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Post Merger Integration of the Finance FunctionA Blueprint to Help Build An integrated Finance Function
2MCS1495GM15.PP
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
Establishing A New Vision For Finance
Information
Skills Organization
Technology
Roles andResponsibilities
Finance
3MCS1495GM15.PP
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
Establishing A New Vision For Finance
4MCS1495GM15.PP
Establishing A New Vision For Finance
Seven critical issues Measuring the cost Defining the vision
Information
Skills Organization
Technology
Roles andResponsibilities
Finance
5MCS1495GM15.PP
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:
Establishing A New Vision For Finance
6MCS1495GM15.PP
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?
Establishing A New Vision For Finance
7MCS1495GM15.PP
The seven critical issues facing CFOs:2. Performance measurement
Elements of the Issue Questions you should ask Elements of the Issue Questions you should ask
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?
Establishing A New Vision For Finance
8MCS1495GM15.PP
The seven critical issues facing CFOs:3. Information as a competitive asset of the company
Elements of the Issue Questions you should ask Elements of the Issue Questions you should ask
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?
Establishing A New Vision For Finance
9MCS1495GM15.PP
The seven critical issues facing CFOs:4. Organization and skills of Finance
Elements of the Issue Questions you should ask Elements of the Issue Questions you should ask
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?
Establishing A New Vision For Finance
10MCS1495GM15.PP
The seven critical issues facing CFOs:5. The cost of Finance
Elements of the Issue Questions you should ask Elements of the Issue Questions you should ask
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?
Establishing A New Vision For Finance
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The seven critical issues facing CFOs:6. Managing all Dimensions of Financial Risk
Elements of the Issue Questions you should ask Elements of the Issue Questions you should ask
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?
Establishing A New Vision For Finance
12MCS1495GM15.PP
The seven critical issues facing CFOs:7. Coordinating improvement projects around the company
Elements of the Issue Questions you should ask Elements of the Issue Questions you should ask
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?
Establishing A New Vision For Finance
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Information
Skills Organization
Technology
Roles andResponsibilities
Establishing A New Vision For Finance
Seven critical issues Measuring the cost Defining the vision
Finance
14MCS1495GM15.PP
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
Establishing A New Vision For Finance
0%
1%
2%
3%
Inefficent companies Fortune 500 average Best-in-Class
15MCS1495GM15.PP
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
Establishing A New Vision For Finance
Finance headcount
16MCS1495GM15.PP
Establishing A New Vision For Finance
Seven critical issues Measuring the cost Defining the vision
Information
Skills Organization
Technology
Roles andResponsibilities
Finance
17MCS1495GM15.PP
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
Roles andResponsibilities
Tech-nology
Establishing A New Vision For Finance
– 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
Roles andResponsibilities
Finance
18MCS1495GM15.PP
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
Establishing A New Vision For Finance
Finance
19MCS1495GM15.PP
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
Establishing A New Vision For Finance
Finance Vision
20MCS1495GM15.PP
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
Establishing A New Vision For Finance
Finance Vision
21MCS1495GM15.PP
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
Establishing A New Vision For Finance
Finance Vision
Finance
22MCS1495GM15.PP
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
Establishing A New Vision For Finance
Finance Vision
23MCS1495GM15.PP
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
Establishing A New Vision For Finance
Information
Skills Organization
Technology
Roles andResponsibilities
Finance
24MCS1495GM15.PP
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
Establishing A New Vision For Finance
25MCS1495GM15.PP
Achieving The Vision
Finance Vision Self-Assessment Business Process Transformation Organizational Change – BetterTech Performance Measurement Financial System Improvement
Information
Skills Organization
Technology
Roles andResponsibilities
Finance
26MCS1495GM15.PP
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
Roles andResponsibilities
Technology
Depending on the needs of the company, a wide range of improvement tools are available to help achieve Finance’s new vision
Achieving The Vision
Finance
27MCS1495GM15.PP
Each of the five improvement tools addresses a unique subset of the Finance Vision Components
Achieving The Vision
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
28MCS1495GM15.PP
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
Achieving The Vision
29MCS1495GM15.PP
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
Achieving The Vision
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
2. Business process transformation
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
ANALYSIS DESIGN CONSTRUCTION IMPLEMENTATION
ANALYSIS DESIGN CONSTRUCTION IMPLEMENTATION
Requirements definition
Data Conversion
30MCS1495GM15.PP
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.
Achieving The Vision
2. Business process transformation
31MCS1495GM15.PP
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
ANALYSIS DESIGN CONSTRUCTION IMPLEMENTATION
ANALYSIS DESIGN CONSTRUCTION IMPLEMENTATION
Achieving The Vision
32MCS1495GM15.PP
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
Achieving The Vision
33MCS1495GM15.PP
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
ANALYSIS DESIGN CONSTRUCTION IMPLEMENTATION
Achieving the Vision
5. Financial systems improvement
34MCS1495GM15.PP
Best Practices
Organization Process Systems Performance Measures
Information
Skills Organization
Technology
Roles andResponsibilities
Finance
35MCS1495GM15.PP
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
Roles andResponsibilities
Best Practices for Finance
Best Practices for Finance
Finance
36MCS1495GM15.PP
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
Best Practices for Finance
37MCS1495GM15.PP
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
Best Practices for Finance
Organizational options
38MCS1495GM15.PP
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...
Best Practices for Finance
Staff development Best Practices
39MCS1495GM15.PP
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
Best Practices for Finance
40MCS1495GM15.PP
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
Best Practices for Finance
41MCS1495GM15.PP
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
Best Practices for Finance
42MCS1495GM15.PP
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
• Financial Reporting
– Management Reporting
– External Reporting
Plan and Manage Business
Financial Analysis and
Reporting
Perform Accounting
Close
Manage Accounting
Transactions and Ensure
Compliance
• Financial Reporting
– Budgeting
• Treasury
• Internal Audit
• Tax
Core Transactions and Processes Decision Support and Risk Management
Finance Value Line
Best Practices for Finance
43MCS1495GM15.PP
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
Best Practices for Finance
44MCS1495GM15.PP
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
Best Practices for Finance
45MCS1495GM15.PP
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
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 & 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
Best Practices for Finance
46MCS1495GM15.PP
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
Best Practices for Finance
47MCS1495GM15.PP
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
Performance metrics: Benchmark target level
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
Best Practices for Finance
48MCS1495GM15.PP
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
Performance metrics: Benchmark target level
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
Best Practices for Finance
49MCS1495GM15.PP
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
Performance metrics: Benchmark target level
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
Best Practices for Finance
50MCS1495GM15.PP
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
Best Practices for Finance
51MCS1495GM15.PP
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
Performance metrics: Benchmark target level
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
Best Practices for Finance
52MCS1495GM15.PP
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:
Performance metrics: Benchmark target level
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
Best Practices for Finance
53MCS1495GM15.PP
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
Best Practices for Finance
54MCS1495GM15.PP
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
Best Practices for Finance
55MCS1495GM15.PP
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
Best Practices for Finance
56MCS1495GM15.PP
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
Best Practices for Finance
57MCS1495GM15.PP
Performance metrics: Benchmark target level
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
Best Practices for Finance
• 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
58MCS1495GM15.PP
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
Best Practices for Finance
59MCS1495GM15.PP
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
Best Practices for Finance
60MCS1495GM15.PP
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
Best Practices for Finance
61MCS1495GM15.PP
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)
Best Practices for Finance
62MCS1495GM15.PP
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
Best Practices for Finance
63MCS1495GM15.PP
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
Best Practices for Finance
64MCS1495GM15.PP
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”
Best Practices for Finance
65MCS1495GM15.PP
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 Practices for Finance