An Accounts Payable Automation Trends report shows 63% of accounts payable (AP) teams spend more than 10 hours processing invoices, and 66% still enter data manually into ERP systems.
This number shows AP teams are being held back and stuck in manual work. The majority report experiencing compliance gaps, strained vendor relationships, or late payments.
Outsourcing, therefore, has become a smart move if you’re looking to manage your accounts payable tasks better.
This article explains what AP outsourcing entails, its trade-offs, how it compares to AP automation software, and how to decide whether it’s the right solution for your organization.
Benefits and Drawbacks of Accounts Payable Outsourcing
Before you outsource your AP to a third-party firm, let’s weigh the benefits against the potential risks:
Benefits of AP Outsourcing
Here’s why you should outsource your accounts payable:
- Cost Control: You can reduce the costs of hiring and training an in-house AP team. When you outsource, you pay a monthly fee that is often lower than your total operational costs.
- Operational Efficiency: Instead of spending hours on tasks like data entry and invoice processing, you can redirect your internal team to activities that drive business growth and revenue.
- Speed and Accuracy: Providers often complete tasks faster and more accurately than internal teams with other duties.
- Scalability: Companies that provide AP services have the resources to scale up or down seamlessly with your business needs.
- Compliance and Security: Business process outsourcing firms invest in certifications and security protocols. They ensure all AP processes comply with required security standards, such as SOC 2, ISO 27001, and the NIST framework.
Drawbacks of AP Outsourcing
However, AP outsourcing isn’t the perfect solution for every business, and here are the potential challenges you should consider:
- Loss of Process Control: If you transfer most of your AP processes to a third party, you’ll have less flexibility over your workflows, making it difficult to respond to urgent payment requests.
- Transition Challenges: There may be real-time data synchronization and compatibility issues between third-party tools and your existing accounting and ERP software.
- Security Risks: When you grant a third party access to your AP data, there’s a risk to your data privacy and compliance if the service provider does not implement relevant security measures, such as HIPAA, GDPR, and other compliance standards.
- Fewer Vendor Contacts: When you rely heavily on an external AP firm, you may have only a few direct interactions with suppliers, which can weaken the relationships you’ve built over time.
Although there are some drawbacks to seeking support with your accounts payable processes, the benefits outweigh them when done correctly.
What Does Accounts Payable Outsourcing Actually Involve?
The best accounts payable outsourcing firm offers more than just faster invoice processing.
Here are their core functions:
1. Invoice Processing
Your external AP firm receives invoices and uses automated tools to match them to purchase orders and contracts.
The team manages the approval workflow and resolves invoice discrepancies to prevent overpayments or fraudulent attempts.
2. Payment Execution
Once the invoices are approved, your AP outsourcing provider leverages business accounting software to schedule payment based on vendor terms, due dates, and cash flow.
They ensure your business benefits from early payment discounts and maintain the pay files to facilitate better cash flow management.
3. Financial Reporting
Your outsourcing firm regularly generates detailed reports that show processing times for all invoices, payment statuses, and cost savings.
You gain visibility into processes, including your payment cycles, outstanding liabilities, and the efficiency of the invoice processing. You can use the insights to improve your AP workflow and enhance operational efficiency.
4. Vendor Management
Your AP outsourcing company handles vendor payment and related inquiries.
They help with onboarding, dispute resolution, and maintain up-to-date vendor records. Basically, they ensure vendors are satisfied, which cultivates stronger relationships.
5. Compliance and Risk Management
Your outsourcing provider ensures that all AP processes comply with applicable financial regulations and industry standards.
They stay up to date with tax-changing laws, both regionally and internationally, helping reduce the risk of fraud and compliance claims in your company.
If you need more than AP services, our team provides comprehensive financial support.
At CDH, we bring the full accounting advisory expertise alongside tailored AP support. We help you optimize your AP processes and pair that with tax compliance and financial accounting reporting.
Talk to us today, and let’s offload your day-to-day processing while integrating AP into a broader financial strategy.
AP Outsourcing vs. AP Automation Software – Which One Solves Your Problem?
AP outsourcing involves hiring a third-party provider to manage your AP processes. AP automation software, on the other hand, is a SaaS add-on to your ERP or accounting system to streamline AP workflows.
Here is a breakdown on when to keep your accounting in-house and when to outsource:
| Aspect | AP Outsourcing | AP Automation Software |
| Control and Oversight | Offers limited in-house control because a third-party provider manages the direct day-to-day operations. | Maintains complete control within the in-house teams, increasing flexibility to respond to vendor-related issues. |
| Expertise Access | Access to skilled professionals who have experience with compliance regulations and provide efficient AP management. | Lack of access to extensive knowledge of AP nuances. |
| Cost | Cost-effective because it eliminates the need for in-house teams, and you can save on technology expenses. | Higher initial setup costs because it requires a heavy investment in purchasing and integrating the software. |
| Financial Visibility | Access detailed reporting from outsourcing firms, but customization may be limited. | Get real-time visibility into your financial processes and customize reports to align with your company’s specific needs. |
| Scalability | Allows you to easily expand or scale down to adjust to your business needs, and you don’t have to hire or train an in-house team. | Gives your team direct control to scale with your business. However, you might require an additional subscription and hire a team to handle any increasing workload. |
| Data Security | Includes layered security policies and protocols for authorized personnel to access data. | Allows you to handle your data in-house securely and includes built-in security measures to safeguard your company’s information. |
| Implementation Timeline | Can be immediate, since you leverage providers’ existing systems and processes. | Can take several weeks, depending on integration complexity and customization requirements. |
| Best For | If you want to increase your AP capacity quickly without adding more internal AP staff. If you prefer an end-to-end AP managed service. | If you have an internal AP team that wants to streamline workflow. If you want more control of the AP process and vendor relations while proceeding quickly. |
How to Choose an Accounts Payable Outsourcing Provider
Not all AP accounts payable outsourcing companies are created equal.
Follow these 6 steps to find the right third-party provider:
1. Set Clear Objectives and Metrics
Outline your objectives for outsourcing accounts payable.
Are you looking to improve invoice processing time, reduce operational costs, or enhance vendor relationships?
Also, set clear, measurable key performance indicators to monitor your AP partner’s performance.
2. Understand Your Options
There are different outsourcing options, and you should choose one that best aligns with your business goals and needs.
You can opt for models like business process outsourcing (BPO) or managed services, depending on whether you’re looking for a full service outsourcing or selective service outsourcing to manage specific tasks.
3. Research the Providers
Review case studies and evaluate potential providers based on cultural fit, experience, pricing models, and reputation.
The right provider should have an outstanding reputation and align with your business values. In addition, they should have industry-specific knowledge and customize AP services according to your needs.
Their pricing model should also offer long-term benefits such as improved vendor relationships and operational efficiency, alongside short-term savings.
4. Evaluate System Compatibility
Ensure your provider’s technological infrastructure, including automation tools, software, accounting, and data management systems, integrates with your existing systems.
It helps prevent delays and data errors during execution.
5. Develop an Implementation Plan
Prepare a detailed transition plan in collaboration with your preferred outsourcing partner.
It should clearly outline the support, define the roles and responsibilities for each party, and provide specific implementation timelines.
6. Ensure Data Security and Compliance
Your outsourcing partner should adhere to industry-standard security measures and regulations such as SOC 2 or GDPR certification.
You should also implement strategies, such as limiting data access and using encrypted data transfer channels, to help protect your financial data during the outsourcing period.
When is AP Outsourcing the Right Choice?
Although there are multiple reasons you can seek support with your accounts payable processes, here are a few main ones:
- Handling High Invoice Volume Manually: If you’re processing large volumes of invoices manually, you might be facing slow turnaround time and delayed vendor payments. However, outsourcing AP experts makes the process more efficient, ensuring timely payments.
- Rising Invoice Processing Costs: If your AP department is spending more to process payments, consider outsourcing where you don’t need to upgrade or hire extra staff to alleviate these costs.
- Missing Payments and Discounts Consistently: This signals that your AP department lacks structure. AP outsourcing can ensure invoices are tracked consistently and that vendors are paid on time, reducing unnecessary penalties.
- Difficulties Scaling: If your business is growing, invoices, suppliers, and contracts may increase. AP outsourcing offers scalable solutions that accommodate this and future growth without requiring internal process restructuring.
- Managing Multi-Currency and Global Payments: You might need an AP outsourcing company if your business operates internationally. The provider handles global payments and complex state and local tax compliance, including applying the correct tax rules for each jurisdiction and ensuring regulatory compliance.
Frequently Asked Questions (FAQs)
Here are answers to some of the most commonly asked questions:
Can an Outsourced Provider Work With Our Current Accounting System?
Yes, most AP outsourcing providers work with major accounting software.
For example, an AP provider can handle everything from the technical setup of the accounting tools to the maintenance, ensuring your invoices, approvals, and payment data flow seamlessly.
How Do Outsourced Teams Handle Urgent or Exception Payments?
A well-structured AP outsourcing partner will:
- Define what ’ urgent ’ includes, for example, same-day payments and supplier escalation.
- Set up a priority system for urgent, exceptional cases, and assign a dedicated account manager.
- Maintain a separate queue for such payments to be processed before the scheduled timeline.
What Compliance Standards Should an AP Outsourcing Company Meet?
A reputable AP outsourcing firm should be tax-compliant and meet recognized data security, financial, and regulatory standards.
They should have:
- SOC 2 Type II certification to confirm that their processes are independently audited and reliable.
- Payment Card Industry Data Security Standards (PCI DSS) if they handle payment card data.
Conclusion
Accounts payable outsourcing can help you streamline your AP process, reduce operational costs, and enable your internal team to focus on your business’s bigger goals.
If you’re thinking about outsourcing your AP duties, consider CDH to ease the burden on your overloaded accounting team and get integrated finance expertise.
Whether you’re a nonprofit, a distributor, or a growing business, our team at CDH offers tailored AP outsourcing solutions that expand with your business needs. We handle your routine AP tasks, including vendor billing, expense management, and tax payment processing.
Schedule a consultation and let’s discuss how our business outsourcing services will streamline your operations and drive success.
