Nigel Tufnel: "You see, most blokes will be playing at 10. You're on 10, all the way up, all the way up...Where can you go from there?

Nowhere.

What we do, is if we need that extra push over the cliff ...
...Eleven.
One louder."

Marty DiBergi: "Why don't you just make 10 louder and make 10 be the top number, and make that a little louder?"

Nigel Tufnel: (after taking a moment to let this sink in) "Hmmm ... These go to 11!"

--From the movie, This is Spinal Tap (1984)

This is one of my favorite movie scenes  -- the absurdity that an amp can be louder because it "goes to 11" always makes me chuckle:

The number 11 is, of course, arbitrary and doesn't really mean anything when determining an amp's "loudness." 

Similarly, the common and overused AP benchmark of cost per invoice doesn't mean much.  I am always amused when I see "cost per invoice" figures because varied finance operations, inconsistent cost calculations and invoice complexities differ signficantly at each company. 

Comparing cost per invoice from one organization to the next is like comparing one amp that goes to 10 with another amp that goes to 11.  It's almost a meaningless comparison ...

... and this is THE serious pitfall of benchmarking.

I define benchmarking as a quality assurance process where an organization sets goals and measures its performance in comparison to other organizations that are recognized as leaders.  Benchmarking is a proven way to identify opportunities to reduce costs, strengthen controls, improve service levels and manage cash more efficiently.

However, benchmarking runs the risk of being seriously flawed because accounting and organizational disparities must be recognized when comparing metrics. The type of industry, location, regulatory environment, services provided and SLA requirements are some factors that make benchmark comparisons very difficult.

Furthermore, invoices are inconsistent in size, complexity and control risk. The bottomline is that invoices can vary greatly for many reasons:

• PO's: Was a PO Used to generate the invoice? What was the quality of the PO?  What was the cost of generating that PO?
• Line Items: How many line items are on the invoice? Obviously, invoices with more line items are harder to process than invoices with fewer line items.
• Technology: What is the underlying technology (if any) used to process & authorize invoices?
• Internal Controls: What is the control environment for handling exceptions & approvals?  A stringent set of internal controls usually means sacrificing some cost efficiency. 
• Materials vs. Services: Is the invoice for goods or services? How are services verified?  The processing of these 2 types of invoices can vary greatly.

A final issue is: how are AP costs calculated?  It's almost a certainty that AP costs are not calculated consistently across organizations.  What is included and what is not included in this calculation can be quite different across organizations.

So how do you compare "cost per invoice" metrics and normalize for these types of differences when comparing benchmarks?  

Better yet ... What are some more meaningful AP cost metrics? 

Next week, Nat Goodman, a well-known AP industry expert, will not only discuss this "apples to oranges" pitfall but also 11 other critical benchmarking issues.  The registration numbers have been off the charts so clearly this is a topic of interest.  I encourage you to attend.

Here's the registration link:

AP Benchmarking: 12 Critical Issues

-Rakesh Shukla

P.S.  A much, much better metric than "cost per invoice" is "cost per invoice line item."  Think about it -- an invoice with 4 line items is probably going to take twice as long to process as an invoice with 2 line items.  Anyways, Nat will discuss this in more detail next week.