The Changing Landscape of AP Automation

March 13, 2024

Advances in artificial intelligence, machine learning and other automation technologies continue to transform most business processes, and Accounts Payable (AP) is no exception. Manual and paper-based processes are replaced with digital alternatives that greatly reduce processing costs and decrease processing time. These changes allow businesses to reduce operational costs, take advantage of early payment discounts, and gather new insights into spend strategies and trends across the organization.

This article reviews the history of Accounts Payable (AP) processes over the last few decades and projects the impacts these evolving technologies will have on AP in the near future.

Manual Processes

In the recent past, all the steps of the AP workflow were performed on paper. Invoices and related documents, such as purchase orders and goods receipts, were printed out and exchanged as paper files. An incoming invoice would be reviewed by the AP team, then walked over or emailed to the appropriate employees for coding and approvals. After approval, the invoice was forwarded back to the AP team to manually key the pertinent information into the accounting system. Finally, the original document was physically stored in the company’s archive, either in a hard copy filing system or digitized and stored in a document repository on the network.

Due to the large number of these manual steps, throughput times were often very long, and it was difficult to keep track of the status of various documents. Using manual processing method, invoice payments may take as long as three to four weeks, and a single AP team member can process around 40 invoices per day. The lack of transparency and lengthy processing times associated with manual invoice processing can damage supplier relationships, reduce, or eliminate early payment incentives, and burden an organization with unnecessary indirect cost.

Early Digital Processes: EDI, ERP and OCR

The development of electronic data interchange (EDI) systems in the 1960s allowed for early digitization opportunities for AP departments. This new method of data exchange allowed documents to be processed by technology rather than by humans. To ensure document readability, standardized invoice formats were introduced, specifically ANSI X12 810. Thanks to EDI, businesses could exchange data digitally and transfer information without the need to create a hard copy. The use of EDI boosted efficiency in accounting and remained the standard method of exchanging complex transactional data for almost three decades. Even today, EDI invoicing remains a common method of data exchange between large suppliers and their customers.

By the 1990s, most employees had personal computers and email, accelerating the expansion of digital processes in AP, and making e-mail a very popular method of document exchange. Regardless of the increasing rate of digitization, many businesses continued to work with physical prints. It was common for accounts payable to receive an invoice via e-mail only to print it out before forwarding it internally, as new solutions had yet to be developed for handling the digital copy as an electronic transaction.

During the same time, AP processes began to evolve with the arrival of enterprise resource planning (ERP) systems, a term first applied by the Gartner Group in the 1990s. At its most basic level, an ERP connects and integrates the different aspects of your business allowing you to streamline your processes and share accurate information across the company. The central feature of all ERP systems is a shared database that supports multiple functions used by different departments in an organization.

To comply with government directives and ensure the digital availability of all relevant data, businesses started capturing invoices in their ERP system instead of relying exclusively on paper files without abandoning their existing manual process. As a result of their compliance, many companies now had parallel AP processes: a digital one in the ERP system, where every step of the workflow had to be recorded manually, and a paper-based one, whereby printed documents were forwarded between departments.

Digital AP processes were further enhanced with the development of optical character recognition (OCR) engines, a technology that recognizes text within a digital image. From the early 2000s, OCR technology was available as an online service, enabling companies to shift from entering data manually to capturing invoice data electronically. Initially, OCR capabilities were limited, and it was necessary to define exactly where each piece of information was on the invoice. OCR engines had to be trained on each distinct invoice format to successfully recognize data fields.

For many years, the hybrid approach described above, with its combination of manual and digital processes, was the standard way of working in AP departments. However, the advent of automation for AP transactions opened new options.

Enter AP Automation

Today, many businesses automate at least some elements of their AP approval and payment process. While cost savings and efficiency remain at the top of the list of advantages, forward-thinking businesses also see AP automation as a critical driver of their overall digital transformation.

To take full advantage of the capabilities offered by automation, many companies opt for end-to-end solutions that map the entire AP process within a single system. Such end-to-end solutions encompass the following features:

Mailroom

Invoices need to be prepared for processing. Whether attachments to emails that need to be moved to an OCR system (referred to as “digital” mailrooms) or traditional pieces of mail which need to be opened and scanned, the invoices need some pre-processing attention. Traditional mailroom services are hard to find, and most modern AP Automation companies are limited to offering only Digital Mailrooms due to the operational cost of managing a traditional mailroom service.

A common issue with AP Automation solutions is related to Document Separation. Although many advancements have been made in OCR, the technology still has challenges separating an invoice from an attachment not related to a payable invoice. Having a human look at all pages, whether submitted electronically or as hard copies, and organizing them into one or more payables solves many of the issues associated with sending submissions directly to the OCR solution without any review for how the pages are organized into payable units.

Data Capture

Once the documents are prepared, an AP automation solution captures and extracts the relevant invoice data before transferring it to the ERP system. Today, the data capture technology identifies and extracts information regardless of where it is located on the document: at the header level, or in specific line items.

Rules

Based on the extracted information, the automation solution verifies the document’s validity. At this step, the technology attempts to identify and pull in the ERP identifiers required to successfully transmit the document into the ERP system. Values such as Vendor Id, Approver Id, and Coding can be automated based on the successful OCR of the Invoice data.

Three-way Match

The invoice is matched to the corresponding purchase order (PO) and goods receipt. If the information on all three documents corresponds, the invoice is approved. If not, the system automatically informs an AP clerk to take corrective action. Invoices without a PO must still be checked manually.

Non-PO Invoice Approval and Release

If the invoice is not backed by a Purchase order, it will be routed to approvers and released to the ERP once approved.

Payment Authorization and Execution

Lastly, a complete invoice-to-payment solution authorizes and executes the payment ensuring correct payment modalities and reducing the risk of fraud. In addition, invoice payment optimization technology opens opportunities for early payment discounts and rebate programs.

Summary

By implementing a digital AP workflow, companies can benefit from numerous advantages, including reduced manual labor, optimized process reliability, improved security, and compliance with global e-Invoicing mandates.

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