Digital transformation is now a watch-word in business and its application is widely claimed to improve revenue growth, operating, and customer experience. However, digital transformation not done right, often results in failed promises. Ask for a digital transformation definition, and one is likely to receive many different answers. We define digital transformation as the use of digital capabilities to enhance the business and value for its customers. This could be applied along the various segments of a business – front-office, middle-office, and back-office- to individual functions within the segment or integrated across the business for larger results.
In this article, we describe the transformation of accounts payable invoicing process. Our Healthcare client is a PE invested major medical service provider. Their business objectives are to provide patient-centric quality care while improving revenues and operating margins. We work with them in their back-office operations.
The problem: The accounts payable process while being purely transactional was absent of any processing baseline information. Thus, there was no visibility of productivity, capacity, unit processing costs, vendor payments to terms, monthly invoice amounts processed, and others. In short, there was no baseline nor competitive information for the function. Some significant business impacts were frequent vendor defaults and credit holds. This also impacted cash position and cash balance risks while eroding operating margins. As their service provider we engaged to assess and improve the situation.
The approach: We started with a plan – what were we going to do, how, by when, what would be the measures, and expected targets and outcomes. We complete a detailed assessment of the current process, established key process measures, identified gaps, captured current process data, and determined function benchmarks. We were thus able to measure daily productivity rates, invoice inflow to outflow ratios, daily production to target, and inventory. We also established metrics for processing cost per invoice, first pass through percentage, defect percentage, and improvement cost savings and ROI per month. We were able to complete the first stage of implementation in about 120 days.
We also embarked on a lean sigma approach for process, people, and technology improvements. By time-studying processes, using root-cause analysis, and identifying process gaps through measures, we re-engineered processes, implemented new processes, and made technology improvements. We automated various manual processes, generated automated reporting, cross-trained associates, and created new processing models by dedicating high-volume less complex invoice processing while assigning high complexity work to higher skilled resources. We also developed analytics on vendor profiles and for vendor rationalization; for example, which vendors submitted most errored invoices and working with procurement to stop errors at the source. Future plans include full automation of vendor submits and further business improvements through near real-time analytics and feedback.
Results: We were able to improve first pass through to an average of 95%+ when compared to prior baselines. The saved costs from this defect reduction amounted to an average ROI of 6.10% per month. The cost/invoice is currently at the lower end of researched benchmark of $2-$30. Note the variability in the available benchmark data; this is due to aggregated information available across different industry segments and companies, process variations, degree of automation, invoice volume, and productivity. Due to business analytics, our client was able to reduce payment defaults, improve credit ratings and cash position, while contributing to investors returns.
Conclusion: Properly planned and executed digital transformation initiatives is a winning strategy for businesses. It enables superior customer and employee experience, enhances operating margins, and share-holder value. The key is to relentlessly focus on the business goal and execute to plans. As we showed, using process, people, and digital tools thoughtfully will yield meaningful results. We would love to talk to you and share our learnings if you are facing similar challenges to your business.