Accounts payable outsourcing: Benefits, drawbacks, and alternatives

How are you handling accounts payable? Are you struggling with manual data entry, buried under a pile of unpaid invoices?

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The good news is that you have options. Outsourcing accounts payable is an attractive choice for many small businesses, freeing your team from the process entirely by shipping some or all of the work to a third party.

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But before you jump at the opportunity to outsource AP, you should weigh the pros and cons. If you’d rather keep the process in-house, financial technology is one alternative that can help simplify your AP process. These apps can often automate the invoicing process from end to end, improving efficiency for everyone involved.

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In this post, we’ll look at the benefits and drawbacks of outsourcing AP and answer some of the most common questions about accounts payable outsourcing. By the end, you’ll have all the info you need to make an informed decision about how to move forward.

What is accounts payable outsourcing?

Accounts payable outsourcing is the process of hiring a third party to handle most (or all) of the tasks in your accounts payable cycle. An accounts payable outsourcing provider can do it all, from generating purchase requisitions to making payments and posting journal entries. They should be able to perform these time-consuming tasks quickly and independently, freeing you up to spend more time on business strategy and driving growth.

Why should you outsource accounts payable?

The AP process has many steps and requires constant attention. That means there are some pretty clear benefits of outsourcing accounts payable:

Cost savings

Instead of hiring a clerk to perform AP tasks internally, you can contract with a third-party accounts payable outsourcing company instead. An AP vendor will ensure your accounts payable process is complete and accurate without any hand-holding from you or your staff.

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This can be a cost-effective option because it reduces some of the hefty costs of full-time employment, like payroll expenses, software, and equipment. It can also reduce your processing costs if the provider can help you avoid late payment fees or negotiate with vendors for early payment discounts.

Increased efficiency

A company whose sole job is to perform AP tasks will almost certainly be more efficient at performing those tasks than you would be. High-quality service providers will have comprehensive business processes in place to streamline invoice tracking and related tasks. They’ll also hire quality employees and invest in specialized training that makes the entire workflow seem effortless.

Solves pain points

If there are areas in your AP process that are ineffective, tedious, or stressful to complete, an AP service provider can slip right in and do those tasks for you. For example, you may realize that your AP process lacks controls. If you’ve noticed you’ve sent duplicate payments or missed payment deadlines, an AP service provider can step in and provide the financial controls you’re missing.

Provides credibility

Using a well-known provider to perform AP functions can lend credibility to your business. Suppliers, vendors, banks, and manufacturers who see that you contract with a high-quality provider will feel confident that they’ll get paid on time and in the correct amounts, making it easier for you to commission deals.

What are some drawbacks of outsourcing accounts payable?

There are pros and cons to every decision. While outsourcing accounts payable has many benefits, there can be some downsides:

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• Security risk: There’s inherent risk whenever you grant systems access to a third party, so be sure the risk is worth it. If the AP service provider processes your data within their own systems, make sure they provide the same level of security you require from your internal tools.
• Loss of control: This may go without saying, but if you rely on a third party to perform most aspects of your collection cycle, you’ll lose some control. For example, dependency on an AP service provider could mean that you have less direct contact with vendors you’ve built relationships with over the years, or you may be unable to quickly provide an answer if a supplier has a question about an invoice.
• Less flexibility: If you want to do something outside the prescribed method—like expediting payment to show good faith to a new supplier or to improve relationships—it could be more difficult with a third-party provider controlling your invoice payment process.

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FAQs about accounts payable outsourcing

It can be daunting to transition away from doing AP internally and hire someone else to do it for you. Here are some of the most frequently asked questions about AP outsourcing:

Who would benefit from outsourcing AP?

You should consider outsourcing your AP process to a third party if your current AP process takes too much time or simply isn’t working. You might benefit from accounts payable outsourcing if:

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• There’s too much back-and-forth with vendors to finalize payment
• Your in-house AP department is falling behind on their work
• Your AP team spends most of their time on data entry
• Your suppliers have expressed frustration with late payments
• Your employment costs are higher than you want them to be
• You struggle to match invoices with purchase orders
• You lose track of which invoices arrived first
• You’re paying late fees to vendors or suppliers

What should you look for in an AP service provider?

If you decide to outsource your AP cycle to a third party, make sure that they’re:

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• Reliable: The company you hire should have no issues delivering the services they promise. Look at online reviews and testimonials, or get recommendations from your business partners or network to find someone reliable.
• Punctual: The company you hire should perform their services according to the schedule you agreed on. Whether it’s daily, weekly, or monthly, the company should do the job they set out to do and not leave you waiting. If they’re consistently late with delivery, choose a different provider.
• Thorough: An AP service provider should perform what they say they will, but they should also make suggestions for improving your AP process. For example, a provider you’ve hired to do your monthly reconciliations might notice an internal control deficiency. Good providers will voice their concerns and suggest solutions.

What services should your AP provider offer?

Not all AP service providers are created equal. To get the best services, make sure your third-party provider offers offers these benefits in addition to core accounts payable functions:

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Integration capabilities

Your AP service provider should be able to integrate their preferred software with your tech stack, including your accounting system, inventory management platform, and enterprise resource planning (ERP) software. They should also be able to set up payment gateways that make it easier for you to send payment and potentially help you get paid faster.

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Flexibility

You want to find a service provider who can perform the AP accounting services you need. For some businesses, that may be the entire AP process from start to finish, but others might only want to outsource some parts of it.

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Security

Your AP service provider should do everything they can to protect your company’s information. Here are a few things you can do to suss out a vendor’s security posture:

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• Ask prospective providers targeted questions about their security practices
• Verify that they follow third-party data security standards, like the National Institute of Standards and Technology (NIST) framework
• If relevant, ensure the provider complies with regulations surrounding data security and privacy, like HIPAA or the General Data Protection Regulation (GDPR)

Using accounts payable automation software instead

AP automation software has come a long way in recent years. For example, tools with optical character recognition (OCR) capabilities can scan incoming invoices, and you can use AI to draft journal entries and schedule payments based on what it reads.

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AP management software can also automatically match purchase orders, send approvals to the right manager, communicate with your electronic payment platforms, and update your inventory numbers. With the right tool, you can get most of the same benefits as you would by outsourcing AP—with the added bonus that you can keep the process under your control.

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And even if you know you want to use an accounts payable outsourcing service, automation software can be great to employ alongside your contracted provider. Most providers will either implement their own smart technology if you don’t have one in place already.

How Ramp can replace AP outsourcing

When you automate your AP workflows, you can reduce errors, improve vendor relationships, and free up your team to focus on more valuable work. Ramp’s modern financial tooling helps you do just that while keeping AP in-house and under your control.

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Ramp Bill Pay automates your entire AP process so every invoice is recorded, tracked, approved, and paid without any manual intervention. With all your financial data in a unified dashboard, you can quickly find any invoice, analyze monthly spend, and find opportunities to optimize cash flow.

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Even if you outsource AP to a trusted partner, Ramp can still help your business save time and lower costs. See why Ramp customers save an average of 5% a year with an interactive demo.