Accounts Payable

Accounts Payable Outsourcing: 4 Pitfalls & How to Avoid Them

Apr 7, 2022

Done right, outsourcing accounts payable (AP) reduces costs and unlocks cash flow in your business. 📈 But you should watch out for some common mistakes that could leave you stuck paying high fees, getting poor service, and damaging vendor relationships.

Here at Relay, we work with business owners and their outsourced accountants to automate accounts payable inside banking — so we’ve seen a lot of scenarios of AP outsourcing going right and going wrong. 👀 We’re sharing our learnings below, so you can learn about some of the common AP pitfalls and how to avoid them.

IN THIS ARTICLE:

What it means to outsource accounts payable

Outsourcing accounts payable means hiring a third party to handle all of the bills inside your business. 🤝 The scope of work here can vary widely. An outsourced AP department could take on just one part of the AP cycle (e.g.: invoice intake, invoice processing, approval workflows, or payments), or they can take everything off your plate.

It all depends on what your goals and approach to AP outsourcing. Let’s take a closer look at your options.

What are your AP outsourcing options?

First, let’s clear up a common misconception: “AP outsourcing” doesn’t just mean sending the work overseas! While this might be common practice for some enterprise companies, it’s far from the best option for small businesses.

For a small business with a lot of moving parts, it’s actually preferable to outsource accounts payable to an accounting or bookkeeping firm — often the same one that already manages monthly bookkeeping. 📒 In fact, 37% of small businesses are actively seeking their accountant’s help managing bill payments.

With that out of the way, here are your options for AP outsourcing: 

  • Overseas companies. A lot of companies promise to streamline your AP with low-cost overseas labor. Lower overhead is an attractive selling point — but it’s also risky, especially if you have critical vendor relationships.

  • Technology. As long as the AP work gets done, what difference does it make if it’s done by a robot? 🤖 The trick here is finding AP software that fits your needs and budget.

  • An accountant or bookkeeper. As mentioned above, this is likely the best approach for small businesses — especially if you already have a trusted relationship with an accounting or bookkeeping firm. Their experience managing your finances means they’ll be able to expand services to AP much faster. 🚗💨

In summary, if you’re a small business, you want to look for an accountant or bookkeeper to outsource your AP — whereas enterprise businesses should try to send that work overseas. 🗺️ In both cases though, you will want to incorporate technology into your AP process.

Now, let’s take a look at some of the things that can go wrong 😱 (and how to avoid them).

4 pitfalls when outsourcing AP

Before you engage your next outsourcing partner, here are the problems you’re most likely to face. Knowing these potential pitfalls will help you avoid them.

1. Failing to document your current process

One of the worst ways to outsource AP is to simply dump the entire process onto your vendor and let them run with it. 🙅 After all — they’re the experts, so they’ll fix what’s broken and keep what’s working, right? 

The reality is that outsourced AP vendors need your help understanding exactly what’s working and what isn’t. Nobody except you understands the nuances behind each vendor relationship. Once outsourced, critical details may get lost and relationships may be damaged.

To get around this, clearly document your entire AP process before you outsource. In fact, your outsourced AP partner should be actively helping you do this before taking on any of the work. 🔍

2. Not vetting your AP service vendor

We’ve all been there. You get sold on someone who looks great on paper, even has good references, but you still somehow end up with low-quality work. 😤

Apart from doing your due diligence, there are a few additional ways to avoid low service quality:

  • Start with a pilot project that’s limited in scope and time.

  • Have the vendor take over just one part of the AP process.

  • Have the AP vendor start with just a portion of invoices at first.

Most importantly, you should never start an engagement without a clear Service Level Agreement (SLA) in place. ✍️ Your SLA should outline things like expected processing times, response times and what happens when there are disputes.

3. Failing to set communication expectations

When you reach out to an external vendor, you’re not always going to get an immediate response. ⌚ 

But sometimes payables can be time-sensitive. So a lag in communication could impact how quickly you address AP concerns or mistakes. An SLA that outlines response times can help here — but it may be even better to set regular, recurring meetings to review the AP process and raise issues ahead of time.

4. Sensitive payment data leaks

When you outsource AP, you give away a lot of highly sensitive information to a 3rd party: payment details, vendor information and behavior patterns. 🗄️ If any of that data is breached, it can be used to damage your business — fraudsters can use it to impersonate your business or your vendors. 

To minimize this risk, you should go out of your way to get clarity from your outsourced AP service vendor about how they’re protecting your data, and what internal controls they have in place to prevent breaches.

Biggest underlying mistake: outsourcing for the wrong reasons

A lot of issues with AP arise when outsourcing is done for the wrong reasons or without clear goals in mind. So below, we’ll help you determine if it’s a good option by looking at some of the best reasons to outsource AP.

Benefits of outsourcing accounts payable

The biggest benefits of outsourcing AP include taking administrative work off your plate, improving financial processes and getting more clarity into your cash flow. Let’s take a closer look at some of the best reasons to outsource.

Outsourced AP frees up time to focus on strategic work

It isn’t unusual for the person who manages your bill payments — whether it’s you or your office administrator — to be overwhelmed with administrative AP tasks. 📚 And whenever new vendors are added or AP mistakes happen, your attention is taken away from mission-critical work.

By outsourcing, you entrust the process to experts who can deal with AP more efficiently, freeing you to focus on more strategic work. 💡

Outsourced AP lowers your invoice processing costs

With manual AP, the average cost of an invoice is $15, with an average processing time of 45 days. 🐌 A slow and inefficient process can negatively impact your vendor relationships — which are crucial for small businesses — and put a strain on their service levels.

On the other hand, by combining AP outsourcing with AP automation, you can make significant improvements to your process. Done right, you can bring down AP costs by as much as 6xdown to $2.56 per invoice. 

Your vendors can recommend a better AP process

For many smaller companies that run AP in-house, the team managing that process also juggled other responsibilities. 🤹 This usually means that nobody dedicates their full, undivided attention to improving the AP process.

A third-party team that manages AP for other companies will have the tools to make the process faster and more efficient. If you’re a small business that works with an accounting or bookkeeping firm, chances are that your firm has a deep understanding of the latest technologies and best practices when it comes to AP. 

Relying on their expertise leads to big gains in efficiency, faster.

You get better reporting with outsourced AP

This is not to say that you can’t get great reporting while managing AP in-house. However, you’re more likely to get good reports in place because many AP outsourcing providers will offer reporting as part of their management fee. 📊 

These reports can give you a clearer picture of how much you’re spending per invoice, how long it takes to make payments, and other important vendor management metrics that you can use to optimize your business. 

Tips for outsourcing AP

If you’re feeling like outsourcing your AP process is the right way to go, there are a number of things you can do to find the right partner. 

Take time to research your options

If you’re truly struggling in your AP process, you may be tempted to rush into signing on with a new vendor. Don’t be too hasty! There are a lot of vendors out there that are more than willing to take on your AP function, but not all of them are going to make sense for your business. It’s worth spending all the time you need to find a partner that really delivers on the benefits we outlined above. 🧐

Prepare yourself for the change

Once you’ve chosen the right vendor for your business, make sure you’re ready to work with them. Get a sense of what their process will look like, talk to anyone on your team that may also need to be involved, and makes sure you’re available when needed to keep the process moving. 🔁 A few things to keep in mind:

  • Map out your existing AP process.

  • Have a Service Level Agreement in place.

  • Establish communication expectations ahead of time.

  • Start with a pilot project.

Align expectations and scope of work 

Have early conversations with your vendor to set expectations around what parts of the AP workflow they can take on — and whether this includes invoice receipt, invoice processing, invoice approvals, and payment processing. This scope of work should be outlined clearly in their statement of work and will help you understand what your role is in the relationship. 📝 It will also help you keep them accountable and help you connect the dots between their performance and what they’re billing you.

Going further: Automate accounts payable with Relay

Outsourcing and automation go hand-in-hand. Chances are that whatever outsourcing vendor you choose, they will aim to implement technology to increase efficiency overall. ⏩

As you narrow down your selection, consider automating AP with Relay. Relay’s money management platform can help you collaborate with your outsourced AP team, while also streamlining the administrative work of paying bills. It includes features like auto-importing of bills from QuickBooks Online and Xero, same-day ACH payments, and multi-step approval workflows.

Whatever course of action you take with your AP — keep in mind that by optimizing your process you can make significant efficiency gains throughout your business.