A Case Study on Invoice Audit Frequency
When evaluating invoice audit frequency requirements in the process of managing utility and telecom expenses, how beneficial is it to audit invoices monthly vs. doing one-off audits? Through years of hands-on experience and daily interactions with our clients, RadiusPoint has concluded that an ongoing monthly billing audit is, in most cases, more beneficial to organizations of a certain size.
In fact, these 5 questions should help determine a correct answer for any organization:
- What impact would refunded overcharges have on your organization’s cash-flow if they occurred once a month vs. once every other year?
- What impact would these refunds have on its tax load and net interest expense if they occurred monthly vs. every other year?
- Do telecom vendors impose a time limit over overcharge refunds? (E.g., 6 months)
- How many overcharge occurrences are typically identified during a one-off audit or ongoing audit? Is it worth the time expense incurred in gathering invoices?
- When using a Telecom Expense Management specialist, does your organization delegate end-to-end control over invoice processing?
These questions also take place in a reflection process around the matter of hiring a TEM-UEM specialist to manage telecom, wireless and utility invoices and services. From experience, we observed that many organizations plan a telecom and utility invoice audit every 2 years. Bringing this frequency to a monthly audit with a view to recouping overcharges each month —instead of leaving vendors playing with the cash a couple years— requires the use of a BPO specialist like RadiusPoint.
Among the many issues to consider when starting a telecom-utility invoice audit process, the resources required to preparing RFPs is an important one. When subjecting telecom/utility services to Requests for Proposal, certain time-consuming tasks must happen, whether the invoice audit is performed every 2 years, or on a monthly basis:
- Time to create the RFP
- Time to evaluate the RFP
- Expertise to evaluate service offerings, i.e. levels of service – (surface audit or in-depth audit)
- Time involved with vendor meetings
- Contract negotiations
- Gathering 2 years of invoice copies
- Gathering vendor contracts
- Gathering other documents required by auditors
- Answering auditors’ questions pertaining to environment, services, and locations
Gathering these documents and the paid labor time involved in going through the RFP process will require an organization Accounting Department to spend less time on regular daily tasks. For some organizations, time constraints are the biggest obstacle in getting an invoice audit scheduled. Switching to a monthly invoice audit conducted by a TEM-UEM specialist may be the only way to overcome that obstacle. What is then the cost of this extra work?
Accounting for the cost of the invoice audit
An Expense Management service provider specializing in telecom, wireless or utility invoices would be receiving the organization’s vendor invoices monthly as a part of their services to manage the full lifecycle of such invoices, from receipt to payment. If this BPO service provider is already processing invoices and allocating charges on a monthly basis, performing a monthly audit is simply the next logical step in the expense management process.
Financial arrangements vary depending on the audit firms hired to perform a one-off audit. Is the audit firm hired on a contingency basis? While this type of arrangement may be appealing (they only share in what is found), it also presents many pitfalls that may result in depriving the organization from the benefits of a full and complete audit.
Based on our experience, these are some of the issues of contingency-based audits:
- Typically identifies only low-hanging fruits
- The inventory of services and cost is NOT fully done
- The contingency fee applies to savings identified, not realized
- ‘Cost Avoided’ charges apply to all overcharges identified and optimization recommendations — whether implemented or not.
- Your team must identify every issue already reported to the vendor before the audit work starts, lest the audit firm takes credit for any Refunds and Costs Avoided.
True cost of contingency-based invoice audit mission
What are the consequences of focusing the audit only on the low-hanging fruits? Most often, the audit only bears on very simple contract issues and third-party charges on local service invoices. At the end of this type of surface audit, the audit firm provides a report of overcharges and refunds but not a complete inventory of services, i.e., every phone number or circuit number identified, together with physical address, and detailed monthly charges and use.
When do Cost Avoided charges come into play? How are they calculated? Most audit firms hired on a contingency basis expect to be paid on “Cost Avoided” over a specific period of time. The audit firm identifies a phone line no longer in use, makes a recommendation to cancel the line, then calculates the associated Cost Avoided over a 12 to 24-month period. The audit firm may or may not actually cancel the line. For the client organization, it is therefore imperative to know who is contractually responsible for disconnecting services so that the purported savings are actually realized.
Here is an example of what a contingency-based invoice audit would cost:
|Refunds identified||Examples of error||Monthly fee in error||Refund achieved||Payment to audit firm|
|35% of one-time credit||Long Distance plan erroneously placed on local service invoice||$100||$600||$210 ($600 x 35%)
Possible loss of 18 months of overcharges $1,800.00 due to vendor refund restrictions
|35% of one-time credit||Contract error on MPLS services||$52,000||$312,000||$109,200 ($312,000 x 35%) Possible loss of 18 months of overcharges $936,000 due to vendor refund restrictions|
This involves a 6-month refund with no interest or taxes paid by the vendor. Telecom and utility vendors differ in their refund policies. Over the past few years, they have shortened their refund period to six months or less. Many vendors have a 1-month refund policy that has to be disputed by the audit firm, simply to retrieve overcharges billed to their client.
|Optimization cost savings||Example of recommendation||Monthly fee (incl. taxes & fees)||Cost avoided||Payment to audit firm|
|35% of Cost Avoided calculated over 12 months||Remove phone line that is no longer needed||$85||$1,020 ($85 x 12 months)||$357 ($1,020 x 35%)|
|35% of Cost Avoided calculated over 12 months||Implement E-Fax technology to eliminate fax lines at 100 locations||$8,500||$102,000 ($8,500 x 12 months)||$35,700 ($102,000 x 35%)|
Would it be more beneficial for the organization to receive error identification and potential Cost Avoidance as part of a monthly telecom/utility invoice audit?
Let’s explore the pros and cons of both frequencies.
Pros & cons of one-off invoice audits
|Refund sharing – no fee until an error is identified||Audit is limited to cherry-picking or surface errors; no deep-dive into services|
|Cost Avoided sharing – No fee until a fee is identified as avoidable or service is optimized||Possible dispute over who found the Cost to Avoid, and who optimized the services
Could result in having to move to a different vendor = additional cost
Could entail payment whether the change is made or not
|Refunds identified as errors can be retroactively claimed for up to +/- 6 months depending on vendor||The error may have been repeated each month for 2 years, yet vendor only re-credit the account for a fraction of the overcharge
The larger the dollar amount, the longer the vendor will take to make the refund. It could take months to recover overcharges
|Dealing with the audit firm only once every other year||Time spent in gathering invoices, contracts, and any required information every other year|
Pros & cons of regular invoice audits by TEM-UEM specialist
|Eliminates the Accounts Payable tasks to payment of invoices||Monthly fee for lifecycle management (receipt to payment) of invoices|
|Eliminates paper invoice handling by the organization; Invoice digitalization performed by TEM-UEM specialist||Perceived loss of direct control of invoice processing|
|Proactive error elimination on a monthly basis through monthly invoice audit||TEM-UEM specialist must be onboarded by vendors|
|No refund sharing, and errors identified monthly through invoice audit|
|No Cost Avoidance fees, and detailed monthly processing allowing for monthly cost optimization|
Hiring a TEM-UEM specialist to manage telecom, wireless and utility invoices throughout their lifecycle may make more sense if the client organization has 50+ locations, multiple wireless users, plans to make acquisitions or divestitures, or has staffing constraints. A strong TEM-UEM specialist will usually offer services to augment an AP team, bring soft savings to the bottom line, and identify errors and other optimizations resulting in hard savings.
Invoice Processing Expense Allocation
Invoice Payment Invoice Imaging
Contract Management Reporting at the Cost Center or Location Level
Reporting at the End-user Level Interface with Accounting Software
Cost of invoice audits based on 2 scenarios
What would be the cost for an organization if it hired a TEM-UEM specialist to manage invoice processing monthly throughout their lifecycle and perform a monthly invoice audit, rather than hiring a firm to provide one-off audits?
In the example below, we assumed that the client organization has $3MM in annual telecom/utility expenses to be managed, and the refunds and Cost Avoided mentioned in the Contingency Audit example above were identified during the one-off audit.
|One-off audit components||Annual cost/expense|
|Labor cost of Accounts Payable processing the invoices||$97,128|
|Hard savings for refund identified and recovered in the one-off audit – Paid to audit firm||$210 + $109,200 = $109,410|
|Hard savings for Cost Avoided in the one-off audit – Paid to audit firm||$357 + $35,700= $36,057|
|Total over a 12-month period (excl. time requirement to create and run RFP process)||$242,595|
In the above example:
• Annual cost of a TEM-UEM specialist: $42,000
• Savings realized by hiring a TEM-UEM specialist: $200,595
These savings would have to be viewed in a couple of ways due to the refund and Cost Avoided differences in the one-time invoice audit and the monthly invoice audit. The monthly audit will allow for an immediate refund and Cost Avoided, eliminating the continuing overpayment of an error over a 24-month period. The one-time audit will most likely leave 18 months worth of unrecoverable overpayments due to the vendors’ refund policies. In this example, the loss amounted to over $900,000 because the audit firm could not get the vendor to refund the entire 24 months of erroneous billing.
What makes more sense for an organization? Is it better to manage invoices monthly and use an outside firm for invoice audit purposes every 2 years… or to receive a monthly invoice audit in the framework of a monthly TEM-UEM specialist’s services?
To start a discussion with our audit specialists around a billing audit for your organization, contact us at your earliest convenience.