Business systems technology has advanced to enable the automation of backend invoicing processes that improve the productivity of asset teams involved with procure-to-pay activities while reducing product/service acquisition costs. Many E&P companies are automating the accounts payable (AP) process to achieve a lower cost, flexible cost structure.

The historical process
The AP process has been paper-based. Invoices are received in the field, passed to engineering and production teams for approval and coding, then mailed to the headquarters’ AP department for entry and payment in the accounting system. The process presents several challenges. Without visibility of the invoice from the moment of receipt, it is difficult to ensure that invoices are paid on time. Vendor discounts are lost when payment of an invoice is delayed. Personnel waste time trying to answer vendor invoice status inquiries or process and pay duplicate invoices re-sent by vendors who think the original was lost. Invoices are copied and filed in both field offices and headquarters, taking up valuable real estate. Companies are exposed to audit and Sarbanes-Oxley Act (SOX) compliance risks due to manual enforcement of spend authority rules.

Automating AP
Many organizations now scan invoices at the back end of the process after approval and payment, which reduces storage costs and improves accessibility but does not fundamentally change the overall process and cost structure. To transform AP, invoices must be captured electronically at the front end and drive the entire process. The steps addressed in an automated AP process are:
1. Invoice receipt. Paper invoices are received and scanned in the field or at a central, shared-service location. Electronic invoice documents are received as e-mail attachments or electronic invoice data transmitted as PIDX XML or EDI. Received invoices are stored in a central system that is accessible throughout the company.
2. Invoice header capture. Invoice header information (vendor, invoice amount, date, discount terms) is captured and validated at invoice receipt for accrual and cash forecasting purposes and to identify invoices that need to be expedited to obtain vendor discounts.
3. Line item coding. Invoice detail is captured, including account codes, cost centers, amounts, and, if appropriate, well, lease, and authorization for expenditure (AFE) information.
4. Invoice approvals. Invoices are electronically routed internally for the appropriate expenditure, coding, and financial approvals. Automated systems prohibit invoice payment without proper approvals.
5. Invoice entry and payment. After approvals, invoices are paid from the accounting system. Depending on the system, invoice data can be entered and managed from the beginning of the process or loaded after coding and approvals.
6. Information storage and access. Internal users and external auditors can access documents, header and coding information, status, and approvals throughout the process. Historical data provide metrics to measure the effectiveness of the process and enable continuous improvement.

Solutions
Advances in networking, computer storage, data integration standards, and scanning technology have actualized solutions to automate the process that can be implemented quickly and cost effectively. Although many accounting systems now have the capability to “paper-clip” an invoice document to a transaction, they do not address the entire process. In the oil and gas industry, document management/imaging systems (DM) and electronic invoicing services (e-invoicing) are the most prevalent solutions supplementing the accounting system.

DM systems are optimized for processing paper invoices, although they can handle a variety of electronic formats. Invoices are received in the field or at headquarters and are scanned. Advanced optical character recognition (OCR) capabilities use sophisticated algorithms to extract invoice header and line item information and provide real-time validation against the accounting system. Invoices are routed for approvals based on amount, expenditure type, and authorization levels. Invoice data are passed into the accounting system’s data entry screen for validation and posting. DM systems usually are deployed in-house, and invoice documents are accessible through links from the accounting system.

E-invoicing services are Internet-based and optimized for receiving electronic invoice data from vendors that have been on-boarded to the service, although the systems can accommodate scanned invoices. The e-invoicing service extracts the chart of the account, vendor, well, and AFE information so invoices can be coded appropriately outside of the accounting system. Invoices are routed for approvals based on amount, expenditure type, and authorization levels. Once invoices are approved and coded they are transferred across the firewall where they are batch uploaded into the accounting system and posted.

The oil and gas vendor community comprises large companies that can transact business electronically and small vendors that can only prepare paper invoices. Since e-invoicing is strong in vendor interactions, while DM is strong in internal processes and integration with accounting systems, many companies implement both in an integrated environment.

AP automation benefits
According to the Institute of Management & Administration’s “Accounts Payable Department Benchmarks and Analysis 2010” report, it costs almost 20 times less for companies with high levels of automation to process invoices than it does for those without automation. There also are intangible benefits that accompany the tangible cost savings.

Approvers can process invoices anywhere they can get a network connection. AP data entry can be reduced through automatic data capture.

Paper invoices are destroyed and file rooms eliminated since invoices are available electronically to internal people evaluating spend and external auditors.

“Automating AP streamlines our internal controls process,” Tom Nelson, chief financial officer at Petro-Hunt, said. “Instead of searching for and copying invoices, we can provide our public and joint interest auditors a CD of the invoices and approvals.”

Electronic storage and routing of invoices for approval eliminates payments without proper authorization and challenges from joint venture auditors over lost or misplaced invoices. “An efficient approval routing process has improved our internal controls associated with SOX compliance issues,” Tom Batsche, assistant controller at Plains Exploration & Production Co., said. “We also have a better understanding of our cash needs and have reduced time requirements associated with monthly close cycles.”

“With an automated system, we do not lose any invoices and know their status at all times,” West Griffin, chief financial officer at Energy XXI, said. “We can identify bottlenecks and take action to take advantage of discounts.”

AP systems identify invoices with discounts and expedite the process. Some companies have justified automation just on the money saved by capturing discounts.

Developing automation strategy
“Know Thyself” is the critical element in selecting an automation solution. The first step is to understand the current process. Where are the bottlenecks? How long does it take to process invoices, and what are the costs? What discounts have been lost through long cycle times? Why are invoices coded incorrectly and the wrong vendors paid? What is the stratification of the vendors based on the number of invoices processed?

As the “process owner,” AP usually leads the effort to assess the current situation, determine requirements, and establish the desired invoice processing model. It is important that the departments responsible for purchasing products and services and approving invoices are included in the evaluation as they are impacted by the chosen solution.

IT strategy provides a framework for evaluating different solutions. DM systems can be purchased and implemented internally or hosted and rented in a software-as-a-service model. E-invoicing solutions are typically provided as an Internet service with price based predominantly on the volume of invoices processed. Outsourcing the entire AP process is now a viable option in today’s integrated and networked environment.