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Outsourcing Accounts Payable: The Pros and Cons

February 27, 2019
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Managing your relationships with vendors and suppliers is challenging enough.

When complications occur in your accounts payable processes, they can hamper your business growth.

In the worst scenarios, a poorly performing accounts payable process can even be a liability to your company.

For these reasons, many companies are attempting to streamline their finance and accounting operations by adopting and integrating automated accounts payable tools and by restructuring their internal processes for a 21st-century business environment.

According to one study, 78% of best-in-class businesses had adopted e-invoice processing technology compared to just 38% of their struggling competitors. The study also revealed that best-in-class AP departments who relied on procure-to-pay (P2P) automation derived the most strategic value.

But adopting new technology presents an entirely new challenge in and of itself, especially for small and mid-sized businesses.

Current Challenges in Accounts Payable

Many accounts payable departments are still dependent upon costly and sluggish legacy systems like optical character recognition (OCR). Some are still heavily dependent upon paper invoices and checks. Retraining their workforces and overhauling their internal processes is a costly and burdensome prospect, so it gets put off.

However, those businesses which can incorporate automation, e-invoicing, and other efficiency tools will gain an edge over their competitors. They’ll even negate many of the problems that have plagued AP departments for decades.

To acquire the resources necessary to streamline their internal processes, small and medium-sized businesses often turn to accounts payable outsourcing companies to fill the gap. There are pros and cons to this approach.

What is Accounts Payable Outsourcing?

Accounts payable outsourcing is the practice of hiring a third party to handle your organization’s AP processes. AP providers come fully equipped with the tools, skills, and technology not only to manage your existing accounts payable functions but also to integrate new capabilities to give you a more streamlined environment.

The best providers don’t just take over your AP tasks. They improve and augment them.

Outsourcing accounts payable isn’t for everyone. Some companies handle sensitive financial data, which makes it difficult or impossible for them to hand it over to third parties. Other companies prefer to adopt new technology and processes in-house rather than hand control of their operations to another organization.

Regardless, accounts payable outsourcing services can be an advantage to those companies who don’t have the time, the means, or the capabilities to transform their internal AP processes.

The Pros of Outsourcing Accounts Payable Processes

Outsourcing is not merely the shifting manual tasks like data entry to an outsourced provider. According to most case studies, companies typically use process outsourcing to add value to their businesses and to improve AP dramatically.

Here are just a few of the benefits of outsourcing.

Cost Savings

Most of the accounts payable cost savings that come from outsourcing are the result of avoiding overhead expenses.
Hiring new staff and training your existing employees to follow new methods and use new technology is expensive, both in terms of monetary costs and time. Furthermore, onboarding new technology, although necessary, comes with a hefty price tag.

Processing costs can also add up. According to one study by the American Productivity and Quality Center, the bottom 25% of organizations surveyed were paying $10 or more for each invoice they processed. Meanwhile, the top 25% could do the same tasks for $2.07 or less.

Although some of the differences related to these costs are based on the organizations’ industries, organizations that had adopted accounts payable automation tended to see reduced costs.

More Resources

Outsourced accounts payable providers have all the resources they need to optimize your process, including automation and reporting tools. Instead of going through the process of acquiring these tools themselves, many companies choose to outsource to get access to their benefits at a fraction of the cost.

Accounting System Integration

No matter your current accounting system, the best accounts payable outsourcing firms have the tools to integrate with it. If you’re fed up with your current system, a provider can even help you onboard a new one.
Easy integration helps you get started quickly so you can see value immediately.

Faster Results

If you don’t have access to technologies that give you AP automation, workflows, and other time-saving tools, your outsourced provider can step in to deliver them at a fraction of the cost. If you’re still reliant upon cumbersome processes and old technology, outsourcing could help you see results faster and more clearly.

Stronger Security

As the business world expands and supply chains stretch farther and farther across the globe, payments to vendors and other service contractors are becoming even more complicated. Even small businesses must rely on vendors in numerous locations to deliver their products and services to customers.

But without the right efficiencies and reporting tools, the risk of payments fraud and vendor non-compliance escalates as businesses grow. In fact, according to the 2018 Payments Fraud and Control Survey by the Association for Financial Professionals (AFP), 78% of all organizations surveyed were hit by payments fraud in 2017. Among those that were hit by fraud, 92% said the attacks collectively cost at least 0.5% of their organization’s annual revenue.

Mid-sized businesses don’t often have the luxury of employing a robust team of security experts, nor do they have the resources to run extensive audits and eliminate risks. To get the security tools and skills they need, many small to medium-sized businesses rely on the outsourcing services of larger and more sophisticated AP experts.

In many cases, outsourcing is the easiest way to eliminate paper invoices, checks, and receipts. Paper processing has long been one of the most significant sources of problems for accounts payable professionals, especially in terms of fraud.

Fewer Errors

There’s nothing worse than conducting an accounts payable audit and discovering errors. Errors don’t just lead to costs. Depending on the rules that govern your industry, errors could even lead to compliance issues.

Even a small error, such as an inaccurate payment to a vendor, can cause serious problems during an audit.

AP outsourcing companies don’t just follow best practices when doing their work. They incorporate technologies that identify errors before they become liabilities.

The Cons of Outsourcing Accounts Payable Processes

Despite the myriad benefits of outsourcing your AP processes, it may not be the best choice for you. You may have hesitations about working with a third-party, or it may not be a reasonable choice in your industry.

Here are a few of the reasons you may want to avoid outsourcing.

Handing over Control

Businesses that are used to doing accounts payable in-house are also used to a certain level of control. If you oversee the AP department, for example, you may enjoy the fact that you can step into a room and speak with your staff whenever you want.

When you outsource, you don’t have as much visibility over the process, nor do you have as much control over how the process works.

Privacy Concerns

Inevitably, outsourcing requires you to hand over data to a third-party. That data is then stored on their internal servers or in a data center via the cloud. Depending on your industry, you may need to meet rigorous privacy standards to avoid fines and other penalties.

Before outsourcing AP, review your provider’s privacy policy and data security measures to ensure they meet your standards. If you handle sensitive financial data, rights reserved information, or other proprietary data, be sure your outsourced provider can live up to your privacy needs.

Duplication Challenges

Companies outsource their accounts payable operations in part to gain access to better tools and processes. Of course, this rapid change in processes can cause problems in-house, especially if your employees are used to your old procedures.

In these cases, there is sometimes a possibility that certain entries will be duplicated. Before outsourcing, it’s wise to educate your employees about the new process so they can work in tandem with your outsourced provider.

Despite the downsides, there are numerous benefits to outsourcing. As vendor relationships grow ever more complicated, more and more businesses will need to rely on outsourced providers to re-architect their accounts payable operations.

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