© 2011 Financial Operations Networks LLC Accounts Payable Metrics Dashboard to Track Productivity Chris Doxey Business Strategy, Inc. Tuesday, April 12,

© 2011 Financial Operations Networks LLC

Accounts Payable Metrics Dashboard to Track Productivity

Chris DoxeyBusiness Strategy, Inc.

Tuesday, April 12, 2011

www.TheAPNetwork.com Page 2

THE ACCOUNTS PAYABLE

Leadership ConferenceAgenda

• Identifying accounts payable objectives

• Dividing the accounts payable department into functions

• Defining metrics― Cost saving and value― Transactional quality― Customer service― Controllership

• Using metrics as a benchmarking tool

• Establishing service level agreements

• Recap



Leadership Conference

Identifying Accounts Payable Objectives



Leadership ConferenceDefining Objectives

• An objective is a specific step, a milestone, which enables you to accomplish a goal. Setting objectives involves a continuous process of research and decision-making.

• Setting correct objectives is critical for effective performance management. Such objectives as higher profits, shareholder value, and customer satisfaction may be admirable, but they don't tell managers what to do.



Leadership ConferenceDefining Objectives (Cont’d.)

The objectives must:• be focused on a result, not an activity • be consistent • be specific • be measurable • be related to time • be attainable



Leadership ConferencePerformance Management

• Performance management is the integrated process of objective setting, appraisal and pay determination which supports the achievement of the company's business strategies.

• At an individual level it will result in action plans related to performance improvement, career development and training.



Leadership ConferencePerformance Management (Cont’d.)

• When a performance management system is operated effectively, there are great benefits for both individuals and organizations.

• It creates organizational focus and alignment and a shared mental model for leading and managing the business in a way that converts strategic objectives into effective business practices.



Leadership ConferenceBenefits of Performance Management (Cont’d.)

1. Clarity on strategic direction

2. The alignment of your firm's resources

3. Increased discipline in daily operations

4. Provides the basis for managing the business of today and for developing it into the future—through the performance of people

5. Gives the means for evaluating and improving both individual and company performance against pre-defined business strategies and objectives

6. Develops employee understanding of what needs to be achieved

7. Helps all employees to improve corporate performance

8. Helps all employees to be rewarded on the basis of their contribution



Leadership ConferenceAccountsPayable Objectives

• The mission of the accounts payable department is to serve as a financial support function to meet the company’s goals and objectives.

• The primary goal of accounts payable is to provide for timely and accurate recording of the company’s expenditures and to ensure that suppliers are paid in a timely, accurate and efficient manner consistent with the overall delegation of authority and segregation of duties guidelines and regulations.



Leadership ConferenceObjectives of an Accounts Payable AssociateAn accounts payable associate plays an important role in a company's record-keeping process. The objectives of an accounts payable associate are:• Entering and verifying financial information with

their company's ledger or database that reflects what the company owes to valid suppliers.

• Verifying invoices and disbursing payments with accuracy and timeliness.

• Adhering to the company’s internal controls and guidelines.

• Ensuring customer satisfaction.



Leadership ConferenceSummary ofEffective Objectives

Effective objectives must be:• focused on a result, not an activity

• consistent

• specific

• measurable

• related to time

• attainable




Dividing the Accounts Payable Department into Functions



Leadership ConferenceAccounts Payable Responsibilities • Supplier file maintained, which includes minority supplier information

• Open invoices and amount paid to each supplier year-to-date

• Online verification of data entry including account number verification against general ledger

• Multiple general ledger account distribution for each invoice so that distributions balance with total invoice amount

• Master, detail, and summary records can be displayed online for open invoices

• Ability to put a supplier on hold to suppress payments for any reason

• Partial payments supported for situations such as back-orders and non-fulfillment of requirements

• Duplicate invoice warning to eliminate duplicate payments

• Accounts payable register with detail manual and computer checks generated with grand totals by type of check



Leadership ConferenceAccounts Payable Responsibilities (Cont’d.)

• Voided checks will back out all associated accounting entries

• Electronic bank interface available to read bank reconciliation tape (for additional charge)

• Fast payment processing enables you to take advantage of supplier prompt payment discounts

• Supplier search by name or partial name

• Supplier master shared with Purchasing module

• Ability to display purchase orders online, including current status

• 1099s and magnetic media reporting fully supported

• Recurring payments handled automatically

• Ability to assign general ledger account numbers to a supplier

• Check register can be printed on-demand

• Separate "Remit To" address supported

• Void check option adjusts supplier history and reverses all related entries



Leadership ConferenceDividing the APDepartment into Functions

SupplierMaster

InvoiceProcessing Disbursements

Research and Reporting

AccountReconciliation

Internal Controls

Customer Service




Defining Metrics



Leadership ConferenceGetting Started

1.Identify

2.Gather

3.Analyze

4.Report

5.Improve

1. Identify the Process2.Gather Data3.Analyze Outcomes4.Report Results5. Improve the Process



Leadership Conference1. Identify The Process• Define the components of the accounts

payable process—Supplier master—Invoice processing—Disbursements—Research and reporting—Account reconciliation—Internal controls—Customer service

• Review the process

• Determine what should be measured —Start simple!

• Ensure that the data is easy to collect

1.

Identify



Leadership Conference2. Gather

• Don’t start from scratch

• Use a template to gather the data

• Include your team in the process

• Define the time period for measurement

• Determine when to start

2.

Gather



Leadership Conference3. Analyze

• Do the outcomes make sense?

• Are there areas of concern?

• How do results “stack up?”

• Set a target for comparison—Internal processes—Other companies—Like industries

• Establish goals

• Review

3.

Analyze



Leadership Conference4. Report

• Publish and communicate metrics

• Compare results and trends

• Use metrics to communicate the value of accounts payable

4.

Report



Leadership Conference5. Improve

• Identify areas of improvement

• Implement action plans

• Assign responsibilities

• Review best practices

5.

Improve




Using Metrics as a Benchmarking Tool




• Benchmarking is defined as a process of comparing your organization’s practices to the best practices or standards of other similar organizations.

• The benchmarking process can become ambiguous if the purpose is unclear.

• Key questions to ask are:―Is the purpose of the survey for information purposes

only or to compare like processes?―Should the survey be structured to define best-in-

class processes?―Is the survey in place to compare within an industry

or segment?

Definition of Benchmarking




The following steps are used in a traditional benchmarking process as defined by Robert C. Camp in the book Benchmarking – The Search for Industry Best Practices that Lead to Superior Performance (1989):• Identify what is to be benchmarked• Identify comparative companies• Determine data collection method and collect data• Determine current performance gap• Project future performance levels• Communicate benchmark findings • Establish functional goals• Develop action plans• Implement specific actions and monitor process• Recalibrate benchmarks

Traditional Benchmarking Approach



Leadership ConferenceTypes of Benchmarking

Types of benchmarking used in the AP process are:

1. Internal

2. Industry/volume

3.World-class



Leadership Conference1. Internal Benchmarking

• Benchmarking works best within an organization because the accounting and other measurement principles are similar.

• The measurement criteria are standardized and well understood. These benefits are magnified if the units being measured are homogeneous.



Leadership Conference2. Industry/Volume• Staying within your industry increases the likelihood

of finding similar processes, thus providing more relevant and compelling comparisons.

• The smaller AP units cannot replicate the economies of scale but can consider the technology as a possibility, as automation continues to become more affordable. More technology suppliers are targeting medium and small AP units with reasonable solutions.



Leadership Conference3. World Class• In world-class benchmarking, a company compares

its AP process to the best-in-class. This may mean crossing industry lines in order to obtain new ideas.

• For example, Motorola wanted to improve its order entry/fulfillment and sought out Lands’ End, a best-in-class company, whose core business relied upon that process.

• Many companies have studied process leaders like Walmart for supply chain and FedEx for tracking excellence, in spite of differences in industry and scale.



Leadership ConferenceMeasuring CostCost can mean different things to different companies. However, the most inclusive AP cost (not necessarily the most correctly presented), may include the following elements—which are further complicated by organizational differences: • Salaries – differences based upon scale, experience,

and skill mix required ― Indirect salaries: remote processors (not in the AP center)

and related costs― Managerial salaries: this may or may not include all or part

of an AP department overseer such as an assistant controller

― Benefit costs: social security taxes, unemployment taxes, pension, medical and other perks differing based upon benefit plans




• IT Software & Hardware – AP is sometimes considered the client for disbursement systems and charged accordingly

• Equipment – depreciation and interest on the un-depreciated portion within the department, including furniture and fixtures

• Occupancy – geographical differences influence real estate, property taxes, construction, and utilities, while company standards influence the work environment

• Travel• Training• Telecommunications – inbound and outbound • Delivery – postage, express mail • Due to the variability of the use and nature of the above elements, a simple

salary and benefit cost is most often preferred. In an effort to level the playing field on varying costs and systems, many companies use cost per full-time employee (FTE) equivalent.

Measuring Cost (Cont’d.)



Leadership ConferenceComparability Issues With AP Costs

Postage (sometimes charged to mailroom)?

Freight processor invoice volumes?

Outsource freight & courier processing and payment?

P-card invoice volumes, rebates?

P-card invoice volumes, administrative costs?

ERP maintenance?

ERP implementation?

Do you use p-card?

T&E processing?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Yes No

When computing cost per invoice or line, do you include costs for the following:



Leadership ConferenceMeasuringInvoice Processing• The principal difference between companies may not be the cost

or the accounting, but how much they process. The following methods are shown in the order of labor intensiveness, from least to most costly:― Interfaced: transactions that are processed by operating/accounting departments

other than AP that are merely uploaded into the accounts payable system; they involve hardly any AP effort/value-added

― P-cards: may require minimal involvement for verification and reclassification ― Electronic invoices: represent significantly reduced AP work except for

establishing new suppliers and resolving exceptions ― Evaluated Receipts Settlement (ERS): entails minimal front-end AP work, but

more resolution effort on the back-end ― Optical Character Recognition (OCR): contains differing levels of computer

acceptance and establishment of templates― Paper Images: includes digitizing documents for expeditious workflow― Data Entry (via paper): involves considerable key strokes




• If paper images or data entry lack an electronic match, the process is even more laborious. Purchase order matches are sometimes more expensive than non-POs due to increased criteria; other times the lack of a PO requires additional AP research to determine the cost center and account number.

• However, the process does not stop with matching. Organizations differ on the percentage of exceptions a process generates. Frequently, exceptions vary by industry. The receipt of materials generally results in more quantity exceptions than the approval of service invoices. On the other hand, service invoices involve more routing and deliberation.

MeasuringInvoice Processing (Cont’d.)



Leadership Conference• Invoice processing:

― Invoices: paper, EDI, other electronic, service, materials ― POs: transactions with POs/without POs― Electronic POs/non-electronic POs ― PO matched invoice vs. non-PO matched invoice

• Line items verified• Non-PO invoices – material, service, assets • Electronic interface transactions• P-cards• ERS• Remittance advice requests• OCR

― Freight invoices

• Keyed invoices• Exceptions – price, quantity, quality• Types of exception resolution: accepted price, denied price, located missing

quantity, charged back differences

Additional Considerations




• The number of suppliers from which a company buys is essentially driven by:― Industry― The purchasing process (centralized or decentralized) ― P-card use― Need for competitive sources

• While it may be difficult to limit the number of suppliers a company may use, substantial savings can be attained via the migration from paper checks to electronic payments and p-cards.

Measuring Suppliersand Payments




• Number of suppliers

• Recipients

• Paper checks

• Wires

• ACH transactions― Debit blocks

• Positive pay/payee flags

• Frequency of payments

• Emergency/manual payments

Measuring Disbursements




• Number of active suppliers― Inquiries: voice, email, web, internal/external

• Number of new suppliers• Reactivated suppliers• Deactivated suppliers

― Purged suppliers

• Merged suppliers• Electronic invoice trading partners • Is the supplier master reviewed quarterly, annually?• Is the supplier master compared with the employee

file quarterly, annually?

Measuring theSupplier Master




• Match exceptions• Payment days• Days sales outstanding• Incorrect payments• Duplicate payments• Stop payments• Late payments

MeasuringCustomer Service

• Response time• Invoice backlog• Check voids by reason• Post-audit

recovery dollars• Discounts

earned/unearned• Unknown addresses • Debit balances



Leadership ConferenceMeasuringInternal Controls• Number of controls reviewed quarterly• Percentage of control deficiencies per quarter• Account reconciliation issues identified per quarter

― Outstanding variances― Clearing account issues (GRIR)

• Disclosure items identified per quarter• System access issues/segregation of duties

exceptions identified • Delegation of authority overrides identified• Outstanding debit balances• Duplicate/erroneous payments processed• Accounting and tax accrual errors• Supplier risk management impact items



Leadership ConferenceDividing the AP Department into Functions

SupplierMaster

InvoiceProcessing Disbursements

Research and Reporting

AccountReconciliation

Internal Controls

Customer Service

1. Cost Saving and Value

2. TransactionalQuality

3. Customer Service

4. Controllership



Leadership ConferenceSample AP Scorecard

Benchmark FY07 FY08 FY09 FY10

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$1.50

$1.91

$2.39

$1.95 $1.80

Cost Per Invoice Trend

Benchmark FY07 FY08 FY09 FY10

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$0.25

$0.95

$1.27

$0.76 $0.72

Cost Per Line Trend

1. Cost Saving and Value




2. Transactional Quality

Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

$6

00

.0

$2

99

.4

$4

61

.4

$6

23

.4

$7

81

.8

$9

43

.8

600,011

299,380

461,394

623,426

781,778

943,792

GR/IR Dollars

$ Over 90 days (in thousands) Total Dollars (in thousands)

Fiscal Month

Do

lla

rs (

in t

ho

us

an

ds

)

Paid Early Paid in Terms Paid Late

0%

20%

40%

60%

80%

100%

120%

31%

68%

1%4%

95%

1%2%

97%

1%

Paid Within Terms

Dec-09 Jan-10 Feb-10Fiscal Month

Sample AP Scorecard (Cont’d.)




3. Customer Service


0

500

1,000

1,500

2,000

2,500

3,000

1,2

00

1,3

00

1,4

00

1,5

00

1,6

00

1,7

00

2,100 2,200

2,300 2,400 2,500 2,600

Supplier Self Service Vs. Calls Tracked by Symposium

VSS Sessions Calls Tracked by Symposium

Fiscal Month

Vo

lum

e

Dec-09 Jan-10 Feb-100%

20%

40%

60%

80%

100%

13% 13% 13%

71% 70% 70%

16% 16% 17%

Customer Service Inquiry Resolution

0-1 Days

2-5 Days

Over 5 Days

Fiscal Month





4. Controllership

Dec-09 Jan-10 Feb-10

0%10%20%30%40%50%60%70%80%90%

100%

1% 1% 1%

99% 99% 99%

PO/Non-PO DistributionElectronic and Manual

Non-PO Invoices PO Invoices

Fiscal Month


1,000

2,000

3,000

4,000

5,000

6,000

$0$0 $0

$0$0 $0

5,110 5,120 5,130 5,1405,150

5,160

One Time Supplier

Amount (in Thousands) Volume

Fiscal Month





Establishing ServiceLevel Agreements



Leadership ConferenceService Level Agreement (SLA) Checklist1. Assess whether a SLA is appropriate

2. Get management commitment

3. Designate SLA managers

4. Educate the parties involved about SLAs

5. Assess current services

6. Gather feedback

7. Ensure agreement about the agreement; create a draft

8. Solicit feedback

9. Complete pre-implementation activities, such as establishing tracking mechanisms and conducting pilots

10. Implement and manage the agreement



Leadership ConferenceExample AccountsPayable SLAs

Invoice Processing:• At least 95% of invoices & requisitions processed within

5 working days of receipt • At least 95% of invoices & requisitions processed

correctly—approved/supplier/account coding/tax coding • SLA Measurement based upon:

― Number and percentage of invoices & requisitions returned or held that can’t be processed due to insufficient approval, incorrect coding and/or information.



Leadership ConferenceExample AccountsPayable SLAsPayment Cycle

• At least 90% of invoices paid in accordance with payment terms and in accordance with current payment cycles

• SLA measurement based upon:—Number and percentage of invoices & requisitions returned

or held that can’t be processed due to insufficient approval, incorrect coding and/or information.




Recap



Leadership ConferenceRecap• Identifying accounts payable objectives• Dividing the accounts payable department

into functions• Defining metrics

― Cost saving and value― Transactional quality― Customer service― Controllership

• Using metrics as a benchmarking tool• Establishing service level agreements

© 2011 Financial Operations Networks LLC

Thank You!