Overcoming The Sunk Cost Bias Against AP Modernization

Remote working requirements have forced corporates to have serious conversations about whether the way their back offices operate is conducive to the realities of a modern economy. For businesses that continue to rely on paper and checks to manage accounts payable (AP) workflows, the reality is that working from home cannot support the legacy ways of paying vendors and managing spend.

In recent weeks, discussions have ballooned about the acceleration of AP automation and cloud adoption as a result of the pandemic. Despite these expectations, the reality is that the digital migration of accounts payable has not been as dramatic or accelerated as initially expected.

“There is this idea that you have these umbilical cords to on-premise systems, physical invoices and checks, reports and other processes,” explained Greg Bartels, CEO of accounts payable technology firm IPS, in a recent interview with PYMNTS.

As it turns out, that umbilical cord is hard to cut, even in a volatile market climate.

Proprietary Systems, Proprietary Needs

One of the biggest challenges for organizations in need of AP transformation is their continued reliance on proprietary, on-premise systems, as well as hybrid systems of on-premise and cloud-based tools.

This strategy leads to a “state of latency,” said Bartels, adding that the continued use of checks and paper documents is difficult to disrupt, because organizations’ entire business models can be based on these legacy workflows.

But those business models are “starting to crumble” in today’s environment, he noted. And increasingly, organizations are discovering that the on-site solutions they’ve built aren’t enough to ensure business continuity today.

Businesses are also discovering the importance of working with an AP solution provider that understands the specific needs of each industry. In the media arena, for instance, payables are complex, and service providers require a high degree of industry-specific knowledge to lower invoice exception rates and enable straight-through processing for seamless vendor payments.

“With media payables, there is an enormous amount of industry knowledge you have to have in order to understand how to make payments to media vendors,” said Bartels. “You have what’s called a path of liability, where agencies are taking money from brands they’re advertising for and placing those funds with media vendors, so there is an intermediary and lots of money going through.”

Understanding these industry nuances was key to signing media buying company Norbella as IPS’ latest client, he noted.

Cutting The Cord

Whether businesses are recognizing that their on-premise AP solutions cannot support a work-from-home model or that their third-party solution providers are failing to address the nuanced challenges of their particular industry, firms are certainly waking up faster than ever to the need to migrate accounts payable to the cloud.

There may be no better opportunity than right now for businesses to take that leap — but, according to Bartels, not every organization is ready.

He noted that many firms have a “sunk cost bias,” having already placed sometimes hundreds of thousands of dollars to deploy an on-premise, proprietary AP solution that fails to meet expectations. Yet because they’ve invested so much money, they’re less likely to change course and invest in a new AP automation solution provider — even if it would address their challenges more effectively.

It’s one of the reasons why organizations have not transformed their AP operations as quickly or dramatically in recent weeks as some might have hoped.

“Strategically, we’re hearing that it’s time to transform accounts payable,” said Bartels, “but we’re not seeing the actions to support the words as much as you would expect.”

Migrating from on-premise solutions to a subscription-based, cloud-based AP provider can help ease the perceived financial burden of AP transformation, he noted, adding that many businesses have a misconception that adjusting their accounts payable strategies will be just as expensive as developing their initial on-premise systems.

“The idea that you can create a path to implementation with much lower upfront costs is a point people need to start to understand,” Bartels said.