Outsourcing Accounts Payable: The Pros and Cons

Why accounts payable outsourcing is gaining popularity

As the business world becomes more competitive, companies continually look for ways to improve services and increase cash flow. Following the rationale that time is money, businesses use outsourcing to make the most of internal employee time.

The accounts payable (AP) department is a popular candidate for outsourcing. Many businesses and organizations turn over their accounts payable to specialized third-party teams to:

Identify areas to lower costs and increase profit margins
Enhance organizational efficiency
Better manage cash flow and working capital

Outsourcing is popular, but it comes with some challenges alongside the benefits. What is the process for finding and implementing the best accounts payable solution for your organization? Is accounts payable outsourcing that solution?

This article covers:

Why an in-house accounting staff is more expensive than outsourcing AP services
The risks and rewards of outsourcing AP to specialized outsourcing providers
Alternatives to AP outsourcing that offer its benefits without the drawbacks

Download the free ebook: How Automation Can Solve Finance Teams’ Biggest Challenges

What is accounts payable outsourcing?

Accounts payable outsourcing refers to contracting with a third-party team to manage your accounts payable process. In AP outsourcing, activities such as managing short-term debts and creditors are conducted by qualified third-party AP teams.

Other services you can outsource include:

Accounts payable administration
Accounts receivable management
Discrepancy resolution
Sending purchase orders

The best third-party teams manage your company’s basic AP functions. This frees your in-house AP department to focus on higher-level tasks and attend to the core business processes that enhance your company's performance and improve service levels.

AP automation vs. AP outsourcing

An alternative to outsourcing your AP function is implementing AP automation. AP automation is different from AP outsourcing in several ways. When you outsource accounts payable, a third-party company runs your AP department. With AP automation, your in-house accounts payable team uses a sophisticated platform to streamline your internal AP systems.

Essentially, AP process outsourcing transfers tasks and responsibilities to another company for efficient management. AP automation uses business intelligence software to manage your in-house systems (with lower total costs on your part).

AP Automation software frees up time spent on repetitive, manual tasks like invoice data capture, three-way matching, and paying vendors so that they can focus on more strategic work. This has several advantages, including lower costs, 24/7 operations, and lower third-party risk.

Why do companies outsource accounts payable?

If your business is making do with paper invoicing and optical character recognition (OCR) to manage your AP processes, you already know the challenges of outdated systems.

Upgrading old accounting systems to modern tools is costly and time-consuming. But evaluating your options with a complete understanding of what’s available leads to better business outcomes.

Let’s look at the pros and cons of outsourcing.

Pros of accounts payable outsourcing

Cost and time savings

Outsourcing AP tasks saves your company considerable money and time. According to recent reports, hiring one employee can cost as much as $4,425. Executive hiring costs climb even higher.

Such costs stack up quickly, especially for large companies. Outsourcing minimizes the cost and time associated with recruiting, hiring, training, and compensating additional employees.

Improved efficiency

Manual accounts payable processes are prone to data entry errors. Moreover, invoice processing speed is limited by your staff's abilities and work hours. Third-party accounts management companies have modern facilities and software to efficiently and accurately accomplish tasks.

Access to better tools

Third-party AP service providers offer professional teams and the latest software to do the job. When you outsource AP tasks to them, you gain access to excellent tools such as computer systems complete with customized invoicing, expense management, and other accounting software.

Reduced workload

Outsourcing accounts payable reduces the workload in your company. This leaves your AP team free to attend to the value-creation activities of the business.

Increased profitability

AP outsourcing solutions put efficient systems in place that allow you to pay vendor invoices on time (or even early) to enhance supplier relationships. A satisfied supplier may offer discounts due to early payments, thus increasing your profitability.

Cons of accounts payable outsourcing

Despite the benefits of using accounts payable outsourcing companies to relieve your internal accounts payable department, there are drawbacks to this approach.

Lack of process control

While it is easy to supervise an in-house AP team, the same cannot be said for third-party service providers. You cannot control how they handle your accounts or run back-office processes. This may hinder transparency, communication, and efficiency.

Difficulty reporting accounting errors

When it comes to outsourced AP services, error reporting can be problematic.

Since you are not physically present to supervise tasks, mistakes may not receive due attention. You may not even notice serious errors — such as duplication of invoice processing and exception processing — until it’s too late. Outsourcing may also make spotting payment fraud more difficult.

Third-party risks

Outsourcing may help your company cut costs and improve services, but over-dependence on third-party providers introduces more risk. If a third-party company experiences mismanagement or bankruptcy, it may disrupt your accounting services and affect vendor relationships.

Privacy and security concerns with accounts payable outsourcing

Outsourcing accounts payable data means sharing sensitive information such as BPO and bookkeeping details with third-party teams. This could create a potential gap in your business rules and data security systems.

Should you outsource accounts payable?

There is no hard and fast answer to the question of outsourcing, as the individual needs of your business, your AP volume, and the structure of your current processes will help determine the best course of action.

Outsourcing your accounts payable processes represents a significant time and monetary investment. Information collection, data centralization, provider selection, and implementation all require time and effort. When considering outsourcing, answer the following questions to get a better idea of your needs and what’s possible.

Do you need more flexibility? Outsourcing your accounts payable functions can give you the flexibility to quickly scale up or down, depending on changes in business needs.

Could you realize cost savings by outsourcing? If your current accounts payable process has considerable cash leaks or issues, moving to outsourced AP may improve budget optimization even after the cost of service fees. The average cost to process an invoice is as high as $15, and outsourcing or automation may offer up to a sixfold reduction in processing costs.

Do you have the internal support to make the switch? The move to outsourcing requires internal stakeholders to champion the project and take it to completion. It also requires buy-in from your finance and executive teams. Get an idea of the internal interest before making the move.

Could the increased efficiency of outsourcing help internally? Outsourcing allows you to focus on core operations while freeing up resources for other business functions. If your team can create value elsewhere in the business by moving to an outsourced AP model, outsourcing might make sense.

Will outsourcing improve operational costs? Some companies find that the cost of outsourcing is offset by the overhead savings created by delegating certain processes to an external provider. Conduct a cost analysis to determine if outsourcing your AP processes could improve efficiency and reduce operational costs.

Are there alternatives to AP outsourcing that could work? When considering a major change to your processes, it helps to explore all your options. AP automation (discussed later in this article) may provide the efficiency and visibility of outsourcing while allowing your company to maintain control of its processes.

Tips for successful accounts payable outsourcing

Choosing a reputable third-party processor is an essential step in reaping the benefits of outsourcing your AP tasks. Here are some tips to help you.

1. Research accounts payable outsourcing businesses

Choosing the best outsourcing companies may be challenging if you don’t know what to look for. Consider these tips when looking for the best team to partner with:

Read reviews and testimonials of the company to see what previous or present clients say about them.
Review the company’s previous projects to see if they meet your expectations.
Use a security questionnaire or other supplier evaluation tools to understand the company’s data security and service-level processes.

2. Prepare your in-house team for change

Outsourcing requires several changes to your in-house AP processes. These include delegation of responsibilities, implementation of new software, and changes in the submission systems. Early preparation ensures a smooth transition to outsourced services.

3. Collect all relevant data for migration and cleanse it well

Well begun is half done, as the saying goes. Before implementing a move to outsourcing or automation, get your data in order to ensure you begin your new program with a clean slate. Take time to check and cleanse data for errors, duplicates, or issues that could hinder transparency in your AP processes.

4. Use performance tools to make sure your accounts payable outsourcing team measures up

The efficacy of third-party service providers is difficult to gauge without implementing performance metrics and measurement tools. You may never know if they are billing for idle time, accessing non-work websites, accurately reporting issues, etc., if you don’t set expectations and check that they’re met.

5. Implement change management for your project

Once you’ve got your automation or outsourcing project up and running, be sure to back up its success with a strong change management system. Streamline communication between all stakeholders: vendors, internal teams, and the finance department. Create documentation to outline how updates and changes will be managed. Provide a point person to address questions or concerns and keep everyone updated.

Consider AP automation as an alternative to outsourcing

Implementing automation software may be a cost-effective and reliable way to solve workflow issues within your AP function. Automation offers many benefits of outsourcing accounts payable without the liabilities of engaging a third-party team.

By implementing AP automation, businesses can:

Improve internal processes without increasing or outsourcing the department
Increase visibility through real-time data access and analytics insights
Use accounts payable solutions that integrate with other systems, such as finance or ERP tools
Create dynamic controls for every user, from departmental stakeholders to the CFO
Implement well-designed workflows and purchasing processes unique to your business case

AP automation: Case studies and outcomes

There’s little doubt that accounts payable outsourcing and automation improve your organization through higher cost savings, better pricing, increased profitability, greater efficiency, and better data insights and tools. Automation offers all these outcomes without sacrificing the security or visibility of your AP process.

Order.co helps high-performing clients in diverse industries increase the efficiency of their procurement process.

ZeroCater: Using Order.co, this office catering company cut its invoice volume by 50x, improved its spend visibility, and eliminated organization-wide rogue spending.

SoulCycle: This well-known fitness brand streamlined processes across its 90+ locations by creating curated ordering with preferred vendors, implementing invoice consolidation, and improving budget tracking for better spend management.

XpresSpa: Using AP automation in its 50 locations helped the organization realize nearly 10 percent first-year savings, reduce its management approvals to 47 percent, and achieve 100 percent order compliance.

Streamline your AP process with Order.co

While accounts payable outsourcing is a viable option for some organizations, many can get the benefits of outsourcing while maintaining higher efficiency and security using a procurement platform.

Order.co streamlines many accounts payable functions and offers valuable insight into procurement spending.
It creates the efficiency of an outsourced solution while eliminating the uncertainty associated with third-party teams.
Order.co also provides a centralized and dynamic ordering process that empowers teams to get what they need more efficiently.

To see how automation can improve your business outcomes with a scalable solution, request a demo of Order.co.

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