ROI for eliminating the cost of manual data entry when processing paper forms

Published: 22nd December 2009
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Many papers are written on the benefits of digitizing paper and eliminating manual paper processing. The intent of this paper is to focus in on the cost of processing paper orders, like purchase orders or invoices, while offering a step by step process to determine internal cost in addition to exploring the benefits of outsourcing this function to a Service Bureau.

Full Text

As a Sales Manager for a data extraction Service Bureau and former Product Manager for MCI's network fax service, I've seen many applications heavy on paper processing over the years. The greatest challenge in helping customers with this problem and offering an alternative solution is their understanding of their internal cost, and thus ROI when weighing against an alternate solution. To calculate ROI, first you need to know your internal cost. Very, very rarely is this understood by our customers? In a Coopers & Lybrand study in 1998 it references the cost of processing paper at $20 per document. The same study says the cost of finding a misfiled document can be as much as $120, and the cost of labor to find a lost document is $220. Additionally, the Coopers study says 7.5% of all documents get lost and 3% get misfiled. (Coopers & Lybrand, 1998) The cost of processing paper clearly goes well beyond the easily measurable hard cost like FTE's for paper handling and data entry. It also involves soft cost, like the cost of finding a lost document, as cited above related to the Coopers & Lybrand study.

So how do you start quantifying the true cost of processing paper? First, start with the obvious hard cost that involves FTE's processing your paper forms. The formula is relatively simple; the key is the accuracy of the formula by capturing all the hours spent handling the paper. Here is the formula;

Hard Cost Formula

(Number of FTE's) x (hours spent per day) x (Avg. hourly wage) x (total days) = (Annual cost of processing paper) / (documents processed) = hard cost per document

The activities related to hours spent per day that should be considered are the following;

· Creating, sorting, filing and indexing documents

· Printing and inputting documents into ECM or ERP system to begin the work flow process

· Duplicate work in dissimilar systems

· Supervisor review and storage of completed document or order including digitizing the paper

· Searching for lost or misfiled documents

Soft cost

Next, you should include soft cost as part of your ROI calculation. Soft cost includes;

· Error related losses due to manual data entry

· Facilities like power, hardware, connectivity, software

· Support, management and IT

· HR cost like hiring and training due to turnover

· Storage space cost

· Disaster recovery cost

The soft cost is often scoffed at by our customers because including these cost make the ROI for our services seem more attractive. Granted this is true, but does not make the cost any less relevant. According to a paper written by Peter F. Ransome on the keys to achieving ROI with ECM, a telling statistic related to DR is cited. Ransome notes that 90% of all companies that have a major disaster go bankrupt in under 6 months. This statistic may be indicative of the general state of operations for the business or may emphasize the importance of a good DR plan, it is likely a combination of the two. The challenge then, is assigning a quantitative number to the soft cost. (Ransome, Peter, 2006) According to Jerold Zimmerman in his book, "Accounting for decision making and control", ROI for a business unit is evaluated based on performance of its cost center, and its output must be measurable. This involves all the cost associated in producing a profit also known as the matching principle by GAAP (Zimmerman, Jerold, 2009) . So it is entirely relevant and necessary to include both hard and soft cost when determining a true ROI or cost benefit analysis for determining the cost of a solution to automate paper processing.

Internal Analysis

The next step is to go through the internal analysis process to quantify the hard soft cost. Unfortunately, this process involves old fashioned research and number crunching, but is essential to both truly understand internal processes and to arrive at an accurate ROI. Although this is a complicated process, it can be simplified by following the flow of paper from the time it first has an internal touch point, to when fulfillment is complete and the document is stored with consideration for any additional access to that document is the case of secondary billing. Once this process is complete, the cost can be plugged into the cost benefit analysis formula to determine the ROI for a business case.

Final thoughts

ROI is a tool used as a part of the business case to analyze the cost and benefits of making or not making a change in a process. Since the value of outsourcing a key business function like order processing comes down to cost reduction and the choice to make a change or not. ROI is a crucial component to the business case. If the decision to make a change is made, the next question is to evaluate a premise or outsourced solution. As my experience is with ASP's, I am partial to their value proposition. The ASP or Service Bureau's business model is based on economies of scale, since it focuses on this business function, it can spread overhead over more transactions and gain more expertise in that specific business function. This is the case with using a Service Bureau to process paper. The hard and soft cost above considers quantifiable expenses, but another cost factor that should be considered is the cost of capital for the internal hardware that supports the existing processes. NPV and IRR, and MIRR are the financial tools to measure the cost of capital. Outsourcing to a Service Bureau not only should reduce all the associated cost with processing a transaction, but it will also reduce the cost of capital for an internal system along with the risk of implementation. In our experience, we see obsolescence of software and hardware in as little as 6 months with 18 months being the max. Time overruns during implementation can render depreciation schedules as incorrect. In the Service Bureau model, both implementation and risk can be defined and mitigated as the customers is purchasing a service, not hardware and software meant to provide a service. Our experience shows over 90% of the applications we evaluate will reap cost saving benefits when outsourcing paper processing to our Service Bureau.

Benefits of outsourcing your order processing

· Administrative Cost Reductions - 30% - 60% hard dollar savings

· Real-Time Order Processing

· Leveling of Peak Processing

· Significant Reduction in Error Related Loses - Reduces returns and charge backs

· Improves Your Customers Satisfaction - Consistent, accurate on-time deliveries

· Eliminate hardware and software obsolescence

· Eliminate risk of implementing an internal change that doesn't work

If you found this paper beneficial, go to http://ocrservicebureau.com and request a free ROI spreadsheet tool to determine your cost of processing paper.

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