Blog - 170 Systems Perspectives on AP

Why AP Automation Fails ...

Rakesh Shukla — Wed, 01 Jul 2009 09:01:00 GMT

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During my college days, I would go to this local bike shop and gawk at all the new racing bikes. The owner was an old Italian former pro racer. As a poor college student, I couldn't afford any of the super expensive racing bikes in his shop. Heck, I couldn't even pay for the seat on these bikes!

Nevertheless, this old Italian gentleman was very patient with me. With his thick Italian accent and big white mustache, he would educate me on all the bike handling and racing subtleties of any bike that interested me.

One day, a gorgeous (and I mean gorgeous) Italian racing bike appeared. The red paint job, the shiny new components, the sleek new design ... it was the most stunning bike I had ever seen. When I asked him about it, he sighed sadly, shook his head and as he put his finger over his lips, he tsk-tsked "not good bike."

In that charming Italian accent, he said something to me I have never forgotten: "That bike, she is like beautiful woman that is very bad soul-mate."

Apparently, the bike was a disaster to ride -- not comfortable, unresponsive and very high maintenance ... but the paint job was spectacular.

That same disappointment happens with technology investments. Check out this chart which I have posted before:

Only 11% of respondents thought they were getting a high return from their investment ... and 43% believed they were obtaining a low, negative or unknown return.

Unfortunately, these results are true for AP Automation investments as well.

AP automation has so many obvious benefits:

reduced costs
better visibility
improved cash flow
reduced risk of fraud and errors

So why do some AP technology investments fail?

... for several reasons:

Automating bad AP processes
Unwieldy and unfriendly user-interfaces
Too much customization
Poor roll-outs
Inadequate knowledge transfer

When done right, AP automation offers a compelling ROI ...sometimes a jaw-dropping ROI ... BUT this requires a comprehensive understanding of your requirements and a rigorous evaluation of all the available solutions. This can be a daunting task.

It can be difficult to sift through the over-promises and bold claims. I just completed recording a webcast titled "Why AP Automation Fails ..." with Phil Searle, Founder and Managing Director of Chazey Partners. In this complimentary webcast, Phil clearly and explicitly explains the 6 key criteria to consider when evaluating AP solutions.

Functionality: What are the must-have and what are the nice-to-have features?
Technical Requirements: What are the critical technical hurdles for your organization?
Support: How well is a vendor's solution supported? What level of support is right for you?
Vendor Credentials: What credentials are important and how do you verify them?
Pricing: What the pros and cons of the various pricing models?
Return on Investment: This is critical and needs to be fully understood.

This is a must-see webcast if you are considering purchasing an AP Automation solution!

This 60-minute Webcast is ready to be viewed:

Featured Speakers:
Phil Searle, Founder and Managing Director, Chazey Partners
Rakesh Shukla, Co-Founder, 170 Systems

Father's Day Crash Managing Risk with AP Automation

Rakesh Shukla — Wed, 24 Jun 2009 08:43:00 GMT

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I had a very enjoyable Father's Day ... unlike 2 years ago. You see, in 2007, instead of enjoying a relaxing brunch with my family like most normal fathers do, I wanted more thrills and excitement, so I entered a bike race!

On the very final sprint in the last 200 meters, I crashed ... very badly.

The unspoken truth in the cycling community is that racing is very dangerous. Riding at very high speeds in a tight shoulder-to-shoulder pack gives you very little reaction time if something goes wrong. You must be alert as possible to the sudden movements of other riders, road conditions, upcoming turns, etc. You have to constantly manage and assess the risks ... and especially be aware of riders who might do something stupid and then play it safe and avoid them ... even if it means losing the race.

To make a long story short, I did not manage risk very well on Father's Day 2007 and ended up paying dearly. During the final sprint, a reckless 20-something kid swerved up beside me outside the yellow line (you are not supposed to cross the yellow divider line on the road for obvious safety reasons). I knew this kid was dangerous because he had been riding erratically the whole race. The prudent thing to do would have been to hit the brakes, give up any chance of winning and let him go past me. But noooo, I stubbornly held my position because I felt strong enough to win the sprint.

That is the last thing I remember.

I woke up in the ambulance with a concussion, some very serious lung contusions, a broken shoulder blade and some very nasty road rash all over my body. To this day, I still have absolutely zero memory of what happened but witnesses said that as my front wheel was clipped (i.e. I was cut off), I did a spectacular flip in the air and landed on my head and shoulder ... at close to 40mph. Apparently, it was a bad pile up -- another guy in the ambulance had lost all four front teeth!!!

Lying in the hospital bed, my 7 year-old daughter's reaction to my injuries struck a deep chord -- I realized how lucky I was to still be alive and not be paralyzed ... things could have been a lot worse.

My Father's Day bike crash is a story about poorly managing risks and paying the costs. The economic crash is also a story about poorly managing risks (see blog entry here). After most crashes, regardless of the type of crash, risk management becomes a priority. So, in today's tough economic climate, it's no surprise that managing risk has become a top priority; especially for CFOs:

In the business world, risk is managed with strong internal controls. In fact, strong internal controls optimize business performance. Here's another way to think about it -- controls are like brakes. Brakes allow you to go faster. If a bike didn't have brakes, how fast could it really go? Of course, you also have to be willing to use the brakes! Strong internal controls, like brakes, allows a business to put the foot on the accelerator and aggressively reduce costs without increasing risk.

With the unemployment rate at its highest level in over three decades, it is clear that companies are simply trying to survive by cutting expenses and laying off workers. Individuals whose homes are declining in value and whose retirement assets have been wiped out are also trying to survive. Many are becoming desperate. It is not surprising that occupational fraud is increasing. It's a vicious cycle where losing valuable assets to fraud may push a struggling company perilously close to insolvency which, in turn, increases the risk of fraud.

And fraud is on the uptick.

In a recent Special report on Occupational Fraud by the Association of Certified Fraud Examiners (ACFE), more than half of the Certified Fraud Examiners (CFE) surveyed said the frequency and dollar amount of fraud is increasing:

"The message to Corporate America is simple: Desperate people do desperate things," said ACFE President James D. Ratley, CFE. "Loyal employees have bills to pay and families to feed. In a good economy, they would never think of committing fraud against their employers. But especially now, organizations must be vigilant during these turbulent times by ensuring proper fraud prevention procedures are in place."

From the 2008 Fraud Report to the Nation, we already know that over half of all fraud incidents are AP related. This leads to some serious implications for AP:

Layoffs are affecting AP's internal control systems... Most in-house fraud examiners reported that because of layoffs, some internal controls procedures were eliminated.
Fraud levels will keep rising... Almost 90% of fraud examiners expect fraud to continue to increase during the next 12 months.

But the recession is affecting more than just increased fraud risk. AP staff cuts that are not coupled with process improvements will inevitably lead to more mistakes and errors.

How is risk being mitigated in your AP processes? Is a fraud or accounting crash lurking around the next corner?

AP Automation can reduce risk because it simplifies and centralizes processes and most good solutions have preventative controls that are automated.

Here are some of the specific ways in which AP Automation strengthens controls to manage risk and prevent fraud and errors:

Robust Approval Framework
Segregation of Duties

Automatically enforced at the transaction level

Automated Enforcement of Policies and Procedures
Properly Maintained Transaction Backup
Internal and External Audit Support

-Rakesh Shukla

AP Automation Saves Trees!

Rakesh Shukla — Fri, 12 Jun 2009 15:19:00 GMT

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This past week was my son's "graduation" from elementary school. He has been at this school for 8 years since Pre-K so it was an emotional night.

The Head of School gave a very moving speech which drew on quotes from the class play, "The Suessical." One of the quotes was:

And that's not the end of out troubles here...
For on the other side of town
The Truffula Trees were all cut down.
They once stood tall, in all their glory - but that's another story...

The "other story" being referenced here is "The Lorax" written by Dr. Seuss (published by Random House) in 1971 - nearly 40 years ago!

It is a very sad story.

A greedy Man ignores the warnings of the Lorax and cuts down all the Truffula trees.

....The habitat of Swomee Swans is destroyed.
... The dwellings of the Brown Bar Ba Lots is destroyed.
... The home of the Humming Fish is devastated.
... eventually the Lorax are forced to leave.

In the end, the narrator is given the last remaining Truffula seed with the following instructions:

Plant a new Truffula. Treat it with care.
Give it clean water. And feed it fresh air
Grow a forest. Protect it from axes that hack.
Then the Lorax and all his friends may come back.

The headmaster concludes by giving the 6^th graders the following challenge:

"You can make a difference - you can preserve our environment, save our wildlife, keep our air and water clean. Be role models, educate your peers and your parents - make sure we recycle, reuse and reduce but also that we rethink - perhaps one of you will write the sequel to The Lorax and write a different ending to the story."

It was a great message to the kids. We should all do our part to be green.

And a simple way to be green is to use as little paper as possible ... it really makes a difference. I know this is self-serving but AP Automation can reduce paper in so many ways --- no more copies, no more mailing, no more faxes etc.

Some AP departments are overflowing with paper. How socially responsible is making 10 copies of every invoice that comes in the door (which many organizations do whether they realize it or not)?

Grow a forest. Protect it from axes that hack.
Then the Lorax and all his friends may come back.
Unless someone like you cares a whole awful lot, nothing is going to get better. It's not.

-Rakesh Shukla

A Cell Phone for a 12 year old?

Rakesh Shukla — Thu, 04 Jun 2009 13:59:00 GMT

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It's been about a year since one of my very first blog posts titled, A Cell Phone for an 11 year old?

A year ago, my son tried to make the case that he needed a cell phone but had no idea of the costs.

It turns out that he actually didn't use his phone that much to talk. Instead, TEXTING became all the rage. I became aware of this when our monthly bill doubled! You see, I didn't have him on a texting plan, and he sent and received 750 texts!

"Do you realize that sending text messages cost money?" I asked.

"Uhhh, no"

"Do you realize you texted 750 times last month?"

"Sometimes I get 50 in a day!" he responded proudly.

"What are you texting about?"

"Stuff" he replied like it was none of my business.

At that point, I got concerned and asked him to hand the phone over so I could see what was going on.

Here was a typical text conversation with one of his buddies:

SON - hi
BUDDY - hello
SON - im bored
BUDDY - me too
SON - bye
BUDDY - bye

750 texts like this! I put him on a plan and told him not to go over 500 texts in a month.

Anyways, the same lack of knowledge about costs continues to persist about technology investments.

Check out this chart:

What is striking (at least to me) is that almost 20% or respondents have NO IDEA of the return on their technology investments!

That's excusable for a 12 year old but not a finance manager ... especially an AP manager. Other surveys (such as IOMA's) show that most AP departments have no idea of current costs even after the economic turmoil we have been through.

Here is the point I made last year which I feel is still valid now:

Survey after survey shows that the #1 priority for most finance departments and especially AP is cost reduction. Well, how can you make the case to save money with proposed/desired initiatives if you don't know your current costs???

The other benefits of a formal cost analysis are a better understanding of your current AP processes and inefficiencies, as well as establishing the groundwork for future benchmarking to measure how you are improving as an organization and how you compare to other organizations.

IOMA also states that when it comes to technology investments, "traditionally, AP has not been a priority, which is why so many organizations rely on completely manual processes. ... The problem is that most AP Managers do NOT build a good enough case."

How can you build a case for any type of investment if you don't have a handle on current costs? Understanding costs would be a NECESSARY first step to building a case for technology investments.

-Rakesh Shukla

Cash is KING -- How AP Can Help

Rakesh Shukla — Wed, 27 May 2009 08:50:00 GMT

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I attended The Hackett Group's 19^th Annual Best Practices Conference a few weeks ago.

There were a lot of very smart executives and insightful presenters at this conference. Of the many informative sessions that I attended, here was the best quote:

"A company can lose money for years and years ... but you can only run out of money ONCE."

Mark Tennant
President, REL Americas

How true.

The gist of Mark's presentation was that with shrinking sales and margins, generating increased cash flow from operations is critical but very tough to do in this economic environment.

Of course, selling off assets and reducing capital expenditures can yield one off benefits but at what cost? At the very least, such short-sighted measures will hurt the capability of the business to capitalize when the economy recovers.

Instead, the most effective way to increase cash flow in these times is to focus on the processes that directly affect working capital:

Customer to Cash (AR)
Forecast to Fulfill (Inventory)
Source to Settle (AP)

Here's the slide that really caught my attention:

Although AP makes the smallest contribution to cash flow, it is still significant. By properly managing payment terms and increasing DSO, there is almost $28M of cash opportunity per $1 Billion of sales!

I have written about AP's role in managing cash in these previous blogs:

-Rakesh

The 7 Biggest Problems with AP Metrics

Rakesh Shukla — Mon, 18 May 2009 08:41:00 GMT

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There is no question that effective AP metrics can address an organization's key pressures and challenges by increasing the efficiency and effectiveness of critical processes.

BUT ...as I explained in my last blog entry, poorly designed metrics can drive bad behavior. Poor metrics also have other significant problems. As outlined in Jon Casher's white paper titled 10 Must-Have Metrics, here are the 7 biggest problems when it comes to metrics:

Too many metrics: When an organization has more than 20 or 30 metrics, it is likely that some of them are not useful and some may be lost in the clutter and overlooked. In some instances, a metric may have been developed to measure the effectiveness of a procedural change. At some point in time, that measure may no longer be needed yet the information is still collected and the metric continues to be reported. Some metrics may be redundant - e.g. having too many metrics to measure productivity.
Metrics are not actionable: A metric such as the number of invoices processed is often reported as a key metric in many Accounts Payable departments. While it may be important to monitor such a number to help determine if there is adequate staffing, it is probably the wrong thing to track. Since every Accounts Payable department is responsible for processing all invoices, it is far more useful to develop and use metrics that help you understand what invoices are not being processed or are not processed efficiently and why.
Metrics are not timely: Information should be collected and analyzed so that actions can be taken in an appropriate time frame. Real-time feedback can be very helpful for managing the processing of invoices as it allows for immediate actions to be taken to reassign work. However, real-time feedback is not as important for developing long-term staffing plans and requirements.
Best practices for others may not be best for you: What may be a best practice for one organization may not be appropriate or even feasible for another. Practices that work well within a company with one location may not be usable in a geographically dispersed company operating in multiple languages, multiple currencies and many time zones. Limitations of an organization's systems and regulatory issues often restrict or even prohibit certain practices. Effective metrics are aligned with an organization's goals, vision and mission and address key pressures and challenges. Metrics may be needed to address problems or issues unique to an organization. The Accounts Payable department of a manufacturing firm usually has metrics that focus on the accuracy of Purchase Orders and on receiving documents associated with Evaluated Receipts Settlement (ERS) transactions as there are no invoices for these. A company that does not use ERS might not need such metrics.
What is being measured is unclear or ill-defined: A metric can cause rather than resolve problems if poorly defined. This is especially true if the data that needs to be captured is poorly specified, or if the results that are reported may be interpreted differently. Number of invoices processed is a metric that is commonly used in many Accounts Payable departments to assess employee productivity. However, the effort associated with processing an invoice may vary greatly depending on whether or not it is against a Purchase Order, the number of line items on the invoice, whether the charges on the invoice have to be allocated to many departments, and other factors. An employee who deals with complex invoices may appear to be far less productive than an employee who only processes invoices with no Purchase Order, a single line item, and charged to a single account. In such situations, the number of each type of invoice processed may have to be defined rather than the single metric.
Metrics may drive the wrong behavior: "Gaming the system" can happen when the wrong metrics are used or metrics are used inappropriately. One company based part of individual compensation on "number of invoices processed." First one and then all of the Accounts Payable staff stopped processing complex invoices in order to increase output. Invoices from several key suppliers were not being processed. As a consequence, some suppliers stopped shipping critical raw materials and others raised their prices.
Data collection effort is excessive: The amount of time being spent on collecting data may exceed its potential value. One company concerned about the quality of Accounts Payable's customer service instituted a 30 day test to capture extensive information about each transaction that needed interaction with a supervisor, employee outside of A/P or a vendor. The effort was so time consuming that the backlog of unprocessed transactions more than tripled. That backlog not only reduced productivity, it increased the number of calls and emails to A/P asking about the status of unpaid invoices and expense reports.

In my next blog entry, I will start to explore the a framework for developing metrics that addresses these pitfalls.

-Rakesh Shukla

P.S. For more info on this surprisingly interesting topic, I would also encourage you to check out last week's webcast titled 10 Must-Have Metrics.

How AP Metrics Can Encourage Bad Behavior

Rakesh Shukla — Fri, 08 May 2009 15:39:00 GMT

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In this past week's webcast titled, 10 Must-Have Metrics, Jon Casher, president of Casher & Associates, made a great point about how you need to be very mindful about how certain AP metrics can drive the wrong behavior.

Here was his example. A company based its bonus on a seemingly very simple metric - the number of invoices processed. This is a flawed metric. Here's why -- a very clever AP Specialist realized that if she arrived before everyone else and hand picked the "easiest" invoices such as the simple ones with one line item, she could process more invoices per day. Soon her associates started doing the same thing. Nobody wanted to process the complicated invoices from the "challenging" suppliers.

What ended up happening was that the suppliers who sent in not-so-easy invoices to process weren't being paid! This caused all kinds of problems as you can imagine.

So the lesson learned is that you need to consider the unintended consequences of your metrics - even if the metrics appear innocent.

In the webcast, Jon outlines a complete framework for developing metrics that should prevent these types of problems:

What should be measured
Why it should be measured
When it should be measured
How it should be measured

He then reveals his 10 Must-Have AP Metrics. I encourage you to view the on-demand webcast which has now been archived on our website.

We also have a very detailed white paper on this topic.

-Rakesh Shukla

The Best Way to Resolve AP Disputes

Rakesh Shukla — Fri, 01 May 2009 11:34:00 GMT

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My boys won the New England Super Regional AAU Tournament this past weekend. Even though it's only a 12-year-old basketball tournament, it's a major accomplishment.

When you consider that we have been practicing together for only a month and soundly defeated several teams who have been playing together for years (including a team that placed 5th at Nationals last year), the significance of this accomplishment is only magnified.

What shocked me more than winning, though, was the dirty play against my boys in the Final Four game ... the trash-talking profanity was non-stop and extremely vulgar ....... chippy guards were kicking my son in the back of the knees and tripping him whenever the referees turned their heads ....and ... you won't believe this one ... another one of my kids was punched in the stomach when the refs were not looking.

This was not basketball. It was violence meant to intimidate my boys. But my boys played through it and showed some real mental & physical toughness.

The other disburbing aspect of winning was the lack of graciousness from my fellow coaches ... many were downright jealous. "How dare a a newly-formed suburban team with an unknown coach win the Division 1 Super Regional Championship???"

In fact, one of the other coaches/teams was so envious, that an informal complaint was filed that I was cheating! He claimed that my kids were too old.

Thank goodness I had all my birth certificates and other paperwork in meticulous order. I had collected and prepared everything in a neatly organized binder weeks ago whereas most other teams were scrambling at the last moment with scraps of paper here and scraps of paper there.

Which brings me to my point about disputes and protests ...

... WHOEVER HAS THE BEST DOCUMENTATION WINS.

Think about what this means for AP disputes. If all information, including all related documents and audit trails is available online, not only will there be fewer disputes but the disputes that do happen will get resolved more quickly.

Some studies have shown that AP can spend up to 20-25% of their time dealing with supplier disputes and inquiries. What a productivity drain! Having all documentation online will solve this problem quickly.

I learned many things this past weekend -- maintaining the best documentation possible to help resolve disputes in your favor was one of the biggest lessons learned.

-Rakesh Shukla

How AP Got its Groove Back

Rakesh Shukla — Fri, 24 Apr 2009 10:47:00 GMT

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Recently, Karen Kroll penned a very good article for BusinessFinance titled "How AP Got its Groove Back."

The gist of the article is that "with external funding tight and sales flat or declining at most firms, more corporate executives are looking internally to identify ways in which they can squeeze cash from operations -- or at least get a better handle on its flow. When you can't look to sales to replenish the corporate coffers, you need to be better stewards of the cash you've already brought in, says Thomas Bohn, executive director and chief executive officer with the International Accounts Payable Professionals (IAPP), an Orlando-based industry association."

Most of the article presents a very interesting case study for setting up a new AP Shared Services operation at Broadridge, a $1.6 billion solutions provider based in New York.

There are lots of great tidbits including the following:

"At this point, leading firms are automating about 80 percent of their invoices, says Kurt Albertson, director of advisory services with The Hackett Group in Atlanta. This compares with about 20 percent for other firms."
"an in-house finance and accounting shared services center can cut AP costs by 40-plus percent, but only if tools like imaging and workflow solutions are introduced ..."
"As Broadridge's experience shows, technology is key to transforming and improving the accounts payable process ... While all potential technology investments are scrutinized these days, the benefits of systems that can streamline the AP process increasingly are recognized by the folks holding the purse strings. "Processing paper-based invoices is very inefficient," Jones says. "Enterprises can't afford that level of inefficiency today."
"Moreover, most executives urgently need to enhance visibility into cash flow, and technology can provide that ... executives today are eyeing projects that let them know when cash is coming and going. "

There are a lot of other interesting points in the article including a list of AP Best Practices at the end that includes a quote from yours truly:

1. Keep it simple. Avoid processes "with multiple loopbacks, and re-thises and re-that's," as these add time, says Rakesh Shukla, co-founder of 170 Systems. Along these lines, you want a single technology platform, chart of accounts, vendor master file, and so on, he adds.

2. Eliminate paper. Processing, storing, and finding paper consumes time, space, and money, notes Evie Fletcher, accounts payable manager with RDO Equipment Co. in Fargo, North Dakota. Use electronic data transmissions and imaging and workflow solutions to cut paper use.

3. Use key performance indicators. Executives who want to improve the job their AP department is doing need to focus on key performance indicators (KPIs), says Duncan Jones, a London-based senior analyst with Forrester Research. Examples include the average time it takes to process an invoice and the number of invoices each AP employee handles.

4. Bring stakeholders together. Truly improving AP requires bringing together representatives from procurement, treasury, and the supply chain, as well as accounts payable, says Kurt Albertson, director with The Hackett Group. "You have to get the four groups working together."

-Rakesh

How Post-it® Notes Can Improve Your AP Process ...

Rakesh Shukla — Thu, 16 Apr 2009 12:42:00 GMT

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Last year, 3M ran a contest called "One Million Uses and Counting" for the most unique and creative uses for those sticky notes.

Some of the ideas were certainly unique!

... decorate a car or truck ...

... a fashion statement ...

... wall art ...

... a prank on a co-worker ...

Now, I will admit that all of these ideas were creative if not ... how should I put it ... lacking usefulness.

On the other hand, putting little stickies on a wall as part of a process mapping exercise is probably one the best process improvement tools known today! According to Penny Weller from The Hackett Group, just laying out the process and looking for bottlenecks or places where people differ on how the process should be done is incredibly helpful. Each step of the process can be more easily rationalized.

If the reason for a process step is "it's always been done that way!" then you have probably identified an opportunity for improvement!

Penny Weller did a great job of explaining some very useful process mapping and process rationalization techniques in our last webcast which is now available for on-demand viewing on our website. It's well worth the time to check it out.

-Rakesh

Understanding AP Errors Six Sigma for Dummies

Rakesh Shukla — Fri, 10 Apr 2009 12:41:00 GMT

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Coaching 3^rd grade girls basketball is an exercise in patience. Lots and lots of patience. 8 and 9 year old girls have a very short attention span so you need to be patient. Teaching skills like dribbling and shooting and passing takes patience. Did I mention that you need to have patience?!?

Let's focus on passing as an example. It seems like a simple enough skill - throw and catch the ball with your teammate. But it's amazing how often a bad pass or a bad catch results in a turnover. I would estimate that on my daughter's 3^rd grade team, only about 50% of all passes are completed successfully and I am probably being generous.

As a coach, I want to emphasize teamwork through good passing - especially at this young age. However, the more passes you make, the higher the chance that you will turnover the ball. Here's the math:

1 pass:     1 - (.5) =                          50% turnovers
2 passes:   1 - (.5 x .5) =                     75% turnovers
3 passes:   1 - (.5 x .5 x .5) =                88% turnovers
4 passes:   1 - (.5 x .5 x .5 x .5) =           94% turnovers
5 passes:   1 - (.5 x .5 x .5 x .5 x .5) =      97% turnovers
6 passes:   1 - (.5 x .5 x .5 x .5 x .5 x .5) = 98% turnovers

So, with each pass, if there is a 50% chance of a turnover, with as few as 3 passes, there is almost a 90% chance of a turnover before all the passes are completed. It's a real coaching dilemma - if the girls try to pass the ball more than twice, we are virtually guaranteed the ball will be turned over!

Now suppose I decided to work on passing every day for a month and our passing completion rate improved to 80%. What would this do for turnovers? Again, here is the math:

1 pass:     1 - (.8) =                           20% turnovers
2 passes:   1 - (.8 x .8) =                      36% turnovers
3 passes:   1 - (.8 x .8 x .8) =                 49% turnovers
4 passes:   1 - (.8 x .8 x .8 x .8) =            59% turnovers
5 passes:   1 - (.8 x .8 x .8 x .8 x .8) =       67% turnovers
6 passes:   1 - (.8 x .8 x .8 x .8 x .8 x .8) =  74% turnovers

As you can see, it's still not that great - after 2 passes, the girls will still turnover the ball more than half the time!!!

What if, by some miracle, the girls learned to pass at a 95% completion rate?

1 pass:     1 - (.95) =                                 5% turnovers
2 passes:   1 - (.95 x .95) =                           10% turnovers
3 passes:   1 - (.95 x .95 x .95) =                     14% turnovers
4 passes:   1 - (.95 x .95 x .95 x .95) =               19% turnovers
5 passes:   1 - (.95 x .95 x .95 x .95 x .95) =         23% turnovers
6 passes:   1 - (.95 x .95 x .95 x .95 x .95 x . 95) =  27% turnovers

Now, that's a lot better!

Now, let's switch gears. Instead of basketball and passing, what if we were talking about payment errors in an AP process?

... well, the implications for AP are pretty profound ...

If the entire AP process consisted of just 6 sub-process steps where each step had a 95% accuracy rate, the entire 6-step process would have a payment error rate of 27% ... YIKES!

A 27% error rate is clearly unacceptable. The implications here are 2-fold. To get the error rate down to acceptable levels, each sub-process step must have an accuracy rate that is almost perfect AND the number of sub-process steps must be kept to a minimum. This argues for a simplified AP process where each sub-process step is automated for higher accuracy.

In general, If you have a manual AP process that looks like this, you will have a higher error rate than if you had a simpler, automated process.

BTW, what I have just illustrated is the dumbed-down explanation of Six Sigma. Six Sigma is a measurement of the number of acceptable defects produced by a system and means that the output will be 99.99966% good with no more than 3.4 defects per million.

Penny Weller did a great job of explaining this in last week's webcast which is now available for on-demand viewing on our website. I encourage to take a look.

-Rakesh

How NOT to Improve AP Quality ...

Rakesh Shukla — Thu, 02 Apr 2009 13:39:00 GMT

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As any quality expert knows, "that which gets measured gets improved."

So if you DO NOT want to improve the quality of your AP processes then ... don't measure anything.

On the other hand, if you DO want to improve your AP processes, then you need to start tracking key metrics and performance indicators through Quality Programs.

But what Quality Programs have proven track records and what exactly needs to be measured?

In yesterday's webcast, Penny S. Weller, PhD, CMA, Senior Business Advisor, at The Hackett Group explained how the following Quality Programs can improve, energize and turbocharge your AP processes:

The "Green Room"
Activity-based Management
Balanced Scorecard
Six Sigma
Hackett Benchmarking

In a very easy-to-understand manner, Penny walked through how each of these Quality Programs can be implemented in your AP Department in a practical way.

The webcast is definitely worth checking out for this reason alone --Organizations with formal Quality Programs have lower AP costs.

How much lower?

38% lower costs to be specific ...

-Rakesh Shukla

AP Errors are Expensive ... A Costly Chain Reaction

Rakesh Shukla — Wed, 25 Mar 2009 08:43:00 GMT

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This is a picture of the cast of my daughter's 3^rd grade play. If you squint, you can see her near the middle of the back row in a white tank top dressed as a crow.

The play, "Why Mosquitoes Buzz in People's Ears" is based on a very amusing West African folktale. And when 3^rd graders perform the play, it is even more enjoyable.

Here's the storyline -

... a mosquito tells a tall tale to an iguana ...

... the iguana refuses to listen to such nonsense and puts sticks in his ears...

... unable to hear, the iguana offends a friendly python trying to say good morning ...

... the python is so upset, he shoots down a rabbit hole and terrifies the rabbit ...

... seeing the rabbit scares the crows overhead ...

... the crows spread an alarm that danger is near ...

... a monkey gets spooked and accidently knocks down an owl's nest ...

... mother owl is so upset that she refuses to hoot to wake the sun ...

The night grows longer and longer until King Lion calls a meeting to figure out what the heck happened. The chain of events is traced back to the source of all the trouble - the pesky mosquito. Mother owl is satisfied and hoots the sun to rise ... and the mosquito is forever plagued with guilt, compelling him to be a pest and buzz in people's ears, asking for forgiveness.

Sometimes, a seemingly isolated event, can cause a chain reaction with unintended consequences. This is especially true with AP errors. Let me explain.

Let's take the example of a supplier short-pay error. What is the cost of such an error???

The costly chain reaction is revealed when such an AP error is broken down into the steps required to address it.

Each step is time-consuming and the cost of one error can be significant. It's worth noting that paper-based processes, understandably, are known to have higher error rates - keying errors, matching errors, lost and/or misfiled documents, etc. Quality of service is also affected since errors result in irritated vendors and frustrated internal clients.

So, how do you prevent AP Errors?

The best way is to start tracking key metrics and performance indicators through Quality Programs.

But what Quality Programs have proven track records and what exactly needs to be measured?

If you want to learn more, please register for our upcoming April webcast with Penny S. Weller, PhD, CMA, Senior Business Advisor, at The Hackett Group to learn how the following Quality Programs can improve, energize and turbocharge your AP processes:

The "Green Room"
Activity-based Management
Balanced Scorecard
Six Sigma
Hackett Benchmarking

-Rakesh Shukla

Haste Makes Waste ... The Risks of Cutting AP Staff

Rakesh Shukla — Thu, 12 Mar 2009 11:27:00 GMT

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"A hasty man drinks his tea with a fork."

- Ancient Chinese Proverb

This amusing Chinese proverb on the futility of hurrying is similar to the more familiar "haste makes waste" truism.

... and how true it is!

You see, this past weekend, I got lost driving my son to his basketball game - a big playoff game against a worthy rival. We were hopelessly late. The coaches were calling me all in a frenzy as my son is one of the better players on the team.

So I'm lost and I'm late and my cell phone won't stop ringing with the "Where are you?!?" calls when I notice that I am very low on gas. Just great. Starting to panic a little bit, I pull into the local mom-and-pop gas station, fill up the tank as fast as I can, get directions to the gym and we are off.

Not so fast.

My car starts to sputter ... the engine stalls and there are awful fumes coming from under the car! Is the fuel pump malfunctioning? Has some BMW engine part that I can't pronounce busted? Did I pump in some watered-down shoddy gas?

Somehow, after about a dozen more stalls and restarts, we lurch and stammer into the parking lot just as the engine finally dies. The car is towed to the dealer and and I am scratching my head as to what the heck happened.

A long tow trip later, I found out why my car died. Are you ready for this? In my hasty rush, I had put diesel in my car! What a knucklehead thing to do! Haste truly made waste which resulted in a very expensive repair bill. To top it off, we also lost the game.

So what does this have to do with finance and AP? Here's my prediction: with the downsizing of finance departments, there is going to be a rise in knucklehead accounting and transaction processing mistakes.

As corporations continue to cut SG&A costs, nowhere are the risks greater than in over-worked, under-staffed finance departments - especially AP. Below is a graph of the rise in restatements. The graph only goes to 2006 -- the number of restatements in 2007 and 2008 are lower but still high around 1200.

Now here is the "haste makes waste" point: studies of corporate restatements suggest that well over half of the errors ... more than 50% ... were human errors -- ordinary books and records deficiencies.

Cutting staff in AP is invariably going to lead to more mistakes and errors -- especially so in manual, paper-intensive operations.

And AP errors are expensive to fix!

I'll elaborate more in my next blog entry.

-Rakesh Shukla

P.S. I thought diesel pumps were supposed to be tucked away in the back away from the regular gas pumps ... (sigh) live and learn.

Preventing Vendor AP Fraud A Great Tip For Maintaining Your Vendor File

Rakesh Shukla — Fri, 06 Mar 2009 10:59:00 GMT

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Yup, that's an outhouse.

What if you used Google Maps to view a vendor address and it turned out to be an outhouse?!? Alarm bells would probably go off in your head that an unscrupulous "vendor" was trying to swindle your company.

Nat Goodman used this outhouse example in this past week's webcast on preventing AP fraud. As we discussed in the last blog entry and according to Nat:

"Every addition or change to the vendor master should be verified to approved documents [such as updated W9s, contract amendments, verified correspondence, etc]. That means approval and support before keying AS WELL AS verification to file changes AFTER processing. In order to avoid duplicate vendors on file, be particularly careful about how the vendor name is keyed with consistent naming and keying conventions."

Vendor addresses should be treated particularly carefully. Again, according to Nat:

"We need to guard against false addresses that can be used to embezzle funds. However, we are not only concerned with phony vendors but we want to confirm that the vendor appears to be a business person with legitimate qualifications to perform the work or provide the goods. Switchboard.com and Yellowpage.com have business and residential listings. Mapquest.com is great way to view a property. Many consultants/service providers work out of their home. Here is an opportunity to view their home. If they have an outhouse on the property you may think twice. If a goods producer lists an address on a vacant lot, a red flag goes up and you may want to check further."

Bottomline ... all new vendor addresses or changes should be carefully verified. With Google Maps or a similar tool, it's easy to check a vendor's office or location.

-Rakesh Shukla

P.S. Our March webcast titled Preventing Procure-to-Pay Fraud - 5 Vulnerable Processes featured Nat Goodman, a well-known AP Industry Expert. One of the topics Nat discusses was maintaining the Vendor Master File.

Preventing Procure-to-Pay Fraud ... 5 Vulnerable Processes

Rakesh Shukla — Tue, 24 Feb 2009 12:15:00 GMT

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For the past month, my blog entries have been focusing on AP Fraud. It's a fascinating subject and I just scratched the surface. If you want a true expert's take on AP Fraud, I encourage you to attend next week's webcast featuring Nat Goodman, President of Goodman and Associates.

Nat is going to focus on how to prevent procure-to-pay fraud through practical advice on how to tighten internal controls, prevent malfeasance, stop theft, detect red flags, and safeguard company assets for 5 vulnerable P2P processes:

risk-mitigating tips for maintaining the master vendor file
susceptible areas for p-card purchasing
solid techniques for properly accounting for airline flights
challenges and solutions for recording/accruing of expenses
hard lessons learned for payment execution

Without stealing Nat's thunder, let me give you a preview of the first bullet point about master vendor files. How vulnerable is your vendor master file?

Be honest.

Nobody enjoys maintaining a clean master vendor file. It is tedious work that is often overlooked. And yet poor internal controls for vendor files can lead to massive AP frauds.

A very recent case in point is the $2.5M billing fraud in Utah where the bank account information for a legitimate vendor (an insurer) was changed (to a fraudulent bank account) ... without any verification. Fraudulent invoices were then submitted and paid to the fraudulent back account. The thieves stole $2.5M before getting caught.

According to Jon Casher, another AP industry expert:

"It's a very simple process to change the bank routing number and account number for payments being made via ACH. In the Utah case, the change was probably made without verifying that the new account number belonged to the insurance company. To prevent such problems from happening, all changes to the vendor master file should be reviewed and verified.

In the March 4th webcast, Nat will present his views on properly maintaining the vendor master file. I highly encourage you to register.

-Rakesh Shukla

A True Story of AP Fraud ... a Woeful Failure to Segregate AP Duties

Rakesh Shukla — Tue, 10 Feb 2009 15:17:00 GMT

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In my last blog entry, I explored the importance of segregating AP duties.

Today, I will present a fascinating case study of AP Fraud that highlights the risks of poor AP internal controls.

This is a true story.

Our tale concerns a husband-wife team who colluded with an outside vendor to fleece their company of at least $2 million over a seven-year period. As related in one of our AP fraud white papers, the target of this sustained fraud was the well-respected newspaper, The Charlotte Observer, where poor internal controls contributed mightily to the scandal they were, to their considerable embarrassment, obliged to report in their own pages.

The Profile of an AP Fraudster

The mastermind of the scheme was a Mr. Johnson, a white male and 22-year employee of the newspaper with an unblemished record. Believe it or not, this is the typical profile of an AP Fraudster.

It was Mr. Johnson's good fortune to serve as a purchasing manager who also had authority to both receive goods and services and approve invoices for the same. The invoices would naturally flow through the AP department, where Mr. Johnson's wife happened to work. All the Johnsons needed to complete a seamless scam was a cooperative and unscrupulous vendor. Mr. Johnson cultivated a friendship with a favorite supplier until they became close enough that he could propose his ploy: for every two shipments you send me, invoice The Observer for three, and we'll split the payment for the phantom shipment!

Too Many Hats for One Head

The breakdowns in internal controls that allowed this arrangement to prosper over a 7-year period are manifold. Consolidating so many responsibilities in the hands of even the most trusted of employees is the first bright-red flag. A married couple with entangled duties connected with AP is another red flare. Significant budget variances, on the order of $50,000 of bogus charges per month per department, were overlooked as boom times created a lax atmosphere that tolerated such large discrepancies. Poor inventory controls allowed non-existent shipments to be processed and paid for. To top it all off, nobody involved was bonded and the company wasn't insured against such a loss.

NASCAR Insider?!? Where was the Common Sense?

While there is no question that better systems and procedures might have excised this cancerous scheme, simply bringing common sense to bear would have at least curtailed the loss. During the seven years that the Johnsons were siphoning off a substantial chunk of The Observer's revenue, their lifestyle took a dramatic turn for the better. They sold their old home, moved into a new lakefront mansion in an exclusive neighborhood, added a swanky boat, traveled like pashas and stockpiled fancy automobiles. Indeed, not only did Johnson flaunt his new-found wealth, he abandoned discretion entirely by incessantly insinuating himself into the picture - literally - in the very high profile world of NASCAR. Every week, it seemed, he would be photographed bear-hugging the winner at the victory celebration, an awesome display of insider status in the region's most revered sport.

Meanwhile, his demeanor around the office was quite the opposite. Formerly out-going and hands-on, Johnson retreated into his office where he spent most of each day behind a closed door and drawn blinds.

How could anyone, indeed everyone, have failed to notice? The answer is that of course people noticed, but they didn't trust their intuition enough to call Johnson's bluff. All Johnson had to do to deflect curiosity over the course of the better part of a decade was claim an aunt died and left him an inheritance. Naturally, once the fraud was unmasked, the aunt was discovered to be as imaginary as the stream of phantom shipments Johnson authorized and his wife paid for.

AP Internal Control Breakdowns

Clearly, a woeful failure to segregate duties was at the heart of this calamity. Had Johnson not had the power to approve his own actions, this fraud might have been prevented altogether. Improved transparency and more disciplined approval framework would also, at the very least, make a fraud such as Johnson's more difficult to launch and impossible to sustain.

While Mr. and Mrs. Johnson eventually received their comeuppance - curiously, The Observer did not take immediate legal action upon their exposure - the newspaper nonetheless took a substantial hit, both in terms of financial loss and tarnished reputation. Nor were the perps the only people to suffer: managers who presided over the slipshod operations were sacked, steering lives and careers off track. The real tragedy of this tale is that if today's AP automation software and associated best business practices had been in place at The Observer, this entire fraud, and all the damage that ensued, would never have happened in the first place.

-Rakesh Shukla

P.S. Our March webcast titled Preventing Procure-to-Pay Fraud - 5 Vulnerable Processes features Nat Goodman, a well-known AP Industry Expert. One of the topics Nat will discuss is segregation of AP duties. The pre-registration for this complimentary webcast has been very strong, so I encourage you to register soon.

Segregation of AP Duties What's the Best Approach?

Rakesh Shukla — Fri, 06 Feb 2009 15:27:00 GMT

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Question: What do the following situations all have in common?

A policeman ticketing a Dunkin' Donuts truck driver ...
A doctor prescribing medicine from a pharmaceutical company in which he owns stock ...
A politician accepting contributions from a special interest group ...
A procurement manager being wined and dined by vendors ...
A hungry wolf guarding the chicken coop ...
A judge sentencing a family member ...
Coaching your own son or daughter on a travel team ...

Answer: In each situation, there is a conflict of interest.

A conflict of interest is a situation where someone (such as a doctor,politician, procurement specialist, police officer, judge, coach, wolf etc.) has a personal interest or motivation that might compromise the reliability and integrity of bigger obligations.

In many cases - especially where money is involved - a conflict of interest may tempt someone to break the law. Nowhere is this truer than in Accounts Payable.

In AP, there are a lot of conflicting duties which should always be segregated. Segregating AP duties is one of the most important internal controls in finance. For example, the person entering the invoice should not approve the invoice for obvious reasons. Similarly, the person who sets up a vendor should not enter the invoice into the ERP system. There are many examples in AP where duties should be segregated. The problem is that most finance departments constantly have pressure to do more with less. But to follow segregation of duties to the letter, you need enough staff which isn't always a luxury - especially in these economic conditions.

But wait!

Haven't ERP systems addressed segregated duties through a security framework which governs the acceptable use for each authorized user?

Aren't roles and responsibilities managed so that, for example, an entry-level accounts payable clerk can access modules only related to her specific job function while the CFO can access any module in the system?

Well ... yes ... but the problem of trying to maintain segregated duties using this classification approach is that these configurations are expensive to design and deploy. As employees are promoted, reassigned, or terminated, organizations must continually update their ERP systems with everyone's correct authorization level including consultants, contractors and business partners. Supporting and maintaining the classifications and configurations is a resource intensive job.

Furthermore, most organizations struggle with their initial ERP setup -- millions are spent in projects that can take up to 3 or more years. Unfortunately, the setup of these segregated classifications is often the last phase of the project and does not receive the attention it requires especially if the project is over budget or behind schedule - which is more common than not.

With AP automation that includes a robust workflow engine, you should have complete end-to-end AP process visibility as the invoice transitions from one step to the next ... the AP system should track all changes maintaining a comprehensive audit trail of what was performed and by whom for all prior steps so potential conflicts can automatically be caught at the transaction-level.

Using this approach, limited headcount can still allow for segregated duties since segregation can be enforced at the transaction level instead of the job role level. Employees can still be cross trained and allowed to perform multiple functions as long as they don't perform conflicting duties on the same transaction. For example, an AP Specialist could both enter invoices and also setup suppliers as long as there is no conflict on each and every transaction.

This transaction-level segregation can be enforced by the workflow software which allows you to move away from restrictive job role controls ... rather than limiting what functions employees can carry out as part of their jobs, this approach allows enterprises to boost productivity while mitigating the business risks.

One last point here ... this approach requires less overhead since segregation rules are defined once at the process level as opposed to the constant overhead of ERP administration.

-Rakesh

P.S. Our March webcast titled Preventing Procure-to-Pay Fraud - 5 Vulnerable Processes features Nat Goodman, a well-known AP Industry Expert. One of the topics Nat will discuss is segregation of AP duties. The pre-registration for this complimentary webcast has been very strong, so I encourage you to register soon.

Reducing AP Costs vs. Preventing AP Fraud??? A Classic Accounts Payable Dilemma

Rakesh Shukla — Fri, 30 Jan 2009 14:13:00 GMT

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The classic finance dilemma is choosing between reducing costs or strengthening internal controls. Typically, these are opposing goals. Achieving one goal usually means sacrificing the other. For example, strengthening internal controls usually means increasing processing costs. Nowhere is this more true than with Accounts Payable.

The bottom line is that strengthening internal controls remains purely a cost burden... for most companies. The Hackett Group studies show that on average, compliance costs have added $200,000 per US$billion of revenue to the cost of finance since the start of SOX in 2003.

However ...world-class finance costs are about 50% below the average company's costs and continue to decline as a percentage of revenue.

So what are these world class companies doing to strengthen controls while keeping a lid on control costs? 4 things:

Centralizing and simplifying processes
Leveraging technology
Automating controls
Using more preventative controls

Let's quickly talk about each of these points.

Process Centralization and Simplification

Shared services is the best way to centralize processes and reduce costs. In fact, here is a very compelling data point -- 20% of companies that have implemented financial shared services have achieved savings of over 40%!

Leading companies also have simpler processes ... 20% fewer key controls per billion dollars in revenue.

Technology Leverage

Leading companies have consolidated technology platforms resulting in fewer ERP systems and minimal duplication of data. The best companies have only 1 ERP vs 2 ERPs for everyone else.

Shared databases for purchasing and payables allow companies to have a single vendor master file and a single chart of accounts (which is easy if you have a single ERP system) ... the big benefit here is a single source of the truth which is critical for financial data.

Control automation

The average companies also perform a LOT more manual control activities than leading companies which means they are operating with an unnecessary level of risk. Peer companies perform manual control activities 2.4 times more than leading companies. All this manual activity increases the risk of control failure which is perilous in today's regulatory and legislative environment.

Greater Use of Preventative Controls

Finally, leading companies have more preventative controls. Of course an environment where deficiencies are prevented in the first place is more desirable and much less expensive than having to detect problems after the fact.

The number of preventative controls are 11% higher for leading companies.

So there you have it. To solve the classic financial executive dilemma of reducing costs while, at the same time, strengthening controls, you must centralize and simply processes, leverage technology appropriately and automate controls with more preventative controls.

-Rakesh Shukla

P.S. Our March webcast titled Preventing Procure-to-Pay Fraud - 5 Vulnerable Processes features Nat Goodman, a well-known AP Industry Expert. The pre-registration for this complimentary webcast has been very strong, so I encourage you to register soon.

The Cookie Thief ... Thoughts About AP Fraud Detection

Rakesh Shukla — Wed, 21 Jan 2009 08:30:00 GMT

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My 8-year old daughter is a cookie thief. You see, I caught her with her hand in the cookie jar the other day.

"How long have you been taking cookies without asking?"

"Uhhhh ... just today, Dad!"

Yeah right. I gave her a stern look even though I was a master cookie thief myself in my youth.

"Really Dad, I swear. This is my first time."

Of course, this wasn't her first cookie theft -- but it was the first time she was caught. Later that day, I was wondering how many cookies have been "stolen" in households throughout the U.S.? The answer is that it's impossible to know for certain because of the unknown number of cookie raids that have never been detected!

It's actually not that different from estimating fraud losses. In the 2008 Association of Certified Fraud Examiners' (ACFE) report, it states that the typical organization loses 7% of its annual revenues to fraud. Based on US GDP of just over $14 trillion, this translates into a staggering $990 billion in annual losses. But here is the caveat from the ACFE report:

Fraud, by its very nature, does not lend itself to being scientifically observed or measured in an accurate manner. One of the primary characteristics of fraud is that it is clandestine, or hidden; almost all fraud involves the attempted concealment of the crime.

Consequently, many instances of occupational fraud may go completely undetected. Further, even for those cases that do come to light, the full amount stolen may not be ascertainable, or the victim organization may decide not to report the theft to the authorities or the general public. As a result, determining the true breadth and depth of this form of crime is nearly impossible.

2008 ACFE Report to the Nation
On Occupational Fraud and Abuse

In the report, each fraud type was classified using the Uniform Occupational Fraud Classification System (commonly known as the Fraud Tree) into one of three major categories:

Corruption
Asset Misappropriation
Fraudulent Statements

Fraudulent Disbursements (the set of yellow boxes at the bottom), a type of asset misappropriation, represented 2/3rds of all cases. And within this Fraudulent Disbursement branch, in terms of frequency, the top 3 frauds were AP related:

Billing Schemes
Check Tampering
Expense Reimbursement

There is no question that fraud and specifically, AP Fraud, continues to be a real problem.

Now here is where it gets interesting ... How were the frauds detected? Here are the ACFE Fraud survey results:

I find it just remarkable that Internal Controls ranked a distant second ... and barely ahead of By Accident - in terms of detection! Sure, it's an improvement over the 2006 survey where Internal Controls ranked fourth but it's still terrible! Clearly, more effective internal controls are needed.

In my next blog entry, I'll talk about the 4 best practices that are critical to strengthening internal controls to manage risk while keeping a lid on costs.

-Rakesh Shukla

The #1 AP Fraud Detection Lesson from the Madoff Ponzi Scheme

Rakesh Shukla — Thu, 08 Jan 2009 08:07:00 GMT

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Happy New Year! I hope everyone had a safe and relaxing holiday. I have to admit that it's good to be back into a more normal routine.

About the time of my last blog post, the sensational Madoff scandal was hitting the newswires. I have been fascinated by not only Madoff's Ponzi scheme but also the utter failure of the SEC to detect a fraud which reportedly swindled $50B ... F - I - F - T - Y BILLION!!!

A Ponzi scheme is named after Charles Ponzi (see 1910 mugshot above). It's a fraudulent operation that pays returns to older investors from newer investors until the whole house-of-cards collapses. It's a classic pyramid scheme.

What makes this fraud even more fascinating is that the SEC had been receiving tips about the Madoff fraud for over a decade. In particular, a money manager named Harry Markopolos made it his personal mission to expose Madoff. Unfortunately, he couldn't persuade the SEC to investigate despite detailed report after detailed report on how it was virtually impossible for Madoff's strategy to work.

It's frustrating and even sickening how the SEC ignored these tips, especially when Markopolos gift-wrapped them for the SEC. Clearly, the SEC doesn't understand the first rule about detecting frauds. According to the Association of Certified Fraud Examiners (ACFE), the #1 way in which fraud is discovered is ...

... by a tip or complaint.

Yup, nearly half of the fraud cases in the ACFE's 2008 study were uncovered by a tip or complaint from an employee, customer, vendor, or other source.

Since over half of all fraud cases are AP-related, the lessons for AP are clear ... tips and complaints need to be encouraged. The best way to do this is through anonymous hotlines.

Both employees and third parties should be encouraged to report illegal or suspicious behavior. Whistleblowers should be assured that all and any reports are confidential and that there will be no retaliation by the organization whatsoever.

Whistleblowers should also be reassured that unlike the manner in which the SEC handled tips and complaints about Madoff, when a tip is received, it will be properly investigated.

In my next blog entry, I'll explore something else that is disturbing about the ACFE chart above. Can you guess what it is?

-Rakesh Shukla

10 Must-Have AP Metrics

Rakesh Shukla — Tue, 23 Dec 2008 13:07:00 GMT

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First off, Happy Holidays to each of you!

For those of you who didn't get our e-mail offer for our new white paper titled Must-Have Metrics, I have included it below. The initial response has been off the charts. The paper was authored by Jon Casher who is a renowned AP expert. I strongly encourage you to download the white paper and read it carefully. The paper has a lot of great information to help you prepare for 2009.

===============

As a tumultuous 2008 draws to a close, most companies and departments are scrambling to become more effective and more efficient. To survive, the best AP Managers are tracking key metrics to optimize payable processes - metrics that alleviate critical pressures and solve difficult problems.

But ...

Why should anything be measured in the first place?
What exactly should be measured?
When and How should metrics be applied?

To answer these questions, please open Must-Have Metrics authored by industry expert, Jon Casher.

===============

This will be my last blog post for 2008. Wishing you all the best during this holiday season and a Happy New Year!

-Rakesh Shukla

AP vs. AR ... A Classic Tug O' War over Working Capital

Rakesh Shukla — Wed, 10 Dec 2008 16:37:00 GMT

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Paris, 16 July 1900. Games of the II Olympiad
Credit: IOC/Olympic Museum collections

Yes, believe it or not, Tug O' War used to be an Olympic event!

In the financial supply chain, the classic tug o' war is buyers (AP) vs. sellers (AR) -- HOW FAST OR SLOW are invoices paid.

Discounts notwithstanding, buyers want to pay as late as possible while sellers want payment as early as possible. Each party is trying to optimize working capital and when it comes to managing working capital - TIME IS MONEY. The fact is that more businesses fail due to cash flow issues than due to lack of profits.

In my last blog post, I made a compelling case for paying invoices early to take advantage of early payment discounts. The annualized yield on terms of "2/10 Net 30" is very compelling (37%!!!). But in today's environment where bank credit & loans are getting harder and harder to obtain, cash is king once again. Lending standards are getting tighter and tighter and some banks have stopped lending and extending credit altogether.

The days of easy credit to help fund operating expenses is over. If a company does not generate cash surpluses, it may run out of money - even if it is making a profit! So even though a 37% yield is appealing for paying early, managing cash and keeping it for as long as possible may be more important.

So how can AP improve working capital? By stretching payments - holding off payments till the last second or even paying late to bolster cash flow.

Stretching payments can be tricky, however. Paying vendors late can cause many problems:

Higher Prices: Late payments may undo the favorable prices negotiated by purchasing. Vendors may simply raise prices to cover the costs of financing tardy invoices.
Vexed Vendors: More gripes and kvetching from disgruntled vendors will suck the productivity out of your AP staff.
Supply Chain Headaches: Late payments may result in delayed shipments of goods and services. If these delays adversely affect your core business, is it really worth the hassle?

So ... should you take every discount or stretch payments for as long as possible to maximize cash flow? The answer depends on how badly cash is needed and the current working capital needs and policies at your company.

-Rakesh Shukla

How to Earn 37% on AP Invoice Discounts Despite the Lowest Interest Rates Ever …

Rakesh Shukla — Thu, 04 Dec 2008 12:11:00 GMT

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Check out this amazing chart of the 13 week T-Bill Treasury rate since 1960:

3 month T-bills at ZERO? Are you kidding me???

The yields are at never before imagined levels ... all-time record lows across the entire yield curve:
... 2-year notes at almost a jaw-dropping 3/4%
... 5-year notes at an amazingly low 1.5%
... willing to lock up your money for 30-years at a miniscule 3.0%?

At these yields, you are basically donating your money to the Treasury rather than lending it. But what if you could earn 37% in this low interest environment?

How?

By taking your AP invoice discounts.

If your vendor offers you a discount of 2% if you pay within 10 days (2/10 net 30), you'd save $2 on a $100 order ... if you simply pay 20 days earlier than usual.

To figure out how this translates into an annual interest rate, use this formula:

Discounted amount /(Discounted price/100) X 360/N =
Effective annual interest rate

where 360 = days in the fiscal year, and N = the number of days between the discount date and the final payment deadline.

So, in the "2/10 Net 30" case, 2/(98/100) X 360/20 = 36.7%.

37%!!!! In an economic climate where t-bills are earning 0.05%, 37% seems like a no-brainer.

Even if the discount terms are slightly different, the yields will blow away anything you can safely earn in the bank. For reference, here's a list of effective annual interest rates for some common discount terms, as calculated by the American Institute of Professional Bookkeepers:

1/10 net 30 = 18.2%
1/10 net 45 = 10.4%
1/10 net 60 = 7.3%
2/10 net 30 = 36.7%
2/10 net 60 = 14.7%
2/20 net 90 = 10.5%
3/10 net 30 = 55.7%
3/10 net 60 = 22.3%
3/20 net 90 = 15.9%

Now, none of this is possible if your AP cycle times are too long or if you don't have visibility into AP discounts that are coming due ... common problems with paper-based AP processes.

This is where a robust AP Automation solution that tracks upcoming discounts can provide some real value. By shortening invoice processing cycle times and knowing which discounts are about to be lost if invoices aren't paid promptly, you can take those negotiated discounts and save your company a lot of money.

Now, there is one twist to consider -- the need to increase working capital. AP can increase working capital by stretching payment terms and foregoing the discount. In general, it's difficult to justify not grabbing that 37% annual discount yield but there are some working capital tradeoffs. I will have more to say on this topic in my next blog entry.

-Rakesh Shukla

Blog - 170 Systems Perspectives on AP

Why AP Automation Fails ...

Father's Day Crash Managing Risk with AP Automation

AP Automation Saves Trees!

A Cell Phone for a 12 year old?

Cash is KING -- How AP Can Help

The 7 Biggest Problems with AP Metrics

How AP Metrics Can Encourage Bad Behavior

The Best Way to Resolve AP Disputes

How AP Got its Groove Back

How Post-it® Notes Can Improve Your AP Process ...

Understanding AP Errors Six Sigma for Dummies

How NOT to Improve AP Quality ...

AP Errors are Expensive ... A Costly Chain Reaction

Haste Makes Waste ... The Risks of Cutting AP Staff

Preventing Vendor AP Fraud A Great Tip For Maintaining Your Vendor File

Preventing Procure-to-Pay Fraud ... 5 Vulnerable Processes

More True Stories of AP Fraud ... Pandemic T&E Dupery

A True Story of AP Fraud ... a Woeful Failure to Segregate AP Duties

Segregation of AP Duties What's the Best Approach?

Reducing AP Costs vs. Preventing AP Fraud??? A Classic Accounts Payable Dilemma

The Cookie Thief ... Thoughts About AP Fraud Detection

The #1 AP Fraud Detection Lesson from the Madoff Ponzi Scheme

10 Must-Have AP Metrics

AP vs. AR ... A Classic Tug O' War over Working Capital

How to Earn 37% on AP Invoice Discounts Despite the Lowest Interest Rates Ever …