Outsourcing accounts payable (AP) has been recognized as the best solution for businesses looking to stabilize financial operations, cut costs, and enhance overall productivity. By outsourcing AP functions like invoice processing, vendor invoice management, and other invoice-related tasks to third-party service providers, companies can shift their focus to core business activities.
Accounts payable outsourcing not only helps reduce the workload but also helps with regulatory compliance. However, it has some drawbacks like decreased control and potential security risks. So in this article, we’ll check out and understand the pros and cons of accounts payable outsourcing to help you determine if it fits your organizational needs.
What is Accounts Payable Outsourcing?
Accounts payable outsourcing is tying up with a third-party service provider to manage all AP-related tasks, including invoice processing, payments, vendor management, and regulatory compliance. Companies that outsource these functions may simplify their operations, lower overhead expenses, and focus their staff on higher-value tasks.
AP outsourcing helps all types of businesses in smart invoice management with better accuracy and scalability which helps them cut manual labor costs and also helps to minimize the risks posed by fraud, errors, and compliance struggles.
Let us Understand Why Accounts Payable Outsourcing is a good option for businesses
Accounts payable (AP) is a great way to do smart cash flow management, vendor relationships growth, and overall financial health improvement for businesses. It ensures that a company fulfills its commitments to suppliers and vendors by handling the timely processing of invoices, payments, and financial obligations. This is critical for keeping businesses running smoothly and avoiding late fees or supplier disruptions. Proper AP management also helps organizations in managing their working capital, since simplified payment processes increase cash flow, allowing them to better allocate resources for growth and investment.
Properly managing accounts payable improves vendor relationships, resulting in better terms, discounts, and collaboration. It ensures tax and regulatory compliance, decreasing the odds of penalties and audits. Finally, an effective AP system expands internal control by reducing the chance of errors, duplicate payments, and fraud, and this is why outsourcing AP automation can be a good thing for your business.
But to give more clarity on this check out top five reasons listed below that explains why AP automation is important for your organization:
Your AP Team is Overwhelmed with Their Workload
When your accounts payable team is overburdened, inefficiencies can creep in. Outsourcing can take away from this pressure, allowing your internal teams to focus on higher-value tasks while a third-party service handles day-to-day operations.
Your Invoice Processing Costs Are Too High
Manually processing invoices can be time-consuming and costly. Outsourcing this process can significantly lower costs by using more efficient technology and standardized processes.
Your AP Process Lacks Controls
One of the main benefits of accounts payable outsourcing is access to better internal controls and fraud prevention mechanisms. External providers typically offer more stringent audit trails, compliance checks, and security measures.
Your Vendor Relationships Are Suffering
Poor vendor invoice management can lead to delayed payments and strained relationships. Businesses can ensure timely and accurate payments, improve vendor relationships, and maintain credibility after outsourcing AP.
You Would Rather Pay for an AP Service Rather than Hire More AP Staff
Rather than investing in more in-house staff and training, outsourcing AP functions allows companies to reduce overhead costs while still maintaining operational effectiveness.
Pros and Cons of Accounts Payable Outsourcing
Outsourcing accounts payable does offer a good amount of benefits which makes it a useful option for many businesses. It can save time, reduce errors, and free up resources. However, handing over your most core critical financial functions that also to a third-party provider can be risky sometimes.
Hence before making this decision, let us give you a deep view of its pros and cons. While outsourcing can streamline processes and improve efficiency, it also raises concerns about control, security, and trust. Balancing these factors will help ensure you make the best choice for your business. Below are the pros and cons, please take a good view and try to understand them logically :
Pros of Outsourcing Accounts Payable
Outsourcing accounts payable offers several tangible benefits for companies:
Timely Invoice Processing
Outsourced providers make sure that invoices are processed promptly, reducing the risk of late payments and avoiding costly penalties.
Helps with Screening for Duplicates
Advanced systems help screen for duplicate invoices and errors, and tweak your process for ensuring accuracy in your financial records.
Reduces Fraud and Increases Compliance
With better internal controls and fraud detection mechanisms, outsourcing minimizes the risk of financial fraud and ensures compliance with regulatory standards.
Eliminates Hiring Needs
Outsourcing reduces the need to recruit, train, and retain additional staff, cutting down operational costs.
Helps in Getting Experienced Professionals
Partnering with an AP outsourcing provider gives you access to a team of professionals with extensive industry knowledge, resulting in smoother, more accurate operations.
Transforms Costs from Hourly to Fixed
Outsourcing allows your finance team to move from variable labor costs to predictable, fixed monthly fees for AP services.
Shifting Roles to High-Value Tasks
With AP tasks offloaded to a third party, your internal team can focus on more strategic tasks, such as financial planning and analysis.
Eliminates the Need to Cover Absent Employees
Sick days and vacations can cause delays in the AP process. Outsourcing eliminates the need to be concerned about employee absenteeism affecting payment schedules.
Accounts Payable Process Tracking
Outsourcing firms provide transparent tracking systems, allowing you to monitor every step of the AP process and improve visibility.
The Drawbacks of Outsourcing Accounts Payable
Despite the many benefits, AP outsourcing does have potential downsides:
Negative business impacts
Outsourcing can create a disconnect between your business and the AP function, potentially leading to misunderstandings or delays in resolving issues.
Less Control Over AP Processes
If an external provider handles your AP processes, you may have less direct control over operations and need to rely on their systems.
Managing Error-Reporting Issues
If an outsourced provider makes errors, correcting them can be a longer and more complicated process compared to in-house teams.
Risking a Business Crisis
In the event of service interruptions or provider issues, outsourcing AP can leave your company vulnerable to delayed payments and vendor dissatisfaction.
Data Privacy and Security Concerns
Sharing sensitive financial data with an external provider can raise concerns about data privacy and security breaches. It’s crucial to work with a reputable firm that adheres to strict security protocols.
Duplication Issues
Although outsourcing improves efficiency, there’s still the risk of duplicate payments if the process is not tightly controlled.
Communication Problems
When an external provider handles AP, effective communication becomes essential. Miscommunication can lead to delays or errors, affecting business performance.
Accounts Payable Outsourcing Pricing
When considering AP outsourcing, it is necessary to understand the associated costs. Pricing is typically based on the volume of invoices processed, the complexity of your operations, along with the level of service required. On average, businesses can expect to pay between $3 and $10 per invoice for outsourcing services.
How Much Does It Cost to Outsource Accounts Payable?
The cost to outsource accounts payable varies based on factors such as:
- Volume of invoices: Larger businesses with higher invoice volumes may pay less per invoice due to economies of scale.
- Service level: Some providers offer basic services, while others include advanced features like real-time reporting, fraud detection, and compliance checks, which can increase costs.
- Geographic location: Outsourcing costs can differ depending on whether the service provider is domestic or offshore.
Accounts Payable Outsourcing Process
The AP outsourcing process typically involves the following steps:
- Assessment and setup: The provider evaluates your current AP system, workflow, and requirements.
- Integration: The outsourced provider connects its systems to your accounting software.
- Invoice Submission: Invoices are submitted electronically or through other channels.
- Processing: The provider validates and processes invoices, ensuring accuracy.
- Payment: Payments are scheduled and processed according to your approval workflows.
- Reporting: The outsourced firm provides regular reports and updates on the status of your AP process.
Accounts Payable Outsourcing vs. Accounts Payable Automation
For businesses looking to optimize their AP process, both outsourcing and automation offer solutions, but each has its pros and cons. Outsourcing involves handing over the entire AP process to an external provider, allowing you to benefit from specialized expertise without increasing headcount.
On the other hand, accounts payable is integrated with smart invoice automation software that helps it streamline and speed up the accounting process in-house. This can lead to faster processing times, but requires an initial investment in technology and ongoing maintenance. So let us look at the below difference table to get better clarity :
| Criteria | Accounts Payable Outsourcing | Accounts Payable Automation |
| Scope of Work | Full AP process managed by a third-party service provider | Automates specific AP tasks such as invoice processing, approvals, and payments |
| Cost | Typically higher due to service fees | Lower long-term costs but requires upfront investment |
| Flexibility | Depends on the service provider’s capabilities | Highly flexible and customizable |
| Control | Less control, as an external team handles operations | Complete control over the AP process |
| Scalability | Easily scalable with outsourced teams | Highly scalable with software capabilities |
| Error Reduction | Dependent on the expertise of the provider | Reduces human errors significantly through automation |
| Implementation Time | Takes time to set up agreements and processes | Faster implementation with software tools |
| Long-Term Benefits | Relieves internal resources but ongoing costs may rise | Saves time and costs in the long run |
Which One Should You Choose?
Making the final choice between AP outsourcing and AP automation can be confusing for anyone but please understand that it all depends upon factors including like business size, budget, control preferences, and long-term goals.
- Small Businesses or Startups: If your business is small with a limited budget or and very low AP transactions, outsourcing will be the more cost-effective solution. It allows you to get the benefit of external expertise without a significant upfront investment.
- Growing or Mid-sized Businesses: For companies with growing transaction volumes, automation could provide long-term benefits by improving efficiency and reducing operational costs over time. It also offers better control and visibility into your AP process.
- Large Enterprises: Large businesses with complex AP needs will get more benefits from a hybrid approach. So it is smart for them to outsource certain tasks while using automation to handle routine processes. This provides the best of both worlds – external expertise for complex processes and technology for efficiency.
Key Considerations Before Making a Decision
- Budget: Assess both the upfront and long-term costs of each solution.
- Process Complexity: If your AP process is complex and involves many exceptions, outsourcing may be better suited. If it’s mostly repetitive, automation can handle it more efficiently.
- Internal Resources: Do you have the capacity to manage software and handle technology in-house, or would you rather focus on core business functions and let a third party manage AP?
Final Thoughts
To make the final choice if you need to outsource or automate your accounts payable, look at your company’s specific demands, invoice volume, and desired level of control. Both options can bring good efficiency and cost savings, but outsourcing enables you to get the much-needed external expertise, while automation provides complete control with less reliance on third-party sources.
You can make a well-informed decision on the outsourcing of your accounts payable activities after you have evaluated the overall benefits and drawbacks of this strategy, taking into account the size and complexity of your organization.
FAQs On Accounts Payable outsourcing
Is it beneficial to get accounts payable outsourcing services?
Yes, outsourcing AP can be beneficial for businesses looking to save time, reduce errors, and leverage expert services without maintaining an in-house team.
Is it cheaper to outsource accounts payable?
It depends. While outsourcing has service fees, it can reduce internal staffing costs. However, automation software may have lower long-term costs.
How to decide if outsourcing AP or getting in-house software is beneficial?
Choose outsourcing if you want expert management with minimal involvement. Opt for automation if you prefer control, customization, and lower long-term costs.
What is the cost of outsourcing AP?
The cost varies depending on the provider, the scope of work, and your business size. Typically, service fees range from a few hundred to several thousand dollars monthly.
