Best practice finance diagnostic review long

Post Merger Integration of the Finance FunctionA Blueprint to Help Build An integrated Finance Function

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A Prototype for FinanceIntroduction Finance is playing a broader role in the success of companies post M&A. Successive years of downsizing, rightsizing and increasing focus on shareholder value have spotlighted the Chief Financial Officer’s ability to cut costs, to provide accurate information on operations and to assess the bottom-line impact of business decisions.

The transformation of the Finance organization from a scorekeeper to a business partner will require the CFO to master traditional cost-controlling activities, intimately understand the business, identify key business performance measures, relate complex financial markets to internal operations, adopt leading-edge information systems and spear-head efforts to retrain and refocus finance and operations personnel throughout the company.

ObjectiveThis prototype expands on this vision for Finance, provides a view of the issues facing CFOs and outlines techniques for achieving the vision. Best practices for Finance include organizational options, process improvement opportunities, competitive benchmark metrics, financial information systems alternatives and techniques for improving performance measurement.

The prototype is intended to serve as a framework for the development of a highly integrated, high performance finance process in companies of all sizes.

Establishing A New Vision For Finance

Achieving the Vision

Best Practices

• Organization• Process• Systems• Performance Measures


Information

Skills Organization

Technology

Roles andResponsibilities

Finance

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Table of Contents

Establishing A New Vision For Finance Seven Critical Issues Facing CFOs 4 Measuring the Cost 13 Defining the Vision 16

Achieving The Vision Finance Vision Self-Assessment 25 Process Reengineering 30 Organizational Change 31 Performance Measurement Design 32 Financial Systems Improvement 33

Best Practices For Finance Organization 35 Process 42 Systems 59 Performance Measures 63 Case Studies 69


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Seven critical issues Measuring the cost Defining the vision

Information

Skills Organization

Technology


Finance

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The key issues facing CFOs today indicate a shift from the traditional scorekeeper role to one more closely linked with the business

Scorekeeper Business Partner Issue response response

Business partnering and Approver and auditor Advisor, coach and problem solverinfluencing strategic business decisions

Performance Historical reporting of Defining new balanced measuresmeasurement profit and loss linked with business strategy

Information as a competitive Information is power andSharing information is power,asset of the company should be controlled information is a corporate asset

Organization and skills Centralized control, Matrix organization, focus onof Finance focus on accounting decision-making

Cost of Finance More finance staff, better Lean operations, balanced oversight, more control controls, business unit autonomy

Managing all dimensions Report the impact of risk Proactive management of of financial risk on bottom line risk areas

Coordinating improvement Separate, discrete Integrate program of changesprojects around the company projects driven from common goals

Business partnering and Approver and auditor Advisor, coach and problem solverinfluencing strategic business decisions

Performance Historical reporting of Defining new balanced measuresmeasurement profit and loss linked with business strategy

Information as a competitive Information is power andSharing information is power,asset of the company should be controlled information is a corporate asset

Organization and skills Centralized control, Matrix organization, focus onof Finance focus on accounting decision-making

Cost of Finance More finance staff, better Lean operations, balanced oversight, more control controls, business unit autonomy

Managing all dimensions Report the impact of risk Proactive management of of financial risk on bottom line risk areas

Coordinating improvement Separate, discrete Integrate program of changesprojects around the company projects driven from common goals

All CFOs must face seven critical issues:


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The seven critical issues facing CFOs:1. Business partnering and influencing strategic business decisions

Elements of the Issue Questions you should ask Elements of the Issue Questions you should ask

Finance shifts from a transaction orientation to a project orientation

More involvement before strategic decisions are made

Finance as consultant, coach and advisor

Finance shifts from a transaction orientation to a project orientation

More involvement before strategic decisions are made

Finance as consultant, coach and advisor

How can the Finance staff demonstrate their value to the business staff?

What does it mean to add value to your company?

How can the Finance staff obtain a deep and meaningful understanding of operations?

Are new forms of alliances and ventures being established to broaden the reach of your company?

Is Finance taking a proactive role in evaluating the existing portfolio of business and in developing potential strategies?

How can the Finance staff demonstrate their value to the business staff?

What does it mean to add value to your company?

How can the Finance staff obtain a deep and meaningful understanding of operations?

Are new forms of alliances and ventures being established to broaden the reach of your company?

Is Finance taking a proactive role in evaluating the existing portfolio of business and in developing potential strategies?


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The seven critical issues facing CFOs:2. Performance measurement


Balancing measures - internal vs. external, process vs. result, financial vs. operating

Choosing the few measures that link to strategy

Intelligent linkage of performance measures with incentive compensation programs

Keeping measurement systems simple

Balancing measures - internal vs. external, process vs. result, financial vs. operating

Choosing the few measures that link to strategy

Intelligent linkage of performance measures with incentive compensation programs

Keeping measurement systems simple

Is the number of measures appropriate? Are the measures linked to business

strategy? Does Finance impact the establishment of

operational measures?

Is the number of measures appropriate? Are the measures linked to business

strategy? Does Finance impact the establishment of

operational measures?


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The seven critical issues facing CFOs:3. Information as a competitive asset of the company


Information access to all who need it

Finance has the responsibility to verify the “official” numbers not restrict them

Encourage external, prospective information

Strive for single storage of information in common, shared repository

Information access to all who need it

Finance has the responsibility to verify the “official” numbers not restrict them

Encourage external, prospective information

Strive for single storage of information in common, shared repository

What is the reporting relationship between Finance and information systems?

Does Finance report both financial and operational measures?

How much emphasis is placed on forward-looking measures?

Does Finance lead the effort to select, collect and disseminate key measurement information that helps the business to achieve its strategy?

What is the reporting relationship between Finance and information systems?

Does Finance report both financial and operational measures?

How much emphasis is placed on forward-looking measures?

Does Finance lead the effort to select, collect and disseminate key measurement information that helps the business to achieve its strategy?


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The seven critical issues facing CFOs:4. Organization and skills of Finance


Link Finance organization structure to business strategy

Build a small core Finance staff with deep skills

Educate business people in financial concepts

Centralize transaction processing. Distribute decision support

Link Finance organization structure to business strategy

Build a small core Finance staff with deep skills

Educate business people in financial concepts

Centralize transaction processing. Distribute decision support

What functions are centralized today? Can more of the transaction processing be

centralized? What skills are lacking in Finance? Can the financial competency of the

business staff be increased?

What functions are centralized today? Can more of the transaction processing be

centralized? What skills are lacking in Finance? Can the financial competency of the

business staff be increased?


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The seven critical issues facing CFOs:5. The cost of Finance


Streamline transaction processing

Invest in decision support Look to systems to reduce total

long-term cost Benchmark carefully with peers

Streamline transaction processing

Invest in decision support Look to systems to reduce total

long-term cost Benchmark carefully with peers

How does your Finance cost compare to your peers?

Do you have sufficient decision-support capabilities?

Can systems changes produce process savings?

Is the current cost of Finance allocated properly between processing and analysis?

How does your Finance cost compare to your peers?

Do you have sufficient decision-support capabilities?

Can systems changes produce process savings?

Is the current cost of Finance allocated properly between processing and analysis?


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The seven critical issues facing CFOs:6. Managing all Dimensions of Financial Risk


Risks are becoming more complex

Monitoring operational and financial risk

Reporting requirements to external parties and to management

Risks are becoming more complex

Monitoring operational and financial risk

Reporting requirements to external parties and to management

Is the CFO linked into all risk management activities such as insurance and safety?

Is there adequate oversight over new financial instruments and investments?

Is the appropriate information related to this risk presented to shareholders and other external entities?

Is the CFO linked into all risk management activities such as insurance and safety?

Is there adequate oversight over new financial instruments and investments?

Is the appropriate information related to this risk presented to shareholders and other external entities?


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The seven critical issues facing CFOs:7. Coordinating improvement projects around the company


Tracking concurrent projects Linking initiatives through linking

goals Prioritizing projects and making

choices Communicating objectives,

progress and results

Tracking concurrent projects Linking initiatives through linking

goals Prioritizing projects and making

choices Communicating objectives,

progress and results

Can you identify all of your improvement projects?

Are all projects working together? Are resources dedicated to the greatest

potential areas?

Can you identify all of your improvement projects?

Are all projects working together? Are resources dedicated to the greatest

potential areas?


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Information

Skills Organization

Technology




Finance

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Percent of total

revenue

3.0%

2.1%

1.0%

The overall cost of the Finance function is one broad measurement for determining the relative efficiency of the function

The total cost of the Finance function varies:

– Extremely efficient companies 1.0%

– Fortune 500 company average 2.1%

– Inefficient companies 3.0%

Source: Price Waterhouse Surveys


0%

1%

2%

3%

Inefficent companies Fortune 500 average Best-in-Class

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The 1% to 3% range as a percent of revenue is largely driven by headcount. Surveys of multi-billion dollar companies indicate a wide range in the headcount per revenue relationship.

SOURCE: Gunn Howell Markos Partners, Inc. March 30, 1993.

Finance headcount per $ billion of revenue

73.2

140.2

247.0

299.6

621.8

4th Quartile

3rd Quartile

2nd Quartile

1st Quartile


Finance headcount

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Information

Skills Organization

Technology


Finance

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A Finance Vision is defined in a variety of dimensions

The Finance Vision is to continuously provide a proactive, forward-looking service that focuses on business issues, performance measures and value-added analysis to assist the Company and business units. This can be achieved by:

Skills

Infor-mation

Organization


Tech-nology


– Shifting Finance from scorekeeper to business partner

– Streamlining the financial processes – elimination of non-value added activities

– Providing more useful information

– Enhancing financial skills

– Organizing the financial staff for maximum benefit

– Enhancing customer focus

– Improving the use of technology

Information

Skills Organization

Technology


Finance

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The role of Finance is evolving from a controlling role to an influencing role

Ensure financial integrity Satisfy shareholder needs Increase shareholder value Manage financial risks Serve as business advisor Serve as MIS liaison to the businesses Take ownership of financial processes Educate business staff in finance Audit records inconspicuously Foster continuous improvement mindset Implement short-term improvements Implement long-term financial strategies Identify performance measures and cost drivers Facilitate communications between businesses

Roles andresponsibilities

Roles and responsibilitiesFinance Vision


Finance

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Finance

Technology allows Finance to streamline processes and improve access to information

Adopt state-of-the-art, but notbleeding-edge technology

Integrate financial applications (not necessarily one application)

Financial system investments prioritized based on strategy

Standard Finance toolsets (one for executive, one for analysts)

User-friendly, on-line, graphics, drill down and EIS capability

Technology investments cost - justified

Technology

Technology


Finance Vision

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Finance

The organization of finance is shifting to support a more agile, volatile business environment

Small “pure” Finance unit

High-caliber Finance staff

Business Finance units sponsored and funded by the businesses

Size of Business Finance unit determined jointly by Business and Finance

All operational activities shifted to Operations

Where appropriate, some Finance activities shifted to Operations

Organization

Organization


Finance Vision

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Financial skills are evolving from an accounting control orientation to a financial advisory orientation

Robust financial analysis skills

Expanded understanding of finance and accounting

Formal staff rotation and succession planning

MIS literate

Continuous improvement mindset

Performance evaluated on performance improvements – business and process

Focus on helping, facilitating and following-through on initiatives

Ability to work on cross-functional teams

Skills

Skills


Finance Vision

Finance

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Finance

Information, once a source of power, is now an asset to be leveraged throughout the business

Accurate, accessible, and timely

Entered and stored once

Logical roll-up of data to meet business needs

Security ensured

Analysis of trends

Production of performance measures and process metrics

Information

Information


Finance Vision

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Creating a Finance Vision Statement helps to articulate Finance’s role in the company, to set its direction and to prioritize future improvement programs

Vision Statement

• Influence the right business decisions…

…To exceed competitors’ growth in shareholder value and cash flow

• By providing:• Innovative and actionable

information and performance reporting

• Quality financial and information services

• By being:• Good business partners

Representative Finance Vision Statement


Information

Skills Organization

Technology


Finance

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The design of the Finance organization and its roles, responsibilities and values must reflect the philosophy of executive management

Traditional Emphasis Emerging EmphasisTraditional Emphasis Emerging Emphasis

Manage by objectives Manage by values

Efficiency Effectiveness

Customer first Customer and staff

Information is power Information sharing is power

Supervise employees Empower employees

Individual learning Team and organization learning

Measure results Understand process

Controlling role of Finance Influencing role of Finance

Financial measures Operational measures

Mergers and acquisitions Partnerships and alliances

Defined organization structures Agile and virtual organization

Match norms Diversity

Direction Consensus

Vertical management Horizontal management

Organizational boundaries Boundaryless organization

Manage by objectives Manage by values

Efficiency Effectiveness

Customer first Customer and staff

Information is power Information sharing is power

Supervise employees Empower employees

Individual learning Team and organization learning

Measure results Understand process

Controlling role of Finance Influencing role of Finance

Financial measures Operational measures

Mergers and acquisitions Partnerships and alliances

Defined organization structures Agile and virtual organization

Match norms Diversity

Direction Consensus

Vertical management Horizontal management

Organizational boundaries Boundaryless organization


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Achieving The Vision

Finance Vision Self-Assessment Business Process Transformation Organizational Change – BetterTech Performance Measurement Financial System Improvement

Information

Skills Organization

Technology


Finance

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1. Finance vision self-assessment: A diagnostic tool to identify the gap between where you

are and where you want to be

2. Business process transformation A proven approach to redesign financial processes for

improved results

3. BetterTech An approach for managing the staff and organizational

dynamics of process and systems-driven change.

4. Performance measurement Designing and implementing a system of performance

measures that link with business strategy

5. Financial system improvement A systematic approach for evaluating your financial

applications and implementing new or improved packages

Skills

Information

Organization


Technology

Depending on the needs of the company, a wide range of improvement tools are available to help achieve Finance’s new vision


Finance

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Each of the five improvement tools addresses a unique subset of the Finance Vision Components


Components of the Vision

1. Vision self-assessment

2. Business process transformation

3. BetterTech

4. Performance measurement

5. Financial system improvement

ProcessSkills InformationRoles and

ResponsibilitiesTechnologyOrganizationImprovement Tools

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Sample Page

The Finance Vision self-assessment helps an organization to design an improvement program that focuses on reducing the gap between current and desired performance

1. Finance Vision self-assessment

IV. Organization

Small “Pure” finance unit

High-caliber finance staff

Business finance units sponsored and funded by the businesses

Size of Business Finance Unit Determined Jointly by Business and Finance

All operational activities shifted to Operations

Where appropriate, some Finance activities shifted to Operations

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

ExceptionalAbove

Average AverageBelow

AverageNot

Import

Where has the focus of the Financefunction been today?

Where should the focus of the Finance function be tomorrow?

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

ExceptionalAbove

Average AverageBelow

AverageNot

Import


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The gaps identified in the Finance Vision self-assessment determine how other tools can be used to improve performance

IV. Organization

Small “Pure” Finance Unit

High Caliber Finance staff

Business Finance Units Sponsored and Funded by the Businesses

Size of Business Finance Unit Determined Jointly by Business and Finance

All Operational Activities Shifted to Operations

Where Appropriate, Some Finance Activities Shifted to Operations

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

Exceptional

AboveAverage Average

BelowAverage

NotImport

Where has the focus of the Financefunction been today?

Where should the focus of the Finance function be tomorrow?

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

5 4 3 2 1

Exceptional

AboveAverage Average

BelowAverage

NotImport

1. Finance Vision self-assessment


Redesigning the performance measurement system allows linkage of business strategy with reward systems

4. Energizing the company through performance measurement

• Determine overall strategies and business environment

• Develop a value chain

• Determine strategic initiatives

• Review current Performance Measurement questionnaire and results

• Brainstorm possible measures

• Evaluate preliminary measures using Delphi voting process

• Discuss meaures

• Design chart books

• Review with Steering Committee

• Review measurement set

• Validate measures

• Develop implementation plan

• Present recommendations

• Review implementation plan

• Construct charts

• Link with information systems

• Integrate into management process

• Discuss measurement link to reward system

• Modify reward system

• Monitor and improve results

Performance Measurement Design Implementation Compensation

Fact finding Selection Confirmation

Phase I Phase II Phase III

The systems development lifecycle can be used to analyze, develop and implement enhanced financial systems which make information rapidly available to finance and the business

Requirements definition

Software installation

Design and integration

Program coding and testing

Project/change management

Package evaluation

Systemtesting Training

Implementation and system acceptance

Post-Implementation review

ANALYSIS DESIGN CONSTRUCTION IMPLEMENTATION

5. Financial systems improvement

2.

Business process transformation

3.

BetterTech

4.

Performance measurement

5.Financial systems improvement


Envision New ProcessesEvaluate Processes

Manage Transition Activities

Map selectedfinancial

processes

Conduct project initiation activities

Conduct Finance function interviews

Prepareand present summary of envisioned processes

Assess customer satisfaction

Profile current financial systems

Collect and compare best practices

Summarize opportunities for

improvement

2. 13.Develop integrated

implementation plan

12.

Evaluate system options

11.

Conduct Envisioning Workshops

8.7.

6.

4.

3.

1.

Identifyquick hit

opportunities

10.

Refine new process design

9.

5.

The financial processes can be analyzed and redesigned to reduce cost and improve the degree of value added to the business

3. BetterTech

The uncertainties of the people and organizational dynamics of change can be managed with systematic tools and techniques

PROCESSAND

SYSTEMSCHANGE

STAFFAND

ORGANIZATIONCHANGE

Buildprojectteam

Articulate business vision

Alignstructure

Implement communication leadershipAlign rewards

Alignculture

Developchangeleadership

Design jobs

Establish change readiness

Develop HR policies

Developfunctional and supervisory skills

Conduct stakeholder analysis

Develop performance measures

Continuously improve:• Measures• Structure• Rewards• Skill• Culture

Developsystemsskills

Establish project team, resources and schedule

Map “as is” processes

Design “to be” processes

Specify functionality

Develop prototypes

Test and pilot the processes

Configure the system

Turn the system on

Implement the processes

Institutionalize

Maintain and improve



Requirements definition

Data Conversion

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To reduce cost and improve the degree of value added to the business, the financial processes are analyzed and redesigned

Envision New ProcessesEvaluate Processes

Manage Transition Activities

Map selectedfinancial

processes

Conduct project

initiation activities

Conduct Finance function

interviews

Prepareand

present summary

of envisione

d processes

Assess customer satisfactio

n

Profile current financial systems

Collect and compare

best practices

Summarize opportuniti

es for improveme

nt

2.

13.Develop

integrated implementati

on plan

12.

Evaluate system options

11.

Conduct Envisionin

g Workshop

s

8.

7.

6.

4.

3.

1.

Identifyquick hit

opportunities

10.

Refine new

process design

9.

5.



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3. BetterTech

The BetterTech systematic tools and techniques help manage the uncertainties of the people and organizational dynamics of change

Exact timing will vary. Many activities will be iterative and continuous.

PROCESSAND

SYSTEMSCHANGE

STAFFAND

ORGANIZATIONCHANGE

Buildprojectteam Articulate

business vision

Alignstructure

Implement communication leadership

Align rewards

Alignculture

Developchangeleadership

Design jobs

Establish change readiness

Develop HR policies

Developfunctional and supervisory skills

Conduct stakeholder analysis

Develop performance measures

Continuously improve:• Measures• Structure• Rewards• Skill• Culture

Developsystemsskills

Establish project team, resources and schedule

Map “as is” processes

Design “to be” processes

Specify functionality

Develop prototypes

Test and pilot the processes

Configure the system

Turn the system on

Implement the processes

Institutionalize

Maintain and improve




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Redesigning the performance measurement system allows linkage of business strategy with reward systems

4. Performance measurement

• Determine overall strategies and business environment

• Develop a value chain

• Determine strategic initiatives

• Review current Performance Measurement questionnaire and results

• Brainstorm possible measures

• Evaluate preliminary measures using Delphi voting process

• Discuss measures

• Design chart books

• Review with Steering Committee

• Review measurement set

• Validate measures

• Develop implementation plan

• Present recommendations

• Review implementation plan

• Construct charts

• Link with information systems

• Integrate into management process

• Discuss measurement link to reward system

• Modify reward system

• Monitor and improve results

Performance Measurement Design Implementation Compensation

Fact finding Selection Confirmation

Phase I Phase II Phase III


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The systems development lifecycle is used to analyze, develop and implement enhanced financial systems that make information rapidly available to Finance and the business

Requirements

definition

Software installati

on

Design and

integration

Program coding and

testing

Data conversion

Project/change management

Package evaluati

on

Systemtesting

Training

Implementation and system

acceptance

Post-implementation review

Requirements

definition


Achieving the Vision

5. Financial systems improvement

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Best Practices

Organization Process Systems Performance Measures

Information

Skills Organization

Technology


Finance

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The Finance Vision can be achieved through the application of the relevant tools along with the appropriate best practices

Organization and staff development Best Practices

Financial process Best Practices

– Performance goals

– Benchmark metrics

– Best Practice procedures

Financial system trends and options Performance measurement

principles and benchmarks Case examples

Information

Skills Organization

Technology


Best Practices for Finance


Finance

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Focusing on Best Practices for organizing Finance will assist in the transformation from scorekeeper to business advisor

RolesRoles SkillsSkills ObjectivesObjectives

Organizational Best Practices for Finance

Utilize finance function as a catalyst for change

Locate finance teams in business units

Balance service and control roles

Encourage diversity among finance staff

Produce monthly financial bulletin to all employees

Adopt decentralized, matrix-managed finance function

Refocus finance as more team-oriented, less expert-oriented

Conduct worldwide controllers conference

Reduce processes owned by Finance

Centralize transaction processing

Implement shared services center

Outsource transaction processing

Utilize finance function as a catalyst for change

Locate finance teams in business units

Balance service and control roles

Encourage diversity among finance staff

Produce monthly financial bulletin to all employees

Adopt decentralized, matrix-managed finance function

Refocus finance as more team-oriented, less expert-oriented

Conduct worldwide controllers conference

Reduce processes owned by Finance

Centralize transaction processing

Implement shared services center

Outsource transaction processing

Finance staff: In business units With improved interpersonal skills Becoming business managers As integral parts of business teams Becoming more strategic and team-

oriented With focus on process and results Serving internal customers Using self-managed teams CFO as cultural change agent With broad knowledge of

the business With general management

orientation In cross-functional, problem-solving

teams Supporting largest customers Moving to and from marketing

and manufacturing Encouraging financial literacy

throughout the company

Finance staff: In business units With improved interpersonal skills Becoming business managers As integral parts of business teams Becoming more strategic and team-

oriented With focus on process and results Serving internal customers Using self-managed teams CFO as cultural change agent With broad knowledge of

the business With general management

orientation In cross-functional, problem-solving

teams Supporting largest customers Moving to and from marketing

and manufacturing Encouraging financial literacy

throughout the company

Loosen expense controls Concentrate on cash flow not

profits Push down spending authority Reduce errors and cycle time

through information sharing Reduce corporate finance staff

size View financial results as results,

not ends Eliminate unnecessary controls Reduce layers of management

and review No single right answer, many

ways to do things Produce information, not data Increase sharing of financial

information Break down silos through

sharing of financial information

Loosen expense controls Concentrate on cash flow not

profits Push down spending authority Reduce errors and cycle time

through information sharing Reduce corporate finance staff

size View financial results as results,

not ends Eliminate unnecessary controls Reduce layers of management

and review No single right answer, many

ways to do things Produce information, not data Increase sharing of financial

information Break down silos through

sharing of financial information


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A matrixed finance organization is viewed as more responsive to the customer than the traditional centralized Finance organization

Gate-keeper, auditor

Accounting specialist, highly standardized procedures

Headquarters has the knowledge, authority and control

Historical number crunching, centralized decision-making

Team member, coach, advisor

Business perspective and operational exposure, more flexible procedures

Knowledge, authority and control distributed throughout the business

Prospective analysis and problem-solving

CentralizedFinance

MatrixedFinance


Organizational options

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The companies leading the financial turnaround enhance the position of the financial professional, using every tool possible, from compensation to training to professional development

Staff development is one key elementin the transformation process

Acquire relatively few, high quality staff; compensate them well and expect higher productivity to offset the cost

Give individuals substantial leeway in structuring their jobs to speed their development and increase their job satisfaction

Explicitly manage the hiring, placement, training and rotation of Finance professionals thoughout the organization

Merck provides substantially above average compensation but has a “below average cost of the Finance function”

Citicorp considers a business unit controller position essential for advancement within Finance

Pepsico moves Finance professionals every 12-18 months to ensure that individuals don’t become isolated or stale

Scott Paper utilizes a committee including the corporate and division controllers for the placement and development of all finance professionals

Best Practice Examples

Source: PW benchmarking/Best Practice research. Continued...


Staff development Best Practices

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Staff development Best Practices

Staff development is one key elementin the transformation process

Source: PW benchmarking/best practice research.

Aggressively seek out business understanding to increase attractiveness/usefulness of financial professional contribution

Actively weed out poor performers and those unable to make the transformation and reward superior performers

Build loyalty and pride among Finance professionals, regardless of whether they report into the central function or are part of business units

General Electric invests more dollars on training per employee than any of the Fortune 500

Exxon and General Motors consistently rotate finance staff to and from central Finance to give them a sense of Finance as a home

Exxon and Anheuser-Busch Finance professionals adhere to a functional work ethic that exceeds the norms of the company. “Last guys out are always Finance”

Best practice Examples


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Ford demonstrates the value of a matrix organization

SOURCE: CFO Magazine, March 1995.

Organization Best Practices: Matrix

The goal:

Transform the role of Finance from gate keeper to team member

Measurement:

The profit measurement dimensions have been shifted Product line is now the #1 dimension of profitability measurement Corporate function is the secondary dimension The geographic dimension moves from # 1 to # 3

Organization:

The Central Finance Organization has been disbanded Shifting Finance staff to product development teams Finance staff won’t advance without operating experience on their resumes Finance staff are gaining credibility with Operations staff Extensive finance staff movement to sales, treasury, international and production line supervision Best and brightest Finance staff put on the line not in HQ Financial Planning, Profit Analysis, Financial Systems and Accounting report to Business Unit Head Treasury and Corporate Finance report to CFO Business Controllers report to Business Unit Heads with dotted line to CFO

“We are going to run our business the way the market looks at it.”

“We are going to run our business the way the market looks at it.”

– Ford Finance Executive


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Spotlight on shared services for Finance

Shared financial services are an appropriate organizational option for those processes where decisions affect the entire company and where economies of scale are achievable

Benefits of shared services

• Lower administrative costs• Faster processes• Better use of system investments• Balancing workloads• Better communications• Consistent processes• Improved customer service• Leveraged purchasing• Improved cash management

Shared services issues and key decisions

• Which processes to include?• What is best organizational structure?• How to standardize procedures?• Which systems to standardize with?• How to communicate with divisions and customers?• Any logistics difficulties?• How to charge for services?• Shared Services in US vs. Shared Services in Europe.

Services typically shared

• Accounts Payable• Payroll• General Accounting• Accounts Receivable• Treasury• Tax• Strategic Procurement• Budgeting/Forecasting• Internal Audit

Services which typicallyremain locally

• Financial analysis• Financial reporting• Requisitioning• Customer management• Cost accounting• Fixed assets• Human resources

Case examples

• General Electric - Financial Services Operation (FSO)

• Young and Rubicam• Johnson & Johnson• CPC International• BP European HQ• PepsiCo Pan-European

Service Center


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The Finance Value Line can be used to separate the various Finance processes between transaction processing activities and decision support activities. Best Practices are available for each process on the Value Line

• Expenditure Cycle

• Revenue Cycle

• Fixed Assets

• Production Costs and Inventory

• Employee Compensation and Benefits

• Financial Reporting

– General Ledger Accounting

– Consolidations

• Financial Planning and Analysis


– Management Reporting

– External Reporting

Plan and Manage Business

Financial Analysis and

Reporting

Perform Accounting

Close

Manage Accounting

Transactions and Ensure

Compliance


– Budgeting

• Treasury

• Internal Audit

• Tax

Core Transactions and Processes Decision Support and Risk Management

Finance Value Line


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The overall financial process is comprised of 10 key sub-processes

Process-by-process summaries

For each sub-process, we have identified performance goals, performance metrics, best practices

and examples of companies who have successfully improved these sub-processes. The

performance metrics and Best Practices have been collected through benchmarking surveys and

process improvement projects. The data comes from hundreds of corporate headquarters,

divisions, plants and office locations around the world.

Expenditure cycle Revenue cycle Financial reporting Financial planning and analysis Production costs and inventory

Fixed assets Employee compensation and benefits Treasury Tax Internal audit


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Process summary

Process flow

Tender, negotiate,and award contract

Order and receivegoods and services

Process accountspayable

Pay suppliers

Performance goals:

Low cost of process and purchased itemscycle time of process and deliveryHigh percentage of items received on-timeHigh quality of items receivedReduce the # of PO’s and invoicesTimely payment cycleAccuracy of transactions

Best Practices:

• Vendor management role of purchasing• Vendor performance monitoring (cost, quality, delivery)• “Coordinated” purchasing• Commodity teams• “Local” purchasing with approved vendors• Procurement cards• Electronic requisitioning, routing, approval• EDI linkage to suppliers, paperless PO’s Integration with materials mgmt. / General Ledger Systems• Integrated Purchasing and A/P Systems/single vendor file

Performance metrics: Benchmark target level

Total cost of expenditure cycle / $1000 revenues $1.97Average cost per PO 10.41Average cost per invoice 2.22Cycle time to schedule payment 3 DaysPercent of transactions w/o error 98%Percent of line items received on-time 95%

System options:

•SAP R/2 and R/3 A/P PO Mainframe and client server•DBS smart stream A/P New client server•Oracle financials A/P PO Client server, oracle DBMS

Case examples:

Ford - process reengineering, use of ERSSony Music - Paperless Req-to-Check processWarner Lambert - vendor management programDEC - Centralized AP organization

Guide to interpreting the process summaries

Decomposes process into key elements

Presents benchmark statistics to help measure the health of the process

Identifies the critical success factors of the process

Lists those best practices used by companiesexhibiting best-in-class performance metrics

Identifies automated system vendorswho are considered leaders inproviding solutions for this process

Lists specific companies who havesuccessfully redesigned this processand would be a potential source ofadditional information. Refer to KnowledgeView for more details


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Expenditure cycle

Process flow

Tender, negotiate,and award contract

Order and receiveGoods and services

Process AccountsPayable

Pay suppliers

Performance goals:

Low cost of process and purchased itemsCycle time of process and deliveryHigh percentage of items received on-timeHigh quality of items receivedReduce the # of PO’s and invoicesTimely payment cycleAccuracy of transactions

Best Practices:

• Paperless requisition-to-check processing• Vendor performance monitoring (cost, quality, delivery)• “Coordinated” purchasing• Commodity teams• “Local” purchasing with approved vendors• Procurement cards• Electronic requisitioning, routing, approval• EDI Linkage to suppliers, paperless PO’s• Integration with materials mgmt. / General Ledger systems• Integrated purchasing and A/P systems/single vendor file


Total cost of expenditure cycle / $1000 revenues $1.97Average cost per PO 10.41Average cost per Invoice 2.22Cycle time to schedule payment 3 DaysPercent of transactions w/o error 98%Percent of line items received on-time 95%

System options:

•SAP R/2 and R/3 A/P PO Mainframe & client server•DBS SmartStream A/P New client server•Oracle financials A/P PO Client server, Oracle DBMS•Walker Mainframe, DB2•JDE AS/400 •Software 2000 AS/400•Lawson Client server•PeopleSoft Client server, new, No PO

Case examples:

Ford - process reengineering, use of ERSSony Music - paperless req-to-check processWarner Lambert - Vendor Management ProgramDEC - Centralized AP organization

• Collocation of Accounts Payable and Purchasing• Evaluated receipt settlement• Electronic matching - 3 way, 2 way• Single centralized system for all payables• Electronic approval of invoices (Lotus Notes)• Image processing of invoices• Automatic payment of recurring transactions• Automation accruals based on orders and receipts• Consolidation of multiple invoices into one payment• Electronic funds transfer• Centralized AP organization / multi-function staff


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Expenditure cycle: Spotlight on paperless requisition to check processing

Receiving•Accesses Lotus Notes•Receives goods•Confirms receipt against PO•Initiates 2-way match payment

Accounts Payable•Accesses Lotus Notes•Invoice processing•3-way matching•Check processing

User•Accesses Lotus Notes•Requisition “icon”•Enters commodity choice•Selects vendor from approved vendor listing

•Indicates receipt of goods

Financial Systems & Information Repository

•Financial systems•Potential Oracle/UNIX – tracking – matching

1

4

3

3

2

Lotus Notes•Commodity driven•On-line price file•Approved vendor listing•Electronic communication

•Access to financial systems information

The advent of information technology advances such as EDI, GroupWare and Client-Server applications have made paperless purchasing and accounts payable possible

Fax server to vendor


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Revenue cycle

Process flow

• Use of quantitative goals for A/R performance• Systems allow on-line, real-time cash application• Automated interface with general ledger• Automated link with lockbox cash receipt data• Multi-functional teams to resolve deduction issues

Total cost of revenue cycle / $1000 revenues $0.49Percent of billings that are error-free 99.71%Average personnel cost per invoice 0.70Average number of invoices/FTE/year 27,237Total cost to credit/collections / $1000 revenues 0.32Average days sales 21Percent of invoices paid on time 92%Bad debt write-offs / total revenue 0.00%Total cost of A/R / $1000 revenues 0.14Percent of payments that are first time matches 96%Total cost of deductions resolution / $1000 revenues 0.03

Resolve customerdeductions

Administer credit and collections

Process accountsreceivable

Performance goals:

Low cost of processAccuracy of billingsTimeliness/speed of billingsHigh productivity of staff


Best Practices:

• Order entry centralized in customer service• Centralized invoice printing and control• Use of automated systems• Integrated order and billing systems• Automated approval of exception invoices• Use credit teams to manage customer relationships• On-line access to customer history/balances• Materiality limits for automatic write-off tolerances

System options:

• SAP R/2 and R/3 Mainframe & Client Server• DBS Smartstream New Client Server• Oracle Financials Client Server, Oracle DBMS• Walker Mainframe, DB2• JDE AS/400• Software 2000 AS/400• PeopleSoft Client Server

Case examples:

Pepsi Cola - A/R Shared Services ImplementationBristol Meyers Squibb: Consumer Products - Single A/R Function for 3 Divisions Pharmaceutical - A/R Shared Services ImplementationCPC Inc./Best Foods - A/R Shared Services ImplementationChipCom - Order Management System Implementation

Bill customers


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Financial reporting

Process flow

General ledger accounting

Consolidations Managementreporting

Performance goals:

Low cost of processSpeed of cycle timeAccuracy of entriesHigh productivity of staffLow percentage of overtimeAccuracy of reportsAccuracy of forecasts

Best Practices:

System options:

• SAP R/2 and R/3 G/L Mainframe & Client Server• DBS SmartStream G/L New Client Server• Oracle Financials G/L Client Server, Oracle DBMS• Walker G/L Mainframe, DB2• JDE G/L AS/400 • Software 2000 G/L AS/400• Platinum AS/400• PeopleSoft G/L Client Server, New


Total Cost of financial reporting / $1000 revenues $1.37Percent of G/L time spent on corrections 1.31%Cycle time to close G/L 4 DaysPercent profit forecast variance 2%Cycle time for annual budget preparation 60 DaysTotal cost of management rptg. / $1000 revenues $0.24Cycle time for senior management to get reports 3 DaysTotal cost of budget process / $1000 revenues $0.63

Case examples:

Warner-Lambert - Consolidations RedesignNew England Electric - Walker ImplementationSolomon Inc. - DBS ImplementationBP Oil Europe - Oracle ImplementationShell Chemical - SAP ImplementationUnited Distillers - Software 2000 ImplementationCaremark - Platinum Implementation

External reporting

Budgeting

• Shortened / streamlined close process• Soft Close for non-quarter months• Electronic approval of journals• Real-time data access, user-oriented, standard, GUI tools• Focus on analysis vs. transaction processing• Liaison teams linking business and accounting• Challenge policies for materiality• Enterprise-wide financial information warehouse• Ledger fully integrated with distributed budget analysis

• Standardized “reporting” chart of accounts• Profitability analysis by product, market, geography and customer• Flexible overhead allocations• Charge data providers a fee for correcting erroneous data• Journal entry data is staged throughout the month• Missing data does not stop the closing process• Automatic reversal of journal entries


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Financial planning and analysis

Process flow

Performance goals:

Increase accuracy of forecastingLink strategic planning to financial forecastingImprove efficiency of forecasting and measurementsIncrease speed of forecasting and measurementsLimit number of planning iterations

Best Practices:

• Integrated forecast and measurement processes• Five qtr. rolling forecast replaces the annual plan• Ability to develop flash reports after the first day of close• Use product or service composites to forecast/measure• Database of plan and actuals generates mgmt. reports• Integrated/common planning tools• Standardized chart of accounts• Operational structure in tables not account codes• Strat. plan provides targets for “top-down” FP&A process• Targets focused on market share and competition• Continuous planning mindset


Dimensions planned, forecasted & measured in detail 1Iterations per plan or forecast cycle 2 or fewerLine Items planned, forecasted, measured at corp. 100 or fewerPercent of time spent on data collection & manipulation Less than 25%Percentage of time spent on reviews and presentations Less than 10%Duration of forecast cycle Less than 2 weeksForecast cycles per year 4Number of financial targets provided to units 4 to 6

System options:

• Holistic Systems - Holos PC-LAN• IMRS - Hyperion, FYPlan PC-LAN• IRI - Express PC-LAN• Comshare - Commander PC-LAN• Pilot - Lightship PC-LAN• Trinzic Corp. - Forest & Trees PC-LAN

Case examples:

IBM - forecasting, measurements, strategic planningCompaq - financial forecastingTextron - strategic planningPhelps-DodgeBaxter International

• Strategy for removing obsolete reports/measures• Report variance analysis on an exception basis• Balanced set of measures (P&L, B/S, cash flow)• Majority of time spent on controllables• Perform post-acquisition/spending evaluations• Low effort on historical reporting• Low effort related to data collection/manipulation• Number of forecasting lines fewer than number of accounting lines

• Financial forecasts linked to supply/demand planning and pricing activities

Perform Pricing Analysis

Perform strategic planning

Perform financial forecasting

Provide performance measurements

Perform Investment Analysis


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Features

• Annual budget process replaced with a continuous planning forecast process

• Each quarter the company looks out 5 quarters

• Forecasts are closely linked with other strategic and tactical planning processes including annual strategic plan, frequent sales forecasts and manufacturing planning

• Forecasts are linked to top-down targets

• Once a year a snapshot of the forecast is taken and established as that year’s commitment and is the basis for departmental budgets

Benefits

• Encourages a continuous-planning mindset

• Forces management to look beyond the end of fiscal year

• Provides a closer link between finance and customer demand

• Reduces the spike of workload usually experienced at the annual budget time

• Provides an opportunity to adjust plan each quarter rather than once a year

Financial planning and analysis: Spotlight on rolling forecasts

Q1Forecast

Q1Forecast Q4

Forecast

Q4Forecast

Q3Forecast

Q3Forecast

Q2Forecast

Q2Forecast

DepartmentalBudgets

DepartmentalBudgets

Rolling financial forecasts can provide a more accurate plan with substantially less work than the annual bottom-up budget process


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Employee compensation and benefits

Process flow

Manage variablecompensation

Process payroll Administer benefits

Performance goals:

Low cost of processesReduce # of days between hire and “on” payrollReduce # of days between term. and “off” payrollIntegrate HR, accounting and payroll systemsHigh return on benefit plansReduce time from request to confirmationReduce time from end of period to statementReduce forms required for claims/enrollment


Total cost of processes# of days between hire and “on” payroll# of days between term. and “off” payrollReturn on benefit plansTime from request to confirmationTime from end of period to statementForms required for claims/enrollmentPercentage of participation

Best Practices:

• Integrated HR, accounting and payroll systems• Utilization of automated time entry• Single location payroll processing• Standardized forms and cycles• One point entry system• Pay stub used for employee communication• Utilization of modeling tools for benefits planning• Automated pension calculations• Employee access to benefits information

System options:

• PeopleSoft• Tesseract• Cyborg• Genesys• DBS• Integral• Lawson

• Integrated HR, benefits, and payroll systems• Enrollment via Interactive Voice Response (IVR)• Vendors actively managed/accountable for performance standards• Interconnected forecasting between actuaries, finance, and accounting• Standard timetable for award cycles• Automated processing of “award/vesting/exercise”• Standardized procedure to administer, track, and pay executives


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Production costs and inventory

Process flow

Perform cost planning

Perform cost accounting

Perform cost analysis and reporting

Performance goals:

Reduce time spent on data collection/manipulationSimplify cost allocation process/use standard allocationsStreamline/automate physical inventory processIncrease accuracy of cost estimates/forecastsIntegrate receiving,inventory, shipping and accounting systemsIntegrate manufacturing and financial systemsSystem generate management reports

Best Practices:


Total cost of processesCycle time of processesTime spent on/cost of data collection/manipulation# of budget revisions/cost estimate revisions# of steps in allocation process/# of allocation rulesTime spent on/cost of physical inventory process# of monthly adjusting J/Es performed# of regularly issued reports

• Little time spent on data collection/manipulation• Use standard allocations held constant for the period

• Electronic approval of journals• Real-time data access, user-oriented, standard, GUI tools

• Focus on analysis vs. transaction processing• Enterprise-wide financial information warehouse• Integrated receiving, shipping, inventory, and accounting systems

• Integrated manufacturing and financial systems

• Standardized “reporting” chart of accounts• Reports generated directly from cost management system• Use of standard report format• Perform cause and effect analysis between cost and operational factors• Reports delivered in electronic format


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Fixed assets

Process flow

Manage capital Manage projects Manage assets Perform fixed asset accounting

Performance goals:

Reduce cost of processesReduce cycle timeReduce workload for revisionsAligned with strategy targetsIncrease # of projects completed on timeReduce time to close fixed asset accounts

Best Practices:

System options:

• SAP R/2 and R/3 Mainframe & client server• DBS SmartStream New client server• Oracle Financials Client server, Oracle DBMS• JDE AS/400 • Software 2000 AS/400• Platinum AS/400• PeopleSoft Client server, new

Performance Metrics: Benchmark target level

Cycle time of processesTotal cost of processesAmount of fixed asset shrinkage# of projects completed on time# of adjusting journal entriesAverage fixed asset transaction costDollar variance between book and physical

Case examples:

Procter & Gamble - Capital assets

• Use of capital matrix linked to strategic plan• Maximum dollar expenditure not requiring written Approval

• “What if” analysis to determine B/S and P&L impact• Standard computer models used in the processes• Integrated fixed asset, capital planning and G/L systems• Use of standardized forms• Use sampling methods to count assets

• Standardized “reporting” chart of accounts• Corporate-wide standard asset lives • Automatic reversal of journal entries• Computerized asset transfers• Use of bar coding to identify assets• Real-time access to fixed asset ledger• Pooling of fixed asset types• Track assets still under warranty


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Treasury cash management

Process flow

Performance goals:

Best Practices:

System options:

• XRT• ICMS• Platinum Treasury Module• SAP Treasury Module

Case examples:

Efficient collection / disbursement of cashManage cost of fundingAccurate cash forecastImprove investment returnsEnsure sound operational controls

• Clearly defined and communicated cash management guidelines• Integrated treasury management workstation• Automated linkage with bank information and accounting system• Maintain streamlined and cost-effective bank account structure• Utilize EDI, EFT, lockboxes, sweep accounts, controlled Disbursement to more efficiently manage cash flows.

• Sony• Cookson

Establish cashmgmt. objectivesand guidelines

Determine bank relationship mgmt. guidelines and evaluate banking costs

Collect daily balance and transactiondetail

Calculate net cashposition

Execute invest/debttransactions

Producemanagementreports

Design bank and bank accountstructure

Determine STinvest/debtrequirements

Performback officeoperations


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Treasury foreign exchange management

Process flow

Performance goals:

Best Practices:

System options:

• FSS• MCM

Case examples:

Low Transaction CostsEffective Hedging Techniques for Managing Exposure of

Currency VolatilityAccurate and Timely Exposure and Risk Analysis ReportingEffective Risk Analysis for Monitoring and Managing

Counterparty and Market RiskSound Operational Controls for Managing Operational Risk

• Integrated FX management system for transaction processing and risk anaysis

• Automated linkage with accounting• Centralized or regionalized FX exposure management• Clearly defined and communicated FX risk management guidelines for risk appetite, instruments, duration, counterparty exposure etc.

• Ingersoll Rand• Nike• Hewlett Packard

Define businessobjectives anddevelop strategy

Consolidate FXexposure by currencyand maturity

Evaluatetactical hedgingalternatives

Conduct riskmanagementanalysis

Presentstrategydecisions

Executetransactions

Performbackoffice operations

Produceperformancereports

Collect FX exposureinformation


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Treasury investment / debt management

Process flow

Performance goals:

Best Practices:

System options:

• XRT• ICMS• SAVID• Platinum Treasury• SAP R/3 Treasury

Case examples:

Manage investment return against standard benchmarksEnsure safety of principalManage cost of debtEnsure accurate reporting of portfolio information and risk

analysisAchieve lower cost of fundingAchieve lower investment and debt risk (credit, market liquidity)Achieve lower processing costsEnsure sound operational control environment

• Establish well-defined business objectives and risk appetite• Maintain investment/debt transactions in an integrated Treasury management workstation and link with accounting and risk management systems

• Establish clear guidelines for investment and debt management

• Establish a streamlined and cost-effective process for managing investment and debt transactions

• Dell• United Technology Coropration

Define businessobjectives / establishinvest/debt guidelines

Determineinvestment/debt strategy

Evaluatealternatives/obtain approval

Executetransactions

Monitorportfolioperformance

Performbackoffice operations

Produceperformancereports

Analyze cash flow and portfolio


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Case examples:

NationsBankThe Tribute CompanyBall CorporationGreat Western

Performance goals:

Low cost of internal processMinimize annual tax expendituresMinimize penaltiesLow effective tax rateValue-added tax planning

Best Practices:

Tax

Process flow

Review general ledgerInput to tax

Perform tax planning

External reporting to tax authorities

Examination by taxing authorities

Book/tax differences (tax compliance)

Financial accounting for taxes

• Finance feeder systems designed with Tax input• Shortened/streamlined compliance process• Direct GL download into Tax software• Real time data access and analysis• Electronic calculation/generation of book/tax differences• Single transaction calculates both book and tax adjustments, if any• Common accounting system for tax and management reporting• “What-if” system capability• Customer-Focused• Assign Tax department liaison to each major business unit• Increased teamwork with business - increased interaction = knowledge• Tax involved in all significant business transactions

Federal and State Income Tax returns filed by due date 100%

System options:

• TMS-Price Waterhouse• FastTax• CorpTax


• Enhanced team building skills• Tax aligned with and focused on strategic direction of the company• Improved communications with the business• Centralized control of Tax policies• Uniform set of Tax policies• Tax department trained in negotiating skills and conflict resolution• Cross-training of Tax people• Insourcing of Tax work• Outsourcing of Tax work• Conduct customer satisfaction survey• Benchmark effective tax rate with competitors• Actively communicate major Tax savings achieved in the business

FujisawaCaremarkAllamerica Financial

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Performance goals:

Low cost of Internal Audit ProcessHigh Ratings from AuditeesHigh Requests from Management for AssistanceHigh Impact of Audit RecommendationsHigh Coverage of Key Business ObjectivesHigh Productivity of Staff

Best Practices:

Internal Audit

Process flow

Establish Objectives

ExecuteInternalAudits

Monitor Implementation of Audit Recommendations

Perform Risk Assessment

Plan for Internal Audits

High Coverage of RisksSpeed Issuance of ReportsHigh Quality of Staff

System options:

• PW Teammate • PW Researcher• PW Controls• PW Compas• Audit Masterplan• Audit System/2• Lotus Notes• ACL

• Add value by focusing audit work on organization’s business objectives• Improve efficiency by promoting and leveraging management self-assessment of controls

• Use technology to assist with analysis of downloaded data, risk assessment etc.

• Eliminate formal audit reports and replace with management action plans• Use of outside resources to supplement in-house staff in selected technical areas

• Integrate EDP and financial auditing• Closely integrate internal and external audit work

• Use technology to facilitate remote auditing• Participate as controls advisor in new systems development• Use risk analysis to eliminate detailed audit procedures• Apply continuous auditing techniques to improve responsiveness• Implement monitoring techniques as early warning mechanisms

Case Examples:

• Exxon – Use of CD ROM to store and retrieve audit reports• Pepsico – Peer Review• Chase Manhattan – Electronic Working Papers• Bank of America – Business Objective and Risk-Based Audit Methodology• JP Morgan – Integration of Internal and External Audit• Mobil – Remote Auditing• Continental Bank – Outsourcing• Gulf Canada – Management Self-Assessment of Controls


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Strategicvalue

Evaluate financial system improvement projects based on the strategic value of each system and the potential for cost reduction or revenue generation

Financial system priorities: Acme Corporation

Strategic

Tactical

Operational

Potential forcost reduction or

revenue generation

High

Low

High

Generalledger

Salesanalysis

Costmanagement

Managementreporting

Product profitability

Capitalmanagement

Budgetpreparation

HRIS

Fixedassets

Purchasing/Accounts Payable

Illustrative

Low


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Anticipating technology and financial operations trendsare Best Practices for the long-term viability of financial systems

Today’s state-of-the-art

•Significant growth in I/T investment in workstations and PC’s•Approximately 45% of companies plan on keeping finance on host platform•Movement to client-server is mixed and slower than predicted•Most vendors scrambling to develop/acquire/port/rewrite for client/server•New vendors with innovative products have emerged to provide real competition for established players

•Application vendors are teaming with GUI and database vendors, requiring cautious evaluation

•Vendors are now expected to provide multinational products and presence•Per-seat pricing is becoming more common

The players – Big and small

•American Mgmt Systems•American Software•ASK Group•CODA, Inc.•Computer Associates•Computron•Comshare•Consist International•Cyborg Systems•The Dodge Group•Dun & Bradstreet•FlexiWare•Genesys Software•Global Software•Great Plains Software•Holistic Systems•IMRS, Inc.• Industri-Matematik AB

•Integral Systems•J.D. Edwards•KaPRE•Lawson Associates•Marcam Corporation•Oracle Corporation•PeopleSoft, Inc.•Pilot Software•Platinum Software•Quality Software Products•Ross Systems•SAP•Software 2000•SQL Financials•System Software Associates•Systems Union, Ltd.•Tesseract Corporation•Walker Interactive Systems

Projected market trends

• Increasing sophistication of Client/Server models•Incorporation of Best Practices into Software•Application modules evolving into functional objects•Broadening concept of Open Systems•Far more intelligent data management tools

Case examples

•New England Electric •Salomon Inc. •BP Oil Europe •Shell Chemical •United Distillers•Caremark

WalkerDBSOracleSAPSoftware 2000Platinum

Financial Information Systems


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SAP currently dominates the market for client-server-based financial application systems

SAP DBSOracle PeopleSoft AllOther

25%

20

15

10

5

22%

11%

4%3%

60%

SOURCE: IDC Survey, 1995

“Nearly half of today’s multi-billion dollar financial services market is ear-marked for

client-server accounting systems.”– Information Week: 2/27/95

“Nearly half of today’s multi-billion dollar financial services market is ear-marked for

client-server accounting systems.”– Information Week: 2/27/95

Client-server financial systems market share

Market share (Percent)


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Market leaders in virtually all industries are investing heavily in financial systems and financial information

• AT&T

• Bell Atlantic

• Coca-Cola

• Disney

• DuPont

• General Electric

• Intel

• Kellogg

• Kodak

• MCI

• Merck

• Pepsico

• Proctor & Gamble

• Shell

• US West

• Westinghouse

Financial Information SystemsThese companies are currently investing between $20 and $150 million in new financial systems development


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For most companies the performance measures challenge is three fold:

Overall definition Design principles

A carefully selected set of measures derived from

the drivers of the business success that

represent a tool for leaders to use in

communicating strategic direction to the

organization and for motivating change. These

same measures form a basis for managers to plan,

budget, structure the organization and control

results.

• Measures Should be Derived from Strategies

• Each Measure Should be Part of a Balanced Set

- Highlighting Process as well as results

- Easy to Understand

- Few in Number

- Statistical as well as Financial

- Aggregatable without Distortion

• Measures Should Promote an External, Competitive Focus

- Have Quantifiable Goals

- Be Externally Benchmarked

Selecting the critical measures Increasing the focus on those measures Building an efficient information system to collect, consolidate and report

business performance

Performance Measurement


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Balanced focus

ResultProcess

Internal

External

• % Returned Product• Product develop. lead time

• 1st time quality

• Shareholder return• Customer complaints

• Market share

• ROA

• Performance to budget

• IRR • Revenue growth

• Inventory turnover

• Cash flow

• Percent On-time deliveries

• Scenario analysis

• Retailer order response time

Typical focus

External

Internal

Process Results

Shareholder return

Market share

ROA Performance to budget

IRR Revenue growth

Cash flow

Inventory turnover

The Best Practice of a balanced scorecard emphasizes the need for external, process and operational performance measures as well as internal, result and financial ones

Performance Measurement

“Determining the balanced scorecard”


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Description Type of measure

Sales, gross and net Growth

Operating income Profitability

Return on net assets/ Profitability

controllable assets

Operating cash flow Liquidity

Market share, by segment Competitiveness

Daily report card Customer satisfaction,

(quality & delivery) Quality

Order-to delivery cycle time Customer satisfaction

Sales per employee Productivity

Defects per million Quality

Hours per unit Mfg productivity

Product cost and operating Cost & expense mgmt.

Expense as a percent of sales

Working capital & fixed Asset productivity and

capital turns Asset utilization

New product sales as a Innovation

percentage of total sales

Description Type of measure

Sales, gross and net Growth

Operating income Profitability

Return on net assets/ Profitability

controllable assets

Operating cash flow Liquidity

Market share, by segment Competitiveness

Daily report card Customer satisfaction,

(quality & delivery) Quality

Order-to delivery cycle time Customer satisfaction

Sales per employee Productivity

Defects per million Quality

Hours per unit Mfg productivity

Product cost and operating Cost & expense mgmt.

Expense as a percent of sales

Working capital & fixed Asset productivity and

capital turns Asset utilization

New product sales as a Innovation

percentage of total sales

SOURCE: “The Empowered Organization: Redefining the Roles and Practices of Finance”; Financial Executives Research Foundation; 1994.

Guidelines and principles

Performance Measures at Steelcase fall into four categories:

• Financial

• Customer

The Guiding Principles for developing performance measures were:

• Shift from all results-oriented measures to a balance of result and process measures

• Use fewer rather than more measures

• Delta and trend is more important than absolute

• Cascade measures through the organization, incorporating into process identification and ownership efforts.

• Measurement system should capture and convey:

– Trend

– Where we are today

– Goals, short-term and long-term

• Four types: Quality, Cost/Financial, Yield/Productivity and Time

• Every process should have a handful of measures, using at least three of these types

• Measures must be timely

Performance Measures at Steelcase fall into four categories:

• Financial

• Customer

The Guiding Principles for developing performance measures were:

• Shift from all results-oriented measures to a balance of result and process measures

• Use fewer rather than more measures

• Delta and trend is more important than absolute

• Cascade measures through the organization, incorporating into process identification and ownership efforts.

• Measurement system should capture and convey:

– Trend

– Where we are today

– Goals, short-term and long-term

• Four types: Quality, Cost/Financial, Yield/Productivity and Time

• Every process should have a handful of measures, using at least three of these types

• Measures must be timely

• Internal

• Innovation

Recommended quantitative measures

At Steelcase, Inc., the Finance function was asked to take a leadership role in defining performance measurements for use throughout the company

Performance measurement at Steelcase, Inc.


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Survey conclusions

• Every company but one (93%) surveyed has selected the Business Unit/Product Division dimension as the primary measurement dimension.

• Geography is the most common secondary measurement dimension. Two companies reported an equal or nearly equal emphasis between the Product and Geographic dimensions.

• The financial measures used to assess performance in the primary dimension are Revenue, Profit (Gross and Net), Cash Flow and various measures of return (Return On Assets, Return On Net Assets, etc.).

• Secondary measurement dimensions generally focus on Revenue and do not include a measure of Net Profit.

• Fifty percent of the companies have a strong Corporate focus on non-financial performance measures.

• The companies appear to be making a strong move toward “balanced financial measures”, i.e., an equal emphasis on I/S, B/S, and Cash Flow measures.

• Full P&L’s are typically produced at only 3 levels in the organization: (1) Corporate, (2) Business Unit/Division and (3) Segment or Geographic component below Business Unit.

• P&L’s below the third level generally rely on ratios rather than actual allocations to compute “Net Profit”.

• Responsibility for managing profitability resides solely in the primary measurement dimension, e.g., Business Unit/Product Division, and is generally not shared across multiple owners.

• Several of the companies reported that they consolidate fewer than 30 lines at Corporate for I/S and B/S.

• Nearly all report actuals monthly; over half forecast quarterly or less frequently.

• Eleven companies forecast for the current year and rely on strategic planning for the longer-term outlook.

• Three of the companies use a rolling forecast over a 12 or 18-month horizon.

Price Waterhouse LLP conducted a survey of 15 large multinational companies to identify the key dimensions and metrics used for measuring the financial performance of the business

Measuring the business


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Measure Type

Budget vs. actual variances 92%

Product/Product line 86%profitability

ROI/ROA 72%

Cash flow 67%

Customer profitability 49%

Percent of firms using measure

Decision Type

Cost control 96%

Pricing 91%

Investment justification 88%

Sourcing 80%

Performance measurement 78%

New product introduction 78%

Market strategy 70%

Product/Process changes 64%

Percent of firms using profitability measures for

decision-making

Financial performance measures are evolving as more information is available via automated systems and as the focus shifts from internal departmental measures to more externally-focused measures such as shareholder value

Financial performance measures

Common Financial Measures Decisions Made Using Profitability Information

SOURCE: Price Waterhouse LLP Survey, 1994.


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Linking performance measures to financial processes

Management’s challenge to instill performance measurement into the company’s culture can be accomplished through budgeting

• Budgets can involve more than financial measures

• Budgets should be considered to be the annual performance-measurement-setting exercise

• Any measure from “new product lead times” to “percent first-pass quality inspections” can be budgeted

• Budgets do not have to be linear

• Budgets should reinforce the continual improvement mindset

• What has been budgeted should be reported; create a closed-loop performance measure reporting structure

Integrating budgeting with performance measurement is an effective approach


Best practice finance diagnostic review long

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