June 5, 2017

The hidden costs of OCR

A lot has changed since optical character recognition (OCR) was invented. In 1974, the Dow Jones Industrial Average closed at 616, the average cost of a new home was $34,900, and the average cost of a new car was $3,750.

Likewise, the cost of integrating new tech solutions and adding bolt-on pieces to your business management tools has increased.

Depending on whom you ask, there’s a perception that integrating OCR software with your F&A system is an inexpensive means to achieving something that resembles automated invoice processing.

Well, not quite.

Here are just a few examples of how the illusion of saving money through OCR actually creates hidden costs.

Hidden cost #1: Error rate

Decreasing manual error rates is one supposed benefit when you’re in the market for OCR, and most OCR software claims to be 99% percent accurate. But those results are taken from the best possible conditions: clean, quality images; a consistent invoice format; and simple, unchanged algorithms. Oh, and the OCR software itself has most likely been finely calibrated and given plenty of time to learn. Without the perfect conditions, you are more likely to get a much lower quality rate than 99%.

Hidden cost #2: Lack of enriched data

Manual configuration and maintenance, coding for non-P.O. invoices, and pairing for P.O. invoices are not included in the price of OCR software. That’s because it’s not capable of doing that.

When thought of as separate instances, it doesn’t seem to cost much to manually configure, maintain, code, pair, and adjust bad data. But when you combine these instances, the money adds up.

Let’s consider a single example of what seems to be a minor inconvenience and see how quickly it becomes a major cost.

Suppose it takes an employee just five seconds to catch and manually fix an error on a document. Five seconds isn’t a lot of time. But see how those five seconds, and the costs associated with them, add up over time and result in a loss of productivity.

A typical invoice contains an average of 2,500 characters. A highly accurate scan that captures 95% of the characters on the invoice correctly will still scan 125 of those characters incorrectly.

At five seconds per error, your employee will spend 10 minutes and 25 seconds manually fixing a single invoice. So, we’ve gone from five seconds per error to just over 10 minutes per invoice.

If this diligent employee is making $22.80 an hour (plus benefits), the cost to manually correct a single invoice is just under five bucks (or $3.76 per invoice), making the total annual cost of manually correcting “accurately” scanned invoices $45,124 a year. And even after the invoice is scanned and error checked by your system, you still need to pair the P.O.s and code the invoice to the correct spend category and worktag.

To put that amount of money into a bit of perspective, consider that this amount of money is—as of this writing, at least—roughly the annual salary of a Robotics Tech Engineering Technician in Rochester, MN.

Hidden cost #3: Licensing fees, updates, and ongoing testing

So, let’s consider some other costs typically not disclosed when you’re shopping for an OCR solution.

First, you should expect to pay between two to four dollars per invoice for software, licensing fees, and upgrades.

If your service provider is not working with a Workday-certified vendor, with a dedicated API to Workday, a custom integration will probably run you about $15,000 in the first year, plus 10 hours per update, which occurs twice a year, for testing to maintain going forward. Over a three-year period, that’s about $23,000 or $.63 cents per invoice.

Consider the business case for a customer who has two AP clerks manually inputting 1,000 invoices per month. Unless you really figure in all the costs—including the hidden costs associated with OCR error rates and manual coding—it’s difficult to see any actual, tangible value.

Most likely, that sweet deal you think you’re getting by implementing OCR technology still costs you close to nine bucks per invoice versus doing it manually for $10 per invoice. Is it really worth all the hassle?

The savings you don’t see

The only correct number in the analysis above is the number seven. Unless you spent seven figures for a custom OCR software with all the bells and whistles, along with free IT support to maintain it, you’re probably no better off than you were before.

It’s important to look at all the options when buying software and legacy applications. Follow the cost of a process and see where you’ll be forced to spend after you save. Don’t just follow the money, do the math. Sometimes, the cheaper option ends up being the more expensive solution.

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