On a daily basis, business executives must keep up with changes in the business dynamics of how businesses operate. In doing so, they devote a significant amount of time to considering the adoption of cutting-edge technologies.
Regardless of how much executives swear by their instincts and gut feelings, the reality is that very few executives can get their way without a clear objective analysis of the investment needs that justifies the budget spend.
What is Total Cost of Ownership (TCO)
Total cost of ownership (TCO) and return on investment (ROI) are two popular methods for securing funding for planned initiatives.
Total Cost of Ownership (TCO) is a calculation method that determines the total cost of a product or service over its life cycle. TCO is more than just a number on a piece of paper. It should notify the following relevant stakeholders:
- Uncertainty and Risk factors concerning the initial upfront investment or setup costs.
- Strategic fit and Competitive advantage of the selected set of technologies.
- Cost overruns that could materialize due to implementation-related risk factors such as delay, tools, and techniques, skills availability, etc.
- Comparative assessment with the set of technologies that are being replaced.
- Process cost on a per-unit basis (per invoice basis in the case of Accounts Payable).
- Workforce expense on a basis (per invoice basis in the case of Accounts Payable)
Cost Drivers
The types of Cost we‘ll consider are:
Direct costs are derived from keystroke count and are nothing more than workforce-related expenses in terms of FTE Load. The Full-Time Equivalent (FTE) Load is the effort required to perform data entry tasks by one employee full-time. For example, if there are 9 employees, each employee will work 9 hours, and if each data-entry operator’s efforts in hours are equivalent to 3 hours, the data entry FTE Load is 3.
Here are some key metrics to consider:
- Keystrokes per invoice on average
- Average Typing Speed (Keystrokes per Unit Time) — (It is not possible to type continuously. A multiplier should be used as a buffer for all supplementary activities performed by the operator that are incidental to the invoice extraction process, such as time spent moving documents, locating fields, comprehending difficult-to-read data, and so on. The multiplier can be calculated empirically or using simple statistical analysis.)
- Based on FTE load, average wages for Data-Entry Work per unit time.
- Overheads for Data-Entry Work on a per-unit-time basis.
- Indirect costs (These are the extra effort required to resolve impediments, issues, and incidents such as data entry errors, duplicate payments, and so on.
Some key indicators include:
- Downtime and troubleshooting costs for software.
- Average pay for data entry work per unit time based on FTE load for rework.
- Overheads for Data-Entry Work on average per unit time for rework.
- Hidden (intangible) costs (including late payment penalties, vendor issue escalation, employee rotation, and so on. This component should be based on historical data from the company.)
The costs described above are typical for a manual invoice data extraction process. An OCR-based invoice data extraction process incurs additional costs.
Templates are commonly used in data extraction systems based on OCR engines for invoice data extraction. A template is either a zonal OCR engine extractor with fixed page locations for individual data fields or a rule-based OCR engine extractor with a series of if-then rules telling the software where to look for specific information and a parser to make sense of that information.
In addition to direct and indirect costs associated with employee wages, there are additional cost structures that must be considered when establishing a data-extraction system.
Cost of OCR System:
Costs will differ depending on the vendor, the implementation, and the organization.
Licensing Cost:
Licensing structures differ from one vendor to the next. Almost all structures are renewed on a yearly basis. It can be a one-time fee or a pay-per-use arrangement ($/page, $/field, $per document type), or a combination of the two. It can grow as functionality improves. In general, a cloud-based AI-powered solution may be more expensive than an on-premise template-based OCR data-extraction system.
One-time set up cost:
Initial setup takes time, requires management involvement, evaluation of the extraction system with vendors, and IT-related enablement (if on-premise), and is thus costly. Integration, system configuration, and setup, as well as template configuration, are all required.
Cost of resets:
As needed to account for changes in layout and structure: Depending on the type of data extraction system chosen, costs can be attributed to activities such as creating and deploying configuration files, customizing extractors, configuring parsers, and pre-validating using training sample sets.
Training costs
Maintenance
Even with automated data extraction systems, some organizations will still have to process a significant portion of their invoices manually.
Insufficient volumes of a vendor invoice may not justify the development of an automated data extraction template. As with manual data extraction, indirect costs such as verification and rework must be considered. The costs for managing the external consultants who maintain the OCR software are typically the hidden costs.
The greater the number of errors, the higher the cost of data extraction. This is where TCO estimates frequently fail. Cost leakage is also caused by delays and inaccuracies. Organizations must go to great lengths to ensure adequate pre-processing for a smooth and error-free data extraction process. To improve the accuracy and efficiency of the automated data extraction processes, discussions on invoice layouts, field descriptors, page background, font size, number of pages, and so on may be required. Such costs, however, are difficult to quantify and factor in.
Key performance indicators (KPIs) for the Accounts Payable Process
- Invoice exception rate: Data inaccuracies, omissions, and inconsistencies are just a few of the many causes of invoice exceptions, which affect the Accounts Payable processes.
- Average invoice processing time: Time is money. The longer it takes to process invoices, the more it will cost. Wastages should be avoided, and exceptions managed.
- Days sales outstanding (DSO): The number of days it takes to pay a supplier after receiving their invoice is another important metric. Vendor relations and subsequent payment discounts are at stake here.
While some organizations may dismiss the TCO calculation as a simple heuristics exercise, TCO data is more important than one might think. It is critical to the successful implementation and monitoring of a data extraction system capable of automating downstream Accounts Payable processes.
Are you interested in efficient invoice data extraction, with 100% accuracy at a calculated low cost?
