Posted by Steve Wilcox on Mon, May 18, 2009 @ 08:41 AM
There is no question that effective AP metrics can address an organization's key pressures and challenges by increasing the efficiency and effectiveness of critical processes.
BUT ...as I explained in my last blog entry, poorly designed metrics can drive bad behavior. Poor metrics also have other significant problems. As outlined in Jon Casher's white paper titled 10 Must-Have Metrics, here are the 7 biggest problems when it comes to metrics:
- Too many metrics: When an organization has more than 20 or 30 metrics, it is likely that some of them are not useful and some may be lost in the clutter and overlooked. In some instances, a metric may have been developed to measure the effectiveness of a procedural change. At some point in time, that measure may no longer be needed yet the information is still collected and the metric continues to be reported. Some metrics may be redundant - e.g. having too many metrics to measure productivity.
- Metrics are not actionable: A metric such as the number of invoices processed is often reported as a key metric in many Accounts Payable departments. While it may be important to monitor such a number to help determine if there is adequate staffing, it is probably the wrong thing to track. Since every Accounts Payable department is responsible for processing all invoices, it is far more useful to develop and use metrics that help you understand what invoices are not being processed or are not processed efficiently and why.
- Metrics are not timely: Information should be collected and analyzed so that actions can be taken in an appropriate time frame. Real-time feedback can be very helpful for managing the processing of invoices as it allows for immediate actions to be taken to reassign work. However, real-time feedback is not as important for developing long-term staffing plans and requirements.
- Best practices for others may not be best for you: What may be a best practice for one organization may not be appropriate or even feasible for another. Practices that work well within a company with one location may not be usable in a geographically dispersed company operating in multiple languages, multiple currencies and many time zones. Limitations of an organization's systems and regulatory issues often restrict or even prohibit certain practices. Effective metrics are aligned with an organization's goals, vision and mission and address key pressures and challenges. Metrics may be needed to address problems or issues unique to an organization. The Accounts Payable department of a manufacturing firm usually has metrics that focus on the accuracy of Purchase Orders and on receiving documents associated with Evaluated Receipts Settlement (ERS) transactions as there are no invoices for these. A company that does not use ERS might not need such metrics.
- What is being measured is unclear or ill-defined: A metric can cause rather than resolve problems if poorly defined. This is especially true if the data that needs to be captured is poorly specified, or if the results that are reported may be interpreted differently. Number of invoices processed is a metric that is commonly used in many Accounts Payable departments to assess employee productivity. However, the effort associated with processing an invoice may vary greatly depending on whether or not it is against a Purchase Order, the number of line items on the invoice, whether the charges on the invoice have to be allocated to many departments, and other factors. An employee who deals with complex invoices may appear to be far less productive than an employee who only processes invoices with no Purchase Order, a single line item, and charged to a single account. In such situations, the number of each type of invoice processed may have to be defined rather than the single metric.
- Metrics may drive the wrong behavior: "Gaming the system" can happen when the wrong metrics are used or metrics are used inappropriately. One company based part of individual compensation on "number of invoices processed." First one and then all of the Accounts Payable staff stopped processing complex invoices in order to increase output. Invoices from several key suppliers were not being processed. As a consequence, some suppliers stopped shipping critical raw materials and others raised their prices.
- Data collection effort is excessive: The amount of time being spent on collecting data may exceed its potential value. One company concerned about the quality of Accounts Payable's customer service instituted a 30 day test to capture extensive information about each transaction that needed interaction with a supervisor, employee outside of A/P or a vendor. The effort was so time consuming that the backlog of unprocessed transactions more than tripled. That backlog not only reduced productivity, it increased the number of calls and emails to A/P asking about the status of unpaid invoices and expense reports.
In my next blog entry, I will start to explore the a framework for developing metrics that addresses these pitfalls.
-Rakesh Shukla
@rakesh170
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