Whether accounts payable process outsourcing makes sense for your organization depends on how much bandwidth your organization has for managing payable processes.
Accounts payable outsourcing can be helpful for some companies lacking the means, time, and automation software to manage their own AP process that begins after procurement and receipt of goods or services.
We explore the pros & cons of accounts payable outsourcing and compare the possibility of outsourcing to using in-house AP automation software instead.
What is Accounts Payable Outsourcing?
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.
What Are Accounts Payable?
Accounts payable are current liabilities that include short-term debts to vendors and suppliers for goods and services that the company has purchased on credit. Another name for accounts payable is trade payables. The balance sheet account accounts payable is a component of working capital (current assets minus current liabilities).
Pros and Cons of Accounts Payable Outsourcing
The benefits of outsourcing accounts payable are promising. However, the main issue is whether businesses can entrust their company’s most essential financial processes and highly confidential data and documents with a third-party firm.
Hence, a business should weigh the pros and cons of outsourcing accounts payable before deciding on outsourcing accounts payable functions.
The Pros of Outsourcing Accounts Payable
Pros of accounts payable outsourcing include:
- Increasing efficiency and timely invoice processing and payments
- Screening for duplicate payments to avoid double payments
- Reducing errors and fraud and complying with global regulatory rules
- Reducing hiring needs
- Getting trained resources
- Transforming processing costs from hourly employee to fixed per invoice rate pricing
- Shifting roles of your business employees to higher-level tasks
- Eliminating the need to cover for absent employees
- Providing your business with automated accounts payable process tracking
- Processing invoices with AP automation software used by outsourcing providers
Increasing Efficiency and Timely Invoice processing and Payments
The top accounts payable outsourcing companies implement efficient systems that allow businesses to pay their vendor invoices earlier or on time. Faster bills payment means better vendor and supplier relationships and getting early payment discounts.
The rules-driven nature of accounts payable processes makes these procedures appropriate for third-party management. The assigned outsourced personnel are focused solely on the business’s accounts payable systems.
Screening for Duplicate Payments to Avoid Double Payments
Better AP systems also avoid invoice duplication. Duplicates could result in double payments, increasing expenses, and decreasing profitability and cash, adversely impacting cash flow management.
Reducing Errors and Fraud and Complying with Global Regulatory Rules
Outsourced companies that provide AP solutions have experienced professionals who use automated processes to reduce AP errors. These errors include lost or overlooked vendor invoices that could result in delayed or duplicate payments.
AP outsourcing provides features and tools that may help avoid payment fraud.
Some businesses choose to outsource accounts payable tasks to avoid having to deal with complicated regulatory requirements. Delegating these tasks to an AP outsourcing company gives a business more time to focus on other pressing matters.
Reducing Hiring Needs
A growing company may require more in-house accounts payable department personnel to manage its increasing needs for processing accounts payable functions. Businesses that want to improve their service levels while cutting down on hiring costs may benefit from partnering with accounts payable outsourcing providers.
AP efficiency could require companies to add more AP department staff. However, accounts payable outsourcing 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.
Getting Trained Resources
When a company uses accounts payable outsourcing solutions, it pays for the services of experienced professionals who don’t need internal training.
Transforming Processing Costs from Hourly Employee to Fixed per Invoice Rate Pricing
Using outsourcing firms for automated AP tasks may increase the profitability of your business if the accounts payable solutions pricing is cost-effective for these external bookkeeping and accounting services. Accounts payable outsourcing providers often set pricing per invoice processed at the cost of about $1.50 to $2.00 per invoice, not by the hour for time-consuming accounts payable workflow.
Shifting Roles of Your Business Employees to Higher-level 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 relationships management.
Eliminating the Need to Cover for Absent Employees
Outsourcing AP companies have employees that are cross-trained under high standards to cover when absences happen.
Providing your Business with Automated Accounts Payable Process Tracking
These outsourced firms have automated tracking features that allow partner businesses to track every step of the accounting process as needed.
Processing Invoices with AP Automation Software Used by Outsourcing Providers
Accounts payable outsourcing companies often use AP automation software to become very efficient.
The Cons of Outsourcing Accounts Payable
Cons of accounts payable outsourcing include:
- Experiencing negative business impacts from an ineffective AP outsourcing company
- Having less control over AP processes
- Dealing with error-reporting issues
- Risking a business interruption crisis at the AP outsourcing services company
- Lacking the ability to mitigate data privacy and security concerns
Experiencing Negative Business Impacts from an Ineffective AP Outsourcing Company
Ineffective AP processes could compromise a business’s supply chain, the network between a company and its suppliers.
Having 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.
Dealing with Error-Reporting Issues
An outsourced AP department is not easily accessible. They may be doing a company’s bookkeeping from a thousand miles away, perhaps in another country like India. Outsourced companies don’t necessarily guarantee more efficient communication and transparency.
Businesses working with outsourced AP service providers may face challenges when validating issues or errors with an outsourced firm. A separate and outsourced AP department does not guarantee transparency when it comes to reporting errors and problems.
Separate AP departments are also not privy to sudden system changes, such as vendor transaction updates, which may result in future errors or duplications.
Risking a Business Interruption Crisis at the AP Outsourcing Services Company
A company that outsources its accounts payable may grow dependent on a third-party firm. This dependence may be risky, especially if a business’s outsourcing company 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, choosing a credible outsourcing company to work with is essential.
Lacking the Ability to Mitigate 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.
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, and invoice discrepancy resolutions.
Other firms also offer outsourcing accounts payable and accounts receivable services.
Accounts receivable refer to the money owed by customers to a company.
The accounts payable process begins when the AP department receives the vendor invoice. This invoice is subject to methods that verify its validity and prevent duplicates.
Once the invoice is approved, vendor payment is then processed.
Accounts Payable Outsourcing vs. Accounts Payable Automation
AP outsourcing is different from AP automation.
When a business decides to outsource its AP, a third-party company runs its AP department. Third-party accounts payable outsourcing services companies often use AP automation software to achieve efficiency.
Evaluating Accounts Payable Outsourcing and In-House AP Automation Software
When considering outsourcing, develop a list of potential accounts payable outsourcing companies to evaluate for cost, capabilities, security and privacy of your data, 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 and no shipment halts? Will your CFO improve cash flow management?
Security and privacy issues, outsourcing company stability, communications, and vendor relationship issues may lead some companies to choose an in-house automation software solution instead to increase accounts payable and payments efficiency.
Accounts payable automation software, which can be used in-house, is a SaaS add-on to your ERP or accounting system to streamline back-office payables workflow and global mass payments processes.
AP automation software provides:
- Self-service supplier onboarding and tax reporting through a portal
- Capturing and matching invoices online
- With OCR scanning or uploading, document management
- Screening for fraud and duplicate payments
- Automating approvals
- Making U.S. and cross-border payments, and
- Creating real-time payments reconciliation reports.
We described the pros and cons of accounts payable outsourcing. 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, expand your evaluation to compare the potential savings and increased privacy from installing AP automation software in-house.