Top KPIs to Evaluate the ROI of Accounts Payable Outsourcing

Accounts payable (AP) represents a significant challenge for many organizations. A global survey by Taulia reveals that nearly half of all suppliers experience late payments, indicating widespread inefficiencies in AP processes. This problem, often a symptom of deeper financial or operational issues, prompts finance leaders to seek effective solutions. Despite their best efforts, sustaining improvements in AP through internal resources alone proves difficult.

What is Outsourcing AP?

Outsourcing accounts payable services means delegating all or part of your AP processes to an external service provider. This strategic move is driven by various factors. CFOs often choose to outsource AP to scale their operations efficiently, reduce operational costs, and streamline processes. Additionally, outsourcing allows access to the expertise of highly qualified professionals and frees up internal resources to focus on other strategic areas of the business.

Why Outsource AP?

The decision to outsource accounts payable can transform how CFOs tackle persistent inefficiencies in their AP processes. By tapping into outsourced accounts payable services, businesses can not only benefit from cost savings but also rapidly expand their AP capabilities with top-tier talent and state-of-the-art technology, including automation. This strategic move creates a more robust and streamlined AP system, built for enduring efficiency and substantial long-term value. Yet, the true potential of outsourcing accounts payable services is fully realized when companies effectively monitor their outsourcing partner’s performance against well-defined KPIs, ensuring that every step taken enhances the overall efficacy and outcomes of their AP operations.

Read Case Study: Accounts Payable Optimization for a Global Beverage Producer and Distributor

KPIs of Accounts Payable Outsourcing

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

Error-free Processing

Improving accuracy is a common goal for outsourcing accounts payable. 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.

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.

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.

Digging Deeper into the KPIs

While the overarching KPIs provide a broad view, delving into more specific, granular KPIs is essential for a comprehensive evaluation:

1. 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 project.
2. 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 your outsourced accounts payable services.
3. 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.

The ROI of Accounts Payable Outsourcing

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

1. 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.
2. 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.

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.

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

Topics: Accounts Payable Optimisation, Finance & Accounting Outsourcing