Wherever There is Complexity, the Risk of Payment Error Increases
Accounts payable (AP) is often considered the least complex of the activities carried out within the finance and accounting function. However, organisations with high volumes of transactions and large supplier bases routinely discover a number of underlying issues causing errors and financial losses.
Potential causes of failure include multiple methods for paying vendors, complex contractual agreements, and multiple locations, business units and payment centres. Introduce complexity to the process and the risk of non-compliant payments inevitably increases.
Let’s take an example. Imagine you are paying for the services from a firm of solicitors. In the vast majority of instances, you will have been charged correctly but do you know for sure? Here is a brief checklist of the questions you should consider:
- Has the firm invoiced for the right number of hours?
- Has the firm charged at the agreed rate(s)?
- Has it charged for the correct number of solicitors employed?
- Do those hours and the service provided link back to an agreed contract?
- Have you been charged for basic research?
These are simple questions to ask but not easy ones to answer. Think of the resources involved in addressing the answers properly, and the hours a member of your in-house legal team would need to spend to get this done manually. Contract terms would need to be reviewed, LEDES codes confirmed, items charged checked line-by-line. If that’s not enough, your team would need to review the number of hours external counsel participated in meetings, taking into account, of course, the relative seniority of all those involved.
This is just for one invoice. Now multiply that effort by the number of invoices you receive in a typical month, quarter and year. Do you have time to refer back to the relevant contract every time? Do you have time to check line-by-line? Moreover, is this the right use of expensive and scarce internal counsel time?
That said, can you afford not to do this? Just think that even a small proportion of errors or missed manual checks could result in significant financial losses. Recent procure-to-pay research by The Hackett Group found that up to US$ 1.5 million could be recovered using a simple AP audit.
Some organisations have addressed this problem by appointing third party providers, the best of which come with a team of experienced auditors coupled with specialist software.
With the advent of data science and machine learning, the efficiency and effectiveness of such audits is dramatically improved. Machine learning algorithms ingest huge amounts of data from contracts, historical purchase orders and invoices. In doing so, they drastically narrow down the focus of human auditors. This is a perfect example of machine and human working hand-in-hand, ensuring that expensive legal and auditor resources are used where they can be most effective.
Consider also how a combined workflow connecting internal counsel, external counsel and the service provider could dramatically improve the way invoices are reviewed. We estimate this could cut the cost of invoice processing by up to 50%.
If the benefits are so substantial why aren’t organisations focusing their efforts on recovery? Because procurement teams face a difficult balancing act. Despite best efforts and good intentions, many of our client finance and procurement teams don’t have enough hours in the day or resources at hand to monitor compliance. This is especially true when they are expected to manage contracts and track spend throughout the supply chain.
The best course of action? Bring in a specialist provider. And make sure that provider has a combination of analytics and machine learning experience, working alongside highly skilled human auditors.
Although the technology cannot do everything in the process, it does free up staff to concentrate on the more complex cases, which in turn gives them more time to spend on improving the processes further, creating a win-win.
As an example, consider our work with one client, a global automotive manufacturer. In the process of our audit, we uncovered significant overpayments worth up to $4 million. In addition, our contract compliance audits helped to enhance transparency, align expectations and reduce assumptions that lead to errors in the first place.
Financial recoveries, root cause analyses and control assessments equate to substantial margin enhancements, process improvements and risk reduction – ultimately increasing shareholder value and reducing costs in the process.
About the AuthorMore Content by Koushik Chatterjee