Iaop 2013 costa rica end to end finance outsourcing v f

December 3-5, 2013 | San Jose, Costa Rica

© 2013 IAOP® All Rights Reserved

End to End Finance OutsourcingMichelle Ferguson, Senior Vice President, McGraw Hill Financial, and Sanjay Tripathy, Principal, Booz and Company,



Today we will Discuss

Agenda

McGraw Hill Financial - A New Company with 125 Year Heritage

Speaker Introductions

Scope of Global Business Services

Outsourcing Approach

Challenges and Lessons Learnt

Trends in End to End (E2E) BPO

Q & A



A new company, with a 125‐year‐old heritage, focused on providing essential intelligence

Our vision is to be the foremost provider of ratings, benchmarks, and analytics in the global capital and commodity markets

Strong balance sheet enables financial flexibility Will continue to invest in businesses while returning cash

to shareholders Solid track record of top‐ and bottom‐line growth 2013 guidance indicates solid growth:

High single‐digit, top‐line growth Adjusted diluted EPS guidance of $3.15 ‐ $3.25

McGraw Hill Financial



Senior Vice President, Global Business Services• Finance• Human Resources• ERP System• Global Real Estate

BBA – University of Notre Dame• Advisory Council for

DeBartolo Performing Arts Council

• Member of Alumni Board MBA – Columbia Business School

About Michelle



Senior Principal, Americas Leader for Outsourcing and Shared Services Advisory, focused across industries for -• Strategy, Operating Model, Organization Design, Business and

Cost Transformation, People and Change• Fit for Growth (FFGTM) platform• Finance and Accounting• Procurement• Human Resources• Customer Relationship Management• Real Estate and Facilities Management• KPO, Analytics, R&D and Engineering Services• Platform and SaaS Services• Other G&A Functions• Governance, Transition, Re-negotiations• Global supplier relations

Over 18 years of global industry and consulting experience

About Sanjay



Scope of Global Business Services - Outsourcing

• Process “towers” with cross functional support – Global Finance and Accounting – Order to Cash, Procure to Pay, Record to

Report– ERP Implementation – Global Payroll– Global Employee Care / Special Programs– Global Sourcing and Disbursements– Special project support (e.g., People Fluent, Physical Separation)– Cross tower support (financial planning/estimating, contract administration,

service delivery and governance)

• OBJECTIVE: Deliver predictable, scalable, lower cost Finance/HR service consistently across company. Outsource transactional activities to global partners– Relationships with industry leading providers that have global capabilities – Strong governance – Measurements focused (e.g., service level agreements, process health)– Aligned to support our businesses – Process improvement mindset with end to end transformation– Opportunities for direct access, self service

McGraw Hill E2E Finance Outsourcing



Transformation requires a focus on growth and capabilities with an end to end vision

Performance: Enhance business impact with end to end process transformation (e.g. Order to Cash)

People: Become a high-performance employer of choice

Cost: Reshape to be fit for growth with best in class economics

Operating Model: Increase speed, agility and global

connectivity, while building enterprise capability

Growth: Position great businesses for scalable growth

Transformation Goals

Achieve higher and sustained global growth

Capture horizontal synergies across businesses

Drive scalability and predictability in cost structure

Drive business impact through end to end process transformation

Treat talent and data as strategic corporate assets




Enabled by Management Process and Cultural Change…

Theme “Evolving” “Sustained High Performance”

Organization Architecture

Vertical and layered Flatter and compressed

P&Ls Competing metrics and opaque

allocations Transparent, consistent, precise

Governance & Decision-Making

Uneven criteria and pace Clear, selective shifts to align on

emerging enterprise decision rights

Capabilities & Talent Individual business-based Selective shared enterprise capabilities &

talent

Collaboration & Alignment

Shifting to greater flexibility and cross-business leverage

Leadership alignment, with mechanisms established and integration underway

Culture Publishing heritage, avoidance of risk Market orientation with risk management

Change Orientation Hesitant but building momentum Shared common purpose and vision

Geographic Leadership

US-focused with shifting focus to global – Limited accountability for regional results

Regional measurement with cross-LoB management and accountability by geographic sub-region (i.e., ex-Americas)

Critical Metrics Revenue and profits Financial and strategic metrics, with clear

accountability

Stand Up MHFIGrowth & Value Plan




Outsourcing Approach: A swift yet structured process

Transition Begins

Transition Ends

Provider Selection

Solution Development

RFP Responses & down-selection

Rapid Outsourcing Approach and Timeline

Provider Selected Contract Awarded

Change and Risk Management

Providers Down Selected

Month 1 Month 2 Month 4 Month 5 Month 8

Provider Selection & Contract Development

Joint activities with ProviderMH specific activities

Engagement Package & MSA to Pre-

Selected Providers

Communication and Change Management

Governance Design & Transition Planning

Base Case

To be Vision

Outsourcing Objectives

RFP/SpecPackage

Site Visits & Inbound Due

Diligence/BAFO

Outbound Due Diligence

Negotiations and Contract Award




Finance and Accounting Outsourcing – End to End Order to Cash Scope


Critical Success Factors

Collaboration upfront with supplier during joint solutioning to design/enable◦ Outsource End to end scope to enable

standardization, centralization, and process improvements

◦ Interim and future state process ◦ Clear SLAs tied to performance outcomes◦ Engage global regions and business units in the

design, implementation◦ Leverage supplier tools, best practices and

expertise to move the needle on performance tied to business outcomes to achieve more than labor arbitrage

Agreement with supplier on clear milestones around transition, process improvements, productivity levers with risk sharing models to drive transformative improvements

Established collaborative governance including retained organization design, decision rights, services delivery design, implementation

Metric Category Service Level Name Business Units

Formula Measurement Window

Efficiency

Resolve Order Management backlog issues for credit related problems within 24 hours.

MHE Only Resolved order management backlog issues for credit related problems/All credit related backlog issues

Daily

Unapplied Cash / Credits & unidentified as %age of total collections.

All business units

Value of unapplied cash and Credits/Total value of ledger.

Monthly

Sales Orders and Changes processed within 24 hours of receipt

All business units

Number of requests processed within 24 hours/Total requests received

Monthly

Manual billing requests processed within 48 hours

MHE Only Number of manual bills correctly processed within 48 hours/Total number of manual bills created during the month

Monthly

Effectiveness

Days Sales OutstandingAll business

units AR balance/Sales in the period*number of days in the period

Daily

Deductions OutstandingMHE Only Number of deductions/charge backs (from short-

payment of invoices)/Total number received in monthMonthly

Cash Collected as percentage of gross billings (or as a percentage of Beginning AR - for MHE)

All business units Cash collected in month/Gross billings or Beginning

AR

Monthly (rolling 12

month periods)

SupplierRelationship

Dispatch of Bills within 24 hours of business unit requirements (to be agreed).

All business units

Number of bills dispatched within 24 hours/Total number of bills created in a period.

Monthly

Order to Cash E2E scope across Regions, Business Units and GBS

Business Outcome E2E SLAs

Customer Master

• Receive/Validate andEnter PO

• Order Fulfillment• Regular Open Order

Analysis• Invoicing Generation

and Presentment • Shipping and Freight

Details• Pricing Support

% Outsourced: 95

• Initial Analysis• Review of Credit Limits• Receive/Validate

Contracts• Contract

Renewal/Extension• Contract Audits• Ensure compliance

% Outsourced: 90

• New Account Setup• Changes in Existing Accounts

• Price Mapping• Billing Types/Cycle• Tax Status

% Outsourced: 90

Order Management and Billing

Credit Risk and Contract Admin

• Exception Approvals • Define Credit terms• Develop and

Review Credit Policies/Recommendations

• Exception Approvals

• Exception Approvals• Order Release

Matrix• Establish and

Maintain Billing Policies

Outsourced Services

Collections

• Identification and Validation of Disputes

• Resolution on Short Payments/Deductions

• Credit Memos and Reconciliations

% Outsourced: 85

• Processing/Clearing Lockbox

• Misapplied Cash• Exception Coding

Research• Unapplied Cash

and Credits

% Outsourced: 95

Deductions Management

Cash Application &

AR

• Collection Policies

• Strategic and Government Accounts

• High-dollar write-offs

• Deductions Approval

• Banking of cheques

• Approval of write-offs

• Customer Segmentation

• Self-Payer Analysis

• Call Prioritisation• Issue Coding and

Analysis• Research Bad

Debts

% Outsourced: 85

Retained Services

OTC Process in Scope



Outsourcing along with an ERP Implementation Atlas ERP Implementation

◦ Project One launched June 2010; Go-live July 2012 Replacement of Lawson Financials

with Oracle 12 e-Business Suite Chart of Accounts

Atlas Hard Separation◦ Project launch March 2012; go-live

January 2013◦ Financial and operational segregation◦ Separate and distinct bank accounts

and ledgers Atlas Physical Separation

◦ Project launch January 2013; go-live February 2014

◦ Two independent Oracle environments




We selected the following Outsourcing Partners across GBS

Business Focus Area

What they do for us

Locations

Finance AP, OTC, R2R Hyderabad, IndiaDalian, ChinaBucharest, RomaniaJuarez, Mexico

Payroll Global Payroll Manila, Philippines

HR services Customer ServiceSupport: Portal, Taleo, Success Factors, Workday

Charlotte, NCWoodland Hills, TXGurgaon, India

System development Oracle Kolkata, India

Quality control Oracle Chennai, IndiaBangalore, India




Challenges & Lessons Learned Challenges were many…

- Outsourcing Finance and going live with a new ERP system the same day

- Outsourcing Payroll, a new Human Capital Management System for MHE at the same time

- Understanding key controls early in the project lifecycle- Enabling company separation

Lessons Learned were many…- Communicate, communicate, communicate- Coordination - Project management

- Know a Project Manager when you see one- Need different skill set in the leadership team- Don’t panic, overreact to anecdotal and isolated issues- One group does contract administration

- Pricing, SOW, MSA, IT Requirements- Invest upfront in Governance, Retained Org, Roles and Responsibilities,

Decision Rights




End to End (E2E) BPO with a strong transformational component is being favored increasingly by companies

20

5

15

60

5

100

5

Process & Platform

Standardization

Process Improvemen

t

Cost Arbitrag

e

Baseline

Cost

35%Target

Total End-State Cost

65

Retained Goverance

Organization

Target Cost

Business Case Projection

What E2E Transformation Outsourcing Involves

Align partner and client incentives to reduce cost of service

Partner with client to improve operations and share in the benefits

Leverage gain share models to align partner and client incentives

Enablers for transformational partnership

– Benefits Realization Model

– Assets to enable productivity improvements

– Governance structures

Shift clients’ fixed costs to a more variable model

Labor Cost Reduction

Operational Improvemen

ts

Process Transformati

on

Technology Enablement

+

+

+

Source: Booz & Company Database and Experience

Transformational E2E BPO Deal EconomicsTransformation Benefits are Not

Materializing and Governance Costs are Mounting

Value Drivers




Why is E2E BPO gaining favor?

Recognition that global E2E process view enables a holistic service delivery design that pulls on multiple levers including standardization, automation, shared services and outsourcing

Recognition that enduring and transformational savings can only be achieved when a service provider has control over end to end processes

Transformation end to end processes is difficult to achieve internally when processes are fragmented and process governance is difficult to institutionalize

Scalable affordable technology platforms are critical to E2E transformation and are best accessed through third party solutions

End to end process outsourcing rationalizes and consolidates multiple transactional service providers and creates a focused set of strategic provider partnerships

Improved ability to bundle domain expertise and outsourcing expertise into bundled and integrated process transformation solution

More advanced, sophisticated global end to end process solutions from service providers supported by proprietary tools

Growing domain expertise on how to drive process innovation and standardization based on network effect of serving scores of diverse clients

Increasing appetite to commit to productivity improvements, best-in-class service levels and gain-sharing agreements

Buy Side Dynamics (Clients) Sell Side Dynamics (Suppliers)




Type of End-to-End Scope in FAO ContractsFrequency of Inclusion

In Finance, three major end to end processes are typically included in 70% of BPO deals

63%

30%

37%

55%70%

45%

100%

TraditionalPiecemeal

Scope

End-to-EndScope

2012-2013

87

2009-2011

268

Up to 2008

460

Distribution of FAO Contracts with End-to-End Scope Over TimeNumber of new contracts

Purchase to Pay1 51%

Record to Report1 33%

Order to Cash1 75%

Sample Size: :815 multi-process FAO contracts signed as of December 2012Source: Booz & Company Deal Database, Gartner, Everest Group,

Finance E2E Trends in End to End (E2E) BPO



Done right, E2E outsourcing in Finance can achieve both efficiency and effectiveness benefits

Order Order Management &

Billing

Collections & Accounts

Receivable

Manage & Process

Collections

Maintain Customer

Master Data

Manage Sales Orders

Manage Customer

Requests & Inquiries

Authorize & Manage Credit

Perform Revenue

Assurance Activities

Manage & Process

Disputes & Deductions

Maintain A/R Ledger &

Apply Cash

Manage Contacts

Service Customers

Ord

er-

to-C

ash

Help DeskFinancial IntegrityTransaction Processing

Receipt & Scanning

(BSS EDM)

Travel & Expense Claims

Vendor Statement

Reconciliation

Irate Creditor Reconciliation

s

Support Center

Payments & Remittances

3rd Party & Intercompany Invoices/credi

ts

Interface Management

Payment Accuracy Controls

Vendor Master Data Maintenance

Pro

cu

re-t

o-P

ay

Financial & Government Reporting

Period Close & Data Integrity

Asset & Transactional

ProcessingManage & Process

Collections

Maintain Customer

Master Data

Manage Sales Orders

Manage Customer

Requests & Inquiries

Authorize & Manage Credit

Perform Revenue

Assurance Activities

Manage & Process

Disputes & Deductions

Maintain A/R Ledger & Apply

Cash

Manage Contacts

Service Customers

Record

-to-

Rep

ort

Reduce cancellation of orders

Capture invalid deductions

Optimize trade promotion

Improve order to bill cycle TA

Reduce write-offs

Improve collections efficiency

Improve DSO

Reduce collections cash float

Optimize reserves

Increase Order and billing accuracy

Improve contract compliance

Reduce overpayments

Increase contract compliance

Increase PO & AP processing efficiency

Identify duplicate invoices

Optimize discount capture

Identify duplicate invoices

Reduce time to close

Improve month end close processing efficiency

Reduce manual journal entries

Reduce exposure-aged open items

Increase Balance sheet integrity

Optimize & crash period

Effectiveness EfficiencyWorking Capital Controls

Scope of Frequently Outsourced F&A E2E Processes

Business Impact

Finance E2E

Source: Booz & Company Research




End to End BPO suppliers can be divided broadly into three categories, each with different approach, value proposition

Focused Functional Pure Plays

Legacy Indian-heritage IT Service Providers

Multi-tower Global BPO Service Providers

Target Market

Typical Solution Approach

Key Value Proposition

Primarily large market global buyers, though have started pursuing smaller opportunities as well

A platform-agnostic approach with a good mix of onshore and offshore delivery

Ability to combine consulting, technology, and process capabilities with global reach

Ability & experience to cover multiple BPO towers under one deal

Target both mid-market and large-market opportunities

A combination of custom & platform-based solutions

Balanced value proposition around cost & quality impact with spike in transaction-intensive processes

Deep functional domain experience

No rigorously defined market – opportunistic in deal pursuits

Flexible approach depending on the client situation with heavy reliance on offshore delivery

Value proposition centered around near term cost reduction with a spike in transactional processes

Ability to provide bundled F&A services with HR (e.g. TCS, Infosys, Wipro,)

Supplier Portfolio for E2E Processes

Source: Booz & Company Experience, Not exhaustive, with overlaps




Sophisticated companies use a variety of sourcing models tailored by function, process

Best-of-Breed Approach Company outsources clusters of similar or related

sub-processes to different vendors, in order to leverage their respective expertise / specialization

Clusters generally require materially different expertize and / or assets

Interfaces & handoffs between clusters are relatively few, but are clear, well defined, & can be remotely managed; Best suited for non-core processes with broad scope / high complexity

Hybrid Approach Company outsources specialized parts of the

process to different vendors, as well as disaggregates volume across multiple vendors

Managing the resultant portfolio complexity requires very mature VM capabilities

Best suited for processes that have large scale and scope

Exclusive Partnership Approach Company outsources a process in its entirety

to a single vendor Relationship is managed as a strategic

partnership, with open collaboration and information sharing

Potential for high performance and diversification risk requires high level of trust

Best suited for non-sensitive processes with small-to-medium scale

Risk Diversification Approach Company keeps process integrated but spreads

volume across multiple vendors There is sufficient volume to enable more than

one vendor to realize economies of scale Company diversifies risk and gains ongoing

performance / price improvement by creating competition between vendors

Best suited for core processes with moderate scope but large scale

Aggregated Disaggregated

Integrated

Disintegrated

SUPPLIERS

SU

B-P

RO

CE

SS

ES

1

2

3

4Description of Supplier Sourcing Models




Str

ate

gic

Sele

cti

on

Facto

rs

Selection criteria for partners tend to be significantly weighted towards strategic factors for E2E BPO Improve Costs: provide top quartile pricing and

commit to >50% reduction in operating costs and 5% YoY reductions

Deliver Quality Service: adhere to SLAs and other critical KPIs and deploy clear recourse/remediation clauses

Provide Flexible Commercial Terms: that reflect the scale impact of end to end processes and bundling; demonstrate flexibility in pricing strategies

Provide Scalability: to flex with changes to volumes and requirements, and to react quickly to business changes

Demonstrate Domain Process Expertise: Showcase specialized depth in world class practices and ability to leverage these across diverse clients in targeted industries

Drive Future Innovation and Transformation: redesign end to end processes that simplify work and radically improve the service levels and move the needle on critical business metrics

Trusted Partner/Seat at the Senior Table: demonstrate cultural fit and C-Suite impact as assessed through good-faith in solutioning and negotiations

BPO Service Provider Selection Criteria

60%0% 20% 100%40% 80%

Ability to Focus on Business Outcomes, as Opposed to an

Effort-Based Approach, to Pricing

Global Presence/Scale

Ability to Transform Processes

Ability to Provide Innovation (i.e. New-Sources of Revenue)

in the Future

Brand Recognition

Financial Stability

Ability/Track Record to Deliver E2E Industry Specific Services

Key Criteria for Selecting a Service ProviderEnd to End BPO Services?

Nice to Have

Quite Important Not Important at All

Critically Important

Source: Booz & Company BPO ExperienceSource: HFS Research




There are important lessons that can be learned from companies that have outsourced E2E successfully

Strategic Success Factors

Clear Understanding of Your Competitively Differentiating Capabilities“What Matters in Your Markets?”Clear Understanding of Your Performance Gaps“What Is the Benefit and the Cost to Achieve from Internal vs. External Transformation?”Strong Process Ownership and Knowledge“Understanding of End to End Process Baseline, Value Drivers and Performance Upside”

Tactical Success Factors

Successful outsourcing strategies are built on clear and disciplined operating model blueprints– Capabilities that determine market success– Capabilities where cost can be managed aggressively– Capabilities we are good at and where we need

improvement Governance is established early – blueprint decision

processes are clearly understood with no workarounds

Tactical success factors translate the blueprint into source-able packages – Careful articulation of business processes as opposed to

activities – Bundling of these processes to best leverage markets –

and the capabilities of each vendor Accountability and change management ensure successful

execution

Create Coherent, Sourcing Strategies“Optimize Internally vs., Outsource,? Captive or Outsource,? Vendor Platform or Legacy Platform?”

Utilization of a Multi-Vendor Portfolio“Which Vendors Best Match Your E2E Processes?”

Attention to Commercial Terms “How Is Clear Accountability and Risk Sharing Established?”

1

2

3

5

6

7

Deep Change Management Strategies“What is the Transition Plan and Change Impacts?”

8Strong End to End Process Governance“Ability to Drive to Decisions on Standardization and Transformation Aspirations”

4

Tends in End to End (E2E) BPO



Q & A

Iaop 2013 costa rica end to end finance outsourcing v f

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