Optimizing Accounts Payable - Whitepaper by BancTec - BPO Services Provider

Optimizing Accounts Payable Improving Performance & Creating Added Value Through Outsourcing

Q4 2012

Featuring Insights on ...

AP Functions Suitable for Outsourcing The AP Outsourcing Universe Underwritten in part by

Various Benefits of Outsourcing AP Outsourcing Paradigm Impact of Outsourcing on Discount Capture How to Ensure AP Outsourcing Success

Table of Contents Executive Summary.......................................................................................................1 The APO Universe...........................................................................................................2 Benefits of Outsourcing...............................................................................................5 AP Automation Paradigm............................................................................................7 Outsourcing and Discount Capture.........................................................................11 Ensuring AP Outsourcing Success............................................................................13 BancTec Profile................................................................................................................17 BancTec Case Study.......................................................................................................21 Questions to Ask Prior to Making a Decision.......................................................23 Evaluating Outsourcing Solution Providers..........................................................24 Additional AP Functions Suitable for Outsourcing............................................27 Research Methodology................................................................................................30 About PayStream Advisors.........................................................................................30

© 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

Executive Summary As companies search for ways to improve overall performance and create added value, outsourcing non-core business processes such as low-value functions in the accounts payable (AP) process is a perfect place to start. The market for AP outsourcing (APO) has witnessed many changes in recent years and what was once an emerging trend is now becoming a natural element of corporate services. Organizations are now exploring AP outsourcing services that can turn a cost burden into a competitive advantage that provides significant potential to reduce costs, leverage capabilities and deliver sustainable business value. While outsourcing the entire AP process may not be practical for most organizations, many companies are choosing to outsource certain functions, while keeping full control of other more strategic AP functions in-house. This modular approach to outsourcing is gaining momentum in the market and is helping more companies improve the overall performance of their AP department. Accounts payable outsourcing services are now recognized as an effective management tool that works to streamline and optimize AP operations and deliver operational and strategic benefits. Companies are looking for ways to harness value beyond cost reduction through consolidation and automation, in addition to achieving the commercial benefits including accessing and building capability, scalability and flexibility that support the company’s core business strategy. More and more companies now incorporate outsourcing as a strategy in business planning. A strategy that lets the company focus on providing improved client service, produce better products, and do a better job overall, in a more cost effective way, by outsourcing non-critical business functions. AP outsourcing can transform manual, paper intensive AP functions into a fully automated process. Per invoice processing costs and cycle times are reduced while increasing visibility and control of the entire business process. These tasks are accomplished without the expense of acquiring, deploying and managing additional technology and resources. AP outsourcing solution providers have the functionality to tailor a solution to address individual company business rules and integrate with all leading Enterprise Resource Planning (ERP) and enterprise-wide financial systems to deliver a unique set of benefits. This report examines the current demand for AP outsourcing solutions and serves as a reference guide for AP decision makers considering an Accounts Payable outsourcing solution. This report also includes an overview of leading AP outsourcing solution providers and case studies, organized for easy comparison. For more information on this and other research reports available from PayStream Advisors, visit the PayStream Research library: http://www.paystreamadvisors.com/eResearch/

© 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

The APO Universe This technology insight report covers outsourcing functionality around the front-end of the invoice receipt-to-pay process. Figure 1 outlines the functional components offered by accounts payable outsourcing solution providers profiled in this report including invoice receipt, document imaging, data extraction, content management, approval workflow, and reporting and analysis. Other outsourcing functions including check management, utility payments, and post payment audits fall outside the scope of this report; however, they are briefly discussed at the end. Outsourcing the front-end of the AP process makes sense for two reasons. The first is that prepping and scanning invoices and entering data into an ERP or accounting system is non-value adding to the approval and payment process. The second is that, even if an organization decides to use automated data capture technologies to extract data from paper documents instead of relying on manual data entry, these are tools that need continued monitoring and are often cost prohibitive for organizations, especially smaller than Fortune 1000 companies. The low value of the process combined with the complexity of advanced tools makes it appealing to leverage the expertise of an outsourcer. Outsourcing companies can provide service level agreements that guarantee a 99 percent plus accuracy rate in data extraction and a quick turnaround time. Outsourced invoice scanning and data capture will provide the following benefits to companies: »» Improves and accelerates the visibility of invoices to enable improved accrual reports and control processes »» Eliminates the paper at the beginning of the AP processing cycle »» Provides a secure central repository for invoices and supporting documents »» Reduces document storage and retrieval costs »» Eliminates lost and misplaced invoices and supporting documents »» Provides access to invoices and supporting documents by multiple business units (vendor and supplier), enabling them to resolve issues »» Reduces manual data entry and full time employee (FTE) requirements of AP invoices »» Enables the integration of workflow driven automated processing »» Accelerates the invoice entry into a company’s approval queue Invoice Receipt The accounts payable process starts with invoice receipt – whether in paper or electronic format. All outsourcing providers offer some level of mail room services for accepting paper invoices, with some providing dedicated PO boxes for each client. APO solution providers also accept invoices via fax and email, with some providers offering client-dedicated fax lines. Others even go to the extent of allowing suppliers to directly input invoices via an online supplier portal. Irrespective of the channel of

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delivery of the invoice, they are all routed to the client though a single process in a common format. Document Imaging Once invoices are received and sorted in the processing center, paper invoices go through a prepping process (removing documents from envelopes, smoothing creases, removing staples, etc.). Invoices are then scanned. The types of scanners used for invoice imaging as well as scanner speeds and quality vary among APO solution providers. Most solution providers utilize multiple scanner types in the same processing center and scanners are allocated to clients based on their specific needs. Data Extraction Data can be extracted from invoice images in a number of different ways. Some solution providers utilize sophisticated image recognition technologies like optical character recognition (OCR) and intelligent character recognition (ICR) to automatically extract data. Once OCR has been performed on invoices, the data will be verified to ensure accuracy levels. Other providers prefer to manually enter the data and may use double blind keying, also called two pass verification, as a quality control method used to input invoice data. Two data entry operators key in the data and if there are no discrepancies in the data comparison, it is then verified. The goal of the data extraction process is to deliver high accuracy levels, which is critical for the transactional level quality required for the AP process. After the data extraction process is complete, invoices are routed for business rules, matching and approval based on key words and predefined business rules. Content Management Content Management refers to the delivery, storage, management and disposition of electronic data and invoice images. After data extraction, invoice information is transferred to the workflow or ERP system and invoice images are archived in a centralized electronic repository. Depending on client needs, APO solution providers can either provide a central content management system for invoices or integrate with a clients’ existing content management system. Either way, the content management system is tightly integrated with the ERP or accounting application, so users can easily search for and quickly access invoice images and information from a single interface. Approval Workflow This step involves routing of invoices according to pre-defined business rules based on individuals’ roles and access rights. Workflow tools are required to review and approve non-PO invoices that do not go through the matching process as well as handle exceptions that arise as part of the PO-based invoice matching step. Workflow provides a tool to track and manage approval processing at the invoice and aggregate level. Common features offered as part of the workflow functionality include automatic notifications to users when specific actions are required, (e.g. invoice review and

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approval) and reminder messages and escalation procedures when no action has been taken. All these actions are based on approval hierarchies that can be configured and changed without the need for programming or IT involvement. Solution providers offer approval Figure 1 APO Universe APO solutions streamline and optimize the invoice receipt to pay process and deliver tangible results around processing efficiencies and cost

Open Envelopes / Remove Stamps Sort / Batch Invoices Insert Separator Pages

Invoice Receipt

Standard Reports Custom Reports Audit Trails

savings.

Approval Routing Multiple Levels of Approval Escalation / Alerts / Notifications

Invoice Scanning Image Enhancement Work Queue Mgmt.

Reporting & Analysis

Document Imaging

Approval Workflow

Data Extraction Content Managment

OCR / OMR / ICR Indexing / Data Validation Manual Data Entry

Invoice Image Storage Invoice Meta Data Storage Search & Retrieval

workflow functionality as a Software-as-a-Service (SaaS) solution (also known as cloudbased), which decreases upfront costs and maintenance fees since no hardware or software installation is necessary. SaaS solutions provide immediate access to the latest features and functionalities without IT intervention, and functionality is available from any location instantly via a web browser. Reporting and Analysis The process of analyzing key invoice receipt-to-pay metrics is important and this function is not lost when working with an AP outsourcing provider. Providers deliver robust reporting functionality including the ability to generate standard and ad hoc reports detailing the process from the time the invoice was received at the APO provider’s processing center, to the time it was transferred to the client’s ERP or accounting application for approval. These metrics can include how many invoices were scanned in a given period of time, how long it took to extract data from the invoices and the accuracy levels of data extraction, while others only allow for download of transactional data to third party reporting tools.

© 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

Benefits of Outsourcing Most organizations look to outsourcing accounts payable functions to deliver benefits around cost containment. While outsourcing may result in lower costs, it is important to understand the full breadth of benefits that APO can deliver. Outsourcing allows organizations to reap the following benefits: Reduce Upfront Costs In-house technology options, especially licensed software models, have an upfront investment followed by ongoing maintenance expenses. In contrast, outsourcing providers usually charge per transaction based on transaction volume, which are payable over the period of the contract. In this way, outsourcing not only enables companies to convert the fixed costs into variable costs but also allows them to defer the costs over a longer period of time, freeing up capital for other purposes. Deploy Systems Sooner As a service delivered via a web browser, outsourced AP automation solutions may be deployed more rapidly and less expensive than software solutions that require extensive integration with enterprise and legacy systems. These Software-as-a-Service (SaaS) models eliminate the need to purchase hardware and software. This is an important consideration for buyers who are eager to bring the benefits of automation into their organizations as quickly and painlessly as possible. Another compelling advantage of outsourced solutions is that the buyer is not burdened with the periodic expense and effort of upgrading to new versions of the solution and paying annual maintenance fees. SaaS solutions are automatically updated without the need for IT resources or new software. Go Live Quickly Even after implementation, it can take considerable time to go live on technology projects because the system needs to be tested and users need to be trained. Depending on the complexity of the system and the technical savvy of the end users, this process can take anywhere between a few days to many months. However, outsourcing solutions can go live almost immediately because most of the staff used on the project are trained employees of the outsourcing services provider who are already familiar with the technology and only need minimal training on the client’s specific business processes. Increase Efficiencies The rationale for outsourcing is that it is usually better for an expert service provider to perform non-strategic activities than to manage these repetitive, low-value tasks in-house. Using an outsourcing provider enables companies to do more with fewer internal resources. Under the outsourcing model, organizations leverage a third party provider’s technology and expertise to offload transactional functions and gain the © 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

ability to focus more sharply on higher value, analytical activities. An outsourcer’s economies of scale and cost structure can deliver a valuable competitive advantage to companies, particularly in low-margin industry verticals. We all know that paper is the enemy in any AP department. Research shows that eliminating paper increases efficiency and drives cost savings. AP outsourcing is one of the fastest ways to eliminate paper. It can be difficult to convert suppliers from paper to electronic invoices; however, if every supplier is instructed to mail or fax invoices to the AP outsourcing provider’s location rather than the AP department, the AP department quickly becomes 100 percent paperless. Decrease Labor Costs Companies that have high employee turnover or those that have seasonal or cyclical spikes in invoice volume and need to hire temporary employees for short periods of time understand that hiring and training employees is an expensive and timeconsuming task. Further, temporary employees may not always live up to expectations. Even companies that do not fall under these categories have limited capital, human and technical resources that need to be allocated appropriately. Therefore, companies would find outsourcing an appealing option as it allows them to maintain steady internal staff levels. Minimize Risk Every technology investment carries a certain amount of risk – risk of not functioning as expected or being more expensive to maintain than originally planned. Further, changes in organizations’ business environments and government regulations as well as technological advances increase the risk involved in in-house implementation of automation options. In the case of outsourcing, the third party provider assumes and manages the technology risk. However, it is important to note that even outsourcing contracts might not work out as planned. Organizations should therefore be aware of switching costs and penalties for ending a contract early. Manage Solution Provider Relations One of the biggest barriers that hinder AP automation initiatives, especially in the case of electronic invoicing and payments, has been supplier adoption. Persuading suppliers to change their processes to align with buyers’ needs can be a costly and time-consuming process, and success depends largely on the buyers’ ability to present a compelling value proposition to suppliers. Many buyers fail to effectively communicate the value of AP automation initiatives to their suppliers, and as a result, struggle to generate the expected results. Outsourcing the supplier onboarding and enablement process, allows buyer organizations to leverage the best practices and expertise from their provider. In addition, it provides the necessary resources to communicate to suppliers while the company focuses on daily tasks.

© 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

AP Automation Paradigm Organizations are now seeking AP outsourcing services that can turn a cost burden into a competitive advantage that provides significant potential to reduce costs, leverage capabilities and deliver a sustainable business value. PayStream research suggests that these forces have increased an organizations’ interest in automation solutions that work to streamline and optimize AP operations to deliver operational and strategic benefits. A 2012 IDC study highlights key assumptions and drivers that are creating significant changes in the Business Process Outsourcing (BPO) market. At a worldwide level, IDC expects that the BPO market will grow at a five-year compound annual growth rate (CAGR) of 5.3 percent, reaching $202.6 billion in 2016. The U.S. market is expected to grow at a five-year CAGR of 4.2 percent, reaching 92 billion in 2016. Organizations recognize that the transition from manual, expensive paper-based processes to more efficient and cost-effective Straight Through Processes (STP) is usually achieved through multiple small steps, rather than a “Big Bang” approach. The first step towards achieving this goal lies in removing the paper from the source. PayStream research shows that while paper still dominates the AP landscape, more AP departments are getting out from underneath the paper piles and are utilizing electronic invoicing. Invoices received via paper have dropped as eInvoicing increases. There is no doubt that the market is moving in the right direction as companies realize that in order to achieve strategic goals such as improved working capital, they must first streamline their invoice processing in order to accelerate the accurate approval and payment of invoices. Figure 2 Lack of budget

Challenges to the Adoption of Electronic Invoicing AP Outsourcing can eliminate the pain points of eInvoice adoption.

16%

We do not think there will be an ROI

Lack of understanding of current available solutions Lack of resources to manage automation

15%

6%

18%

Supplier resistance

Current processes work

25%

20%

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2010

Figure 3 Benefits of Electronic Invoicing

Fewer supplier inquiries Improved vendor satisfaction Fewer duplicate invoices Increased ability to capture discounts

2011 20% 23% 27% 24% 31% 26% 37% 35% 39%

Increased on-time payments

46% 46%

Reduction in FTE / processing costs

52% 46%

Quicker approval cycles

Reduction in exceptions / discrepancies Better visibility across the transaction lifecycle Fewer lost or missing invoices

50% 47% 32% 47% 38% 63% 51%

AP outsourcing services can eliminate many of the key barriers to automation. A 2012 PayStream survey found that Supplier Resistance is the number one challenge to invoice automation (25 percent). Eighteen percent of survey respondents reported that Lack of Resources to Manage Automation also posed as a challenge. Many AP outsourcing providers include supplier onboarding as part of their service package and needed resources to manage automation can be kept at a minimum. AP outsourcing providers are now helping companies transform their AP operations through automation to generate bottom line improvements, monitor and manage spend, strengthen working capital and build stronger trading relationships by reducing errors in their AP processes and gain control over their entire AP business operation.

© 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

In addition to aiding supplier resistance and the lack of resources to manage automation, AP outsourcing can help to successfully overcome all of the challenges listed in Figure 2. The lack of a budget challenge can be avoided due to the lower costs associated with AP outsourcing. Budgets should also increase due to the increase in captured supplier discounts. The return on investment (ROI) in AP outsourcing can be substantial as fewer resources are utilized on non-core back office AP tasks. Different Stages of AP Automation Until recently, automation efforts in the accounts payable area were focused on invoice and document management, and reporting functionality and the operational benefits that technology delivers. PayStream defines this as the first and second stages of automation. While these first steps in automation provide many rewards, companies are looking for ways to expand their level of automation and efficiency with automated matching of invoices against purchase orders and contracts. PayStream defines this as the third stage of automation. As companies move up the automation curve they are likely to incorporate outsourcing in their automation efforts. Figure 4 outlines the various stages of automation that an organization can experience in its quest to transition from mere tactical benefits to more strategic objectives. More and more companies are now entering the third stage of AP automation where they are leveraging automated matching and approval and collaborative online dispute resolution functionalities offered by innovative solution providers in this space. Savvy organizations have moved to the fourth stage of automation where they have eliminated paper to a significant extent and are primarily receiving invoices via electronic means. Figure 4

Stage of AP Automation

Different Stages of AP Automation

Working Capital

4 Tactical

1

2

Centralized

OCR and Key From Image

Scan Invoices

Online Matching

Manual Indexing

Approval Workflow

Manual Approval

Automated Reports

3 Outsource Data Capture PO Flip

100% Electronic Invoices Supplier Self Service Superior Onboarding

Automated Matching

Integrated Purchase-to-Pay Processing

Online Dispute Resolution

Straight Through Processing

Cost Per Invoice

Collaborative Level Of Automation

As companies move up the automation curve they are likely to incorporate outsourcing in their automation efforts.

Type Of Solution

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Given that a significant barrier still hindering adoption of eInvoicing is changing supplier behavior, this is one area where automation providers are delivering tremendous value by offering robust supplier onboarding and enablement services. Solution providers work closely with buyers to segment vendors and also develop campaigns such as email, direct mail and telephone campaigns in an effort to migrate identified vendors from paper to electronic. These innovative buyer organizations have also considerably reduced the number of invoices flowing through the approval workflow process and are relying heavily on STP or touchless processing to manage clean invoices – invoices that do not contain any errors or those that meet certain pre-determined criteria. This enables organizations to direct valuable AP resources toward managing exceptions and accelerating dispute resolution with suppliers. As companies progress from the first stage of AP automation to the fourth stage, the benefits of automation continue to increase – moving from lower processing costs to encompass more strategic benefits that automation delivers including increased supply chain visibility, improved working capital requirements and better trading partner relationships. This evolution often encompasses outsourcing nonvalue add tasks.

© 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

Outsourcing and Discount Capture Accounts payable departments have the ability to turn their cost center into a profit center by capturing early payment discounts. A series of trade payables and payments innovations in the past few years are improving traditional supplier payment terms, including 2% 10, net 30, and 30 or 45 days net to create a more elastic, powerful mix of working capital tools for innovative organizations. Organizations who have embraced these new innovations have created new sources of profits, while maintaining full control of their cash flow. Dynamic Discount Management (DDM) is an emerging discipline that provides new flexibility on how and when corporate buyers pay their suppliers, typically offering mutual benefits for both parties. The potential rewards for early supplier payments are great. Even the standard discount of two percent for payment within 10 days translates to an annual percentage rate of 36 percent. With returns like that, it’s a no-brainer to pay suppliers early if they are willing to offer a discount. Further, the availability of advanced technologies such as dynamic discounting is enabling companies to extend the discount window and capture incremental discounts. Despite the opportunities in payables to capture discounts, PayStream research shows that only 28 percent of companies are able to always capture discounts offered by suppliers, see Figure 5. Figure 5 Discounts Captured Despite the opportunities in payables to capture discounts, only 28 percent of companies are able to always capture discounts offered by suppliers.

Sometimes 13% 28%

Always

Never

59%

Dynamic discounting solutions provide suppliers with the option of accepting early payments against any or all of their approved receivables, at any point, up to the maturity date for a discount fee. Through web-based buyer-supplier networks, buyers are able to project compressed settlement terms through supplier discounts. Suppliers are able to pick and choose among an array of payment options for each outstanding invoice. The transaction can be self-funded by the buyer or a bank can stand in as a short-term lender. Buyer organizations receive a portion of the discount fee (similar to the rebate earned on a purchasing card transaction). © 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

Many payables departments are unable to capture a high percentage of discounts due to lengthy approval cycles. According to PayStream 2011 statistics, the average invoice cycle time (from receipt to approval) is 21 days. This cycle is much longer for laggard companies. The longer the approval cycle, the fewer discounts an organization are able to capture. On the other end of the spectrum, best-in-class companies are able to complete the invoice approval process in only five days, and are therefore able to capitalize on discount capture. Discount management goes hand-in-hand with automating the invoice and payment management process, which enables companies to compress the entire cycle and capture not only pre-negotiated discounts but also incremental discounts. Outsourcing the invoice management process affords companies the following benefits, which in turn allow them to compress the processing cycle and increase their discount capture capabilities: »» Centralized invoice receipt to a single location, which reduces the time typically wasted in desk float. »» Service Level Agreements (SLAs) that ensure data is entered into the ERP or accounting system in a timely manner. »» Robust workflow capabilities to ensure timely routing and approval of invoices. »» Visibility into invoices and discount terms, so invoices with expiring discounts can be prioritized.

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Ensuring AP Outsourcing Success Companies currently investigating AP outsourcing options should consider the following ten steps to ensure AP outsourcing success: 1. Building a Business Case One of the key decision metrics around whether or not to outsource accounts payable functions is a return on investment. Calculating the cost of outsourcing non-value added processes is an important step in ensuring the success of an AP outsourcing program. The simplest way to compare multiple options – each of which has diverse cost components – is to use the cost per invoice as the least common denominator. The cost per invoice also works because it is how outsourcing service providers typically price their offering. Table 1 shows a quick model, which can be used to compare the following three processing solutions: »» In-House Processing »» Acquiring a Solution »» Outsourcing

Table 1 Comparing Multiple Invoice Processing Options

A. B. C. D. E. F. G.

In-House Invoice Processing (Manual) Number of Full Time AP Staff (FTE) Fully Loaded Cost / FTE / Year Total FTE Cost / Year FTE Cost Loaded by 30% to Account for Soft Cost Fully Loaded Cost for Invoice Processing Total Invoices Processed / Year Cost / Invoice

Number Dollar AXB C X 30% C+D Number E/F

H. I. J. K. L. M. N. 0. P.

On-Demand Technology Implementation Annual Subscription Fees Hardware Cost / Year IT and Internal Support Cost / Year Total Technology Costs Reduction / Redeployment in FTE Total FTE Cost / Year Fully Loaded Cost (AP Staff + Soft Costs) Total Processing Cost Cost / Invoice

Dollar Dollar Dollar Dollar Number (A - L) X C M+D K+N O/F

Q.

Outsourced Invoice Processing Cost / Invoice Quoted By Vendor

Dollar

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2. Getting Senior Management Support PayStream research indicates that more than 15 percent of projects fail due to lack of support from senior management. To increase the chances of an outsourcing project’s success, establish a steering committee comprised of senior members from various departments including accounts payable, procurement, supply chain and in some cases, even treasury. The steering committee would be responsible for participating in periodic meetings with the project sponsors and evaluating key milestones as they are achieved in the project lifecycle. Obtaining executive buy-in early in the process helps increase the chance of success. 3. Documenting Your Requirements Before searching for the right outsourcing services provider, organizations have to thoroughly document their requirements – what functions would the in-house AP department be accountable for versus what functions the APO provider would handle? Who would be responsible for document imaging, data extraction, data entry and validation? All of these questions will be part of the requirements document and should be completed prior to looking for an outsourcing partner. The next step is to create an outsourcing roadmap that includes key milestones and deliverable dates – preferably for a three to five year period. Milestones can be established based on invoice types, business units, geographic locations, or a number of other parameters. For example, the roadmap can state that the objective is to outsource all PO invoices in Year 1 and then extend the project to include non-PO invoices in Year 2. 4. Selecting the Right APO Partner The requirements document can be used to develop a Request for Proposal (RFP), which will be delivered to select solution providers that have already been short listed based on their capabilities and presence in the market. The RFP typically includes three sections: »» An outline of the requirements identified and proposed future state models. »» A list of questions around the service provider’s capabilities that they should answer. »» A separate section where they can detail their commercial terms based on the assumptions provided. Objective score cards should be developed to evaluate the provider responses for the RFP questionnaires, so solution providers can be narrowed down and a decision made as to the provider of choice. Never forget to ask solution providers for client references and talk to existing clients of the short listed providers to understand their current satisfaction with the solution, any challenges they are facing, how smooth the transition process was, etc. © 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

5. Negotiating a Contract Commercial terms submitted by providers are not written in stone and there is always room for negotiation. One thing to keep in mind is balancing fixed costs (annual subscription fees or license fees) against variable costs (per transaction fees). APO providers may also enter into gain share agreements as well – passing on the savings accrued from outsourcing to the client – in order to reduce fixed costs. SLAs and some guarantees and penalties should also be included in the contract to ensure that the provider delivers as promised. 6. Conducting a Pilot Project PayStream recommends conducting a test pilot before rolling out any full scale project. Pilot projects typically range from six months to one year and the scope for the project can be determined based on a number of parameters – business unit or invoice type, for example – and closely aligned with the milestones outlined in the project roadmap. Doing a pilot allows organizations to test the performance of the chosen outsourcing partner before deciding whether they are comfortable entering into a long term contract with that provider. 7. Segmenting the Supplier Base Once a decision has been made, segment suppliers based on how much they will be impacted by the pilot project launch. For example, if the pilot project is going to cover all invoices of a specified business unit, suppliers can be classified based on transaction volume, transaction value, strategic relationships, etc., and decide whether all these groups will be targeted simultaneously or one at a time. 8. Communicating to Suppliers As with any initiative, which impacts suppliers, do not forget to bring them into the loop as early as possible. Communicate to suppliers about the outsourcing project and the changes they will be expected to make on their end – such as sending invoices to different mailing address or addressing them to a different person. Make sure that the right point of contact has been identified at each supplier location and communications are sent to the correct contact. Creating a help line and making it available to suppliers for a period of time during the transition, where suppliers can call in with any questions or concerns will go a long way in helping to create a seamless transition. 9. Evaluating the Pilot Project Performance Prior to embarking on the pilot project, develop key metrics with the service provider, which will be used to evaluate the performance of the pilot. Some widely-used metrics are number of invoices scanned and digitized per day, accuracy of invoice data captured, average time taken to receive and approve an

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invoice and percentage of on-time payments. These established metrics can be compared with the actual performance halfway through the pilot and again at the end to determine whether the project is on the right track and whether to enter into a long-term contract with the chosen provider. 10. Monitoring Your Partner’s Activities It’s tempting to think that once the long-term contract is in place and the outsourcing partner is handling all invoices, the AP department does not have to concern itself with those invoices. This is not the case. Just as evaluation of the service provider’s performance during the pilot is critical, periodic monitoring of performance and service levels is important to ensure continued success of the project.

© 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

BancTec Profile Website Founded Headquarters Number of Employees Number of Customers

Key AP Outsourcing Clients Target Verticals

Awards/Recognitions

Solution Name Frequency of Upgrades

www.banctec.com 1972 Irving, Texas 1800+ Full time employees 1600+ in 55 countries (includes all software and hardware customers worldwide as well as BPO services) Concentra, Hajoca, Cape Cod Hospitals, Bill & Melinda Gates Foundation, Simplex, Linde Gas, UltraLife, GateHouse Media, Sealy, Safety Kleen Banking, Insurance, Government, Healthcare, Transportation & Logistics, Utilities & Telecommunications, Manufacturing 2012 FinTech 100 2011 FinTech 100 2010 FinTech 100 2008 and 2009 Blackbook of Outsourcing for AP (Top Ten) Client (Concentra) awarded PayStream ePayables Excellence Award in 2010 AP Automation Every six months

BancTec is a global leader in business process outsourcing (BPO) and transaction automation for the most demanding business challenges. The company processes $3.5 trillion in transactions annually. Headquartered in Irving, TX, BancTec has a large global footprint with clients spanning 55 countries. BancTec operates 19 BPO centers in the United States and worldwide, leveraging a common technology open platform to deliver reliability, security, and consistently high levels of performance. Providing payment and document processing solutions since 1972, BancTec has consistently stayed ahead of the technology curve to better serve its clients. BancTec’s history in managing payment processing and document processing gives the company an in-depth understanding of client businesses, which facilitates the transfer of critical business processes from the client to BancTec. Starting in 1999 with the delivery of remittance lockbox services, BancTec has expanded its BPO services to other financial transaction and document management processes. As part of the financial transaction portfolio, BancTec provides fully hosted invoice processing and AP Automation services including mailroom processing, scan and capture, receipt of electronic invoices (EDI, eInvoice, direct upload, email © 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

and fax), automated workflow, electronic invoice archive, vendor portal and AP administrative support. BancTec’s AP Automation service provides a multi-tenant environment for AP and purchasing automation and can be integrated with all major ERP systems. It works to leverage and enhance the functionality of the ERP platform by utilizing a disconnected data model to interface with ERP systems. A copy of required subsets of master data is stored and refreshed periodically. The BancTec service provides a web-based, modular procure-to-pay solution, with a wide range of functionality from requisitioning and order management to invoicing and vendor self-service. In addition, the solution is highly configurable and handles multiple languages, currencies and tax calculations out of the box, with no programming necessary. The BancTec solution also provides mobile functionality for clients on the go. BancTec partners with Palette, headquartered in Stockholm, Sweden, to provide the leading software solution for end-to-end automation for each stage in the AP process. Branded AP Master by BancTec, the automated workflow, approval and reporting software is based on Palette Arena, and is offered by BancTec as a hosted Software as a Service (SaaS) solution. Invoice Receipt BancTec supports the acquisition of invoices in multiple formats including paper, EDI, XML, email, fax and PO flip invoices. All mail and packages are opened, bar coded, attachments removed and sorted into work streams prior to scanning. Paper invoices are scanned using BancTec manufactured IntelliScan XDS high-speed scanners and data is captured using state-of-the-art OCR/ICR technology. Invoices are matched by cascading logic and filtered into queues. Fully matched invoices can be passed straight through to a client’s ERP for payment. Non-matching invoices flow to end users based on suggested matching routines/flow proposals. The system suggests default coding routines for non-matching invoices, which reduces the burden on AP staff and approvers. BancTec is the only provider that provides an end-to-end service from receipt of invoices to invoice booking, all hosted and serviced by a single vendor, which offers advantages to their client base in that it ensures a high level of service. Imaging and Data Extraction BancTec scans all batched documents at industry standard levels (300 dpi) to produce a high quality, double-sided, bi-tonal (black and white) digital image in TIFF format for subsequent data extraction and document review process. During the scanning process, an audit trail is included on the front of each document for tracking purposes and each scan is reviewed automatically for quality. Documents that fail the quality check are out sorted for further review, rescan or handling via an exception process. All certified document images are then transferred to the BancTec data capture application software for automated indexing and data extraction. © 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

Invoice data is captured according to the client’s defined business rules. Any data that is not recognized automatically is entered manually to complete the invoice record. All data is validated against data repositories such as the Open PO file, Vendor Master, etc., utilizing BancTec standard look up capabilities and checked for accuracy using client’s specific validation rules. Validated invoice and exception data and images will be transferred electronically to AP Master. Exceptions are processed using BancTec’s standard operating procedures which flag exceptions prior to being transferred to the customer. In an effort to increase Straight Through Processing, exceptions are analyzed to locate recurring mistakes and new workflows can be easily created, ensuring continuous process improvement. Content Management Data and images are available online for a period of 7 years and access to data, images and workflow function commands can be accessed through a browserbased secure https connection. Data and images are hosted on a mirrored, high-availability storage system that is backed up daily. The AP Master software includes a feature-rich query engine, built upon a state-of-the-art document repository. All document data and metrics can be searched using a simple drop down menu and all query results can be exported for offline research and retrieval purposes. BancTec utilizes a disconnected data exchange model to interface with ERP systems, so there is no direct access to the data repository from the client’s ERP system. Invoice data is transferred from BancTec’s processing center to a client’s back-end ERP via an automated transfer agent that handles all bidirectional communication in and out of the ERP. Files are continuously monitored and notifications are sent if scheduled transfers are interrupted. Data transfers are scheduled per the individual client’s requirements, with most transfers occurring on a daily basis. BancTec’s supplier portal is standard and is available at no charge. Clients can determine and assign secure vendor access to the portal. Vendors are granted read-only ability on active AP invoices which include a color coded progress bar for invoice status updates. The vendor portal provides a two-way communication via a chat room environment with AP, in addition to full credit/debit memo and invoice submission capabilities to support and expedite invoice exception handling. Matching and Workflow The BancTec solution features an out of the box, highly configurable workflow system for invoice approval and inquiry. The system provides default workflows for all invoices based on the cascading matching routines that attempt to match PO and non PO invoices to specific workflows and accounting proposals. Users can quickly override the flow proposals and create ad-hoc workflows that can be based on business specific variables such as amount limits, departments and accounting codes, PO number, contract number, etc. © 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

Approvers receive email notification when they have invoices to approve. The BancTec system allows for email approval which negates the need to log into the AP Master system, speeding up the approval process. Reminder settings are configurable and invoices can be automatically routed to an approver’s supervisor or routed back to AP if an approver fails to act within a specified interval. The system provides roles and permissions-based access, which define the behavior and appearance of the system as well as who has access to specific modules and business data. Reporting and Analysis AP Master has robust reporting capabilities and includes a wide array of standard and ad hoc reports that can be easily generated through user-defined, on-demand searches. Reports can be exported to Excel for data analysis that can be utilized to help make critical business decisions. AP analysts, managers, controllers and other key business users can select data elements from checkboxes to report on specific data of interest. Data can be formatted in a number of ways including CSV for additional offline modeling or PDF for read-only publication. Audit trails are easily accessed that track all actions and editing of documents in the system.

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BancTec Case Study GateHouse Media Challenge GateHouse Media, Inc., headquartered in Fairport, New York, is one of the largest publishers of locally based print and online media in the United States. The company’s portfolio of products, which includes 494 community publications and more than 250 related websites and seven yellow page directories, serves over 233,000 business advertising accounts and reaches approximately 10 million people across 21 states on a weekly basis. With more than 150 locations receiving and coding invoices, GateHouse Media decided to undertake a project to improve and automate their accounts payable process, enabling them to reduce costs, cycle times and manual processing. Solution Datrose, a US-based Business Process Solutions Company, was chosen by GateHouse Media to conduct an analysis of its AP process, and was selected to serve as lead vendor for the AP automation project. To form the technical backbone of its AP automation solution, Datrose selected technology from BancTec, including its high-speed IntelliScan scanners and enterprise-class AP automation software, AP Master. Because AP Master is an application and not a toolkit, integration required configuration only, not a lot of programming. In addition, the solution seamlessly integrated with GateHouse Media’s existing ERP systems, while the clear user interface and built-in reporting and metrics make it significantly easier for staff and senior management to monitor the AP process and make adjustments as necessary. “When trying to decide whether to outsource the scanning or bring it inhouse, we evaluated what we wanted our department to be, IT or AP. The Datrose/BancTec partnership allows us to focus on what we do best – accounts payable – while they handle the scanning, and more importantly, our users have really embraced the technology. It’s working very well for us at GateHouse Media,” says Laura Williams, Director, Centralized Accounting Services, GateHouse Media, Inc. Result The joint Datrose/BancTec solution enabled GateHouse Media to realize the following benefits:

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»» 40% plus overall savings realized »» Streamlined process that allows invoices to go directly to AP lockbox »» Invoice information is scanned and captured, eliminating manual invoice entry »» Invoices are automatically sent to approvers via web-based workflow system »» Users receive email notification alerts about invoices needing special attention »» Greatly reduced expenses for overnight shipping as paper invoices no longer have to be sent from each location to the central office »» AP staff as well as site personnel have increased visibility into processed invoices »» A significant reduction in workload for central accounting »» A new process for critical invoice handling »» Reduced onsite storage of paper invoices

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Questions to Ask Prior to Making a Decision »» Process – Is the process a core component of our business? »» Skilled Staff – Do we have the required staff or can we hire the needed people to manage the process or are we better off leveraging the expertise of an outsourcing provider? »» Security of Data – This becomes extremely important when dealing with financial processes. How comfortable are we handing over our data to an outsourcer? »» Ability to Customize – Are our processes unique and cannot be handled by a one-size-fits-all approach? »» IT Resources – Do we have the IT staff needed for hosting and maintaining an in-house solution or should we consider a SaaS solution? »» Financial Resources – Do we have the budget to cover the upfront costs associated with a technology solution? »» Control – Are we giving up any control if we decide to use an outsourcing partner?

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Evaluating Outsourcing Solution Providers Selecting the right AP outsourcing partner can be tricky. It is critical to look at what various outsourcing firms offer and how exactly those services line up with your specific business needs. Below are some questions that can help organizations find the outsourcing company whose offerings best suit their needs. Company and Product Reputation In addition to learning how long a company has been in business, it is helpful to know whether accounts payables outsourcing is a core offering for the company and to understand the growth plans and future vision of the service provider. »» How long has the company been in business? Since when has it been offering accounts payable outsourcing services? »» What percentage of its business/revenue comes from APO? »» How is it funded? If it’s a public company, look at the prospectus. »» How many customers does the solution provider have and who are they? »» How does the company plan to grow and are there any mergers or acquisitions on the horizon? »» How will the company manage growth and the resulting increased customer demand on its systems? Performance and Value The solution provider must be able to deliver on its promises regarding systems, scalability, security, service, and support. »» Does the solution provider provide Service Level Agreements (SLAs)? What metrics are covered as part of the SLA? »» What security measures are in place to protect the integrity of client data? »» What training and ongoing support are provided as part of the solution? »» Does the provider promise an ROI? Solution Delivery Model Since different outsourcing firms offer different outsourcing tools, it is important to look at exactly how the solution is delivered and how well it meets each companies’ needs. »» Does the solution provider offer the solution as licensed software or a hosted model or a combination of both? »» What are the different modules of functionality available? »» Does the provider offer any configuration and customization of the solution, as needed? © 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

»» How does the solution integrate with existing ERP/accounting applications? Invoice Receipt, Scanning and Data Extraction It is important to understand what hardware and technology the outsourcing provider has at its processing center to handle incoming invoices. »» What formats of paper and electronic invoices can the provider accept? »» How scalable are the provider’s operations? What transaction volumes can it handle? »» How quickly can invoices be entered into the system once they are received at the solution provider’s processing center? »» What scanners are used in the processing center? What are the scanner characteristics in terms of speed and quality? »» How data is extracted – OCR or manual data entry? What are the accuracy levels? Document Classification and Routing Once documents are in the system, they need to be sorted, classified and sent to the appropriate queue before any work can be done on them. »» How is invoice data validated against client back-end databases? »» How will invoices be classified into different queues and routed for approval? »» How can business rules and thresholds be configured? »» Can certain invoices be prioritized for routing and approval? Approval Workflow Some outsourcing providers offer approval workflow functionality as part of the solution, whereas others merely transfer the invoice image and information to the client’s workflow system. »» Does workflow functionality to approve invoices and manage exceptions come bundled with the solution? »» Can workflow be configured and changed within the system without programming or IT effort? »» How are users notified about pending invoices? »» Does the solution have mobile functionality? »» What reminders and escalation procedures can be configured in the system? »» How are invoices transferred to the client’s ERP and content management systems? © 2012 PayStream Advisors, Inc | www.paystreamadvisors.com | [email protected]

Reporting and Analysis The ability to track and measure performance is critical to monitor the success of an outsourcing project. »» What reports come standard with the solution? »» Does the solution offer a wizard to create and save custom reports? »» How does the solution integrate with external reporting tools like Cognos or Crystal Reports? »» Can the data be downloaded in multiple formats (.csv or .xls, for example) for further manipulation?

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Additional AP Functions Suitable for Outsourcing In addition to the front-end AP functions that have been discussed throughout this report, there are other functions in the accounts payable process that can also be outsourced. These include: Check Printing and Mailing While most organizations are moving towards automating the AP process on the invoice receipt side, a significant number of business-to-business transactions are still settled using paper checks. Outsourcing the check printing and mailing process has a number of advantages, including security of payment data and the physical checks themselves. Outsourcing companies also run address validation and duplicate check processes on transactions and customize the checks with their clients’ logos and addresses. Additionally, check writing providers are able to leverage favorable postage rates due to the high volumes they process, further lowering costs. Figure 6 Methods Used to Exchange B2B Invoices

64%

Paper still dominates, 64 percent of invoices are traded via paper.

9%

Fax

13%

14%

Email

E-Invoice

Paper

Outsourcing the check printing and mailing process has a number of advantages including: »» Increased security of documents »» Increased efficiency of print and mail processes

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»» Ability to reconcile data from file receipt to mailing »» Increased visibility through online document viewing »» Ability to receive full postal discounts »» Elimination of bank reject charges Expense Report Auditing Scrutinizing expense reports and receipts is an almost fool-proof way to identify and eliminate expense fraud. However, a lot of organizations tend to overlook the importance of the auditing process, especially those with a small AP staff or one with a large number of business travelers and high annual transaction volumes. Outsourcing helps organizations take advantage of the technology and resources of a third-party provider to overcome the hassles of fraud. Organizations can choose to have all expense reports audited or specify the parameters to audit only a portion of the reports submitted. Depending on client requirements, providers can audit a percentage of transactions randomly, audit reports from specific individuals or groups or scrutinize all transactions over a certain dollar threshold. Benefits of outsourcing expense report auditing include: »» Increased control over employee spend and ensure compliance »» Proactively reduce waste, misuse and abuse »» Decrease audit timeline and redirect employee efforts to other tasks »» Ensure expenses are classified properly for taxes and capital expenses Utility Payments Although utility bills are cyclical and arrive in the mailbox at regular time intervals, there can be significant variances between one bill and the next, unlike recurring lease payments. A company that has multiple office locations, especially ones that are geographically distributed can find it challenging to keep track of rate plans, capture detailed usage and cost data and identify errors in the bill before payment is made. Outsourcing companies take on the responsibility of receiving bills, entering them into a central repository and running a series of checks against the current bill and historical data to identify anomalies and errors – all prior to a payment being made. Outsourcers will even handle billing discrepancies. Benefits of outsourcing utility payments include: »» Improved processing time for utility bill payment »» Reduced late fees and shut-off notices »» Ability to electronically capture detailed consumption and cost data at the meter level »» Produce usage reports for facilities, facility groups or enterprise level

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Tax Compliance It is often stated that there are only two certainties in life: death and taxes. Part of the problem with taxes; however, are the uncertainties surrounding regulation. Every enterprise in the U.S. must address the issue of sales and use tax. The more goods and services a company buys and sells, determines the number of tax jurisdictions in which it has nexus. The larger the customer base and the greater their geographic disbursement, the more complicated the sales and use tax collection and reporting becomes. Further compounding the issue, tax rates are constantly changing. Given these complexities, managing the tax compliance process can be time consuming and costly. The burden of tax penalties and audits can be even more costly if the job is not done correctly. Outsourcing providers take the burden of ensuring tax compliance and ensure that the most accurate and up-to-date rates are utilized. Benefits of outsourcing tax compliance include: »» Improved control, accuracy and timeliness of tax functions »» Improved efficiency and reduced tax risk »» Enhanced visibility and control over the entire process Post Payment Audits In spite of all the due diligence and the technology in place to identify erroneous payments before they go out the door, any company that has been through a recovery audit is aware that there is always money to be found by looking at historic transaction data. Missed discounts, duplicate payments, and un-captured rebates go unnoticed each day. The AP department usually does not have the time or the resources to audit past transactions in an effort to identify sources of profit leakage. Recovery audit service providers use sophisticated technology and algorithms to identify these issues, some providers will even collect the money for your company on your behalf. The added benefit of post payment audits is that clients typically pay a percentage of monies collected based on errors identified, which means no out of pocket up front expenses are incurred. Benefits of post payment audits include: »» Recover funds paid in error »» Prevent future payment errors »» Enable management to have confidence AP measurements »» Increase bottom line profitability

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Research Methodology The findings in this report are based on the results of PayStream Advisors 2012 Invoice & Workflow Automation Adoption and Electronic Invoice surveys. Participants in the surveys included more than 300 AP professionals. Based on our experience and the number of respondents, the survey has a confidence level of +/-5 percent.

About PayStream Advisors, Inc. PayStream Advisors is a technology research and consulting firm that improves the way companies plan, evaluate, and select emerging technologies to achieve their business objectives. PayStream Advisors assists clients in sorting through the growing complexities of IT applications related to business process automation with the goal of making objective, analytical, and actionable recommendations. Wherever business process automation technology is an issue, PayStream Advisors is there to help. For more information, call (704) 523-7357 or visit us on the web at www.paystreamadvisors. com.

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