The problem isn’t that companies aren’t using metrics, according to Jonathan Casher of Casher Associates, an accounts payable (AP) and procure-to-pay expert and consultant. The problem is that many companies are using the wrong metrics — or using the right metrics incorrectly.

“People spend a lot of time spinning their wheels trying to satisfy some management reporting requirement without understanding why they’re doing what they’re doing,” says Casher. “If you’re doing a project, you need to know whether you’re on track. If you’re running a department or process, you need to make sure that department or process is under control. You also have to make sure you’re accomplishing your goals.”

Casher, author of a recent whitepaper called “Must Have Metrics,” shared his thoughts on developing appropriate metrics for AP team members at companies using SAP systems. In this article, based on portions of that white paper, he shares five “must-have” metrics for reducing errors and cutting costs from AP departments.

Common Issues and Frameworks for Solving Them

The key to designing, implementing, and maintaining the right metrics is to continuously evaluate and reevaluate the goals of the metrics themselves. Many companies are tracking metrics that were either poorly designed in the first place, or no longer are relevant to the business.

Misinterpretation of metrics is another common issue, as employees often don’t understand what it is they are supposed to be measuring and why. See Figure 1 for a list of seven common issues with metrics.

Figure 1

It’s not enough to simply have metrics in place — they have to be the right ones

There are several ways to approach metrics. Management methodologies such as Six Sigma, balanced scorecard, and the Hackett Book of Numbers include blueprints for developing appropriate metrics. In other cases, metrics may evolve from simple management requests or from the use of business process mapping or activity-based costing tools.

Casher has taken ideas from each of these methodologies and tools to develop a seven-step framework for creating and evaluating the right metrics for your business (Figure 2). Once you are comfortable with a framework for selecting metrics, you can begin the process of creating them. Casher urges companies to focus intently on the bottom line when engaging in this process.

Figure 2

Regardless of the metric, there are several common steps for developing and using it

“People often have metrics imposed on them, so they collect information without really understanding why they’re doing it. They have to determine whether the effort is consistent with what we’re trying to accomplish as a business — and why it is we’re measuring a certain thing,” he says.

5 Key Metrics for Accounts Payable

Although the needs of your business will vary, depending on multiple factors, Casher has isolated several key metrics that AP teams should consider implementing.

1. Input Quality

At most companies, Casher says, the AP team is driven by an 80/20 rule, in which 80% of the team’s time is consumed by 20% of the transactions. The reason for this is often a lack of input quality — too many of the invoices, check requests, accounting adjustments, purchase orders, and other transactions require exception processing, meaning they cannot flow smoothly through the automated system.

The lack of input quality is not the fault of the AP team. However, by tracking input quality at the accounts payable level, companies can get better visibility into issues that may be slowing down their processes, says Casher. He recommends starting with basic metrics to assess whether exception processing is an issue for your company (perhaps if more than 5% of invoices require exception processing), then capturing more detailed information to identify the source and cause of exceptions.

The metric: Track the number and dollar amount of invoices that require exception processing — including the action taken — and report on that information at regular intervals (Figure 3).

Input Timeliness

Although other AP metrics might be useful for streamlining processes or other valuable tangible business improvements, perhaps no metric has a more direct effect on the bottom line than tracking input timeliness. The reason, says Casher, is that companies that process payments quickly can boost the bottom line by capturing discounts that slow-moving companies cannot.

Standard discounts such as 2/10 net 30 (pay your bill within 10 days and receive a 2% discount) can pay huge dividends in some situations, and is equivalent to getting a 36% return versus paying the same bill in 30 days, says Casher. Plus, companies that gain reputations for paying bills quickly are often able to negotiate even larger discounts from vendors.

The metric: Track invoices that are eligible for prompt payment discounts or late fees, as well as the volume of transactions that garner either discounts or late fees (Figure 4).

AP Process Quality

Reducing the number of transaction errors is an overarching goal of most AP teams. Errors such as canceling valid transactions, entering an incorrect amount, or charging the wrong business unit can be costly and time-consuming to rectify. As such, many AP metrics focus on the volume and type of errors committed during the team’s processes.

Although these metrics are useful for finding and addressing core issues with the AP process, Casher warns against placing too much emphasis on them at the expense of other metrics that can have a more immediate impact on the company’s bottom line.

“These are useful metrics to see if there are processes you can change to reduce costs, and also to see if the changes you’ve made are doing what you wanted them to,” says Casher.

Fortunately for SAP companies, the SAP Financials system can capture many of these elements automatically. Others can be measured after the fact by analyzing the AP processes.

The metric: Track transaction errors through the system, including the type of problem, the impact of the problem, and who committed the error. This metric helps you locate and address process problems, such as lack of user training or appropriate supervisory review of certain steps (Figure 5).

AP Process Timeliness

Measuring the actual time each transaction spends in the AP team’s purview not only helps you identify issues that slow certain transactions, but also helps defend the AP team against undue accusations of slowness, says Casher.

“At most companies, the perception of how AP is doing is much worse than it really is. It’s important to have these metrics to be able to show how fast you are turning things around. There may be 40 days between when a vendor cuts an invoice to when it gets paid, but the transaction might only take five days in AP. It’s typically the time it takes to get to AP that’s the issue — not the time it takes to get through AP,” he says.

The metric: Track the cycle time of each transaction from the time it gets to AP until the invoice or other expense is paid. The backlog of transactions should be included and divided into two groups — those that can be processed with no additional input and those that require more input (Figure 6).

AP Output Quality

Errors stemming from incorrectly addressed checks or other output quality issues are very visible to vendors and customers, and should be addressed immediately. Often these problems occur because of incorrect or incomplete information in a vendor master file.

“Output quality is something people see. If you’re not measuring output quality, you’re not able to find and plug holes in process,” says Casher.

The metric: Track the number of checks that are returned, voided, stopped, reissued, or never cashed. Use that information to rectify flaws in the AP process (Figure 7).

Choose Wisely

In today’s enterprise, the ready availability of data makes it easy to implement an unwieldy volume of metrics. When it comes to boosting the efficiency and performance of AP, Casher says more is rarely better.

“These metrics are really just areas for people to think about. Not all of them will be relevant to every business,” he says. “People need to think about what metrics they need in order to measure their own achievements.”

Davin Wilfrid

Davin Wilfrid was a writer and editor for SAPinsider and SAP Experts. He contributed case studies and research projects aimed at helping the SAP ecosystem get the most out of their existing technology investments.

If you have comments about this article or publication, or would like to submit an article idea, please contact the editor.