ePayables Primer (4) – The Main Metric

Posted by Andrew Bartolini on August 6th, 2010
Stored in Articles, General, Process, Procure-to-Pay, Technology

Part Four of our ePayables Primer starts right in with a discussion of the key AP performance metric that can be used to build a case for investment in ePayables. You may select the ePayables tag to see all of our articles in the Primer series and on the topic in general.

ePayables Primer 4 – The Main Metric

An accounts payable department seeking to improve its performance has several key areas upon which to focus: efficiency, effectiveness, and accuracy. An investment in accounts payable automation solutions referred to on these pages as ePayables can help the average AP group drive performance improvement across each of these areas. But in making the business case, one matters much more than the others.

Cost per Invoice

This is the easy win area for enterprises operating in a fully or partially-manual environment today. The key metric to focus on is cost per invoice. When you take (A) the total number of invoices processed and paid annually and divide it by (B) the entirety of your AP departmental costs which include expense items like payroll and other operating expenses, document management expenses, amortized investment expense, and allocated overhead, you get a cost per invoice.

Many AP professionals start to fret about calculating the total cost to run the AP department; don’t. If the operations are centralized, there’s no need to build the total department cost from the bottom up; that’s what budgets are for. Work with finance to pull this year’s and last year’s budgets. Assuming there have been no major business events (mergers, massive layoffs, etc.) the average figure for the past two years will be good enough to use. Just make sure that you understand what elements are included in the total cost.

If you are operating in a Shared Services environment that is combined with other functions, you will need to allocate certain costs across the different functions so that you can understand AP’s actual operating costs. Seek counsel from the Shared Services leadership and finance on an approach. If you’re unable to have that discussion or it is not fruitful follow these four quick steps – (1) Calculate AP’s total annual payroll (2) Divide AP’s total annual payroll by the entire Shared Services annual payroll and multiply that percentage times the entire Shared Services budget (not including payroll) to get AP’s share of the overall annual expenses (3) Add AP payroll from step one to AP’s allocated expenses calculated in step 2 to get the annual cost to run the AP department (4) Divide AP’s annual department expense by the total number of invoices to get a cost per invoice value.

If you are running your AP process in a fully decentralized manner, trying to calculate your cost per invoice will get unwieldy very quickly, Instead, you use a fallback metric – Processed Invoices per FTE (full-time equivalent) as a proxy for cost per invoice.

Taking a partial automation approach (i.e. automating one or two but not all of the phases in Ardent Partner’s ePayables Framework) will require you to allocate costs across the process – this is a more sophisticated analysis and one that Ardent will cover in its future research. If you’re working on this now, feel free to email me (after the dog days – see postscript) and I can walk you through this.

Truth be told, most organizations can stop at this point and make a successful case for an investment in ePayables solutions simply by understanding their cost per invoice, looking at the industry average cost to process an invoice using ePayables solutions, and making an assumption on the timing and volume of invoices that will be converted to the new ePayables platform. The benefits are that straightforward.

While we could stop here, I’ll continue on in the next ePayables Primer to discuss other metrics (because doing so will make the business case more powerful and it is important to understand the full scope of ePayables impact). I’ll also seek to tie the entire series together in a conclusion.

Postscript: In honor of the Dog Days of Summer, we will be publishing 2 articles in each of the next few weeks (on Tuesdays and Thursdays) before returning to our normal schedule on August 30.

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