Mayer Electric, a fast-growing electrical supplies distributor in the Southeast United States, realized it had to automate its accounts payable (AP) process. It had 900 people in eight states using a manual system. Last year Mayer Electric paid thousands of its suppliers about $560 million. “We look at Mayer Electric as a brand. How we pay our suppliers is a reflection on Mayer the brand. If we don’t get it right, we’re hurting our brand,” says Wes Smith, President.
Outsourcing AP was the fastest and most efficient way to automate its workflow and protect its brand.
The manual system
Outsourcing wasn’t an accepted business tool in 1930 when Mayer Electric opened its doors in Birmingham, Alabama. Currently it reaches markets in Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, and Virginia and continues to explore expansion opportunities throughout the southeastern United States.
Before outsourcing, when Mayer Electric’s AP department received an invoice that didn’t match the purchase order, an employee put the invoice in an envelope and manually routed it if the location was a smaller one. Bigger offices had scanners, so the AP department could just e-mail the errant invoice. “There was no process. Accountability is happenstance at best in a manual process. We only had accountability when somebody picked up the phone. Often the result was we didn’t pay our supplier,” says Smith.
Susan Stallings, Vice President of Shared Services Solutions for HOV Services, the outsourcing service provider Mayer Electric chose, says the decentralized manual system “had no visibility and few standardized controls. From a cash-flow perspective, they had little access to their open liabilities.”
Outsourcing would not only standardize and provide controls on a corporate level but also “reduce Mayer Electric’s overhead cost for managing its AP,” she adds.
Automation challenges: getting to a comfort level
After looking at purchasing the requisite technology and restructuring AP internally, Mayer Electric selected HOV Services to automate its AP workflow. Smith says its executives felt comfortable with the HOV team since they had similar corporate values, and he felt HOV “was a partner that had a sense of urgency in resolving problems.”
However, the distributor was initially uncomfortable with turning over the total control of the AP process to the service provider. “We didn’t flip the switch and go live until every stakeholder said, ‘We’re in,’” says Smith.
HOV understood that. “We know buyers take a leap of faith when they outsource their checkbooks,” says Stallings.
Smith says Mayer Electric knew from the outset “there would be hurdles because of the magnitude of this project.”
The first thing it did right was to select a qualified and experienced project manager. Stallings says that helped insure success. In addition, Mayer Electric gave her the authority to make key decisions. “A qualified project manager with decision-making power is something you don’t always have,” she says. “Sometimes politics can get in the way. Not here.”
Mayer Electric chose a phased transition instead of a big-bang approach because it felt it had better control of the transition. Smith had been the CIO before taking the president’s job. “I implemented our ERP system and learned a lot from that,” he says. Mayer Electric had five AP systems in use, so he felt doing a phased approach was a much better transition tack.
To get over the hurdles, HOV Services and Mayer Electric executives had daily calls to discuss the process. Those calls became weekly, then monthly as trust grew. “We worked through the issues until there were fewer and fewer issues. Then there were no issues at all,” recalls Smith.
“We listened to their pain points,” recalls Stallings. “We also felt we could connect with them.”
Automation challenges: customizing the workflow process
Smith says his company selected HOV Services because it liked its systems, processes, and technology that allowed the distributor to enter its paper invoices into an automated workforce process. “But we had to flesh out the details so HOV’s system met the functionality of our business,” says the president. “We didn’t try to give them tools they didn’t want or need,” adds Stallings.
Smith says 50 executives carved out time from their busy day “to articulate our processes” so the two could create a system that would work for Mayer Electric. “We brought in actual managers, salespeople, accounts payable employees, and our purchasing department to use the system in a test mode,” he explains. Their feedback created an “iterative process.”
Smith says designing the system involved “listening, learning, and understanding. They’ll do some things for us because what we want to do makes sense. We’ll change our processes because what they bring to the table makes sense.”
As the system development progressed, Smith says “the pool of people got much bigger.” When it was ready to roll out the completed system, it was time to train everyone.
Automation challenges: Dealing with expectations disconnects
Several weeks into the development of programming specifications for a particular workflow, there was a disconnect between the people defining the business rules and the programmers. “This communication problem became frustrating really quickly,” says Smith.
However, the partners solved the problem just as quickly. The project managers from both sides sat down and together figured out the fix. “They changed out programmers, adding people who had more business experience,” explains Smith.
The president was impressed with how the two sides solved the challenge. “Typically suppliers defend their people ad nauseum until folks are so frustrated they throw up their arms. Here, we told HOV we had a problem. They didn’t question our motives. They trusted we had a problem and then they fixed it,” he says.
Stallings says HOV Services has a transition plan that includes a way to escalate issues. “You need to do this, especially when there is a disconnect in expectations,” she explains. She says the right leadership “at the day-to-day level can work though any problem together.”
Automation challenges: managing workforce change
The final phase of the transition was training 500 employees to use the new system. Smith says the new accountability was “pretty frightening for a lot of folks.” Adds Stallings, “There were some people who didn’t want to go paperless.”
For example, the new system has electronic time monitors. If an employee doesn’t respond within a certain amount of time, the issue automatically escalates to the next level of management. “All of a sudden, employees were getting calls from their managers saying, “I got notified you haven’t completed this invoice. What’s the deal?’”
Smith says employees resisted until they realized the system would hold them accountable. “Once that enlightenment took place, the resistance pretty much went away,” he says.
Why this transition was successful
Smith points out that projects of this magnitude are not cookie cutters because “every business has its unique challenges.” What is important is “having a relationship with a provider that understands, is willing to listen, and is not billing you just for listening. It’s demonstrating commitment to the long term that makes these relationships work,” he says.
He says he looks for relationships with people “who share our same set of values because then the technical aspects will work out.” He says he trusts HOV because “I have a partner that is deeply committed to my business. I don’t expect to come to work and see that all of a sudden we’re not aligned any more.”
The advantages of outsourcing AP
Smith says his relationship with HOV Services “makes our business more profitable, competitive, and efficient.”
The president says outsourcing “puts the problems out there for everyone to see.” The automated workflow system “produces wonderful reports that tell us where the problems are and their magnitude,” says the president. Now Mayer Electric can predict accurately “the areas of the company that won’t have their purchase orders in the system.”
Currently only 65 percent of the purchase orders go through the system on the first pass. The buyer and service provider are “figuring out how we can improve our first-pass yield to 85 percent,” says Smith.
Mayer Electric now has visibility into its AP liabilities; “this stands out as one of the major improvements,” Smith says. The front-end imaging and workflow gives the company immediate exposure to its business. “We are able to manage based on knowledge, not guesswork,” says Smith.
One major component of the payables process is Direct Ship, which has a direct relationship to the receivables. Process improvements, automation, and workflow have improved the turnaround time on these transactions, which resulted in a faster time-to-bill.
The bottom line: outsourcing AP has improved Mayer Electric’s cash flow. “We don’t bill our customers until we have a valid invoice. When you can squeeze the cycle time between receipt of a customer invoice and customer bill, cash flow improves,” says Smith.
Better cash flow also “puts me in a much better competitive situation from a pricing standpoint,” adds the president. “If I’m better than my competition in the whole AP process and I can help my customer get his cash quicker, then I become more valuable to my customers,” he explains.
Smith says the elimination of managing paper has allowed his management team “to focus on core strategic business needs and initiatives, especially those that touch our customers and our bottom line.”