may reveal where coaching, refresher training, resolving an in-house client issue, and even potential process improvements are required.

Finding problems is only half of the task. Encourage potential outsourcers to maintain a structured approach for a speedy resolution and a rigorous ticketing system with escalation procedures. It’s critical to have a solid ticketing system with escalation rules to guarantee that issues don’t go unnoticed.

Analytics also aids in the strategic utilization of security measures. While the underlying cause may still need to be addressed, seeing that five errors were made is less concerning when it’s known that 20,000 others were handled correctly during the same period. On the other hand, a sudden increase in errors necessitates deeper investigation.

Step 10: Have faith in what you do

It’s not the concept that fails when Accounts Payable outsourcing goes wrong. With an anticipated global F&A outsourcing market worth $51.5 billion by 2027, thousands of businesses have shown the idea effectively each year.

Organizations must find the right partner to succeed in long-term Accounts Payable outsourcing, choose an effective location strategy, and develop appropriate procedures and technology.

The “secret sauce” to long-term Accounts Payable outsourcing success is finding a solution that provides more than simply labour arbitrage. By seeking a solution that goes above and beyond labor arbitrage optimization, businesses may gain productivity and organizational redesigning that can save them 20-40% more money.

Understanding how to outsource your accounts payable operation is a major step toward getting your team focused on the most important things.

Nothing is perfect, and there will be rough patches on your road. However, if you are clear on the benefits of Accounts Payable outsourcing, and genuinely dedicated to establishing a working relationship with your vendor – you can pave the way to success together.

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