Transforming the Finance Function

Transforming the Finance Function

Finance Executive InternationalCommittee on Finance & Information Technology

December 8, 2005

1. Introductions and Context 5 minutes

2. Optimizing Shared Services 25 minutes

3. Plan to Perform – Budget and Performance Management 25 minutes

4. Closing Remarks and Comments 5 minutes

Meeting Agenda

TransactionProcessing / Analysis

Financial Analysis

TransactionProcessing / Analysis

Financial Analysis

Business Analysis

Lower total cost of finance

Improve Governance &Business Performance

Current State Future State

F&A BPO

Finance Vision Evolution

Finance Vision Evolution

Companies following this course are defining their paths as follows:

Leadership and Culture

• Reaction to business needs, trends, and inquiries – historical viewpoint

• Single-track career focus• A support executive to the business

• Business advisors providing insight on strategic and operational issues

• Source of business leaders Cross-pollination of finance and operations career modeling

Leading Companies Traditional Finance Organizations

Transparency

• Reporting on what stakeholders want, rather than what they need

• Poorly-aligned responsibility and accountability

• Broad disclosure of information beyond the financial statements (“thought-provoking”)

• Living a culture of accountability

TalentDevelopment

• High caliber talent identified and “hoarded”

• Limited career planning• Inconsistent coaching and career

development (varies by supervisor)• Unclear competencies/skills required

for success

• Competency framework and profiles for different job groups/experience

• Clear and attractive career development

• High potential talent showcased for development opportunities outside Finance

• Finance Academy to coordinate all development activity

Finance Vision Evolution (continued)

Companies following this course are defining their paths as follows:

Leading Companies Traditional Finance Organizations

Simplification

• Major efforts to consolidate information from multiple systems and processes

• “Fire fighting” impedes focus on large scale improvement

• Structured approach to improvement – standardization and rationalization of systems and processes

• Process rigor• Wide adoption of corporate policy

Transactional Processing

• Focus on transactional execution• Emphasis on data gathering and

creating reports• Disparate, locally-driven processes• Lack of visibility into process controls• Multi-touch approach

• Focus on analysis and problem resolution

• Standardized, globally adopted processes and policy

• Cost-effective and scalable processes, policies, and tools (e.g., shared services model)

• Management of outsourced transactional processing

• Exception-handling approach


Optimizing Shared Services

Presented by Josh Rogowsky

Shared Services vs. BPO Strategy

Maximum

Lev

el o

f B

enef

it

What improvementscan be made byimplementing localbest practice?

Can benefits ofstandardization acrossbusinesses andgeography beachieved?

Can shared serviceeconomiesof scale be captured?

Is outsourcingfeasible, beneficial and outweighs additional risk?

Simplification Standardization SharedServices

Outsourcing

Minimum

GLOBAL

REGIONAL

LOCAL

Where is your organization on this grid? What can you leverage?

Insource vs. Outsource

• Are there external suppliers of this service?In all locations?

• Can we do it faster, better, cheaper in house?• Do we have adequate capital investment

funding to deliver service in an SSC?• Can we deliver continuous improvement

programs across all functions?• Do we have the critical mass to implement best

practices and technology to achieve world class performance?

• Do we have access to the specialized resources necessary to achieve best practice performance?

• Can we manage service levels internally? • Can we manage third party relationships?• How quickly do we want to realize benefits?• Is this culturally acceptable?• Do the additional benefits outweigh the

increased risk?

“77% of Fortune 500 companies currently have efforts underway to outsource some aspect of their business support services”.

Outsource

Insource

Strategic ImportanceHigh

Low

High

Ris

kLow

There may be opportunities for outsourcing specific activities or ‘end to end’ processes. Some questions to consider ….

Two Models To Consider

Centralize-Standardize-Outsource• Centralize and standardize business processes prior to

outsourcing• Realize efficiency gains and cost savings before outsourcing• Better manage outsourcing vendor selection and alignment of

expectations

Transform-Operate-Transfer• Use of vendors to perform transformation• Avoids costly and time consuming process redesign• Easier to do externally

However, Shared Service Centres have very different characteristics from a normal “Support” function

Key Design Principles

• Run like a business & customer focused• Mainly newly recruited staff - no “bad habits” and low seniority• Flat organization reflecting minimal management layers• Organized around teams evolving to self-direction• General management leadership skills rather than functional• One leader for all shared services• Special reward and recognition programs to drive behaviors• Service Level Agreement maintained between provider and

customer

Seven Challenging Questions

• How do we make the case for Shared Services? • What processes should be included? What criteria should be

used? • Where should the Shared Service centers be located?• How do we manage the customer/service provider relationship

and ensure we deliver the appropriate service levels?• What organizational model should we adopt and why? • What technology do we need to support a Shared Services

organization?• What is the best implementation approach/sequence

Service Level Agreements evolve over time - often starting as simple informal agreements that then migrate to a more formal arrangement after the services have been ‘bedded in’

The Key Components Of Shared Service Implementations

They typically comprise of:• Definition of services offered and the Shared Services Centre

responsibilities.• Definition of Business Unit responsibilities e.g. timetable and quality of

source data .• Description of minimum service levels, response time, quality measures

and expected performance levels. • Definition of service level controls, reporting and governance.• Define the disputes/issue resolution process for the SSC and Business

Units.• Establish the procedures to resolve service failures.• Define the charge back mechanism

Service Level Agreements (SLAs) define the relationship between the service providers and users.

The “real” story behind outsourcing

The Rationale for Outsourcing is at Odds with Market Experience

Have You Brought Any Outsourced Services Back In-House?

Risks Cited

Problems Faced by Participants with Negative Experiences

An example of a ‘Tiered Service Delivery’ model

Note the use of ‘self service’ for routine

enquiry's

Tier 0 (Self-service)

Predefined answers Basic to complex inquiries

Tier 1 (Service Representative)

Predefined answers Basic to complex inquiries

Full range of service support Transaction processing

Tier 2 (Specialist)

Interpretation and problem solving Program delivery

Tier 3 (Consultant)

Forecasting Policy/program design

Special studies Critical incident

support

Advice & counsel

Transaction processing

CO

ES

erv

ice C

enter

The Key Components Of Shared Service Implementations

The Operating Model will also rely on the specific customer requirements and the skills/ technology required to support the delivery of the service


Plan to Perform – Budget and Performance Management

Leading Organizations Are Increasingly Questioning The Value Of The Traditional Annual Budget Process

“The budget is the bane of corporate America”

Jack Welch, Ex CEO – General Electric

“Budgeting is an unnecessary evil”

Dr Jan Wallander, Honorary President – Svenska Handelsbanken

“The budget is a tool of repression rather than innovation”

Bob Lutz, Ex CEO – Chrysler

“The process of management is not about administering fixed budgets, it is about the dynamic allocation of resources"

Lord Browne, CEO BP

Why Is The Annual Budget No Longer Suitable For Today’s Business Environment ?

• The bottom up annual budget process is too slow and too infrequent to provide actionable information

• Annual performance contracts hard wired to budget targets, make it difficult to respond quickly

• Targets based on a single financial year may encourage short term thinking

• Most annual budget processes encourage and reward “gaming”

• “Last year +” budgeting encourages unnecessary spend ("Use it or lose it")

• “Stretch numbers” used for target setting are usually unsuitable for resource planning purposes

• Overly tight control from the centre may stifle innovation and reduce agility at a local level

Negotiation

Top down targets

Bottom Up Forecasts

Is It Possible To Manage Without Budgets Entirely?

• In the 70s, Swedish bank Svenska Handelsbanken abandoned its annual budget completely, choosing to rely on KPIs and rolling forecasts.

• A number of other companies in Scandinavia and other parts of Europe followed suit to form the much publicised “Beyond Budgets” movement.

• For the majority of organizations, eliminating budgets entirely may not be realistic, as the annual financial cycle is so deeply embedded in their culture and processes.

• Many large corporations are now applying lessons learned from these pioneers to create a lighter, less arduous annual budget and to place greater emphasis on rolling forecasts, KPIs and trend analysis as management tools.

Increasingly Organizations Are Moving Towards A Lighter More Continuous Process Based On Rolling Forecasts

Top down targets

Bottom Up Forecasts Bottom Up Forecasts Bottom Up Forecasts

Continuous Dialogue

In this environment, budgets and forecasts become part of an ongoing management dialog, rather than an annual negotiation

Resource Allocation

Forecasting

(Compensation/Incentives)

Manage & track / Market Expectations

Set Strategic Goals

Scenario Modelling

StrategicPlanning

Target settingVariance Analysis

OperationalManagementWhat If Analysis

(Record to report)

OpportunityTo Action

PublishStrategy

PerformanceMonitoring

EvaluateOptions

Strategy toExecution

Plan To Perform: The Strategic Management Cycle

As Organizations Move To A Lighter Budget, Or Abandon It Completely, New Tools Are Emerging To Take Its Place

Operationalizing Strategy: Strategy maps, Balanced Scorecards, KPIs

Target Setting: Benchmarks and relative targets,

Controlling costs: Exception reporting, rolling forecasts, “war chests”

Performance Mgmt: Rolling Forecasts, Dashboards, KPIs

Resource planning: Trends, Rolling Forecasts, Option trees

Compensation: Balanced Scorecards and qualitative evaluations

Investor Communications: Value reporting based on ratios and KPIs

Systems Are A Key Enabler In Achieving A Truly Integrated Performance Management Environment

Analysis Tools Dashboards Forecast/Budget Tools

Forecast/BudgetingWorkflow

Common Data Structures

• Vendors such as Hyperion, Cognos, GEAC and OutlookSoft all currently provide Corporate Performance Management Solutions (CPM), with varying degrees of integration.

• Developments in Web Services, SOA and XBRL are likely to transform this space in the near future.

PerformanceManagementEnvironment

People Process

SystemsOrganisation

Culture

Skills

Mgmt Behaviours

Level of detail

Frequency

Linkages toOther processes

Business Value Drivers

Data Quality

Efficient Workflow

Embedded Controls

User InterfaceRemuneration& incentivisation

Leadrship Style

Develoution ofAuthority

Systems Are Important, But They Are Only One Factor In Designing An Effective Performance Management Environment

To be successful, you must develop an approach, which is fully aligned to the culture and structure of your organisation.

Design Principles

• Clearly articulated strategic goals linked to KPIs

• Active support from top management, to reinforce the right behaviors

• Reliable and accurate data and effective business intelligence systems

• A forecasting system which is tightly integrated with management reporting tools

• Incentives that encourage “the right” decision, not just meeting the annual financial targets

• Paul Gaynor, Partner [email protected] (678) 419-1674

• Josh Rogowsky, Director [email protected] (646) 471-3163

Contacts

Transforming the Finance Function

Documents

Transcript of Transforming the Finance Function