The Right KPIs for Effective Management of Accounts Payable
“If you can measure it, you can manage it.”
These famous words are attributed to Peter Drucker, one of the best-known gurus of management. As are the inverse words, “If you can’t measure it, you can’t manage it.”
These words have been taken to heart by every business and corporation all over the world. Key Performance Indicators (KPIs) or Key Result Areas (KRAs) or the more simply stated Objectives and Goals, are used to set expectations and measure performance.
KPIs are important for an individual employee to understand the expectation the organization has from him/her. It provides clarity to the role that is assigned. Some organizations go a step further and also define the resources and constraints while the employee works towards delivering on these KPIs.
KPIs have become critical in managing large, distributed organizations, both at the individual level as well as the consolidated team, function/division and company level. It provides a bird’s eye view to the management about the functioning of the different moving parts, indicating the areas which require a deeper dive.
In the data based BPO services space that oWorkers operates, the relevance of setting up KPIs cannot be overstated. In the diverse set of contracts that oWorkers has with clients from around the world, KPIs play a key role in tracking progress and commercial outcomes. KPI-based measurement systems have contributed to the growth of oWorkers and its recognition amongst the best BPO providers in the world.
Managing Accounts Payable with the help of KPIs
The Accounts Payable function in an organization is an important unit that handles a critical part of the business, the paying out of money to suppliers. It interfaces with external parties, suppliers, and hence needs to ensure that the company is not put in a position where key suppliers become unfavorably disposed towards you, leading to supply-side issues for the company. It needs to ensure that the company’s money is used judiciously and paid out only when necessary and in a manner that furthers the organizational goals and mission. It receives invoices and acts on them. It needs to maintain a high level of accuracy so that the financial statements prepared by the company reflect an accurate picture.
How does one ensure that the AP function is able to operate efficiently and deliver?
Creating a set of KPIs that reflect their responsibilities and deliverables is normally a great starting point, as it is for almost all functions of the company.
In order that KPIs do not suffer from the shortcomings that sometimes creep in on account of it becoming a tick-box exercise, like KPIs becoming unreasonable or unrealistic, it is important that they be set up with care and after due consideration and discussions with stakeholders.
BPO is a people-based business. oWorkers is uniquely placed in each of its operating areas by being recognized as one of the best employers, drawing jobseekers to their doors, instead of having to go and find them. This has been made possible through working as a part of the local community. Their ability to set expectations through KPIs, where each individual knows the expectation from him/her, as well as being able to track and reward people for performance based on the same KPIs, has stood them in good stead.
Recommended KPIs for Accounts Payable
The wheel does not need to be invented again and again. It has been invented and available for our use.
Yours is not the first organization to set up KPIs for the AP function. Many larger, more successful ones have been doing it for years. Based on their experience and learnings with KPIs for the function, five KPIs stand out as the right choice for the AP team.
Invoice processing cost
If you were asked to pick one key function, the most important one, for the team, what would it be? In most companies it is likely to be that of invoice processing. If that is the case, then it would make sense to build some of the KPIs around this key process.
AP being a support function, one that performs a certain part of the processing that enables revenue generation through the sales and marketing efforts, cost management is a desirable goal for the team. While cost at the team level should be tracked, performance is better indicated through a unit cost-based measure such as invoice processing cost. When a company is able to track the cost per invoice, it also facilitates the process of benchmarking against others, either in the industry or even outside, and picking up best practices for creating cost efficiencies.
Most clients, especially the ones from Western Europe and North America, vouch for the cost efficiency of oWorkers and note savings of almost 80% when they outsource work to them. The oWorkers practice of offering a choice between billing methods is also much loved by clients.
Invoice processing time
Just as the unit cost becomes a measure of cost efficiency that can be benchmarked, the time taken to process becomes a measure of time or processing efficiency that will facilitate benchmarking against others and picking up best practices. Here we are talking about the elapsed time, from start to finish, being measured, not the total time consumed in processing across various touchpoints.
As with cost, processing time per invoice is also a straightforward measure that is transparent and easy to understand. For the calculation, the time taken up to the final approval should be taken into account, assuming that the release of payment, thereafter, is a purely operational process that will happen when it needs to happen. Tracking this measure can identify inefficiencies in the system such as errors in processing, that tend to elongate the processing cycle, thereby reducing the number of invoices that are processed in a given unit of time. Delays can result in financial impact not only by increasing the processing overhead but also by reducing opportunities for earning early payment and other discounts offered by suppliers.
With each of their centers being able to work on a 24×7 schedule, the speed of processing stops being an issue when oWorkers becomes a delivery partner.
Invoices processed per employee
Employees are a critical part of any organization. Moreover, often, the initial part of invoice processing in most organizations is likely to be manual. The reason is simple; the invoice received for payment has been generated either manually or by the technology tools used by the supplier, which are not connected to the AP tools used by your company. Hence, at least the initial data entry, making the invoice amenable to be processed in your AP systems, is manual, requiring manual intervention for which people are needed. Hence, it becomes important to establish the human resources being consumed in the activity. This measures the time taken across various touchpoints in the process.
The effort is to keep the metric simple and straightforward. It is recommended that this be a simple quotient of dividing the number of invoices processed in a given period of time, by the number of employees in the department, or mandays contributed by people to the department.
With a philosophy of working with employees, and not freelancers and contractors that are preferred by some of their competitors, getting employees to scale up has been the hallmark of oWorkers delivery. They pay social and local taxes for employees and are regularly rated 4.6 or more, on a scale of 5, on external platforms like Glassdoor.
Outstanding in terms of days payable
Some of you may be aware of DSO (Days Sales Outstanding) as a key measure on the business side. It represents, on an average, the number of days it takes to collect the money for a sale that has been made. The flip side of this measure is DPO, or Days Payables Outstanding. In other words, on an average, how many days does it take for a payment to be made after an invoice has been received.
But there is a catch here, and hence it needs to be viewed with some care. On many occasions, the reason for the number to be high is that contractually, the payment is only required to be made after, say, 30 days or 60 days of the invoice being received. In other words, your company has been able to negotiate favorable credit terms with suppliers. Hence, if the DPO is high, and increasing, it may be worthwhile investigating deeper into the next layer of detail before taking action.
The usual method for calculation of DPO is:
(Average outstanding amount of invoices payable / Cost of goods sold during the period) x No. of days in the period.
This metric seeks to measure the error rates. Another way of looking at this measure is that it measures the rework that is needed. The lower the exception rate, the higher the straight-through processing and the higher the efficiency of the system.
The simple measure is arrived at by dividing the total number of exceptions in processing by the total number of invoices processed in the same period. Some likely causes could be data entry errors, inadequate supporting documentation, sent to the wrong approver, etc. These exceptions, it must be noted, will also have a cascading effect and negatively impact other KPIs such as DPO and average time for processing.
It has been seen that manual processing is more prone to errors and exceptions as compared to automated invoice processing.
With its super secure facilities & protocols for client data security, in addition to its ISO certifications (27001:2013 & 9001:2015), oWorkers provides an environment for automation of processes. Its long-standing relationships with leading providers equips it to leverage their technologies for client projects. It is also GDPR compliant.
It is the experience of leading providers that automation of processes leads to improvement in many of these measures. Tracking these measures also surfaces other areas for improvement such as employee training needs.
From time to time, the measures will provide indications on areas that require a deeper dive to identify an issue and resolve it. For example, if rework is increasing, is there one particular supplier whose invoices are causing this or is it a general trend?
As with everything else, the measures need to be viewed within a perspective. These are tools which will work as we set them up to. Thereafter, making intelligent use of the tools and the information they provide, will be up to the human masters.