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Using Metrics to Add Value in Accounts Payable

New real-time approach boosts productivity, visibility

by Jim Arnold, President, and Joe Collins, Director of Technology Solutions,
APEX Analytix

Financial shared services and accounts payable are often seen as cost centers rather than groups that can provide value to the company. Performance metrics, and a graphical approach to presenting them, can:

• give visibility to financial operations,

• provide insight that can be acted upon to improve processes,

• point out significant weaknesses, and 

• motivate employees to achieve performance goals.

Chances are, everyone in accounts payable (A/P) measures something, to track their performance, either individually or as a department. But the real questions to ask are: Do we measure the right things, for the right people? Do we do this in a timely way?

Trouble is, a lot of A/P organizations are so busy paying invoices and putting out monthly fires that all they can keep an eye on is transaction volume or cost per invoice. Or, they have a half- or full-time-equivalent employee dedicated to tracking metrics every month, who does the job manually and delivers 30-day-old, outdated data. The good news is: You can use automated alternatives to deliver monthly or even real-time metrics that prove to be a lot more valuable to the organization.

How metrics add value

Let's face it: A/P typically flies under the radar of the C-suite in most organizations. The CFO knows bills are getting paid but only hears about it -- and picks up the phone -- when something is amiss. It doesn't have to be that way.

Using performance metrics can pay off big: They show improvements, cost reductions and discounts the company would otherwise miss. You can prove you are implementing better controls and catching duplicate payments before they get out the door, or improving on-time payment percentages so the company's suppliers are happy.

Discounts factor into performance as well. What percentage of available discounts do you capture? How much impact does that have on the bottom line? How does that compare to your industry? If the data shows you are getting $1 million of discounts per billion in spend, what if one of your peers gets $3 million in discounts? Does that mean your company could do a better job of negotiating discounts with suppliers?

Another thing metrics can do is help you compare vendor payment timing to that of industry peers. For example: If everyone else in your industry pays vendors in 45 days, why are you paying in 25 days on average? Why put yourself at a competitive disadvantage with a days payment outstanding (DPO) that doesn't stack up well?

You can automate data collection and deliver key metrics monthly or as-needed in real-time, with the opportunity to incorporate real-time benchmarking, too. Imagine if you could track how well you do internally from period to period -- and compare your operation to others in your industry.

At APEX Analytix, we like to think about metrics in terms of three levels:

• Level One: You record metrics and push them up the line to top management.

• Level Two: Do that in an automated and timely way, either monthly or in real time, with graphical "dashboard" reporting.

• Level Three: Your analysis includes ongoing peer-to-peer benchmarking. APEX Analytix has already installed the "technology plumbing" needed to benchmark against peers in any given industry, for companies that reach this level. It's just a question of aggregating the data and anonymously communicating it back to willing participants.

Visibility matters, too

Once you decide which metrics to track, you need to address the issue of visibility. Metrics need to tell a story, so you must decide for whom you are measuring: Is it the CFO, the senior manager of accounts payable or the vice president of shared services? Know your audience or find out what matters most to them. The CFO probably won't care about the same things that the A/P manager does.

A lot of people we work with at APEX Analytix seem to think that "no news is good news" when it comes to interacting with the CFO or other top managers -- if they can stay out of CFO crosshairs, that's a positive thing. But that's not really true. You need to get on their radar with a meaningful story. Metrics are one way you can demonstrate your value to the organization. If all you are is a cost center to them, you are vulnerable if the time comes that costs need to be cut.

Keep metrics simple

The issue of simplicity has two dimensions:

1. From the preparer's point of view, you don't want to be in the metrics business -- after all, you still have to get the work out. That's why automating collection and analysis is an important ingredient in getting things done simply and easily. Metrics are critical to demonstrating value, but you don't want to spend headcount to use them. That's where software gives you the advantage compared to cumbersome and time-consuming manual approaches or error-prone spreadsheets.

2. From the user's standpoint, metrics must be easy to understand. We've found that a chart-based approach is best. It's a lot easier to look at a graph and see which periods are higher or lower, compared to combing through a spreadsheet or printout to spot data anomalies, patterns or trends. Plotting metrics on easy-to-read graphs lets you quickly see problems, like a traffic light that turns yellow. That's particularly important in getting the attention of busy top execs, especially nonfinancial executives.

Make sure they're accurate

All your effort to develop performance metrics can come to naught if people start questioning the accuracy. That's another good reason to look for a simpler, real-time solution people can trust. We see clients that continue to depend heavily on spreadsheet models or have multiple enterprise resource planning (ERP) systems -- even multiple instances of the same ERP system -- where you have to collect data from separate systems to analyze it. Not only does that waste time, pulling the data together magnifies the opportunity to introduce the kind of errors that can kill credibility.

Ironically, the need for accuracy creates another problem inherent in patchwork-quilt approaches to A/P performance metrics. Double- and triple-checking slows the process to a crawl, and delivers accurate-to-the-penny reports that may be so late they have lost all value as management tools.

Watch what counts

APEX Analytix's new First Strike^™ Decision Metrics software solution includes a broad cross-section of A/P metrics companies should consider tracking. These fall within four self-explanatory categories:

1. Invoice productivity. Year to Year Invoice Comparison, Unpaid Invoices by Status, Invoice Processing by Invoice Method and Invoice Processing by Location are quick-read productivity measures available on demand.

2. Payment efficiency. Disbursement comparisons, Cash flow by days paid, DPO (by spend category) and payments by method used (paper vs. electronic) can help you spot opportunities to improve productivity. In each category, you can drill down to the necessary detail.

3. Controls. You can sharpen A/P controls with metrics such as Duplicate Payments by Root Cause, Duplicate Payments by Status, Cash Discount Trending by Month, Sales Tax by Commodity and Vendor Refund Checks (overpayments, missed discounts or returned checks).

4. Vendor management. Vendors Added by Month, Vendors Changed by Month and Vendor Invoices by Category metrics can tell you about increased opportunity for fraud or duplication -- or forecast what A/P will face as the company grows.

A final word: More is not better

Some folks go overboard trying to monitor 50 metrics at once. After all, if everything is a key performance indicator (KPI), then nothing is. Recent studies seem to indicate that the optimum number of KPIs is about 10 to 15. But our most successful client tracked only three metrics. Cost per Invoice was its cost metric, On-time Payment was its supplier satisfaction metric, and it used Audit Results as its internal control metric.. Everyone in the organization knew what to watch and how their performance was measured.

At nearly any size organization, whether you track three metrics or 15, monitoring real-time results can boost productivity --and add value -- as long as you watch what counts.

Jim Arnold is president of APEX Analytix. Since 1988, Arnold and his team have delivered accounts payable recovery audits, advised clients on best practices and boosted company performance through the implementation of error prevention, real-time audit and procure-to-pay software, FirstStrike™. His background includes stints at Texaco Inc., responsibilities in internal audit at General Foods/Philip Morris and two years as manager of financial planning for the Maxwell House coffee division. Arnold is certified as a CPA, CMA, CFE, CISA and CAPP.

Joe Collins is director, client solutions. Joe joined APEX Analytix in September 2006 and specializes in understanding and addressing clients' financial issues and needs. Prior to joining APEX Analytix, Joe worked for six years as global finance manager at Lucent Technologies, responsible for supporting and ensuring worldwide Sarbanes Oxley compliance for A/P, payroll and time reporting areas, as well as overseeing metrics and reporting. Prior to joining Lucent, Joe worked for five years as an IT and customer service manager. Collins is a certified Microsoft Access and Lotus Notes DB designer, and has an MBA in global business management from the University of Phoenix.