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Jun 08, 2017Finance & Accounting Services

The Hidden Costs of OCR

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, such as the AP functionality of the Workday Financial Management application, is an inexpensive means to achieving something that resembles automated invoice processing functionality. Not quite.

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

Hidden Cost 1: Error Rate

Decreasing manual error rates is touted as a key benefit when you’re in the market for an optical character recognition program to streamline your procure to pay process. Most OCR software claims a 99 percent accuracy rate, 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 percent.

Hidden Cost 2: Lack of Enriched Data

Manual configuration and maintenance, coding for non-PO invoices, and pairing for PO invoices is not included in the price of OCR software. That’s because it’s not capable of performing that functionality. When thought of as separate instances, it doesn’t seem to cost much to manually configure, maintain, code, pair and adjust bad data. However, when you combine these instances, the money adds up. Take a single example of what seems to be a minor inconvenience and see how quickly it becomes a major cost.

Let’s say it takes an employee approximately 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 second increments, and the cost associated with them, add up over time, and result in a loss of productivity.

Consider that a typical invoice contains an average of 2,500 characters. A highly accurate scan that captures 95 percent of the characters on the invoice correctly will still incorrectly scan 125 of those characters. At five seconds per error, your employee is going to spend 10 minutes and 25 seconds manually fixing a single invoice. So that five seconds per error has now become 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. Even after the invoice is scanned and error checked by your system, you still need to pair the PO’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, 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 software solution to mimic certain aspects of Robotic Process Automation (RPA). 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 are getting by implementing OCR technology still costs you close to nine bucks per invoice versus doing it manually for $10 per invoice. So 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 are 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.