Sentara Healthcare, a premier not-for-profit health care provider in southeastern Virginia and north eastern North Carolina, needed a disciplined approach to solve its accounts payable issues and all around financial supply chain. Much like Lawrence Sports, Sentara Healthcare did not have set process in place for controlling its accounts payable department. Rather than having a game plan laid out for the year, complete with plans for emergency situations, it operated on a month-to-month basis, with a “as it comes up strategy”. After much deliberation, Sentara selected to outsource its accounts payable (AP) to Xign, which would apply Six Sigma principles in order to streamline operations and proactively monetize early payment discounts by:
• Measuring and monitoring AP processes to improve managerial effectiveness.
• Compressing accounts payable cycle time.
• Reducing invoice defects by more than 70%.
• Reducing manual touch points through electronic workflow.
• Significantly increasing early payment discount capture.
• Tightening process controls and increasing visibility to liabilities.
One of the best ways to ensure a more proficient accounts payable department is to outsource it to well established companies such as Complete Controller . According to Sentara’s Director of Finance Operations, Linda Horton, “Sentara targeted accounts payable for business process improvement because of the dramatic payback potential… We chose Xign because it is clearly the best equipped to improve our process capability in support of our Six Sigma quality objectives. Xign will help us achieve new levels of efficiency and maximize our early payment discounts while improving financial control.”
Xign, who has a track record of reducing financial settlement costs by more than 50%, provides the ultimate solution for Sentara’s flailing AP department. Xign shifts the old accounts payable routine from paper format to electronic, by servicing everything from transmissions of purchase orders, invoices, and payments all via the Internet. By accelerating the settlement cycle and optimizing working capital to benefit both buyers and suppliers with real-time transaction visibility, delivery of detailed remittance information with every electronic payment and no transaction fees (Xign Press Release, 2005).
Efficiency and cost effectiveness often take a back seat in the AP process, while companies scramble to establish policies which ensure compliance. It’s time organizations such as Lawrence Sports look for ways they can save time and money to improve their bottom line.
Manual invoice processing is an extremely time-consuming and, therefore, costly process that involves:
- Checking invoices against the purchase orders.
- Making sure the price, quantity, and goods match thePOand all the information on the invoice is correct.
- Determining the proper approver and routing the invoice to that person.
- Tracking the invoice to ensure comes back in a timely manner.
- Inputting, coding, and reviewing the invoice when entering it into the accounting system.
By automating the process, companies can greatly reduces the time it takes to process an invoice. In most cases it can be taken down from several weeks or months to a matter of days. Once an invoice is available electronically, it can automatically be matched against the order and routed for payment and sent to the AP department for processing. Technology also automates the processing of periodic or contract-based purchase invoices. When technology like this is fully implemented, most invoices no longer require human intervention. “Since the workflow is automated and the bulk of the invoices are handled by the system, the AP department is now just dealing with exceptions, which frees up their time to be more strategic” (Kaskinen, 2007).
Safety-Kleen, a leading waste management company, was overpaying for its AP process and was unable to gather real time information on its return on investments. Needing to improve on its overall financial management and leave more time for strategic design and implementation, Safety-Kleen decided to outsource invoice processing to BancTec. “BancTec’s BPO service offering allowed Safety-Kleen to benefit from BancTec’s leading edge technology on a per transaction basis, allowing us to see a true ROI immediately,” said Wayne Flake, Safety-Kleen vice president of IT Applications.
“The cost to process paper invoices is high in terms of manual activity required at every stage, high potential for mistakes, missed discounts and late-payment penalties”. BancTec’s AP solutions and services enabled Safety-Kleen to increase the cost-efficiency of its large invoice volumes, simplify their regulatory compliance and improve the allocation of time spent among financial managers (Business Wire, 2006).
Even extremely organized paper-based account payable systems have a lot of opportunities for problems. These include “lost or misplaced invoices; incorrect manual data entry; time lost sorting and filing paper, or trying to locate matching purchase orders” (Business Wire, 2006). This all adds up to slower processing, which can directly impact a company’s financial reputation with both partners and suppliers.
Labor costs for skilled staff can be extensive, so adding manpower to the problem is not a viable solution. There are even more costs and time incurred in the filing and storage of these documents. By automating these systems it keeps management away from the time consuming paper trails and allows for more focus on important and immediate tasks.
The goal for Safety Kleen, as it should be for all companies, is to develop what is known as “lights-out accounting”. The idea is when everyone goes home at the end of the day, the AP system keeps on working. With the technology now available, productivity gains as high as 1,000% have been realized, helping to turn AP into a profit generating machine rather than cost generating. According to Andrew Bartolini, Research Director of Aberdeen, “A very deliberate plan is required to effectively transform an antiquated A/P department into an efficient ’21st century’ function. Enterprises automating the function see almost instant savings, while those outsourcing their A/P operations see an additional 8% in overall savings” (Aberdeen, 2007). “Given the compelling evidence of ROI from account payable automation, it’s not a case of if you’ll ever be able to turn the lights out, but whether you can afford not to” (Goodwin, 2006).
The foundation of accounts receivable is the way credit and collection policies are managed. In an uncertain economy strict policies must be enforced to shorten the collection period and minimize risk. Stricter policies could cost Lawrence Sports some sales opportunities but it will improve the bottom line as they lower collection costs and bad debt losses. There are 10 steps companies needs to take in renovating its accounts receivable process.
“1. Establish written credit policies that cover terms of sale, credit approval, credit limits, new accounts, change in credit status, authority to override credit policy and communication procedures, particularly with sales personnel and customers.
2. Investigate credit applications carefully. Obtain at least three credit references and review them thoroughly.
3. Once credit limits and terms are established, enforce them.
4. Be consistent, firm, and tough. Be willing to say “no.”
5. Regularly examine the credit status of large accounts. This is where many dealers were burned in recent years.
6. Collection starts with timely billing. Prompt billing is essential to accounts receivable turnover.
7. Determine the health of your receivables by preparing a monthly Aged Trial Balance identifying your accounts and their status. Calculate the percentages in each column, current and past due, and set targets to reduce those percentages of aging receivables.
8. Observe trends in the age of your receivables and re-examine all accounts that are consistently past due. Can you identify a common factor to watch for in new accounts?
9. Establish a collection program to ensure that regular, persistent follow-up begins soon after maturity. The best way to keep a receivable out of the 90-day column is to keep it out of the 60-day column.
10. Assign responsibility and authority, and keep sales people informed, notifying them when no further orders will be accepted” (Kuhn, 2006).
Along with the plans for improving the internal A/R and A/P process, companies must also negotiate with other banks for funding options, lines of credit, etc… Having a single line of credit with Central Bank with no other alternatives could be disastrous. Many banks have several different funding options which can help with a variety of situations. These must all be explored (Fiscus, 2007).
Implementation of this plan will be difficult because it not only completely renovates how things are currently being done but must overcome the unavoidable hit to morale which is going to happen. Managed properly, however, implementation of the plan will be a success. This starts with the executive team deciding they are all onboard and supportive of the direction Intersect Investments is headed. Delegation from the CEO to the executive team comes next. This must be done so everyone’s job is clear and concise so the resources such as people, money, and equipment will not be fought over. A big obstacle to overcome in this process is the issue of time as decisions need to be made in 2 or 3 weeks.
Communication from beginning to end is detrimental to the success of this operation. When several plans need to be implemented at the same time it can become difficult to maintain focus.
In 1986 IBM was being attacked by attacked by its competitors in their mid-range of family computers. A major project which was developed to out perform the competitors had to be canceled due to the size and cost of the project. Infighting between several fractions had begun to break out as everyone seemed to have a plan and a legitimate claim for funding before someone else, however, IBM did not have the capital to fulfill everyone’s request. IBM had to come up with a plan to satisfy everyone’s needs on a limited budge. One of the biggest quandaries the company found it in was people were committing to their piece of the puzzle without any understanding of how their actions affected the company as a whole. Even though plans for many of the smaller pieces were in tact, showing how the final result of all these little plans would be success proved very difficult.
“Victor Tang, who was in charge of planning, and Emilio Collar, who oversaw market analysis… viewed this struggle as an issue fundamental to strategic decision-making, one only compounded by the vast complexity of global markets. It simply begged for a more rigorous and systematic process. So together they embarked on an approach for setting priorities as the basis for allocating resources… To their way of thinking, the only way to make sound decisions for allocating resources was to create a priority ranking for each and every one of the line items themselves.”
Collar discovered a model for helping IBM make their priority setting decisions which would allow them to take any number of criteria into consideration and make a very complex situation more workable. The process IBM used was called the Analytic Hierarchy Process (AHP).
“…as part of AHP, you, the decision maker, get to build the hierarchy. You establish the goal, the criteria, and the options. In so doing, you can actually bring ideas, anecdotal experience, even emotion into the process. It allows you to quantify judgments, even subjective ones. It also forces you to consider the interdependencies of your criteria to meet your goals… All this had very real consequences. In the past, we would sometimes chase markets simply because some highly placed executive decreed we should. Usually these decrees were based on an anecdotal experience with a particular customer or industry. But with our priority ranking in hand, it became easier to fend off such unjustified dictates. … For the first time, we could confidently articulate what businesses we were in and, more importantly, which ones we were not.
The implementation of AHP and the allocation of resources that followed resulted in one of the most successful computers in IBM history, the IBM AS/400.
Understanding what your company’s goals and objectives are and how to rank these in a rational and objective manner of importance is necessary for staying on track in obtaining the objectives. Resources for any company are limited and if they are not allocated properly to the sources which meet your company’s objectives then chaos and infighting can become out of control leading to a severe loss in profits (Silverlake Project, 2005).
With this in mind Michael K. Allio, a business strategy consultant for many Fortune 500 companies, suggestions 10 key steps to successful implementation.
1. Strategy must be broken down in basic terms. Nothing can be left for guess work.
2. A common language must be established. The metrics for how each aspect will be measured, the major milestones, resources required, and critical issues must be clear.
3. People have different skill sets. It is the CEO’s job in this case to delegate responsibilities according to the executive teams’ strengths.
4. All aspects must be measurable in straightforward quantitative and qualitative metrics.
5. This is a long-term project and while short-term goals have to be focused on, the long-term goals may not be compromised.
6. Everyone involved in the implementation process must be conscious of using action rather than passive words. Example; “we are” instead of “when we”.
7. A common format needs to be used for communications. This will be easier once the web-based infrastructure is in placed so this must be top on the priority list. Another format will have to be used until it is in place though.
8. Regular, time limited, structured meetings must take place to keep all players involved informed.
9. The budget needs to accommodate the strategy not the other way around.
10. The CEO must be all over every aspect of the process. He cannot assume anything (Allio, 2005).
There are three main goals of this operation which the success will be measured by.
- Increase sales diversity by 40% within 9 months.
- Decrease in accounts payable costs and time spent.
- Decrease collection time down to the current industry standard of 32 days.
By the benchmarking done and ideas presented, companies can get back to progressing rather than sitting idle while it gets pushed into bad situations which spin out of control. Increasing sales diversity will allow more room for error if one company were to default on its payments. By decreasing the time spent on accounts payable, allows more time for focusing on unforeseeable problems which suddenly arrive. The combination of both of these allows more strict negotiations with accounts receivable so A/P doesn’t have to suffer.
Allio, M. K. (2005). The Journal of Business Strategy. Boston: 2005. Vol.26, Iss. 4; pg. 12, 10 pgs
Business Wire. (2006). Safety-Kleen Selects BancTec for Accounts Payable Solution. Retrieved Saturday, May 05, 2007 from http://www.allbusiness.com/human-resources/workforce-management-hiring-recruiting/3981916-1.html
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Goodwin, B. (2006). Cutting the Paper Chase in the Accounts Department. Hutton: 2006. Vol.27, Iss. 6; pg. 36, 3 pgs
Kaskinen, J. (2007). Seeking Best Practices in Accounts Payable. Montvale: March 2007. Vol.88, Iss. 9; pg. 46, 6 pgs
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Silverlake Project. (2005). Transformation at IBM
Xign. (2005), Sentara Healthcare Selects Xign To Automate Accounts Payable Operations Xign Service Enables Leading Healthcare Provider to Extend Six Sigma Methodology to Key Corporate Finance Function. Retrieved Sudany, May 06, 2007 from http://www.xign.com/comp_news_081505.html