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"Efficient
finance operations provide the foundation for financial excellence. Without effective and streamlined financial
business processes that enable you to reduce costs and resource demands, it's difficult to achieve the more advanced objectives of your enterprise."
Source : SAP
The State of the Art in Finance
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CEO NOTES
In the wake of recent accounting scandals and the
increasingly competitive business environment,
many CFOs and the finance organizations they lead
have started to take on new strategic roles within the
enterprise. They are aiming at enforcing stricter
control processes to ensure legal and regulatory
compliance, offering strategic insights into the
internal and external business environment, and
connecting the business strategy with daily
operations through performance tracking.
The trend toward a more strategic role is echoed by
the responses of participants in recent APQC surveys
(formerly known as The American Productivity and
Quality Center). Respondents indicated that, three
years down the road, they would spend 30% more
time on decision support and management.
According to the same surveys, however, these
respondents have not made much progress toward a
greater strategic role. Finance organizations, no
matter what their size, report to APQC that they still
spend almost two-thirds of their time on transaction
processing and controls and only one-third on
decision support and management.
The difficulty lies in bridging the current gap
between the finance function that emphasizes
greater efficiency and the finance function that
becomes a partner in managing the business. The
best companies have found that reaching the goal of
a more strategic finance function warrants a twostep
approach, as follows.
- These companies deal with the complexity of
the various functions that come under the
finance umbrella, making them as efficient as
possible and, in the process, freeing up corporate
resources for other activities. As one global
treasury manager put it, "We must develop a
finance function that is as efficient as it can be,
replicate it globally, and then use it effectively to
help us quickly establish brands and enter new
markets." Companies like this one choose a
variety of approaches to streamline and
automate finance functions while ensuring that
they keep customers happy (in the case of
shared-services arrangements).
- With the efficiency of the transaction and
control functions assured, they can turn to
devising a more strategic approach for finance -
not only giving finance more of a decisionmaking
responsibility in risk management and
compliance, but also a proactive role in
managing the daily cash position to help
increase resources for quick strategic moves.
One global consumer products company took the
following approach to a more strategic path for
finance. In the first step, the company developed a
more efficient cash management, accounts payable,
and accounts receivable group of functions in its
worldwide operations, based on greater transparency
of information. In the second step, the company
developed "straight-through processing" along every
level of the finance function, leveraging its global
reach to maximize cash management efficiency,
foreign-exchange exposure, and the global supply
chain to help fund growth, participate in new
marketing and distribution arrangements, and
comply with worldwide regulations. The following
point of view will discuss the results of the APQC
survey, as well as research performed by SAP, in light
of the current state of the finance function in U.S.
companies, the challenges to that function, and the
road map to increasing its strategic capabilities.
INTRODUCTION
Benchmarking is an important tool that finance
organizations use to stay competitive. It allows them
to determine the value of adopting best practices and
changing business processes. To assess the trends in
the finance function and identify best practices,
APQC has evaluated the performance of over 130
finance organizations. The study included the
following key processes:
- Financial strategy and planning
- Internal controls
- Treasury
- Revenue accounting (order to cash)
- General accounting
- Fixed assets and project accounting
- Accounts payable and expense reporting
- Tax
- Payroll
This SAP Insight will discuss recent trends and best
practices, as well as provide examples for those companies
with best-practice processes, models, and
technologies.
Providing a Complete Picture
Figure 1:
1As of August 2005
2All monetary amounts cited herein are in U.S. dollars.
Study Demographics
The research group encompasses a wide sampling
of organization size. Although the majority of
respondents are billion dollar-plus organizations (in
U.S. dollars ), their size in terms of revenue and
number of employees covers a complete spectrum.
IS COST ALL THAT MATTERS?
Despite more than 10 years of lip service paid to the
idea of a strategic finance function - and the
increasing strategic demands on finance - most
companies admit that, while they do want to focus
more on decision support and management, they are
in reality still spending almost half of their time on
transaction processing (see Figure 2).
Trying to Change
Figure 2:
However, some finance organizations have already
made significant progress on their journey to
becoming a strategic business partner, as illustrated
in Figure 4. First-quartile performers spent only 30%
of their resources on transaction processing,
enabling them to invest 45% of their resources in
decision support and management activities.
The right staffing mix, however, does not necessarily
imply cost-efficient operations. From an overall cost
perspective, the survey identified three insights
worth highlighting, as follows:
- Finance costs tend to be relatively lower for
larger companies.
- Among companies with comparable revenues,
there are still significant cost differences.
- The main source of differences are the types of
organizational structure for finance (for
example, whether there are shared services and
the level of centralization) and the type of IT
(the level of automation and/or degree of
systemic integration).
Figure 3:
Finance Costs as a
Percentage of Revenue
Business Unit
Revenue |
SMB
50k |
Medium
500k |
Large
5b |
Enterprise
Revenue |
| Average |
5.4% |
5.7% |
1.1% |
1.0% |
| Median |
2.7% |
0.7% |
0.6% |
0.8% |
The first insight is not surprising, as larger
companies will be able to leverage economies of scale
(see Figure 4 below).
Size Means Little to Costs
Figure 4:
However, within each revenue band, some
companies had as much as 16 times relative higher
finance costs than other companies with
approximately the same revenues (see Figure 4).
Among all the cost drivers discussed above, the
extent to which the company established shared
services was the strongest driver for cost efficiency
(apart from revenues). In fact, the survey showed
that, given the average company revenue of $4.7
billion, each additional shared service saves an
average of $3.4 million!
It is logical that, in line with the focus on transaction
processing, personnel represent the largest cost
element, on average, comprising more than 65% of
all finance function costs.
SAP research has shown that leading companies
maximize the efficiency of transactional activities as
a first step on the road to a more strategic approach.
One globally diversified industrial manufacturer, for
example, which considers itself world-class in every
strategic respect, has been coping with the
complexities inherent in an acquisition growth
strategy that resulted in more than 60 acquisitions
and an almost equal number of divestitures (55 in
all). The CEO wished to hone in on the segments
where the company's product line leads the market
and exit those where it had no competitive
advantage. While the strategy succeeded and growth
was maintained, operational difficulties began to
show up in the early 2000s. Each of the acquisitions
brought along its own type of IT system; each had its
own finance function and its own approach. The
result was a nightmare for the CFO. Working with a
benchmarking firm to determine which finance
functions were not in the top quartile of
productivity, he found that finance transaction
processes clearly needed to be changed.
Shared services seemed to be an obvious target,
especially for transaction-based functions. The first
chosen was payroll, which suffered from inefficient
processes and lack of automation. Now the financial
center operates so effectively that it has begun to
show a profit when employees ask for extra processes
(cash advances, stop payments, manual checks, and
so forth). The internal customers whose staff
members use direct deposit and the self-service
portal are charged less than those whose employees
prefer paper transactions. The keys to success are the
use of service-level agreements and a well thoughtout
performance management process to establish
and track productivity goals with customers.
WHETHER TO OUTSOURCE OR SHARE
SERVICES
Companies normally approach outsourcing in
waves, with payroll and tax among the first to be
outsourced, and fixed assets, general accounting and
accounts payable and expense as part of a second
wave. Finance strategy and planning, internal
controls, and treasury are not typically outsourced;
revenue accounting and order to cash might emerge
as another outsourcing application in the future.
The outsourcing strategy varies among industries.
While order-to-cash functions are not widely
outsourced today, public utilities and energy are a
notable exception. In these industries, where the
number of customer payments is high and
customers tend to get behind in their payments,
many companies outsource both their accounts
receivable and credit functions, checking all
customers through outside services. At that point,
when collection becomes critical, the utility can
concentrate on enforcing collection rules where
necessary, while the outsourcing service deals with
the majority of customers who do not overstep the
rules.
Companies also like to use shared services; when
managed well, shared services can improve process
effectiveness while helping decrease costs. APQC
research found that the lowest-performing
companies most often had not implemented shared
services for any function and as a result, incurred the
highest cost of the finance function as a percentage
of revenue (see Figure 5).
Shared Services Holds Down Costs
Figure 5:
One consumer products company made the move
toward shared services and gradually improved the
performance of the finance function. The company
optimized both IT systems and organization. The
person in charge of finance shared services
consistently improves the function by measuring
and tracking improvements. Its transaction center
has become largely automated, freeing up finance
employees to perform more value-added, customeroriented
financial work.
Another example is a global pharmaceutical
company that has used shared services for more than
15 years and simply changed the technological
foundation. The company had developed a
philosophy of centralization as part of its long-term
strategy to standardize, reduce costs, and increase
control and economies of scale as it embarked on a
path of growth through acquisitions in the 1990s.
Accounts payable has been a shared service ever
since. The process was run on various legacy
systems, but then upgraded to an overall enterprise
resource planning (ERP) system that handled the
parent company's transactions. Now, however, the
company realizes that processes cannot be made
more efficient without changing the technology
again. The company is experimenting with a fully
integrated procure-to-pay approach, which will
require integrating systems and developing the
omnibus measurement system necessary to track
transactions.
In another case, a large utility turned to shared
services with the initial intent of increasing costefficiency.
The utility, which serves a large
metropolitan area, is diverse and decentralized. Costs
from shared services are shared by its customers;
performance measures are based on the results of
shared services from other utilities around the
country. The flexibility of the payroll shared-service
system has helped the company streamline processes
and dramatically reduce cycle time. The unit more
quickly isolates problems (such as employees who do
not enter the required number of hours) and
addresses them before a payroll run. Continual
benchmarking against other companies in the same
industry helps the utility firm find places to
consolidate and eliminate duplication of effort.
Besides the cost-efficiency inherent in these
improvements, an unforeseen benefit of shared
services is that employees in the payroll function can
take on other responsibilities with a longer-term
impact, such as developing new-hire orientation
programs and providing training programs in
financial management. As the finance function takes
on more strategic roles, it has been able to provide a
new level of incentives for its employees and has seen
its historically high turnover rate moderate over
time.
MORE EFFECTIVE IT LEADS TO MORE
EFFICIENT FINANCE FUNCTIONS
The APQC survey reaffirmed that more effective use
of technology helps companies achieve greater levels
of efficiency and gradually frees up personnel for
more strategic tasks requiring more thought and
managerial capacity. Let's first discuss how the right
use of information technology leads to greater
efficiency and lower costs.
First, the APQC survey showed that companies with
a higher degree of automation have lower overall
finance costs. Companies that had automated more
than 66% of their finance processes had average
finance costs of 1.2% of revenues, while companies
with less automation had average finance costs of
3.0% per revenue. For example, companies that relied
on manual techniques or spreadsheets for cost
accounting and cost management had average costs
three times as high for that process ($2.21 per $1,000
of revenue) than companies with an automated
process (only $0.72 per $1,000 of revenue).
Even more interesting, the APQC survey found that
while more automation means decreased costs, little
automation even impedes reporting. APQC found
that more than two-thirds of companies with less
than 33% automated processes were unable to
provide process cost data. Only 32% of companies
with more highly automated processes were unable
to provide detailed process cost data.
Looking further into the impact of automation,
APQC found that packaged financial software (versus
custom applications or spreadsheets combined with
manual processes) is used in most core finance
processes, including accounts receivable and payable,
payroll, general accounting, and fixed-asset
accounting. As a result, companies have succeeded in
reducing staffing levels in these areas (see Figure 6).
On the other hand, less than 40% of the companies
surveyed had off-the-shelf software implemented in
the areas of cash management and planning,
budgeting, and forecasting. These areas were among
the most staff-intensive processes within the finance
function.
Reducing Staff at the Core
Figure 6:
Companies that had automated more than 66% of
their finance processes had average finance costs
of 1.2% of revenues, while companies with less
automation had average finance costs of 3.0% per
revenue.
The research also found a correlation between the
level of cost decrease and the lack of IT complexity.
Companies in the APQC survey reported that their
average costs decreased dramatically when they used
a single instance of ERP software and a common
chart of accounts (see Figure 7). When they used
multiple instances or even multiple applications, the
cost was more than 50% higher than with the single
instance and common chart of accounts.
Figure 7:
Comparison of Single-
Instance ERP versus
Multiple/Applications
|
Planning/
Budgeting/
Forecasting |
Cost Accounting/
Cost Management |
Evaluating and
Managing
Financial
Performance |
Single-instance accounting
software/ERP, common
chart of accounts |
$1.60 |
$1.69 |
$1.87 |
Multiple instances or
multiple accounting
software applications |
$2.62 |
$3.55 |
$3.21 |
MORE EFFECTIVE IT ENABLES MORE
STRATEGIC FINANCE FUNCTIONS
The use of an integrated ERP system by the finance
function also paves the way to a more strategic
approach. If a company establishes a more integrated
process, planning and reporting cycle times are
much reduced, providing data for critical decisions
much sooner and enabling improved decision
making by company executives. For example,
looking at budget preparation cycle time or closing
of monthly accounts, the APQC survey revealed that
companies relying heavily on manual processes or
spreadsheets took an average of 90 days to prepare
their annual budgets, versus an average of 62 days for
companies relying on an ERP system. The survey
showed that companies with a rolling forecast
reduced annual budget preparation time to 60 days
from 85 days on average. The average survey
participant generated $330,000 in cost savings each
additional day the budget cycle time was reduced
(through technology and improved processes).
Vendor Package
Finance professionals echoed the fact that, moving
forward, IT would take over more of the
transactional aspects of the function, while they
themselves will take over decision support and
financial management activities, helping to make the
finance function more strategic. This forward
thinking is revealed in the APQC survey: despite the
current focus on processing transactions, APQC
respondents all indicated that, three years hence,
they would be more involved with decision support
and management activities, underscoring the basic
importance of these more strategic capabilities
These respondents reflect the fact that CFOs and
finance functions must deal with a wealth of new
difficulties, including many that are at the heart of
the company's strategic goals - such as increasing
shareholder wealth. The CFO's function has become
pivotal to a company's health in the following ways:
- Balancing revenue generation against cost
efficiency
- Assessing risk daily
- Siphoning off risk into the future through
sophisticated use of derivatives
- Managing earnings expectations and the need to
create shareholder value
- Mitigating the deleterious effects of exchange
rate fluctuations
Yet it is difficult for the finance function to manage
the earnings flow and shareholder expectations for
those earnings, given increasing global competition
and regulatory constraints. To achieve excellence in
finance requires a greater attention to a balancing act
between operational efficiency and strategic
effectiveness. The foundation for both is a great deal
of analysis, data, and management time devoted to
each, as well as more automation of nonstrategic,
more operational processes, freeing up manpower to
perform the data collection
AN EXAMPLE OF A STRATEGIC
FINANCE FUNCTION
A global consumer products company has created
highly successful strategic finance functions based on
a four-phase approach and using software from SAP.
The end point: complete transparency of financial
data across all global divisions. The CFO believes that
cash generation is the lifeblood of a consumer
products company, affecting all parts of the
organization. Cash, in fact, is the barometer of the
success of the company's brand-building exercises;
sales indicate the strength of the brand, and sales
generate the cash that allows the company to fund
its brand-building activities in new regions and new
product areas. To develop the capability to monitor
and understand the company's cash flow, however,
the CFO realized he had to take care of four endemic
and chronic inefficiencies and data difficulties in the
following areas:
- Cash management
- Foreign exchange processes
- Funds transfers
- Month-end closing and accounts receivable
To achieve excellence in finance requires a
greater attention to a balancing act between
operational efficiency and strategic effectiveness.
The problems with cash management were symbolic
for the CFO as the root of all other evils. The process
was essentially manual, took most of the day, and
resulted in many mistakes. That led to missed
funding opportunities in the commercial paper
market, whose rates rise during the day; seizing
opportunities required understanding the cash
position immediately at the start of the day. From
there, according to the CFO, the finance function
could achieve all other strategic objectives.
In Phase One, the company standardized and
established new processes to reconcile bank accounts
daily, concentrate cash, determine a final number to
borrow or invest each day, improve control, enhance
accuracy, and pare down the number of full-time
equivalents (FTEs) involved in the function. In
another development, global vendor payments were
integrated with the bank payment systems, and
customer receipts posted to the general ledger. Each
day, the company could then reconcile all global
account information. Contracts in the ERP system
were linked to the daily cash position, providing
performance reporting and investment calculation.
In Phase Two, the CFO integrated the systems of the
offshore divisions into the main system. That tactic
assures that he can see the state of cash management
in operations around the world.
Phase Three involved implementation of straightthrough
processing, whereby payments are
transmitted directly to the bank from payment data.
A single platform uses payment files extracted from
the SAP® accounts payable and treasury applications
for all types of payment. In effect the central
treasury department has become the house bank for
all of the company's far-flung subsidiaries. The
company believes straight-through processing
eliminates costly errors caused by processing
different payments in different countries. In
addition, the straight-through processing of foreign
exchange has cut down on difficulties in reconciling
payments and revenues in the 30 or more currencies
in which the company operated.
Phase Four completed the process of developing this
strategic approach. This final step entailed entering
all foreign exchange and commodities hedging
contracts into the system, enabling the company to
reconcile them itself without going through a third-
party processor. The company went so far as to do
away with all manual processing in accounting for
derivative contracts, as well. Not only did the
company reduce costs; it also created the type of
transparency and audit trail necessary to truly
comply with the U.S. Sarbanes-Oxley Act.
The company went so far as to do away with all
manual processing in accounting for derivative
contracts, as well. Not only did the company
reduce costs; it also created the type of
transparency and audit trail necessary to truly
comply with the U.S. Sarbanes-Oxley Act.
CONCLUSION
As a result, of the joint research between SAP and
APQC, we found that the best companies, and their
CFOs, recognize the importance of ready access to
the right information to drive the right choices
between different variables. Achieving this access
requires the right system that will deliver the
following benefits:
- Accelerate closing processes through
automation, workflow, and collaboration
- Improve business analysis and decision support
by providing historical and forward-looking
views
- Deploy performance management tools that
analyze the company and its resources
- Maximize cash flow through improved billing,
receivables, collections, payments, and treasury
management
- Increase effectiveness of compliance efforts
through comprehensive auditing, deeper
reporting, and management of internal controls
(Sarbanes-Oxley)
In addition, the integrated systemic foundation will
help companies meet the following objectives:
- Structure strategy and communicate goals
throughout the entire organization
- Monitor the performance of strategic key
success factors using external and internal
benchmarks
- Use tools that support a financial planning
process that integrates global strategic planning
and specific operational planning problems in a
closed-loop process
Table of Contents
- CEO Notes
- Introduction
- Is Cost all That Matters?
- Conclusion
© 2006 by SAP AG. All rights reserved. SAP, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver, and other SAP products and services
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