George Snow, Full Circle Systems, Denver
Exploration, drilling and production departments aggressively invest in advanced, proven technology to reduce exploration risk, drill wells more efficiently, and improve margins through reduced costs for producing hydrocarbons. Horizontal drilling and multi-stage fracturing is common practice in shale gas plays but would have been unthinkable a few years ago.
Business systems technology has advanced just as significantly allowing finance and accounting organizations to streamline their business processes with improved cycle times, reduced costs, and automated controls that ensure compliance. Many leading E&P companies are automating processes now to achieve a lower cost, flexible cost structure that positions them to scale operations without adding headcount once drilling activity increases with economic recovery. Accounts payable (AP) is a major cross-functional process that can be dramatically transformed through IT automation.
Historical AP process
The AP process has been paper-based where invoices are received in the field, passed around for approval and coding through a "rubber stamp" and mailed to the headquarters AP department for entry and payment in the accounting system. Without visibility to the invoice from the moment of receipt, it is difficult to accurately accrue expenses and forecast cash requirements. Vendor discounts are lost because, instead of being expedited, invoices are on the approvers' desks while they are out in the field.
Non-productive time is spent in fire drills as headquarters and field personnel try to answer vendor invoice status inquiries or process and pay duplicate invoices re-sent by vendors thinking the original was lost. Data entry costs are high as invoice information is manually entered into the accounting system. Invoices are copied and filed in both field offices and headquarters taking up valuable real estate. Companies are exposed to audit and SOX compliance risks due to manual enforcement of spend authority rules.
Automating the AP process
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. In order to transform AP, invoices must be captured electronically at the front-end and drive the entire process. The steps addressed in automated AP process are:
- 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 and accessible throughout the company.
- Invoice header capture – Invoice header information (vendor, amount, invoice 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.
- Line item coding – Invoice detail is captured including account codes, cost centers, amounts and, if appropriate, well, lease and AFE information.
- Invoice approvals – Invoices are electronically routed internally for the appropriate expenditure, coding, and financial approvals. Automated systems prohibit invoice payment without proper approvals.
- 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.
- Information storage and access – Internal users and external auditors can access documents, header and coding information, status and approvals throughout the entire process. Historical data provides metrics to measure the effectiveness of the process and enable continuous improvement.
AP solutions
Advances in networking, computer storage, data integration standards, and scanning technology 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 don't address the entire process. Document management/imaging systems(DM) and electronic invoicing services (E-Invoicing) are the most prevalent solutions in the oil and gas industry supplementing the accounting system.
Document management and imaging
Document management and imaging 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 utilize 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 is passed into the accounting system's data entry screen for validation and posting. DM systems are usually deployed in-house and invoice documents are accessible through links from the accounting system.
Electronic invoicing
E-Invoicing services are internet-based and optimized for receiving electronic invoice data from vendors that have been on-boarded to the service although they can accommodate scanned invoices. The E-Invoicing service extracts chart of account, vendor, well and AFE information so invoices can be coded appropriately outside of the accounting system. If the vendor submits enough detail, the invoice data can be automatically mapped to the company's internal codes. 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.
Hybrid environments
The oil and gas vendor community is comprised of large companies that can transact business electronically and many small vendors that can only prepare paper invoices.Oil and gas companies realize they need to process both electronic and paper invoices. Since both types of solutions have strengths in different areas – 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. Invoices and data are captured in the respective system. Electronic invoices are sent to the DM system which acts as the central repository for all invoices accessible from the accounting system. Companies choose to do all approvals in one of the two systems to simplify the environment for the approvers. If the E-Invoicing service is used for approvals, scanned invoices are forwarded to it by the DM system.
Benefits of AP automation solutions
According to the IOMA's (Institute of Management & Administration) AP Department Benchmarks and Analysis 2010, report it costs almost 20 times less for companies with high levels of automation to process invoices over those without automation. There are also intangible benefits that accompany the tangible cost savings.
Reduced filing and access costs
Paper invoices are destroyed and file rooms eliminated since invoices are available electronically. "Automating AP streamlines our internal controls process," says Tom Nelson, CFO at Petro-Hunt. "Instead of searching for and copying invoices, we can provide our public and joint interest auditors a CD of the invoices and approvals. They don't even need to come into our office."
Reduced SOX compliance and audit risks
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," states Tom Batsche, assistant controller at Plains Exploration. "We also have a better understanding of our cash needs and have reduced time requirements associated with monthly close cycles."
Non-productive work eliminated
Invoices are tracked upon receipt making it easy to respond to vendor inquiries and identify bottlenecks. Some systems support self-service where vendors can check the status of their invoices. Since invoices are processed quickly, vendors are less likely to send duplicate invoices. If a duplicate invoice is received it is detected upon receipt rather than after being processed a second time up to the point where it is posted for payment. "With an automated system we don't lose any invoices and know their status at all times," comments West Griffin, CFO at Energy XXI. "We can identify bottlenecks and take action to take advantage of discounts."
Increased productivity
AP data entry can be reduced through automatic data capture. Approvers can process invoices anywhere they can get a network connection. Many systems allow users to work off-line and then submit their work once they reconnect to the network.
Improved discount capture
AP systems identify invoices with discounts and expedite the process. Some companies have justified automation just on the money saved by capturing discounts.
Developing an AP 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 burdened 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 our vendors based on the number of invoices processed?
As the process owner, Accounts Payable usually leads the effort to assess the current situation, determine requirements and establish the desired invoice processing model. It is important that constituents from other departments are included in the evaluation team as they are stakeholders impacted by the chosen solution.
Company culture can dictate what solutions are the most feasible and acceptable. A system that requires engineers to perform complex data entry may not be right for the organization. A change management plan should be implemented because everyone in the process will be asked to do different things or the same thing, but in a different way.
IT strategy provides a framework for evaluating different solutions. DM systems can be purchased and implemented internally or hosted and rented in a SaaS (Software as a Service) model. E-invoicing solutions are typically provided as an internet service and priced 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.
An overall business systems strategy and vision provides guidance in decision making. Is AP automation a point solution or part of a sustained effort to automate and reduce costs? DM systems may be leveraged to automate other complex processes like AFE approvals and used as a repository for other corporate records and controls supporting SOX compliance. E-invoicing systems may provide a platform for other electronic transactions with joint venture partners and customers.
With a solid understanding of the current process, desired end-state, culture and strategy, the company can effectively evaluate different solutions. Besides capabilities and price, the vendors' experience in the oil and gas industry should be taken into consideration.
Conclusion
The current generation of AP automation solutions is mature and proven to improve the process and cut costs. Cycle times and costs are significantly reduced so that companies can do "more with less" and are positioned to handle the invoice volumes that will come with increased drilling, exploration and production activity. Today, drilling departments wouldn't use Colonel Drake's rig, and there is no reason for finance and accounting departments to use manual or outdated business solutions.
About the author
George Snow is executive vice president of Full Circle Systems where he is responsible for consulting and product strategy. He has 10 years' experience in the oil and gas industry providing information technology solutions for automating business processes and improving efficiency. Snow earned a bachelor's degree from Lehigh University and an MBA from Dartmouth College.
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