A Guide to Measuring Accounts Payable Outsourcing ROI Effectively

Outsourcing accounts payable has become a strategic choice for many companies aiming to streamline their workflows and boost financial efficiency. However, just handing over these tasks to an external provider doesn’t guarantee success. Almost half of all suppliers experience late payments according to a global survey by Taulia, highlighting persistent inefficiencies in accounts payable processes. These issues, which often point to deeper operational challenges, push finance leaders to look for better solutions.  

In this blog, we’re going to dive into the key performance indicators (KPIs) that really matter if you want to increase accounts payable outsourcing ROI. Whether you’re thinking about outsourcing for the first time or you’re trying to improve what you already have, understanding these metrics will help you gain better control over your financial operations and improve your bottom line.  

6 KPIs To Track Accounts Payable Outsourcing ROI 

Let’s dive into some critical KPIs that should be monitored from the onset to gauge the effectiveness of your accounts payable outsourcing strategy:  

1) Error-free Processing  

Improving accuracy is a common goal for maximizing the ROI of accounts payable outsourcing. Fewer errors mean less time resolving disputes and faster invoice payments. Monitor the ‘error count’ closely. Establish a clear threshold for acceptable errors and ensure the outsourced accounts payable services firm stays well within these limits.  

2) Timeliness  

The speed of invoice processing is another vital KPI. Track how long it takes to process an invoice from receipt to final payment to the vendor. Aim to consistently beat the average processing time—this metric should serve as a benchmark to assess the efficiency of your outsourcing provider’s AP services.  

3) Cost of Invoice Processing  

Each invoice carries a processing cost. A key objective of outsourcing is to streamline operations and reduce the ‘cost per invoice.’ Strive for significant cost reductions to enhance the cost-effectiveness of your AP processes. Remember, reducing processing costs is one of the standout benefits of outsourcing, making it a crucial KPI to track.  

4) Days Payable Outstanding (DPO)  

Balancing timely vendor payments with maintaining robust cash flow and strong vendor relationships is crucial. The ideal DPO aligns with your vendor’s payment terms—neither too long nor too short. By outsourcing accounts payable, your organization should consistently meet these terms, optimizing cash flow management. Effective DPO management is thus a critical metric for assessing the performance of your accounts payable outsourcing ROI.  

5) Supplier Discounts  

Early or timely vendor payment can help you benefit from vendor discounts. The number of discounts and their amounts can positively impact your cash flow; one of your KPIs should be the number of supplier discounts leveraged by your organization. Over a period of time, if you continue making early or on-time payments, the supplier will offer even more favorable payment terms, which in turn can improve your organization’s cash position. According to an Institute of Finance and Management AP benchmarking report, only 27% of organizations leverage the benefit of supplier discounts. This represents a significant opportunity for savings, making it an essential KPI for tracking your accounts payable outsourcing ROI.  

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6) Invoice Authorization Time   

In any organization, the time it takes to approve an invoice is a crucial indicator of AP efficiency. Often, manual processes supported by outdated technology can drastically slow down these approvals, leading to delays in payments and unresolved invoices piling up. When you outsource accounts payable, one of the immediate benefits should be a noticeable improvement in the speed and accuracy of invoice approvals. This is achieved through modern automation tools that streamline the entire approval process, ensuring invoices move swiftly through the pipeline. Monitoring the reduction in authorization time is a key performance indicator as it not only measures efficiency but also reflects how well the outsourcing partner integrates with and enhances your existing AP processes.  

Calculating the Accounts Payable Outsourcing ROI 

Calculating the ROI of outsourcing accounts payable involves two critical steps:  

• Cost Analysis: Start by assessing the total cost of your existing AP process, which includes resources, technology, and associated overheads. Compare this to the cost savings realized from outsourcing AP tasks, capturing the direct financial benefits of shifting your AP operations.  
• Benefit Assessment: Add up the costs associated with outsourcing and evaluate the tangible benefits, such as labor arbitrage, supplier discounts, faster processing times, and automation ROI. Benchmark these benefits against the expenses incurred before outsourcing. The difference will highlight the financial ROI of your outsourcing initiative.  

What’s the Bottom Line?  

Beyond the measurable financial ROI, outsourcing also brings intangible benefits. These include standardization of processes through reengineering, swift resolution of queries, stronger supplier relationships, and more. Although intangible initially, these benefits gradually translate into tangible ROI as they streamline operations and enhance business relationships.  

If you’re considering outsourced accounts payable services, turn to QX. As a leading provider of AP services for growth-focused organizations, we combine top-tier accounting talent, advanced technology, and a rigorous focus on process quality to add value across the AP cycle. Book a consultation call by clicking here.   

FAQs  

What key metrics should be tracked to maximize ROI of accounts payable outsourcing? 

Track error rates, invoice processing time, cost per invoice, and payment accuracy. Monitoring these metrics helps identify areas to optimize and ensures the outsourcing provider meets performance goals. 

What factors affect the ROI for accounts payable outsourcing? 

Key factors include provider expertise, technology integration, error reduction, processing speed, and cost savings from streamlined operations. 

How can companies measure the success of their outsourcing efforts? 

Companies can measure success by comparing pre- and post-outsourcing metrics like processing costs, error rates, and payment cycles, along with overall cost savings and enhanced operational efficiency.  

Originally published May 09, 2024 07:05:19, updated Dec 05 2024

Topics: Accounts Payable Optimisation, Finance & Accounting Outsourcing