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Transforming the Finance Function
Finance Executive InternationalCommittee on Finance & Information Technology
December 8, 2005
Page 2
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
Page 3
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
Page 4
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
Page 5
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
Transforming the Finance Function
Optimizing Shared Services
Presented by Josh Rogowsky
Page 7
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?
Page 8
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 ….
Page 9
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
Page 10
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
Page 11
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
Page 12
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
Page 14
The Rationale for Outsourcing is at Odds with Market Experience
Page 15
Have You Brought Any Outsourced Services Back In-House?
Page 16
Risks Cited
Page 17
Problems Faced by Participants with Negative Experiences
Page 18
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
Transforming the Finance Function
Plan to Perform – Budget and Performance Management
Page 20
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
Page 21
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
Page 22
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.
Page 23
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
Page 24
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
Page 25
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
Page 26
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.
Page 27
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.
Page 28
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
Page 29
• Paul Gaynor, Partner paul.m.gaynor@us.pwc.com (678) 419-1674
• Josh Rogowsky, Director joshua.d.rogowsky@us.pwc.com (646) 471-3163
Contacts
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