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There is a lot of interest these days in AP optimization. Why? Companies are looking under every desk and business process for inefficiencies and cost reductions. AP optimization is a good place to look. Many companies that I have spoken with over the past few weeks are very interested in reducing paper processing and data entry costs associated with handling and managing inbound paper invoices. In addition to cost reduction, CFOs are also seeking ways to speed up the processing of inbound invoices so they can take advantage of early payment discounts with their key vendors.

It is worth noting that many companies cannot take advantage of early payment discounts because the process of managing the paper invoices takes too much time. Paper does not easily give up it’s information. Somehow the information on the paper invoice must be extracted and entered into the AP software application, approved or rejected and payments made. Sometimes this takes 45 days just to process.

I have worked on a number of projects over the past few weeks where CFOs were seeking to out-source the entire process of handling inbound paper vendor invoices. They want the following:

  1. Reduce the current costs of processing the paper (labor, IT, facilities, etc.)
  2. Scan/OCR the data on the inbound paper vendor invoices to quickly digitize it
  3. Have a human review the scanned data and fill-in any missing or unreadable data from the original paper copy
  4. Submit the digitized invoice into a work flow for approval or rejection
  5. Convert as many paper invoices to electronic EDI or B2B file transfers as possible to achieve real-time integration with SAP

I was surprised to learn this year how many CFOs were interested in out-sourcing this entire process. It seems there is little perceived value of keeping the following functions in-house:

  • paper processing
  • scanning/OCR
  • data review and correction
  • converting paper invoices to electronic invoices (expanding the use of EDI and B2B data exchanges)

The CFO’s office wants the benefit of all-of-the-above, but not necessarily the internal costs of doing it. There are a number of companies now that have developed a managed services offering that combines state-of-the-art scanning technologies, low-cost labor, AP work flow, best practices and managed EDI/B2B services for AP optimization. I have read several analysts reports recently that suggest this is a rapidly growing trend. Typically the costs for these managed services are considerbly less than processing in-house.

Once the AP process is optimized, the CFO will have the flexibility to capture negotiated early payment discounts, and to start looking at things like dynamic discounting. Dynamic discounting is when the CFO or his/her team can negotiate in real-time with key large suppliers to pay earlier than agreed in exchange for additional discounts. On large invoices these numbers can be meaningful.

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