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Accounts Payable Outsourcing vs AP Automation: Which Fits Your Business Needs?

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As the business world grows more competitive, companies are scrambling to improve services and differentiate their brand, while cutting costs. Managing accounts-payable in-house requires time and money that your business might not have. 

Additionally, the bigger a business grows, the more critical it becomes to have your finances in order. But what if hiring more staff is out of the question?

This is where outsourcing payables comes in. Many brands turn to AP outsourcing while looking to solve staffing issues. Accounts payable outsourcing can be helpful for companies lacking the resources and automation software to manage their own AP process.

In this article, we’ll explore exactly what accounts payable outsourcing is, the reasons for outsourcing, pros and cons, and how AP software may be a better choice.

What is Accounts Payable Outsourcing?

Accounts payable outsourcing is the process of hiring and using an outside vendor to manage and execute certain AP tasks, such as processing and paying invoices. Accounts payable outsourcing is a subset of business process outsourcing (BPO). A company hires an experienced third party to electronically capture and process its vendor invoices, accounts payable, and payments, reducing the in-house financial workload. 

AP providers are fully equipped with the skills, tools, and technology to not only manage existing accounts payable functions, but integrate new capabilities, for a more streamlined environment.

Accounts payable involves current liabilities like short-term debts to vendors and suppliers for goods and services purchased on credit. Another name for accounts payable is trade payables. The balance sheet for accounts payable is a component of working capital (current assets minus current liabilities).

The best outsourcing partner doesn’t just take over AP tasks, they improve them.

However, outsourcing AP isn’t for everyone. Some companies handle highly sensitive information which can make it difficult to just hand over data to third parties. Especially if there’s any level of government classification. 

In this case, companies are adopting accounts payable automation and in-house processes to get a handle on AP, and it’s an effective solution.

Biggest Reasons Companies Seek Accounts Payable Support

Although there is a multitude of reasons companies seek support for their accounts payable processes, a few of the main ones are:

Lack of Visibility

A paper-based accounts payable process makes it nearly impossible to improve visibility, and thus, long-term strategies. Storing vendor information, invoices, and receipts in a filing cabinet makes it difficult to predict financial issues or recognize opportunities accurately. 

If you’re analyzing data with paper and excel sheets, there’s a high chance of errors due to limited visibility into vendor costs or ineffective spend.

Outsourcing accounts payable ensures someone always has an eye on your books. These people will take over all of the analysis and reporting on your finances. However, if it’s total visibility into the accounts payable process you seek, automated AP software may be your best bet.

Poor Vendor Management

If you’re not managing AP properly, vendors will dread having to call and look for payment. This will put a definite strain on the relationship and may cause it to end altogether. Plus, if AP isn’t organized, they could spend hours searching for a lost invoice or shipping receipt.

The reality is, everyone has bills to pay. Suppliers want their payments on time, so they can pay their own invoices. Late payments and lack of communication mean your account payable needs an overhaul.

The primary job of an outsourced AP team is to make sure your bills get paid, so there will be less worry on your end. AP outsourcing to a payable service leads to tighter controls and faster payments. However, humans are not free from error. If you’re looking to eliminate human mistakes, then an automated AP solution is your answer.

Costly Payment Processing

If your AP department is spending more than expected on payment processing, it’s time to look under the hood. CFOs typically don’t invest in AP outsourcing because they think it will be costly. Especially when using AP automation software

However, not investing in some form of AP support will cost you more in the long run. Especially if your business is still tied to paper processes and manual data entry.

In fact, companies are paying $22 to process a single paper invoice. If your company handles at least 250 invoices per month, you’re looking at spending over $5,000 to process your payables.

AP solutions are not just for big businesses with a high volume of payments. Whether you outsource to a third-party provider or purchase AP automation software, the cost savings are there.

Accounts Payable Outsourcing vs. Accounts Payable Automation

AP outsourcing is different from AP automation

Accounts Payable Outsourcing

When a business decides to outsource its AP, a third party manages the AP department. Third-party accounts payable outsourcing services will typically use their own AP automation software to achieve efficiency. 

When considering outsourcing, develop a list of potential accounts payable outsourcing companies to evaluate for cost, capabilities, security, data privacy, customer service, and business strength. 

Would you trust each outside company to handle the entire payable process, pay vendor invoices promptly, and ensure your business gets early payment discounts? Will they improve cash flow management?

Accounts Payable Software

Security and privacy issues, company stability, communications, and vendor relationship issues may lead some organizations to opt for an in-house automation software solution instead.

Accounts payable automation software is a SaaS add-on to your ERP or accounting system. It’s designed to streamline back-office AP workflows and global mass payment processes. 

AP automation software provides:

  • Self-service supplier portal for onboarding and tax reporting 
  • Capturing and matching invoices online
    • With OCR scanning or uploading, document management
  • Screening for fraud and duplicate payments
  • Automating the end-to-end approval process
  • Making U.S. and cross-border payments
  • Creating real-time payment reconciliation reports. 

Pros and Cons of Accounts Payable Outsourcing

The benefits of outsourcing accounts payable can be promising. However, one main issue is whether companies can entrust their most essential financial processes and highly confidential data to a third-party firm. 

Thus, a business should weigh the pros and cons of outsourcing accounts payable before deciding on handing over accounts payable functions.  

The Pros of Outsourcing Accounts Payable

Timely Invoice Processing

The top accounts payable outsourcing companies implement efficient systems that allow businesses to pay their vendor invoices earlier or on time. Faster bill payment means better vendor and supplier relationships and more discounts. 

The rules-driven nature of accounts payable processes make these procedures appropriate for third-party management. The assigned outsourced personnel are focused solely on a company’s accounts payable systems. 

AP software can also increase timely payment processing with automated triggers in the matching and approval process. There is zero chance of human error.

Screens for Duplicates

Better AP systems also help to avoid invoice duplication. Duplicates could result in double payments, increasing expenses, and decreasing profitability and cash, adversely impacting cash flow management. One task for AP outsourcing teams is to screen for duplicates. This is like having extra sets of eyes on all of your vendor invoices before payments go out.

Technology can take it a step further with accounts payable software that automatically screens for duplicates the second the invoices are scanned, and before data capture. If there is one already in the system, the information is rejected.

Reduces Fraud and Increases Compliance

AP outsourcing provides features and tools that may help avoid payment fraud.

Some businesses choose to outsource accounts payable tasks to avoid dealing with complicated regulatory requirements. Delegating these tasks to an AP outsourcing company gives a business more time to focus on other pressing matters. They may also have a higher level of expertise in security and compliance.

AP software can do the same thing. It memorizes even more than a human when it comes to features like tax compliance and global regulatory rules.

Eliminates Hiring Needs

A growing company may require more in-house accounts payable department personnel to manage its increasing needs for processing accounts payable functions. 

However, businesses that want to improve their service levels, while cutting down on hiring costs, may benefit from partnering with AP outsourcing providers. The pricing could be more cost-efficient and profitable than the overhead expenses necessary to hire and train new personnel when your business relies on manual processes. 

Accounts payable software can also streamline processes and automate tasks that lessen your need for new staff. Although the technology is not designed to replace humans completely, it complements the people you already have and creates a higher level of efficiency.

Experienced Professionals

When a company uses accounts payable outsourcing solutions, it pays for the services of experienced professionals who don’t need internal training. 

Transforms Costs from Hourly to Fixed

Using outsourcing firms for automated AP tasks may increase the profitability of your business and lower costs. That is, if the pricing for outsourced bookkeeping and accounting services is cost-effective.

Accounts payable outsourcing providers often set pricing per invoice at the cost of $1.50 to $2.00 per invoice, not by the hour.

AP software is typically priced by either a subscription as SaaS or a fixed price for a license fee. Either way, you can also eliminate the need to add more to your payroll and employee processing costs.

Shifting Roles to High-Value Tasks

If a separate party manages AP functions, a company’s in-house teams may focus on other core tasks such as budget, analysis, decision-making improvement, and vendor relationship management. 

Accounts payable automation software will also help your staff focus more on value-based tasks that drive innovation. It may even tighten controls quicker and easier than outsourcing to a third party.

Eliminates the Need to Cover Absent Employees

Outsourcing AP companies have employees that are cross-trained under high standards to cover when absences happen. 

AP automation software is also designed with features that allow for scheduled payments. If you have recurring purchases or need payments to go out on a certain date, the system can be set up to accommodate you. Sick days are no problem.

Accounts Payable Process Tracking

Outsourced firms for accounts payable have automated tracking features that allow partner businesses to monitor every step of the accounting process as needed. The same can be said if you install your own AP automation software. An AP team can easily track critical accounts payable metrics for accurate forecasting and opportunities for improvement.

The Cons of Outsourcing Accounts Payable

There are always two sides to every coin. So, what are the disadvantages of outsourcing your AP activities?

Negative Business Impacts

Ineffective AP processes could compromise a company’s reputation and supply chain. If the third-party AP provider you hire is making late payments, the behavior reflects poorly on your brand—and no one else. 

To avoid this risk, you can always install AP automation software that’s run by your own skilled staff. That way, the risk remains inside the business and payments can be automated.

Less Control over AP Processes

The main advantage of in-house accounts payable departments is that businesses have control over processes and systems. In-house employees are more accessible, so questions and issues may be directed to the concerned parties right away. 

When outsourcing, especially to a third party, any questions must wait for an answer from another business entity. You cannot walk downstairs and talk to someone in accounting.

Accounts payable software ensures the control remains in-house, while still eliminating a variety of manual processes. In this case, it can be a win-win.

Managing Error-Reporting Issues

While an outsourced company ideally will make fewer errors than your own AP team, humans are not infallible, and mistakes happen. Companies working with outsourced AP service providers can face challenges with validating issues or errors in an outsourced firm. A separate and outsourced AP department does not guarantee transparency when it comes to reporting on these problems.

Separate AP departments may not have knowledge of sudden system changes, such as vendor transaction updates, which can result in future errors or duplications. And when it’s time for you to go back and audit the trail of documents, you may have limited access to find where something went wrong. 

If this is the case, a small error turns into a huge hassle that goes unresolved for days or weeks. Identify if the outsourced solution is leveraging complete AP automation or manually keying in data.

An outsourced AP department is also not easily accessible. They may be doing a company’s bookkeeping from another country like India. Outsourced companies don’t necessarily guarantee transparency or more efficient communication.

AP automation software reports any exceptions immediately, as they happen in real-time. The system can also be set up to route specific issues to certain parties, which helps to resolve problems even faster. It makes dealing with reporting issues quicker and more efficient.

Risking a Business Crisis

A company that outsources its accounts payable may grow dependent on a third-party firm. This dependence is risky, especially if the outsourcing partner suddenly faces bankruptcy or security breaches. Such incidences may put a company’s accounts payable processes at risk. 

Switching to another outsourced accounting services provider may be time-consuming and costly. Hence, selecting a credible outsourcing company to work with is essential. Or, you can choose to install intelligent AP automation software that poses little risk to your security.

Data Privacy and Security Concerns 

AP outsourcing companies get access to confidential financial information. Typically, these outsourcing firms also store a company’s data on internal servers and cloud storage. 

While these data storage approaches increase the accessibility of the data to the concerned parties, they make pertinent and confidential information more prone to security breaches and unauthorized access. 

If you are seeking a payable solution that doesn’t interrupt service, AP automation software will ensure vendors always get paid on time, without exposing your financial data to another company. All of your information remains in-house, even if stored in the cloud.

Duplication Issues

If your outsourcing provider charges by invoice, take extra caution to avoid duplicate submissions. Many outsourcing providers don’t have the tools to tell how or when duplicated submissions occur. This can make a business feel powerless to solve the problem. All vendors and AP employees must be on board with submission systems to avoid problems.

AP software immediately scans the system for duplicate invoices and rejects anything that looks similar. It’s like having a separate set of digital eyes constantly scanning your entire database to avoid any issues down the road.

Communication Problems

How a payable outsourcing service communicates is typically on their terms. Although live customer support is ideal, it may not always be in the price range. Staff can also be located overseas and in a completely different time zone; which puts a strain on communication.

Accounts payable software usually has a shared dashboard where all communication is universal. Instead of waiting on emails, or missed phone calls, everyone can communicate through the appropriate channels related to the issue at hand.

Accounts Payable Outsourcing Services

The proliferation of BPO services has made outsourcing accounts payable to India and other countries a standard business practice. 

Accounts payable processes commonly outsourced include:

  • Sending purchase orders
  • Accounts payable administration
  • Invoice discrepancy resolutions
  • Reconciliation and reporting

Other firms also offer outsourcing accounts payable and accounts receivable services.

Key Takeaways

According to research, the global accounts payable automation market is set to reach USD 1,567 million by 2025. This includes the adoption by every industry, including SMEs and MSMEs. 

Outsourcing is an ideal solution for companies that feel overloaded with accounts payable duties. They may be making late payments or experiencing strained vendor relationships, but the common denominator is that they need help.

The ultimate solution to future-proof your business is to consider installing an accounts payable solution. Using in-house AP automation software delivers many benefits, reduces hiring needs by providing up to 80% in substantial time savings, and speeds up the financial accounting close. 

Before your business decides to use a third-party accounts payable outsourcing provider, compare the potential savings and increased privacy of AP automation software today.

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