Which organizational structure for accounts payable is more effective?

  • 06 Apr 2020
  • Best Practice & Strategies
Which organizational structure for accounts payable is more effective? Image

About ten years ago, a trend towards more centralized accounts payable organizational models started. According to research by Ardent Partners ePayables 2013: AP’s New Dawn , already by 2013, 80% of all AP departments were organized as a centralized or shared services operating model. Recent IOFM research, Measuring Your AP performance: Effectiveness Benchmarks, show that centralized structures are more effective compared to decentralized, hence the trend is expected to continue. 

To reach top-level efficiency, the accounts payables organizational structure is not, on its own enough. Companies also need a technology enabler that secures standardized processes and the ability to automate each process step from capture and matching to approval and payment. With both in place, AP can provide timely and accurate visibility into payables data. It is this type of capability that adds true strategic value to the company and should be a goal for every AP department. 

Different organizational models for accounts payable 

Let’s review four different organizational models that companies choose to deploy for their accounts payable department.  

  • Fully decentralized 
  • Partly centralized 
  • Fully centralized 
  • Shared Service Center (SSC) 

The decentralized accounts payable department 

This AP organizational structure has AP professionals working in different physical locations and each location has its own management team with some degree of autonomy in making business decisions.  

A decentralized AP department operates relatively independently from other AP units within the organization. The positives of a decentralized department are that it makes it easier for the organization to allocate the cost of operations among business units. It also tends to drive closer business relationships with vendors, which can improve both efficiency and effectiveness in payments. 

The challenge with this organizational model is that having multiple AP departments creates redundancy and additional expense to operating costs. Each group is allowed to have its own way of doing things and this may make it harder to manage cash flow and ensure compliance. Multiple ledgers make financial reporting complex. 

The partly centralized AP organization 

The difference between the fully decentralized and the partly centralized organizational model is that although AP professionals are working in different physical locations, the management is located at one primary location. 

In this organizational model, each branch office does business with its own regional vendors. Thus, they receive and approve invoices for the items their business unit has purchased. If AP automation is in place the invoices may be paid through a central accounts payable and accounting system. 

The advantage of being partly centralized is that each business unit can maintain a close relationship with its specific vendors, and AP and approvers are able to turn their invoices around quickly because of their high level of familiarity with them. The disadvantage is that there may be different procedures among the branches. 

The fully centralized AP organization 

The centralized AP organization is in a single physical place and handles all payables functions; the team has a unified management team that makes the decisions. A single software solution is used for paying invoices. The advantages of this AP organizational structure are evident. Procedures are followed more closely, and the overall consistency is greater due to the harmonization of processes. Because all payments are issued from one source, there is comprehensive, consistent reporting. 

AP operations located in a Shared Service Center 

In the past two decades, companies have moved transaction-processing activities to low-cost geographies to take advantage of labor arbitrage.  

Shared services host several business processes that are organization-wide for example accounts payable and receivable, purchasing, human resources, legal, payroll, etc. Many shared services focus on a single process. However, the most advanced companies often go beyond those limitations and locate end-to-end processes such as order-to-cash or purchase-to-pay in the centers. 

Shared Service Centers today are highly automated. Technologies such as  robotic process automation (RPA) have enabled shared services leaders to achieve productivity increases and cost reductions beyond the pure labor arbitrage. Gartner research Five characteristics of the best shared service centers find more than 80% of shared services organizations have implemented RPA. However, while RPA helps create more value for organizations, it still cannot unlock the more challenging, business-critical requirements for enterprise companies looking for true, touchless accounts payable automation which require a modern automation software with advanced features such as native invoice capture, waterfall matching and more. 

The effectiveness of different AP operating models 

For each organizational model, IOFM has researched effectiveness along with six different indicators. 

  • The level of annual invoice volume transacted 
  • The level of automation, defined as the extent to which the organization receives invoices electronically and are processed without manual intervention 

 

Low 

Limited 

Moderate 

Significant 

High 

Annual invoice Volume 

<10,000 

10,000 – 49,9999 

50,0000 – 99,999 

100,000 – 999 999 

> 1,000 000 

Level of automation 

<10% 

10%-29% 

30%-50% 

51%-80% 

>80% 

In addition, four data points looking at accuracy: 

  • PO first-pass match rate  
  • Share of POs with a mismatch 
  • Share of transactions requiring corrections  
  • Share of duplicate payments generated 

Volume processing - Of the decentralized organizations, nearly three-quarters process fewer than 100,000 invoices annually. For the partly centralized that number is 71% and for the centralized AP organizations 66% process fewer than 100,000 invoices. The SSC has almost reverse numbers, 65% process more than 100,000 invoices annually.  

Automation level – For the decentralized organizations, only 28% responded that their organization receives over 51% of their invoices electronically and processes them without manual intervention. The corresponding numbers for the other models are 36% for the partly centralized, 52% for the centralized and 57% for the shared service centers. 

PO-to-invoice match rate and errors - Half of the respondents in decentralized operations experience a first-pass PO-to-invoice match rate of 90 % or better. When it comes to PO-to-invoice mismatches, 58% reported none, and another 27% said they experienced a mismatch 10% or less of the time. For the partly centralized, the PO first-pass match rate is evenly distributed from over >90% to <60%, and there were no PO-invoice mismatches nearly two-thirds of the time. Nearly half of respondents from the centralized organizations reported they can match a PO to an invoice 76% of the time or more often on a first pass, and 60% of them reported no mismatch errors at all. Only 11% of SSC-based AP departments achieve a PO-to-invoice first-pass match rate exceeding 90%. However, more than three-fourths of them saw a 10% or less mismatch rate. 

 

Corrections – The decentralized organizations reported that no corrections were needed 12% of the time and half of respondents reported a transaction correction rate between one and five percent; For the partly centralized corrections were required five percent or less of the time for two-thirds of the respondents, and duplicate payments occurred one percent or less of the time for 6 out of 10 of them. The centralized and SSC organizations stated that less than 5% of invoices required corrections and that duplicate payments are rare. 

 

Support your Ap organizational structure with modern technology 

Overall, AP’s role is evolving, CFOs expect more than operational excellence from their AP function. AP is transforming into a strategic business enabler charged with the task to continuously improve efficiency and reduce costs, while strengthening compliance and controls, and ensuring that payments are accurately and quickly reported. At the heart of this transformation is modern accounts payable automation software that supports any type of organizational structure be it decentralized or fully centralized in a shared service center. 

 

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