FINANCE PROCESS OPTIMIZATION MAPPING THE JOURNEY TO HIGH PERFORMANCE

Global Finance 360 | Copyright 2010 | All Rights Reserved 1

Global Finance 360

Volumes have been written about process reengineering and the need to eliminate non-value added activities from organizational behavior. Yet companies continue to struggle with this issue for a variety of reasons, including mergers and acquisitions, changes in technology platforms, global sourcing and simple personnel turnover.

While there are a variety of models to reengineer and optimize processes, the Six Sigma model has proven its usefulness. Pioneered by Motorola, GE and other leading organizations, the Six Sigma model provides a well-defined method for approaching the reengineering effort. There are five steps as defined below:

Define

Definition of a process is required to set process parameters and to understand which activities are part of the process and should be measured and analyzed. The first step is to define the customer or customers for a particular process and to document their requirements. The customer may be an external stakeholder, as in the case of customer invoicing, however, it could also be an internal stakeholder. If there are multiple customers, they should be ranked as

primary or secondary stakeholders. After customers are stratified into primary and secondary stakeholders, their specific requirements for the end-result of the process should be documented. For example, an external customer expects an invoice as part of the Order-to-Cash process; it’s critical to understand what attributes that invoice should have in order to satisfy the customer.

Once the customers for a process have been defined, ranked and their requirements documented, it’s important to create a process map for the process as it currently exists. The map should clearly define the input(s) and output(s) of the process. The map should then be developed to show the process activities as well as the “hand-offs” between organizational roles and departments. Key information flows, including interfaces, reports and queries should be noted on the process map.

Measure

Once a process has been accurately defined it can be measured. The team measuring this process will collect a series of baseline metrics to gain an understanding around both the effectiveness of delivering that process as well as its efficiency as measured by cost. As we’ll see later, it’s important to collect baseline data in a manner consistent with chosen benchmarks so that there is an “apples-to-apples” comparison.

One of the challenges in actually measuring the cost of a process is identifying the FTEs involved in that process. Often there are personnel involved in a “shadow” organization who are involved in some aspect of the process but are never properly identified. These are people who don’t have a Finance title but are still involved at some level in the process. An

“Leading

companies

continuously

pursue efficiency

through

reengineering and

optimization to

enhance service

delivery and drive

out cost. The Six

Sigma model is an

effective tool to

transform finance

processes and

deliver the value

expected by a

company’s

stakeholders.”

The Six Sigma model:

1. Define

2. Measure

3. Analyze

4. Improve

5. Control

Global Finance 360 | Copyright 2010 | All Rights Reserved 2

About Global Finance 360

Global Finance 360 covers the world of corporate finance and accounting and how these activities are impacted by globalization. Focus areas include Finance Delivery Strategy, Shared Services, Business Process Outsourcing, Process Improvement and Organizational Design.

Global Finance 360 is run by Steve Lynch. Mr. Lynch is a Principal in the Finance Transformation practice of a global consulting company. He is responsible for the marketing, sales and delivery of Finance Transformation services in North America and serves as a key liaison for his company’s global Finance practice. He brings more than 15 years of experience advising global companies on their service delivery strategies and has served over 60 clients in a variety of industries including consumer product and industrial manufacturing, aerospace & defense, transportation, technology, entertainment and financial services. He has also served as a Controller in private industry and as an auditor in public accounting.

Mr. Lynch is an active content contributor on the topics of Finance Transformation and globalization and has presented at various forums including the IQPC Shared Services & Outsourcing conference. He can be found on the web at www.globalfinance360.com.

Contact Information:

Steve Lynch

Toll-free: +1.800.216.2512

Office: +1.719.481.2599 1042 W. Baptist Road Suite 194 Colorado Springs, CO 80921

slynch@globalfinance360.com www.globalfinance360.com

example would be a person in a manufacturing facility who has an Operations title but is involved in receiving and entering vendor invoices into the Accounts Payable system. Any effort to accurately calculate the cost of a process must incorporate this shadow organization.

Another challenge related to measurement is actually capturing the metrics. Often a company will state that they are measuring a process for a specific metric, say vendor invoices processed per FTE per annum. The challenge is to capture these metrics through an automated routine rather than gathering them manually, which in itself adds inefficiency to the organization. Once the performance metrics have been defined, it’s often possible to reconfigure an ERP system or produce a specific report that will deliver these metrics without manual effort.

Analyze

Now that a company has accurate baseline performance and cost data, it’s possible to analyze the process to determine how well or poorly it’s performing. The baseline data should be compared to relevant benchmark data to identify performance gaps. This benchmark data is available from a variety of sources including industry organizations and consulting firms.

The analysis should focus on the two key dimensions of process performance: effectiveness and efficiency. The effectiveness metrics will tell the organization how well it’s meeting the customers’ requirements. Many of the effectiveness benchmarks will focus on quality, such as the percentage of customer invoices that contain a defect.

The efficiency metrics will tell an organization how successful it’s performing the process and will use measures such as cost and cycle time. It’s possible for a metric to be both an effectiveness and efficiency measure, such as the time to deliver management reports to internal stakeholders, since one of the likely requirements of these stakeholders is the timely receipt of financial information.

Based on the analysis, a portfolio of improvement opportunities will rise to the surface. In deciding how to prioritize the portfolio of initiatives, several factors should be considered:

1. Processes that are Critical-to-Quality (CTQ) – This is an important concept in process improvement and focuses on those processes which key stakeholder groups such as customers or regulators. Even if another process shows a greater cost savings through potential improvement, a company may decide to tackle the CTQ initiatives first.

2. Processes that are ineffective. These processes are not necessarily critical to quality, yet they can impede the operations of a business. For example, if management information is so poor that it inhibits decision making capabilities, it may make sense to drive through this initiative to bring performance levels to an acceptable quality.

3. Processes that are inefficient. A process may cost far more than similar processes of high-performing companies, or they may have significantly longer cycle times. In either event, these processes are ripe for transformation to improve efficiency.

All of the decisions made in the prioritization of initiatives should be captured in a business case that lays out the required investments and the anticipated benefits. The data collected around the current performance of each process and the gap to high-performing organizations will be essential to developing a fact-based business case for each initiative. In addition to these factors, there can be a number of other factors, many intangible, that drive the prioritization of initiatives. The business case should also identify any key dependencies that must be completed prior to the beginning of a specific initiative.

Global Finance 360 | Copyright 2010 | All Rights Reserved 3

About Global Finance 360

Global Finance 360 covers the world of corporate finance and accounting and how these activities are impacted by globalization. Focus areas include Finance Delivery Strategy, Shared Services, Business Process Outsourcing, Process Improvement and Organizational Design.

Global Finance 360 is run by Steve Lynch. Mr. Lynch is a Principal in the Finance Transformation practice of a global consulting company. He is responsible for the marketing, sales and delivery of Finance Transformation services in North America and serves as a key liaison for his company’s global Finance practice. He brings more than 15 years of experience advising global companies on their service delivery strategies and has served over 60 clients in a variety of industries including consumer product and industrial manufacturing, aerospace & defense, transportation, technology, entertainment and financial services. He has also served as a Controller in private industry and as an auditor in public accounting.

Mr. Lynch is an active content contributor on the topics of Finance Transformation and globalization and has presented at various forums including the IQPC Shared Services & Outsourcing conference. He can be found on the web at www.globalfinance360.com.

Contact Information:

Steve Lynch

Toll-free: +1.800.216.2512

Office: +1.719.481.2599 1042 W. Baptist Road Suite 194 Colorado Springs, CO 80921

slynch@globalfinance360.com www.globalfinance360.com

Improve

Improvement can take many forms depending on the deficiencies revealed in the analysis. It’s important to leverage the understanding of root causes identified previously as well as the bottlenecks in the existing process. Based on the company’s understanding of these issues, a newly reengineered process can be developed that incorporates key learnings as well as leading practices from other organizations. As part of this reengineering effort, the project team should focus on the following six domains of change:

1. Business process – Addresses what the enterprise does, how it does it, what rules it follows and what results it obtains,

2. Applications – Encompasses the capabilities, structure and user interface of software provided to the business users

3. Technology – Identifies the hardware, system software and communications components used to support the entire enterprise,

4. Data – Addresses the content, structure, relationships and business data surrounding information the enterprise retains permanently,

5. Organization – Focuses on the people within the enterprise: their culture, capabilities, roles, team structures and organizational units

6. Locations – Specifies where the enterprise does business, both in terms of geographic location types and in terms of specific physical facilities at specific locations.

The key deliverables from the Improve step are the future state process flows that define the new activities and the organizational units that perform those activities as well as any accompanying narrative that further explains the six domains of change noted above.

Control

A significant challenge in many organizations is sustaining the change created in the previous steps. For lasting change to occur, the new processes need to be embedded in the culture of the organization. One key aspect of this cultural change is the continued focus on maintaining and enhancing the reengineered processes.

To effectively monitor the new processes, a series of performance metrics should be codified into a measurement dashboard. The dashboard will contain a series of metrics that focus on the effectiveness and efficiency of the new processes. It’s logical to use some of the same metrics that were defined and measured in the Measurement step. Quality, cost and cycle time metrics are typical metrics that would be monitored on an ongoing basis.

It isn’t enough to simply calculate these performance metrics, there must be a governance body in place that is responsible for reviewing these metrics regularly and acting on any information that shows the performance to be deficient.

Conclusion

Reengineering and optimizing processes are essential to an organization intent on remaining competitive. This five-step model based on Six Sigma principles can be an effective tool for driving this change. This should be a continuous effort to enhance performance levels and drive cost out of the organization.