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How Vendor Portals Lower A/P Costs
Take this "quiz" to see if you are a candidate
by John Hiatt, Editor of The Balance Sheet
Faced with relentless pressure to get more done with less -- and less-than-favorable economic conditions -- more and more accounts payable operations are exploring technology solutions that promise to cut costs and add value. Many businesses are taking a closer look at using online self-service vendor portals to save time and money.
With the help of Jim Arnold, president of APEX Analytix, and data from a recent "success story" shared by the head of shared services for a retail grocery giant, The Balance Sheet has assembled an informal true-or-false quiz to test your knowledge and help you decide if a vendor portal is right for your unique situation. (Don't worry. No one is keeping score; only you will know how well you qualify. Simply answer true or false for each statement.)
#1: A/P staff spends too much time on the phone.
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A: True. Most large companies have several people dedicated to answering vendor calls -- usually about 15 to 20 percent of their headcount in A/P. A company with 40 people on staff may have six to eight people answering phone calls. "What we've found," says Arnold, "is that most of these questions are 'Where is my invoice?' 'Is it in the system?' 'When do you plan to pay it?' or 'I received this $200,000 check, and I don't know which invoices to apply it to -- can you help?'
"An online automated A/P portal can answer 60 to 80 percent of these questions, at a much lower cost than having people dedicated to the task. After all, those are relatively straightforward questions," Arnold says.
#2: The payoffs from a portal are tough to quantify.
A: False. In fact, hard-dollar cost-savings drive the decision to use a portal in most cases, Arnold says. "The big determinant is the number of A/P staff people dedicated to answering vendor and/or employee calls. All you need are two FTEs involved in that to see a payoff. If you have two FTEs, you could knock that down to one and probably get a three- to 12-month payback, assuming $30 to $50,000 in fully loaded employee costs."
In future years, the payoffs are even greater. If a portal is $35,000 to $50,000 to deploy, you would break even in year one. "In subsequent years, you only pay small, ongoing maintenance costs -- so savings keep growing," he says.
Initial reports from APEX Analytix customers using its FirstStrike® Vendor Portal support that claim. "A major retailer, who expected to save one or two FTEs, has saved five FTEs so far," Arnold says. "That is a pretty significant return on investment."
#3: The benefits are one-sided; vendors won't like the portal.
A: False. Suppliers with a good vendor portal are much happier. They can log onto the system whenever they want and get as much detail as they need, without worrying about time zones or calling during business hours. In addition to single-invoice lookups, vendors with proper access rights can get different cuts on the data, look at a range of payment dates or invoices, and download the data to an Excel spreadsheet for more sophisticated analysis. That allows for much more effective cash forecasting, Arnold says. "In the right circumstances, vendors can even have data mapped directly into their accounts receivable system."
#4: Ease of use is a critical issue.
A: True. When you have thousands of vendors, there's no way you can spend time training them all. So the user interface has to be simple and self-evident. "Some companies have written their own in-house applications, using their IT staff, and ease of use may suffer as a result," Arnold explains. "If the portal is difficult to navigate or too complicated, vendors won't use it enough to deliver the benefits A/P should expect. They'll just pick up the phone, which defeats the purpose.
"In terms of ramp up, we've had clients go from zero to 50,000 hits within six months of putting in a portal. Those weren't likely to have been 50,000 phone calls, of course. But because the portal is available 24/7 for anything from invoice lookups to cash forecasting, they are making full use of it."
#5: A vendor portal can improve security.
A: True. When you set up a vendor, generally you need to gather a lot of information, ranging from standard contact information to business type and invoicing procedures (e.g., paper vs. electronic). A properly designed portal not only captures that information for you, but updates it automatically.
"We're developing supplier registration capability and incorporating robust security, so that when a vendor enters data, you can validate it for potential fraud," Arnold says. "You want to match the information the vendor provides so that the system spots a situation in which the address, telephone number or bank account matches one of your own employees, a prison address or someone on the OFAC list."
It is also important to prevent duplicate vendors, so a good portal automatically checks to see if that vendor is already set up. "That's something most A/P shops cannot do 'on the fly,'" Arnold says. "They rely on annual master file audits to catch duplicate vendors. By that time, the duplicate is already in the system, and the damage has been done. You have to try to recover the duplicate payments long after the fact."
#6: A portal can "keep score."
A: True. "We're working on building in scorecard capability," Arnold says. "Vendors should be able to look at scorecard data that compares them to peer vendors and answers questions like:
What is their on-time shipping percentage, compared to peers?
What is their lead time?
What is their Days Payable Outstanding?
"These metrics can let vendors see where they stand -- and you can use that same data when it comes time to hold someone's feet to the fire on error rates. You would have the data necessary to say, 'You have a lot more reversals or returned merchandise compared to your peers, so you may want to bump up your performance a little.' It's a great way to communicate back to suppliers about what they are doing well and not doing well," Arnold says.
Along the same lines, the interactive nature of a vendor portal allows for another future capability: supplier satisfaction surveys. They can be quite revealing. "Open-ended comment boxes often reveal issues you were not aware of," Arnold says. "Let's say you have been paying in 45 days, and a supplier complains about it. As A/P manager, you don't want unhappy suppliers. So you go down to purchasing, and they show you the underlying contract, and you find that the supplier agreed to 45-day terms up front. That can reveal a communication disconnect."
#7: A business case is a tough sell.
A: False. When you have a dedicated group, it is easier to figure out the economics and make a good business case. The trouble arises when there's no specialization, Arnold says. "If I have 30 people in my A/P department, and they all key invoices and answer phone calls, that's inefficient. You have to stop keying to answer the phone, deal with the call, pick up where you left off and so on. What's more, the skillsets differ. A person great at data entry may not be the one you want on the phone dealing with suppliers."
Step one is to quantify the resources dedicated to answering vendor calls, and then attach labor costs to that. The hard benefits typically drive the decision to use a portal. You can, for example, allow natural attrition to take place without replacing people or losing ground in terms of vendor relations or service. Alternatively, you can redeploy talented A/P staff (who may be bored answering the same vendor questions endlessly) to higher-order activities such as investigating exceptions or tackling internal control challenges.
#8: Vendors will be quick to adopt a portal.
A: False. While you can expect some "early adopters," you will need to engage in low-cost "marketing" to get the word out. Examples include using targeted postcard mailings that encourage vendors to try out your new Web tool, or communicating the self-service Web address on check stubs or e-mail trailers with links to the site. Some companies use on-hold messages that encourage vendors to visit the A/P Web site.
Those vendors who continue to call should get a "walk through" that demonstrates the easy-to-use Web site. "With these methods, we've seen 60 to 70 percent of inquiries migrate to self service, sometimes in a matter of a few months," Arnold says.
What's your score?
Our goal in presenting the payoffs and potentials of an A/P vendor portal in quiz form is to raise your awareness and stimulate thinking about your own situation. Every company is unique, of course, but even a company with just two FTEs dedicated to answering routine inquiries can find significant cost savings from automating the process. We think that's the kind of test even the smallest A/P operation can pass with flying colors.
John Hiatt, editor of The Balance Sheet, writes extensively on business-to-business subjects, especially finance and accounting. He is best known as founding editor of Entrepreneur magazine and former managing editor of Financial News Network.