Accounts payable outsourcing: Pros, cons & alternatives

Outsourcing accounts payable is an attractive option for many small businesses, freeing your team from the manual work of managing invoice processing and vendor payments.

‍

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.

‍

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.

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 growing your business.

AP outsourcing pros and cons

Benefits of outsourcing AP

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

‍

• Cost savings: Hiring a third-party AP provider can be a cost-effective option because it reduces 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 that specializes in AP tasks should be a model of efficiency. 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 parts of your AP process are ineffective, tedious, or stressful, an AP service provider can slip right in and do those tasks for you. For example, if you’ve noticed you’ve sent duplicate payments or missed payment deadlines, an AP service provider should be able to 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.

Drawbacks of outsourcing AP

While outsourcing accounts payable has many benefits, there can be some downsides:

‍

• 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.

‍

Automation: An alternative to AP outsourcing

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.

‍

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.

‍

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.

When to outsource vs. when to automate

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:

‍

• Your AP workflows are inconsistent and lack efficiency
• Your accounts payable department spends most of their time on manual data entry
• Your in-house AP department is falling behind in their work
• There’s too much back-and-forth with vendors to finalize payment
• Your approval process is convoluted
• Your employment costs are higher than you want them to be

Who would benefit from AP automation?

Many businesses that would benefit from accounts payable outsourcing would likewise benefit from automated accounts payable solutions. That said, in addition to the pain points listed above, your business might want to choose AP automation if:

‍

• You want (or need) to keep your AP process in-house
• You already have a large AP team but still need more headcount
• You process a large number of invoices monthly (at least 100 or more)
• 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
• You miss out on early payment discounts
• Your AP process lacks visibility

What should you look for in an AP outsourcing provider?

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

‍

• 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.
• Flexible: 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.
• Secure: Your AP service provider should do everything they can to protect your company’s information. Ask prospective providers targeted questions about their security practices and 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 data security and privacy regulations like HIPAA or GDPR.

‍

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

How Ramp can replace AP outsourcing

When you automate your accounts payable processes, 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.

‍

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.

‍

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