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Death by a Thousand Paper Deductions: 21 Stats

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Susie West
2022/03/08

By Susie West

March 2022

When you think of non-trade deductions, you think of grunt work and heavy lifting. It’s not the fun part of Order to Cash. It’s a piece of O2C which is truly non-value adding.

Writing off all your deductions (which would never happen) would cost companies millions a year. So, teams of five to 10 analysts are employed to investigate small to large amounts, often working on thousands of deductions at any given time. As long as the process is manual, the company is losing out because of the high cost of activity, the high write-off threshold, and the stall in working capital.

This article looks at the numbers (some very alarming) related to manual deductions processing, and the more relaxing numbers achieved once you automate.

 

The Problem With Deductions in Numbers:

  1. Looking at all your receivables invoices, chances are that 2% (of the invoice value) will end up being disputed and dropped into your deductions operation if the process is manual*. For a company with revenues of $10 billion, that’s $200 million in open deductions. Yikes. The wider business ramifications will be felt on activities like M&A.
  2. The cost to manage the manual deduction process problem per $ billion in revenue is $140,000 a year. A $10 billion company is looking to spend $1.4 million on a manual deductions operation each year.
  3. The volume of deductions can be overwhelming. If the process is manual, there’s a temptation to write off smaller deductions. Companies generally have a certain write-off threshold, but some thresholds can sound eye-watering. Prior to automation, for example, ShurTech and Danone were writing off any deduction under $250.
  4. Without automation, deductions teams require many hands. On average, companies need to resource up to manage their manual deductions process to the tune of 17 FTEs per $10 billion revenue*.
  5. One issue with manual deductions is the number of systems requiring access. When a non-trade deduction opens up, the analyst generally needs to access and spend time in 4 + systems to investigate the dispute. Toy company Mattel had a team of 16 to 18 FTEs dedicated to deductions. Most deductions were trade, but many disputes concerned shortage and pricing claims. Each non-trade deduction required the analyst to access a Bill of Laden, a Proof of Delivery, the invoice and the shipping details. All these documents sat in separate systems and needed to be pulled manually.
  6. Another issue with non-trade deductions is workflow, or lack thereof. Before automation, Mattel’s non-trade deductions process suffered from a severe lack of clean, visible workflow at the stakeholder level, meaning the deductions team lost a sense of who was doing what.
  7. All this manual effort means that the days spent resolving a deduction easily become weeks. The Hackett Group states it takes 18 days to close a dispute where automation adoption is low or non-existent*.

 

The Deduction Problem Solved in Numbers:

Deductions aren’t going anywhere. It’s a part of the order-to-cash cycle and we’re stuck with it. Therefore, the solution is in how we automate and simplify it.

  1. Good news! Once automated, chances are that your deductions volume will halve from 2% of the invoice value to 1%*. This means a $10 billion company will improve working capital by $100 million.
  2. With imbedded technology, the cost to manage the non-trade deduction process will reduce by 43%, with your costs to run your deductions operation reducing from $140,000 to $80,000 per $billion in revenue*.
  3. Once automated, companies’ write-off threshold usually reduces to something like $20 (a 96% reduction based on $250).
  4. Automation is a massive contributor to becoming world class. And once automation is in place, you need fewer people to manage deductions. The Hackett Group reports that world-class performers see 10 FTEs managing deductions for each $10 billion in revenue. That’s a 41% reduction in headcount. Once automated, Danone was able to free up 6 FTEs out of a team of 8 and reallocate them to more value-adding activities.
  5. The need to access multiple systems reduces to having to access one. Now automated, Danone, Duracell, ShurTech and Mattel log into one tool to see deductions – deductions by analyst, deductions by supplier, most pressing deductions, value of deductions by reason code, volume by reason code, etc.
  6. Automation means workflow issues go away. Reason codes mean the dispute information finds the correct department automatically. All approvals or pending approvals are tracked and monitored and reported on. Analysts will want to focus their efforts on the high-dollar deductions. The low volume/low value deductions in the long tail are, ideally, matched in the background, automatically. Now that Hershey’s is live with its deductions solution, they are enjoying an auto-match rate of 48% for their long-tail customers.
  7. Once the manual effort has been removed, the reduction in cycle time is significant. The Hackett Group says world-class deduction teams are looking at an average of 15 days*. Once automated, Duracell saw their Average Days to Resolve Deductions improve by 76% in the first 6 months of deployment. Danone saw their reduction cycle drop by a staggering 25 days.
  8. With smart automation tools comes the application of confidence percentages. Taking time to scrutinize and investigate each deduction takes its toll on the business. Mattel saw 94% of their invalid deductions accurately predicted once they had gone live, which meant they could trust the system and focus their efforts on investigating the real exceptions.
  9. A more seamless resolution process means a better cash flow. For a $10 billion company, to have $200 million cash stuck in the deductions process is problematic. Danone saw $6 million in working capital recovered as 75% of FTEs channeled efforts into collecting back invalid deductions.

All companies listed here (Danone, Duracell, ShurTech, Mattel and Hershey's) use HighRadius for their Deductions automation. Furthermore, HighRadius works with customers to automate Collections, Credit and Cash Application.

 

This article was commissioned by HighRadius.

 

*The Hackett Group 2020, The Hackett Group Finance Benchmark

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