Outsourcing accounts payable is a growing trend among businesses seeking to streamline operations and reduce costs. By delegating the accounts payable function to a third-party service provider, companies can focus on their core business activities while enjoying the benefits of improved efficiency and cost savings.
However, outsourcing accounts payable is not without its challenges so companies need to understand what they are getting into before making the leap.
According to a report by Grand View Research, Inc., the global finance and accounting outsourcing market is expected to grow at a CAGR of 9.1% from 2023 to 2030. The report cites the increasing adoption of automation, advanced technologies, and the growth of the BPO industry as key drivers of this growth.
In this article, we will explore the benefits and challenges of outsourcing accounts payable and provide guidance on choosing a service provider and ensuring a successful outsourcing partnership. Whether you are considering outsourcing for the first time or looking to improve your existing outsourcing strategy, this article will provide valuable insights and advice to help you make informed decisions.
Understanding Accounts Payable
What is accounts payable? In the field of accounting, accounts payable refers to the outstanding balance of obligations that a company has yet to fulfill/pay to its suppliers or vendors for goods and services provided. These outstanding debts are recorded as liabilities on the company’s balance sheet and are typically paid within a specified period, such as 30 or 60 days.
Managing accounts payable is a critical function for any business, as it can impact cash flow, vendor relationships, and overall financial health. The accounts payable process typically involves several steps, including receiving invoices, verifying the accuracy of the invoices, obtaining approval for payment, and issuing payments to vendors.
While accounts payable is essential, it can also be time-consuming and complex, particularly for larger companies with a high volume of invoices. It is where outsourcing accounts payable can be beneficial, as it allows companies to delegate these tasks to a third-party service provider, freeing up internal resources and improving efficiency.
What to Look for When Choosing an Outsourcing Partner?
When choosing an outsourcing partner for accounts payable, there are several key factors that companies should consider. Here are some of the most important:
- Expertise and experience: Choosing an outsourcing partner with a proven track record of success in managing accounts payable is essential. Look for a provider with experience working with companies in your industry and with similar accounting systems.
- Technology and automation: Accounts payable outsourcing partners should have advanced technology and automation capabilities, such as electronic invoicing, automated approval workflows, and real-time reporting. These features can help to streamline the accounts payable process and improve accuracy.
- Data security: Given the sensitive nature of financial data, choosing an outsourcing partner with strong data security measures is critical. Look for providers with industry-standard security certifications, such as SOC 2, and robust data encryption and backup protocols.
- Scalability: Your accounts payable needs may change as your business grows and evolves. Look for an outsourcing partner to scale their services up or down as needed without compromising quality or efficiency.
- Cost-effectiveness: While cost savings are a key factor in outsourcing accounts payable, it is important to consider the overall value proposition of potential providers. Look for providers that offer transparent pricing, with no hidden fees or charges, and that can demonstrate a clear return on investment.
Outsourcing accounts payable can lead to significant cost savings for companies. As per the findings of DataDash, outsourcing accounts payable provides a substantial decrease in labor expenses, with companies reporting up to an 80% reduction in labor and associated costs. Moreover, the per-invoice costs are also lower, with an average of less than $3 per invoice.
It is due to the economies of scale that a third-party service provider can offer and the reduction in staffing and overhead costs.
The most important criteria for companies when selecting an outsourcing partner for finance and accounting services are expertise, cost, technology, and service quality. In addition, companies are increasingly looking for providers with advanced technology capabilities, such as robotic process automation and artificial intelligence.
How to Set Up the Relationship with Your New Vendor?
Once you have chosen an outsourcing partner for your accounts payable, setting up a strong working relationship with them is essential to ensure success. Here are some key steps to follow:
- Clearly define roles and responsibilities: Work with your outsourcing partner to define who will be responsible for each aspect of the accounts payable process, including data entry, invoice approval, and payment processing.
- Establish communication protocols: Set up regular communication channels with your outsourcing partner, such as weekly or monthly status meetings, to promptly address any issues or concerns.
- Define performance metrics: Establish clear performance metrics for your outsourcing partner, such as invoice processing times and error rates, to ensure they meet your expectations and deliver value.
- Ensure data security: Ensure your outsourcing partner has robust data security measures to protect your sensitive financial information.
- Create a transition plan: Develop a detailed transition plan with your outsourcing partner to ensure a smooth and seamless transition of accounts payable processes to the vendor.
Omnirms analyzed five essential qualities crucial for establishing and nurturing long-term relationships that yield positive results. These characteristics encompass effective communication, cultural compatibility, transparency, continuous evaluation and improvement, and a willingness to invest in self-improvement.
They also claim that companies that invest in these areas are more likely to achieve their outsourcing goals and realize cost savings.
How to Work with a Third-Party Provider?
Working with a third-party provider for your accounts payable requires effective communication, collaboration, and trust. Here are some tips to help you work effectively with your outsourcing partner:
- Establish clear expectations: Communicate your expectations for service delivery, performance metrics, and communication channels with your outsourcing partner.
- Provide clear instructions: Ensure that your outsourcing partner has clear instructions for how you want your accounts payable processes to be handled, including invoice approval workflows, payment terms, and reporting requirements.
- Maintain regular communication: Establish regular communication channels with your outsourcing partner to address any issues or concerns promptly and to keep them informed of any changes or updates.
- Collaborate on process improvement: Work with your outsourcing partner to identify areas for process improvement and implement changes to streamline your accounts payable processes.
- Monitor performance: Establish clear performance metrics and monitor your outsourcing partner’s performance regularly to ensure that they are meeting your expectations.
Strategic Benefits and Considerations for Outsourcing Accounts Payable
Outsourcing accounts payable can be a strategic decision for businesses of all sizes, offering numerous benefits such as cost savings, process efficiency, and access to specialized expertise. However, outsourcing is not a one-size-fits-all solution and requires careful evaluation of your organization’s needs, choosing the right outsourcing partner, and effectively managing the outsourcing relationship.
Outsourcing accounts payable can help businesses focus on their core competencies, enhance their competitive position, and achieve growth objectives in today’s ever-changing business environment.