Evaluate Your Order-to-Cash Process: 15 recommended metrics to benchmark your O2C operations Hackett Research Summary
Evaluate Your Order-to-Cash Process:15 recommended metrics to benchmark your O2C operationsHackett Research Summary
Source: Raising the World-class Bar in Finance Through Digital Transformation, The Hackett Group
Executive Summary
The first half of 2020 has seen disruption to normal operations in many businesses. Defending cash has been paramount as finance leaders focus hard on liquidity and optimising working capital. This new “cash culture” is expected to be in play for the foreseeable future - a landscape where A/R departments can have a significant influence and contribute to a quicker business recovery.
“Top-performing companies operate at 57% less cost which, for a $10 billion organisation, equates to approximately $200 million in cost savings from general and administrative (G&A) efficiency alone”.Hackett Group Blog 2020
This paper outlines 15 key metrics recommended by Hackett Group that depict a world-class order-to-cash process.
Considering efficiency and effectiveness, each performance indicator is described through the best practices top performing companies employ along with the outcomes they drive.
To find out how you measure up, create your own Receiveables Management Benchmarking Report which will provide performance gap indicators and will help to determine a starting point for improvement and recovery.
The economic volatility has meant agility is critical which in turn has relied on real time visibility and monitoring of important financial KPI’s, risk metrics and customer information to drive robust decision making, flexibility and productivity in receivables processing.
Whilst it is hard to say yet who has successfully weathered the covid storm, those who have faired better have been those closest to the characteristics of world-class organisations. Strong processes, insight and automation underpin a higher level of accuracy, cost efficiency, speed and operational resilience which also help to maintain and strengthen important customer relationships.
Although being best in class may not be top of the agenda, acknowledging the benchmarks you can strive towards could help to prioritise any remediation needed throughout a recovery phase. Once attained, your business should be in better shape to make the necessary pivots and enable business continuity given similar circumstances in the future.
“Financial normalcy is expected in 9-10 months from now”.Strategic Treasurer: Global Recovery Monitor June 2020.
Source: Raising the World-class Bar in Finance Through Digital Transformation, The Hackett Group
What is World-class in A/R?
World-class is defined to be the top quartile performance in operational efficiency and effectiveness process metrics. For today’s A/R teams world-class means being more productive, faster and operating the order-to-cash process at less cost. In addition they are
EFFICIENCYWorld-class organisations operate with more efficiency
EFFECTIVENESS World-class organisations are more effective because they
Five Characteristics of a World-class AR Function ▶ They achieve up to 45% more cost savings than their peers
▶ They enjoy a 24% saving in time spent in low-value work.
▶ They are 50% more likely to have advanced reporting and analytics capabilities
▶ They commit 66% less errors
▶ They collect 95% credit sales within payment terms
more effective at delivering services to internal customers, they can unlock latent business opportunities and can deliver a higher level of customer engagement to improve repeat business
Lower total cost Accurate decision making
Fast cycle time
Higher productivty Optimised working capital
Better alignment to business
Source: Raising the World-class Bar in Finance Through Digital Transformation, The Hackett Group
Credit Management
Average Days It Takes to Complete New Credit Reviews
EFFICIENCY METRIC Best Practice:• Implementation of best-of breed online
credit application• Automated correspondence for missing• information such as bank/trade references,
backups• Providing real-time tracking of application
status
Benefits:• Improve customer experience with greater
visibility• Reduced manual errors
Average days it takes to complete new credit reviews
Automated Versus Manual Credit Modelling Tools
EFFICIENCY METRIC Best Practice:• Automated stakeholder correspondence for
all credit decisions• Integrating with country-specific and
industry• specific credit agencies, public financials
and Insurance bureaus• Automated capture of the fields from the
credit application form
Benefits:• Standardise credit operation across various
platforms• Improved productivity to work on high
value customers
World-class organisations have faster and more accurate credit operations with the help of sophisticated, automated and dynamic credit modelling tools
Automated versus manual credit modelling tools
World-class organisations are 33% faster in onboarding customers.
3 d
ays
2 d
ays
Peer group vs world-class
33%
Peer group vs world-class
84%
16%
25%
75%
2
1
Source: Raising the World-class Bar in Finance Through Digital Transformation, The Hackett Group
Billing and Invoicing
Percent of Invoices Generated & Distributed Electronically
EFFICIENCY METRIC Best Practice:• Adopt automated e-invoicing portal• Deliver invoice according to customer
preferred channel such as portal and e-mail
• Track conversion of customers from paper to e-invoice
Benefits:Self-service customer portal saves print and mail costsEliminate low-value tasks in billing and invoicing such as dealing with paper, doing back-and- forth
Peer group vs world-class
World-class organisations reflect lower billing process costs by 8% in comparison to the overall database.
Average Time It Takes to Bill
Percent of customer invoices generated and distributed electronically
EFFICIENCY METRIC
50%
58%
8%
World-class organisations have been able reduce their average time to bill by 33% thus improving their cash inflow.
Average time it takes to bill
Best Practice:• Self-service customer portal for viewing
invoices • Using a single portal which includes all
relevant• backup documents such as PODs, BOls• Streamlined collaboration between internal
teams
Benefits:• Lower payment cycles• Improved customer experience
3 d
ays
2 d
ays
Peer group vs world-class
33%
3
4
Source: Raising the World-class Bar in Finance Through Digital Transformation, The Hackett Group
Billing and Invoicing
3.0
% Percentage of Invoices Corrected for Billing Errors
Percent of Customers Who Access Accounts via Web-based Application
1.2%
1.8%
Percentage of Invoices Corrected for Billing Errors
EFFECTIVENESS METRIC
World-class organizations reduced billing errors by 1.8% by automating their billing and invoicing
Peer group vs world-class
Best Practice:• Automated invoice generation from
ERP open invoices• Inbuilt correspondence templates and
packages• with auto-attached documents
Benefits:• Lower deductions• Faster collections• Better customer experience
EFFICIENCY METRIC
Percent of Customers Who Access Accounts via Web-based Application
Automated billing and invoicing helps top performers to reduce billing errors and create an exceptional customer experience
Best Practice:• Invoicing customers electronically via
email, portals• Allowing customers to pay in electronic
payment formats ACH, Credit cards and e-Checks through payment portal
• Offering incentives to customers to bring them onto Web-based portals
Benefits:• Faster payments• Improve E-adoption• Better customer experience
Peer group vs world-class
9% 42%
33%
5
6
Source: Raising the World-class Bar in Finance Through Digital Transformation, The Hackett Group
Cash Application
Process Cost per Customer Remittance
Automatic Remittance Posting Matching Rate
EFFECTIVENESS METRIC
EFFICIENCY METRIC
Best Practice:• Standardised processing for
different e-remittance types• Automated aggregation of
remittances from portals, e-mails and EDI
Benefits:• Easy e-adoption in payments• Lower cost in process
payments
Process Cost per Customer Remittance
Remittance <25% Remittance 25%-60% Remittance 61%- 95% Remittance >95%
Bottom Quartile
Median
Top Quartile
Automatic Remittance Posting Matching Rate
$7.8
2
$4.3
4
$3.0
3
$6.8
8
$4.0
0
$2.5
6
$4.9
2
$2.4
3 $1.0
0
$4.0
1
$1.5
3
$0.3
7
Best Practice:• Template-agnostic remittance capture• Aggregating the remittances from
multiple• sources( mails, EDI, web-portals)• AI enabled payment matching &
exception handling
Benefits:• Reallocate users• Reduced costs
World-class organisations have twice the percent of hands-free cash posting with lower process costs
Peer group vs world-class
35% 75
%
40%
7
8
Source: Raising the World-class Bar in Finance Through Digital Transformation, The Hackett Group
Deductions Management
Average Dispute Resolution Cycle Time
Percent of dispute are not resolved by the initial resolver & needs to be escalated within the management team
EFFECTIVENESS METRIC
EFFICIENCY METRIC
Average Dispute Resolution Cycle Time
Percent of Dispute are not Resolved by the Initial Resolver & needs to be Escalated within the Management Team
Top Performers have established a dispute resolution process that requires less escalation and speeds time to dispute closure
Best Practice:• Identifying deductions at Cash
Application • A single repository for all the backup
documents• such as notes, claims across internal and
external teams• Track deductions aging
Benefits:• Improved recovery of invalid deductions• Better adherence to big box retailers
such as Amazon
World-class organisations established a dispute resolution process that reduced escalation by 5% (half).
Best Practice:• Providing visibility into resolution status
and progress of the dispute• Seamless collaboration between internal
teams• Easing the research process by having all
the documents at one single place
Benefits:• Lowers DDO• More bandwidth to work on invalid
deductions
10 d
ays
7 d
ays
30%
Peer group vs world-class
10%
5%
Peer group vs world-class
5%
9
10
Source: Raising the World-class Bar in Finance Through Digital Transformation, The Hackett Group
Collections Management
Process Cost per Collection Contact
Collection Contacts per FTE
EFFICIENCY METRIC
EFFICIENCY METRIC
Process Cost per Collection Contact
Collection Contacts per FTE
World-class organisations have established automated collection process that enables lowered process costs by 66%.
Best Practice:• Providing a prioritised worklist for
collectors• Adopting automatic correspondence
approach• versus dial for dollar approach• Having single source of truth across
various platform to access backup documents such as invoices copies, claims documents
Benefits:• Design scalable collections operation• Facilitates reaching out to a broader
customer base
World-class organisations have established proactive and strategic collections process that enables 30% more contacts per FTE
Best Practice:• Inbuilt correspondence templates and
packages with auto-attached back-up documents to save time
• Sending pro-active reminder to customer prior to the payment due date
• Automated correspondence to different• customer buckets
Benefits:• Restricting phone calls to only select
high-risk• customers• Reduce aging/ past duesPeer group vs world-class
5,78
6
19,3
54
30%
$11.0
66%
$4.0
Peer group vs world-class
11
12
Source: Raising the World-class Bar in Finance Through Digital Transformation, The Hackett Group
Collections Management
Average Days Delinquent
Percent of Credit Sales Collected within Terms
EFFECTIVENESS METRIC
EFFECTIVENESS METRIC
Average Days Delinquent
Percent of Credit Sales Collected within Terms
World-Class organisations leverage smart automation and create direct bottom-line impact by improving metrics such as ADD
Best Practice:• Sending automated proactive
reminders before payment due date• Predict when the customer is about to
pay• using Artificial Intelligence• Provide customers with self-service
portal for viewing invoices and making payments
Benefits:• Improve working capital• Reduce dependence on banks for
short-term banking
World-class organisations leverage smart automation to improve process effectiveness by 12%
Best Practice:• Provide incentives for early payments• Enable payment features such as auto-
pay, schedule pay
Benefits:• Improve Days Sales Outstanding• Minimise missed payments
Peer group vs world-class
79%
91%
12%
10 d
ay s
4 d
ays
60%
Peer group vs world-class
13
14
Order to Cash
Create your own Receivables Management Benchmark Report
You can now see how world-class organisations operate their Accounts Receivable function, the performance standards they are achieving and the resulting business benefits. Now it is your turn to see where you stand.
Why is this important? The global pandemic has re-emphasised the importance of being able to release cash from debtors. Your AR team have been thrust into the spotlight and whilst they have become critical to current business health many organisations have seen inefficiencies in AR process exposed. It’s time to get back on track, to evaluate, and accelerate process improvement initiatives that will strengthen business resilience.
This custom benchmarking report will help you diagnose your receivables operations to identify improvement opportunities and focus on what matters to your business right now.
To be world-class you will have seen that top performing companies rely heavily on automation and insight. We look briefly at technology in the next section, which looks at the power of integrated receivables solutions and AI to optimise the end-to-end order-to-cash process.
Process Cost as Percent of Revenue
EFFICIENCY METRIC
World-class organisations are able to reduce process cost by 56% in total by leveraging automation technologies
Best Practice:• Ensure high employee productivity by
eliminating manual error prone tasks• E-adoption from paper• Keep a track on high-risk customers to
ensure• there is minimal bad-debt and write-off
Benefits:• Improved working capital and cash flow• Easier cash management
Process Cost as Percent of Revenue
56%
0.014%0.017%
0.026%
0.020%
0.013%
0.005%0.009%0.011%
0.005%0.011%
Peer group World-classCreditCustomer billingCollectionsCash Applcation Deductions
15
What Drives World-class A/R Performance?
ConclusionTrue digital transformation can only be achieved when there is a cross company culture embracing digital processes in every department. A scary thought for many organisations but real game changing benefits can be gained through the automation of end-to-end processes in just one department - Accounts Receivable. Strategic investment can play a major role in helping peer-group organisations catch up to their world-class competitors, whilst enhancing stakeholder’s perceptions of how finance adds value to the performance of the enterprise.
• Automation of clerical repetitive tasks across C2C
Core automation means that costs are low and effort is allocated in the right tasks
• Single, integrated platformMore effective in delivering services to internal and external stakeholders
For transforming the receivables function as part of a world-class journey, finance execs should consider primary technology investments in the following areas:
• AI-driven automation technologyLow-error rates in tasks
• Integrated reporting and analyticsBetter decision making and insight
• Using big-data and machine learningImproved outcomes of A/R actions - faster, more effective collections
Achieved a reduction in Days Deductions Outstanding for their complex CPG receivables process.
Unlocked $6M working capital by leveraging artificial
intelligence Reduced bad Debt by 20% and improved Day Sales Outstanding by 5-6 days through automated
collections
About HighRadius
HighRadius provides a cloud-based Integrated Receivable Platform, powered by machine learning and AI. Our Technology empowers enterprise organisations to reduce cycle time in the order-to-cash process and increase working capital availability by automating receivables and payments processes across credit, electronic billing and payment processing, cash application, deductions, and collections.
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