How Insurance CFO's Manage Risk and Compliance Using Analytics

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AGENT OF CHANGEWHAT INSURANCE CFOs NEED TO KNOW ABOUT MANAGING FINANCIAL, RISK, AND

COMPLIANCE DATA

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EXECUTIVE SUMMARY

Studies confi rm that in today’s insurance companies, the effi ciency and effectiveness of the fi nance department will have a direct impact on the bottom line. Why then are so many chief fi nancial offi cers (CFOs) relegated to mere reporting functions, with little opportunity to lead?

It doesn’t have to be that way. By deploying an analytics solution that goes far beyond reporting, fi nance executives can reclaim their rightful role as partners and advisors to their executive peers, thus achieving optimal alignment between fi nancial management and overall business performance.

This paper explores the challenges facing today’s insurance company CFOs. Then it considers how a next-generation reference architecture can empower business users, simplify processes around compliance, and deliver signifi cant cost savings in a fast-evolving industry.

FROM GENERATING REPORTS TO LEADING THE BUSINESS

What are the shared traits of highly profi table insurance companies? Some would say rigorous underwriting; others would say top-notch marketing. The list of critical functions can seem endless: claims handling, customer service, asset management, distribution management, risk management, pricing, diversifi cation, concentration, expense management, and more.

The fact is that all of these areas are important—but one function connects them all. Without an effective and effi cient fi nance operation, how can managers know the status of any given function with certainty? How do claims managers, for example, achieve key performance objectives if they have no way to measure, analyze, and optimize the fi nancial effects of their efforts?

These are not merely academic questions. Research demonstrates that a well-run fi nance department has a direct impact on profi tability. A 2012 study of CFOs in the insurance industry by accounting fi rm WeiserMazars found a remarkably high correlation between the profi ciency of the fi nance department and the company’s profi tability, with an equally high correlation between poor fi nancial management and low profi tability.1 Yet in many organizations, the fi nance department is regarded as a mere reporting function with few opportunities to play a leading role in moving the business forward.

TABLE OF CONTENTS

2 Executive Summary

2 From Generating Reports to Leading the Business

4 Too Much Process, Too Little Insight

4 Holistic Approach to Data

6 Conclusion

1. WeiserMazars, “2012 CFO Study,” October 2012.


http://www.weisermazars.com/cfostudy/

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Top-fl ight insurers don’t work that way. They offer analytic insights and guidance to meet strategic business goals. For example, fi nance teams at leading organizations provide detailed profi tability metrics at the agent and agency level. They also generate lifetime-value data at the customer level, with the possibility of embedding risk-adjusted profi tability (RAP) or similar measures to enhance underwriting decisions.

These are just two of the tactics deployed by fi nance executives at leading insurance companies. The tactics may change from carrier to carrier, but one thing is certain: CFOs must deliver high-value fi nancial data to multiple departments and functions if they hope to assume a leading role in the business (see Figure 1).

Reporting Measures/KPIs Analysis

GAAP

Management

Statutory

Statistical

Annual Report Government/Treasury

SBULine of BusinessProfit CenterCost Center

Annual Statement and ExhibitsBureausAssociationsSpecial Filings

Statistical PlansActuarial

Return on EquityReturn on AssetsNet Investment YieldEarnings Per Share

Revenue Growth Earnings GrowthReturn on CapitalMarket Value Added Equity EarningsYield on InvestmentsDuration of AssetsCredit DefaultNew BusinessMix of BusinessPremium/Asset per CustomerProducts per CustomerFixed and Variable CostsAcquisition CostsCapacity Sales by DistributionAgent/Policyholder RetentionCatastrophesReinsurancePolicy Class/Sub-classPerilPolicy TermStateAgent StateTerritory Price Target/AchievedQuotes Accepted/DeclinedPremium PersistenceExposure MixExposure Units

Shareholder Value AddedMeasured Operating IncomeCumulative Discounted Cash FlowInternal Rate of ReturnUnderwriting P&L

Combined RatioLoss RatioExpense RatioOperating RatioChange in Surplus

Change in Premium WrittenLiabilities to SurplusLeverage Net and GrossCurrent LiquidityReserves to Surplus

Premium PersistencyMortality and P&C ClaimsLoss Frequency and Severity

Figure 1. CFOs need to spend less time on reporting activities in the left-hand column so they can spend more time on value-add activities in the right-hand column.

BASIC INSURANCE FINANCIAL REPORTING ENVIRONMENT


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TOO MUCH PROCESS, TOO LITTLE INSIGHT What is the average length of a company’s monthly or quarterly close process? For many insurance company CFOs, the likely answer is “Way too long.” This is particularly true for larger, more complex insurers with multiple operating units spanning many product lines and territories.

Whether they are CFOs of a business unit or of an entire corporation, fi nance executives know very well that processes can get complicated and ineffi cient when dealing with fi nancial management, risk, and compliance (FMRC) data. For example, business unit CFOs might formally report to the corporate CFO on a monthly basis, requiring many hours of preparation from all business units to generate reports that are frequently repetitive, inaccurate, costly, and inconsistent.

Other examples abound. For instance, a company with multiple subsidiaries might suffer from greater ineffi ciencies with every merger. In many cases, data must be pulled from each of those subsidiary operations and then reported to the appropriate regulatory entities in every state and country where the company happens to operate.

With so much redundancy in the system, highly skilled analysts spend countless hours doing perfectly avoidable work just to source data for fi nancial analysis. Meanwhile, value-added tasks get pushed to the side. Other challenges include the following:

~ Manual, error-prone processes—Whether performing account reconciliations during the monthly close or querying accounts receivable, manual efforts tend to introduce errors while leaving little or no audit trail.

~ Insuffi cient management of enterprise performance—Analysts are often unable to link operational and fi nancial data. Meanwhile, key performance indicators (KPIs) are often calculated differently across various business units and territories, resulting in a hodgepodge of irreconcilable information.

~ Unsustainable compliance infrastructure—As companies continue to adapt to the stringent regulations associated with the Sarbanes-Oxley Act, International Financial Reporting Standards (IFRS), and the Solvency II Directive, among others, many are still struggling with inconsistent governance processes that make compliance a far larger burden than necessary. Even those companies with processes and systems tailored to the latest regulations are in danger of losing ground as compliance and regulations evolve.

HOLISTIC APPROACH TO DATA

In today’s insurance companies, each functional area tends to see its problems in a vacuum. Many stakeholders fail to recognize that a well-conceived and intelligently deployed information environment could benefi t everyone across the business. Instead, they are frequently inclined to build business cases that address their particular challenges, with little or no regard for the bigger picture.

There is a solution. By deploying an enterprise-wide reference architecture to integrate business-critical data, insurance companies can achieve a more complete view across all fi nance functions while building consensus among key stakeholders and IT resources. Additionally, companies can reduce infrastructure costs, improve responsiveness, and make actionable information available to more audiences in less time. They can even achieve signifi cant reductions in operational expenses in areas such as procurement and fi nancial reporting, all while empowering business users to gain new insights that will contribute to greater profi tability.

BREAKING THE APPLICATION BARRIER

According to Hackett Group research released in September 2013, even the most advanced enterprise resource planning applications are simply incapable of supporting the fi nance organization of the future.2

The reason is simple: Stand-alone applications cannot adequately process the volumes and workloads associated with today’s tsunami of data. Many of these applications are proprietary tools that fail to work properly with other applications, isolating critical data in out-of-the-way silos. System changes are costly and time consuming. Summarized data is diffi cult to untangle. In short, a messy assortment of point solutions might address a small number of known issues but they don’t stand a chance against the waves of data to come.

That’s why leading insurance companies are taking a different approach, integrating critical data stores within a unifi ed architecture for enhanced visibility, fl exibility, and scalability across the enterprise.

2.The Hackett Group, “The World-Class Performance Advantage: How Leading Finance Organizations Outperform Their Peers,” September 2013.


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Perhaps most important, a data warehouse can help companies achieve and maintain compliance by offering standard business rules and defi nitions as documentation for the integrity of the information process. This provides a signifi cant level of transparency and consistency in fi nancial reporting and analysis (see Figure 2).

The key to realizing these benefi ts is the implementation of a data warehouse that can store detailed fi nancial transactions across multiple source systems and enterprise resource planning (ERP) instances. The warehouse integrates accounting, journal entries, and ledger accounts with the associated business functions such as sales, underwriting, and claims. Information can be analyzed in a wide variety of ways and on any scale, from a detailed drill at a single line item to extensive historical data. Every transaction remains fully visible to key stakeholders on demand, making it far easier to manage complex processes from beginning to end.

OPERATIONALSYSTEMS

NEXT-GENERATION FINANCE INFRASTRUCTURE

S I M P L I F I C AT I O N , S TA N D A R D I Z AT I O N , C O N S O L I D A T I O N

Data Warehouse

Consolidation

General Ledger

AP Purch AR FA PA

HR

PR

OtherReinsurance

NewBusiness

Premiums

Claims

Commissionsand

Incentives Collectionsand

Settlement

Marketing

PolicyServicing

InvestmentFunds

ManuallyCreated

Data

CalculationEngines andApplications

Reporting andAnalytics

OperationalAnalytics

PlanningFinancial Reporting

Management Reporting

Regulatory Reporting

Tactical Info Delivery

Profitability

AllocationsActuarial

DATA MANAGEMENT

Financial Systems HRAccountingHub

AccountingRules

Sub-ledger

HierarchyManagement

SecurityManagement

MetadataManagement

Data Qualityand Governance

Master DataManagement

WorkflowManagement

RulesManagement

Figure 2. Next-generation reference architecture, the key to a more effective CFO and profi table carrier.


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A next-generation reference architecture from Teradata seamlessly integrates several key elements required by today’s fi nance information delivery systems:

~ Data warehouse foundation—Consisting of the fi nance-specifi c elements of an enterprise data environment, a fi nance data warehouse is uniquely capable of serving as a systems integration platform that links fi nancial details to operational data while simplifying the provision of consistent data to countless applications and users.

~ Data sourcing—Users can move data from source systems into the data warehouse, providing the transparent audit trail needed to tie exact copies of source transactions to the transformed data.

~ Accounting hub—The integrity of any data warehouse in a fi nance environment depends upon reliable reconciliation with the general ledger. Therein lies the value of the accounting hub, which offers a transparent rendering of the complex aggregations and accounting rules that turn operational system transactional data into summary automated postings.

~ Financial and human capital data integration and analytics—ERP data is key to effective fi nancial analysis. Data integration and analytics capabilities source and organize this data in its proper business context across multiple fi nance functions to accelerate the development of timely, accurate reports.

~ Calculation engines and applications—A complete infrastructure must integrate prepackaged software applications and calculation engines with standard business rules that deliver enterprise-wide profi tability, risk, planning, forecasting, and allocation capabilities.

~ Business intelligence (BI) and reporting tools—To fi eld new requests for information, analysts need an ad-hoc environment that provides access to data from multiple sources. If several BI tools exist within an enterprise environment, a common data warehouse foundation helps drive consistent results across disparate tools.

~ Data management—To remain compliant, insurance companies must maintain extraordinarily high levels of transparency and data quality throughout the data life cycle. A well-executed data management strategy helps establish a clear audit trail for easy internal or external review.

CONCLUSION

By and large, the insurance industry is resistant to change. Many CFOs depend on tried-and-true approaches to business intelligence. But too often, tried-and-true just isn’t enough for success in today’s complex world. With technology that plays an increasingly central role in the enterprise; regulations making life complicated for CFOs; and a notable increase in mergers and acquisitions at fi rms worldwide, too much has changed in recent years to pretend otherwise.

Teradata can help CFOs understand what’s next—and what they can do about it. By implementing a data infrastructure for deeper insight into key fi nancial metrics, the necessary tools will be available to boost profi tability and maintain a competitive edge in a fast-evolving industry.

For more information, see the resources for insurance industry professionals available at www.Teradata.com.

CASE STUDY: DATA BECOMES A STRATEGIC ASSET AT LARGE US-BASED INSURANCE COMPANY

This US-based company is one of the largest insurance and fi nancial services companies in the industry, with $23 billion in revenue and $160 billion plus in statutory assets. The company is represented by more than 3,500 agents and employs more than 36,000 associates.

Today, the company depends heavily on an enterprise data warehouse from Teradata. In fact, the Teradata® system now handles more than 100 terabytes of user data—about ten times the size of the entire printed U.S. Library of Congress—and may support 100 percent of the company’s business.

The conclusion is clear: When properly harnessed and managed, data can truly become a strategic asset. To get all the details, download the case study.




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World-Class Finance I The Hackett Group I 1© 2013 The Hackett Group, Inc.; All Rights Reserved. | 300012X

Continued volatile business conditions translate into pressure on finance budgets combined with increased demands for delivery of more business value. If they want to achieve world-class performance levels, this reality is compelling finance organizations to fundamentally rethink their service delivery model. Principally, they must master and five critical activities:

1. Develop global talent management

2. Drive enterprise standards

3. Accelerate global business services

4. Expand IT’s impact

5. Increase enterprise performance management (EPM) value

Companies’ particular resource constraints, differences in business conditions and culture will set their priorities for finance transformation.

The Evolution of World-Class PerformanceWhile changes in the business environment mean changing finance-function priorities, the importance of achieving world-class performance is as relevant ever. The pressure on finance organization to continue to do more with less is relentless. The Hackett Group’s 2013 Key Issues Study found that the number of finance staff and finance budgets are both projected to continue their long-term decline (Fig. 4).

How leading finance organizations outperform their peers

By Erik Dorr and Lynne Schneider

World-class finance organizations are 53 percent more productive than their peers, with fewer full-time equivalent (FTE) staff per $1 billion in revenue (Fig. 1). Further, their costs are 48 percent lower (Fig. 2). Are these gains achievable for your company? With a focused effort, absolutely, for most organizations. Although the journey to world-class performance often can take five or more years, a company is likely to see marked improvements within two. These early wins can free up resources for business analytics and talent development – the highest finance priorities for improving organizational effectiveness and supporting business growth over the long term. Additionally, world-class finance organizations play an important role in realization of performance improvement in other business services functions, such as HR, procurement and IT (Fig. 3).

The world-class performance advantage:

Finance Executive Perspective

Complimentary Research

September 2013

0.0

0.2

0.4

0.6

0.8

1.0

1.2FIG. 2 Finance costs as a percentage of revenue, 2013

Source: The Hackett Group, 2013

Peer group World class

48%

FIG. 1 Finance full-time equivalentsper $ billion in revenue, 2013


Peer group World class

53%

0

20

40

60

80

100


At the same time, the business demands on finance organizations will only increase, with an intensifying emphasis on business enablement and value creation. For 2013, improving the quality of the function’s data is ranked ahead of creating a competitive cost structure and is now number-one priority for finance (Fig. 5). In addition to a focus on data/analytics and costs, finance executives are actively working on their talent plans and continuing to focus on supporting their customers. Overall, finance is taking a more strategic view of its role and service delivery, and focusing less on specific tactics.

FIG. 3 Potential savings from peer groupto world-class performance1

FunctionPotentialSavings

($ Millions)

PotentialSavings

(%)

Finance $49 48%

Human Resources $12 27%

Information Technology $26 16%

Procurement $7 26%

Total $94 28%


FIG. 4 Anticipated changes in finance budget and FTEs from 2012 to 2013

Company revenue Finance operatingbudget

Productivity gap

Finance FTEs

Source: Key Issues Study, The Hackett Group, 2013

6.5%

-1.2%

-3.0%

-3-2-1012345678

FIG. 5 Key finance issues in 2013

Source: Key Issues Study, The Hackett Group, 2013

74%

72%

72%

65%

60%

56%

51%

49%

49%

47%

47%

TALENT FOCUS

0 10 20 30 40 50 60 70 80

Measuring/managing finance’sperformance and business value

Training and developing the skills of staff

Optimizing financing structure andreducing the cost of capital

Aligning staff skills with changing skill setsrequired by the function

Supporting end-to-end process ownershipacross functions and other boundaries

Connecting the finance organizationto customer needs

Attracting and retaining high-caliber talent

Developing leadership capability and a pipelineof potential future leaders

Improving finance's analytical, modelingand forecasting capabilities

Supporting the enterprise in achieving and maintaininga competitive cost structure

Improving the quality of the finance function's dataanalysis and reporting capabilities

COST FOCUS DATA/ANALYTICS FOCUS CUSTOMER FOCUS

1 Calculations are based on a typical $10 billion company and adjustments to eliminate double-counting of opportunity between functions, resulting in small differences between world-class to peer savings opportunity gap for individual functions.


The World-Class Efficiency Journey: A Relentless Focus on CostWhile efficiency is measured using more than just cost metrics, the best proxy for overall efficiency performance is cost. Higher utilization of resources and productivity levels are ultimately reflected in lower cost. The Hackett Group’s data shows that world-class finance organizations operate at 48% lower cost than peers across all of finance (Fig. 6).

The large difference between the process categories is especially interesting: world-class finance organizations run low-value-added, “commodity” transactional processes at far less cost than high-value-added planning and strategy and planning processes. The cost gap for partially repetitive and partially high-value-added risk control and risk processes falls somewhere in between. Equally revealing, the transactional process cost gap has been widening over the last few years, while the planning and strategy cost gap has been narrowing. This is consistent with a pattern of reallocation of resources from low-value-added to high-value-added activities observed at world-class finance organizations. This reallocation in turn is part of a strategy of moving the finance organization “up the value curve,” which leads directly to a discussion of the effectiveness performance advantage of world-class finance organizations.

World-Class Effectiveness Performance: Moving Up the Value CurveWhile the efficiency journey can be illustrated with a single cost metric, the same is not the case for effectiveness. Effectiveness of finance service delivery manifests itself in many ways: accuracy and timeliness of analysis supporting business decisions, quality of partnership between finance and the business, forecasting accuracy, finance’s value contribution in strategic and operational planning. Effectiveness of transactional finance is reflected in metrics like days to close and report financial results, and working capital- related metrics such as days sales outstanding (DSO).

The Hackett Group has identified five key initiatives that finance organizations need to undertake to achieve and maintain world-class performance levels, and meet the dual demands of more efficient operations and delivery of more business value:

1. Develop global talent management

2. Drive enterprise standards

3. Accelerate global business services

4. Expand IT impact

5. Improve enterprise performance management (EPM) value

World-class finance definedThe Hackett Group defines world-class finance organizations as those in the top quartile of companies in our finance benchmark database as measured against both the efficiency and effectiveness axes of the Hackett Value Grid™.

Efficiency metrics address the organization’s ability to complete tasks as inexpensively as possible. Effectiveness metrics address the quality of the outputs or services provided.

FIG. 6 Anticipated changes in finance budget and FTEs from 2012 to 2013

Transacting

2013 cost of finance by process category (as a percent of revenue)

Control and Risk

PEER GROUP WORLD CLASS

Planning and strategy Total finance cost

0.0

0.2

0.4

0.6

0.8

1.0

1.2

-61%

-27%difference

-45%difference

-48%



1. Develop global talent managementAs a result of automation or outright elimination through process reengineering of routine finance tasks (and the offshoring of remaining lower-value-added roles) finance organizations are rebalancing their talent pool. Successful design and execution of this transformation of the finance function cannot happen without the right leadership talent. Thus, not only does a world-class finance organization have structurally different talent needs than the peer group, but to achieve world-class status requires critical skills as well.

The Hackett Group’s research illustrates the talent gap – some would say a talent crisis – in finance is real; for over half of generic business skills, there is a worrisomely large gap between the importance of the skill and the effectiveness of available resources (Fig. 7). The picture looks slightly less bleak for finance-specific skills, but do not be fooled: these skills are in purely transactional finance roles, while all differentiating, high-value, finance-specific roles such as finance technology, business analysis, financial planning and organizational know-how face a serious skills gap.

Without adequately addressing today’s talent situation, achieving world-class performance in finance will be elusive. This situation will get worse before it gets better, in part because leading finance organizations are all competing for the same small pool of talent. Finance organizations need to establish talent acquisition, development and retention programs to address this critical issue.

2. Drive enterprise standardsEstablishing control over proliferating standards is the least controversial and best understood requirement for achieving world-class finance performance. However, many organizations have been targeting standardization in an operating environment that is itself divided into functional silos, and are only beginning to realize that siloed processes inhibit performance, even when high levels of standardization are in place.

FIG. 7 The talent gap in finance

Source: Finance Talent Management Study, The Hackett Group, 2011

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

Importance

Eff

ecti

ven

ess

Cash disbursements

Revenuecycle

Accounting &externalreporting

Tax mgt.

Treasury mgt.Compliance mgt.

Financial planning

Importance/ effectivenessbalance

Business analysis

Finance-specifictech

Data analysis & modeling

Vendor/outsourcing

management

Strategicthinking &

and analysis

Project/programmanagement

Change mgt./process improvement

Business acumen

BUSINESS SKILL

FINANCE SKILL

Without adequately addressing

today’s talent situation, achieving

world-class performance in finance will be

elusive


The Hackett Group is finding that service delivery organizations, including finance, are rapidly adopting the principle of end-to-end process design, while at the same time structurally changing the enterprise process ownership model of their business processes. The main driver behind this trend is the desire for performance optimization and business alignment. Standardization is essential to enabling end-to-end process design. It not only optimizes the business outcome of the process, but also process efficiency by either fully integrating or designing interfaces between sub-processes. For example, in a siloed customer-to-cash process, the data and process models for order processing, invoicing and accounts receivable may be optimized for each process individually, but data attributes needed for integration may be missing. This may result in ad hoc information exchange between order processing, invoicing and accounts receivable, dragging down the efficiency of the entire end-to-end process. To prevent this, organizations must design the process, data model and enabling technology architecture with end-to-end efficiency performance optimization in mind.

Figure 8 illustrates how leading finance organizations are planning for a substantial increase in standardization as well as integration levels across end-to-end processes with financial components. While standardization at world-class finance organizations is currently ahead of that of the peer group, if these leaders fail to drive through the requisite process and master data standards to enable end-to-end processes at an enterprise level (as opposed to merely the process level), they risk losing their hard-won performance edge.

3. Accelerate global business servicesGlobal business services (GBS) organizations represent the evolution of traditional shared services organizations into globally operating, multi-functional, leveraged services delivery organizations that have developed a core competency in the delivery of business services. While traditional financial shared services organizations were instrumental in performance improvement of finance service delivery over the past decade, and indeed in the achievement of world-class finance performance, the traditional model no longer meets the needs of modern, globally operating enterprises.

More and more, GBS organizations are broadening their portfolio beyond transactional finance services. The Hackett Group predicts the movement of increasingly higher-value, knowledge-based work into GBS organizations will take place in a series of waves which represent successively higher levels of capability maturity in the GBS organization. Ultimately, the reallocation of finance resources from transactional to high-value-added roles, and the movement up the value pyramid described in the first section of this report, will demand a GBS model. Therefore, world-class finance organizations that currently successfully operate traditional finance shared services organizations and fail to evolve these into mature GBS organizations are at risk of losing their world-class performance advantage.

FIG. 8 Percent of processes integrated and standardized, by finance end-to-end process

46%66%

35%

63%50%

69%

32%

57%

45%64%

37%

63%48%

68%

25%

53%

Sta

nd

ard

ized

Inte

gra

ted

Current In 2-3 years In 2-3 years In 2-3 years In 2-3 years Current Current Current

Purchase-to-Pay Customer-to-Cash Account-to-Report Plan-to-Results

Source: The Hackett Group, 2013GBS organizations are broadening their portfolio beyond

transactional finance services


World-class GBS organizations effectively balance cost and service. In fact, world-class GBS organizations realize a 10% average annual recurring savings compared with only 6% for the peer group. At the same time, world-class GBS organizations achieve a 7% average annual rate of quality improvement.

4. Expand IT’s impactAlong with the need for enterprise standardization, expanding the impact of IT is the most commonly understood world-class performance driver (Fig. 9). However, as with standardization, structural changes in finance’s operating and service delivery models require changes in the design and implementation of technology. Technology strategies that enabled world-class finance performance in the past are no longer adequate to ensure this performance advantage in the future. For example, successful deployment of GBS organizations and improving EPM capability are highly dependent on technology strategies and investments. By the same token, implementing standards-based, end-to-end processes in the absence of an adequate enabling technology platform will be difficult or even impossible.

Finance organizations of all stripes are projecting major levels of change and transformation in enabling technology, including ongoing investment and consolidation of their ERPs. This is despite the fact that ERP technology has been around for over a decade and companies have spent hundreds of millions of dollars to implement and support it. The implication is that these investments have not delivered a technology platform capable of supporting the finance organization of the future.

5. Improve enterprise performance management (EPM) valueThe Hackett Group defines EPM as the organizational competency to dynamically manage execution of the business strategy through:

• Improved management decision making

• Alignment of stakeholders’ behaviors with the strategic objectives of the organization

• Dynamic measurement of goals and performance

• Leverage of analytical and modeling capabilities

EPM competency is correlated with financial performance of the enterprise. In a study conducted in 2011, 67% of EPM top performers outperformed EBITDA of their industry,

FIG. 9 The benefits of application consolidation

15Xfewer

applications

Total finance applicationsper $1B in revenue* 2X

greaterproductivity

Number of financeFTEs/$1B in revenue

WC41.4

50%lower total finance

costs

Finance cost as a percentof revenue

WC.603%

Low High

Low High

2.8

46.4

Low High



There is a common misconception that executives have to choose between working capital and earnings. Over the long run, managing working capital well, even in times of growth, will improve a company’s competitiveness.

The working capital opportunity in the U.S. is enormous: $1,061 billion in potential working capital improvement, $459 billion of which is in inventory, $318 billion of which is in accounts receivable, and $285 billion of which is in accounts payable.

In Europe, the potential working capital improvement opportunity is €762 billion, €257 billion of which is in inventory, €272 billion of which is in accounts receivable, and €232 billion of which is in accounts payable.

Despite what many think, proactively managing working capital doesn’t require companies to anger suppliers by paying them late. It doesn’t mean customers will be frustrated by sudden changes in payment terms, or that operating costs

Break the profit-cash cycle: A $1,061 billion opportunity in the U.S., €762 billion in Europe

will increase because of too little inventory. There are innovative ways to address issues in inventory management, accounts payable and accounts receivable. Taking advantage of even a small piece of your company’s working capital opportunity can yield quick gains and generate cash that can be used to make investments in GBS and EPM.

FIG. 9 & 10: US working capital opportunity

$1,061 B

$318 B

$285 B

Working captial opportunity FY 2012

Total accounts receivable opportunity

Total inventory opportunity

Total accounts payable opportunity

Total working capital opportunity

$1,061 B

% of revenue

$318 B

$459 B

$285 B

9.4% $459 B Inventoryopportunity

Accountsreceivableopportunity

Accountspayableopportunity

Total workingcapital opportunity

0

200

400

600

800

1000

1200

FIG. 11 & 12: Europe working capital opportunity

€ 762 B

€257 B

€272 B

€232 B


Total accounts receivable opportunity €272 B

Total inventory opportunity €257 B

Total accounts payable opportunity $232 B


$762 B

% of gross working capital 30.0%

% of revenue 10.4%

Inventoryopportunity




0

100

200

300

400

500

600

700

800

FIG. 11 & 12: Europe working capital opportunity

€ 762 B

€257 B

€272 B

€232 B


Total accounts receivable opportunity €272 B

Total inventory opportunity €257 B

Total accounts payable opportunity $232 B


$762 B

% of gross working capital 30.0%

% of revenue 10.4%

Inventoryopportunity




0

100

200

300

400

500

600

700

800

U.S. working capital opportunity

Europe working capital opportunity

FIG. 9 & 10: US working capital opportunity

$1,061 B

$318 B

$285 B


Total accounts receivable opportunity

Total inventory opportunity

Total accounts payable opportunity


$1,061 B

% of revenue

$318 B

$459 B

$285 B

9.4% $459 B Inventoryopportunity




0

200

400

600

800

1000

1200


while none underperformed (Fig. 10). EPM top performers outperformed peers on such metrics such as forecasting accuracy, realization of financial plans, days to report, while operating with lower process costs than peers.

To develop an EPM core competency, companies need to integrate or align strategic planning and analysis, financial planning and analysis, and operational planning and analysis processes. These processes are the first stage of an integrated performance management cycle (Fig. 11). They form a holistic, enterprise-level performance management capability that departs from the finance-centric tradition. Traditional finance centric performance management revolved around the annual financial budget, periodic forecasting against year-end planning horizon, and financial centric variance analysis.

Companies need to integrate or align strategic planning and

analysis, financial planning and analysis, and

operational planning

and analysis processes

FIG. 11 The integrated EPM planning and control cycle

Commercial

Operations

Business supportStrategic planning

Operational planning

Financial planning

Strategic

Financial

EPM

Operational

Operational and financial analytics

Financial reporting

Operational reporting

Performance driver projection

Adjust plan

Business forecast

Opportunity

Performance

Risk

Plan

the

business

Execute the plan

Monitor performance Close perfo

rman

ce g

ap

Source: The Hackett Group

FIG. 10 EPM performance and financial (EBITDA) performance

2.1X More

likely tooutperform

industrythan peers

0

10

20

30

40

50

60

70

80

26%

43%

30%

0%

36%

64%

Underperformance Industryperformance

Outperformance

EPM STUDY PEER GROUP EPM TOP PERFORMERS



Finance organization aspiring to achieve world-class performance should take on a leading role in navigating their organization through the transition from the traditional financial performance management cycle to true EPM. While most finance organizations are in early stages of this transformation, The Hackett Group’s research indicates that those that are capable of supporting this transition represent the next generation of world-class finance organizations. Of course, their ability to develop this EPM leadership role cannot happen without the right talent, process architecture and technology platforms.

Strategic ImplicationsWhile the need to achieve world-class performance in finance service delivery is as relevant now is it has ever been, the traditional avenues for achieving this status have been changed in response to business conditions, new technologies and evolving models for optimization of processes and organizational design.

In this research we have painted a high-level picture of the five most important transformation actions for achieving and maintaining world-class performance in finance. While we can only skim the surface in the space available to us, we hope readers find it a useful framework for conducting an initial diagnostic.

Most important, finance leaders should use this research to validate whether they are asking the right questions. If they have not given previous thought to any of the five actions discussed in this paper, are have probably been focusing on the wrong priorities, getting bogged down by tactical issues and losing sight of the bigger picture of how to structurally improve performance in finance.

© 2013 The Hackett Group, Inc.; All Rights Reserved. | 300012X

This publication has been prepared for general guidance on the matters addressed herein. It does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.

About the Advisors

Erik Dorr

Vice President, Strategic Research

Mr. Dorr has over 20 years of experience in consulting, research and advisory roles in information technology strategy, enterprise application suites and business process reengineering. Before being named to his current position, he was Senior Enterprise Research Director. Prior to joining The Hackett Group, he held a number of senior management positions, including Vice President of IT at a global manufacturing

company, where he was also a member of the executive leadership team.

Lynne Schneider

Senior Research Director

Ms. Schneider is responsible for leading the development of research and other intellectual property for The Hackett Group’s Executive Advisory Programs in both human resources and finance. She has worked in consulting and related research for over 20 years. Her previous positions included Director of Research for Kennedy Consulting Research and Advisory, as well as a variety of internal and external consulting

positions with international companies. As Director of Business Process Improvement at American Greetings, Ms. Schneider managed a portfolio of strategic and operations projects, including both staff and line functions. She was also a senior consultant in Towers Watson’s Organization Effectiveness practice and a consultant in the Change Management practice at Accenture.

For more papers, perspectives and research, please visit: www.thehackettgroup.com Or to learn more about The Hackett Group and how we can help your company sharply reduce costs while improving business effectiveness, please contact us at 1 866 614 6901 (U.S.) or +44 20 7398 9100 (U.K.).

The Hackett Group, a global strategic business advisory, operations consulting and finance strategy firm, is a leader in business best practices,

business benchmarking, and transformation consulting services including strategy and operations, working capital management, and globalization

advice. Utilizing best practices and implementation insights from more than 7,500 benchmarking studies, executives use The Hackett Group’s

empirically-based approach to quickly define and implement initiatives that enable world-class performance. Through its REL group, The Hackett

Group offers working capital solutions focused on delivering significant cash flow improvements. Through its Archstone Consulting group, The

Hackett Group offers Strategy & Operations consulting services in the Consumer and Industrial Products, Pharmaceutical, Manufacturing, and

Financial Services industry sectors. Through its Hackett Technology Solutions group, The Hackett Group offers business application consulting

services that help maximize returns on IT investments. The Hackett Group has completed benchmark studies with over 2,800 major corporations

and government agencies, including 97% of the Dow Jones Industrials, 86% of the Fortune 100, 90% of the DAX 30 and 48% of the FTSE 100.

Founded in 1991, The Hackett Group was acquired by Answerthink, Inc. in 1997. Answerthink was renamed The Hackett Group, Inc. in 2008. The

Hackett Group has global offices in the United States, Europe and Asia/Pacific and is publicly traded on the NASDAQ as HCKT.

Email: [email protected]

www.thehackettgroup.com

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This publication has been prepared for general guidance on the matters addressed herein. It does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.

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