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Best Practices in Creating a Strategic Finance Function
Best Practices is also known as :
Best Practices Exchange,
Benchmarking,
Best Practices PWC,
SAP Best Practices,
Best Practices for Delivering,
Project Management Best Practices,
Exchange Best Practices Analyzer,
Best Practices Database,
Best Practices Portal,
Specifies Best Practices,
Best Management Practice Website,
Simple Best Practices,
Best Practices for Speeding ,
Business Intelligence Practices,
Best Practices Working,
Best Practices Web ,
Set of Best Practices ,
Best Management Practice.
Table of contents
- Executive Notes
- Introduction
- Is Cost All That Matters?
- Whether to Outsource or Share Services
- conclusion: A Checklist for a Strategic Finance Function
EXECUTIVE NOTES
In the wake of recent accounting scandals and in 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 research con- ducted by APQC, an internationally
recognized non- profit organization that provides best-practice research,
metrics, and measures. The participants indicated that, three years down the
road, they anticipate spending 30% more time on decision support and management
(see Figure 3). According to the same research, however, in spite of their
aspirations, participants 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 in evolving the finance role 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 two-step approach, as follows:
- These companies improve the efficiency of the
various functions that come under the finance
umbrella and, in the process, free 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, these companies can turn to
devising a more strategic approach for finance '
giving finance not only more of a decision-
making responsibility in risk management and
compliance but also a proactive role in managing
the daily cash position and thus increase resources
for quick strategic moves.
One global consumer products company took a two-
step 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 world-
wide 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 world-
wide regulations.
Given 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,
the following article will share the results of SAP
research as well as APQC's Open Standards
Benchmarking Collaborative (OSBC) research. The
OSBC research is the first global set of common standards for business processes and data, giving organizations an independent, authoritative resource for
evaluating and improving business practices.
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 more than
130 finance organizations as part of its OSBC
research. The research 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
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 3).
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 allocate only
30% of full-time equivalent (FTE) time to 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 important
highlights, 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 exam ple, whether there are shared services and the
level of centralization) and the type of IT (the
level of automation or degree of systemic
integration).
The first insight is not surprising, as larger companies would be able to leverage economies of scale (see
Figure 5).
However, within each revenue band, some companies had as much as 16 times higher finance costs
than other companies with approximately the same
revenues (see Figure 6).
Among all the cost drivers, however, the extent to which the company
established shared services is the strongest driver for cost efficiency (apart
from revenues). It is logical that, in line with the focus on
transaction processing, personnel represent the
largest cost element, on average, comprising 65% of
all finance function costs (see Figure 7).
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, 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 in which the
company's product line led the market and exit
those from which it derived no competitive advantage. While the strategy succeeded and growth was
maintained, operational difficulties began to show
up. 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 '
to mirror best practice.
The CFO decided that a shared-services arrangement would help increase
productivity, especially for transaction-based functions. He decided to start by
developing a shared-services arrangement with pay- roll, which suffered from
inefficient processes and lack of automation. The result was world-class. The
financial center now 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-thought-out performance management process
to establish and track productivity goals with
customers.
WHETHER TO OUTSOURCE OR SHARE SERVICES
If you want to reduce costs or improve service levels,
should you move to outsourcing, or is shared ser-
vices the answer? Outsourcing is becoming increasingly prevalent as a way to decrease costs for both
large and small companies. For example, APQC's
OSBC research found that when three or more functions are outsourced, average costs of finance as a
percent of revenue are only one-fourth of those costs
without outsourcing.
Companies normally approach outsourcing in
stages, 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 (see Figure 8). Finance strategy and planning,
internal controls, and treasury are not typically out-
sourced; revenue accounting and order to cash
might emerge as another outsourcing application in
the future.
The outsourcing strategy varies among industries
and sizes of companies. Order-to-cash functions are
not widely outsourced today, except notably in the
public utilities and energy sectors. 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, processing
all customers through outside services. At the point
when collection becomes critical, the utility can
concentrate on enforcing collection rules where
necessary, while the outsourcing service continues to
deal with the majority of customers who do not
overstep the rules.
In a similar way, small to midsize companies have
begun to outsource as a way to gain efficiencies they
cannot otherwise obtain. While a shared-service
arrangement can pay off for a large company, this
approach does not always work for a smaller firm
that does not have the volume of transactions necessary to gain the associated efficiencies. On the other
hand, outsourcing provides obvious advantages for
companies that are not as complex or large.
Companies also like to use shared services: when
managed well, shared services can improve process
effectiveness while helping decrease costs. The OSBC
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 9).
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. This company's transaction center has become largely automated, freeing
up finance employees to perform more value-added,
customer-oriented 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 with-
out changing the technology again. The company is
experimenting with a fully integrated procure-to-
pay approach that 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 cost
efficiency. The utility, which serves a large metropolitan area, is diverse and
decentralized. The customers of the shared-services center pay for its costs in
pro- portion to the benefits they gain. 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
APQC's OSBC research 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. First, the OSBC
research 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% of 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, APQC found through the
OSBC research that while more automation means
decreased costs, little automation even impedes
reporting. For example, 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, the
OSBC research found that packaged financial soft-
ware (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 10). On the other hand, less than 40% of the
companies that submitted data to the OSBC research database 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.
The OSBC research also found a correlation between the level of cost decrease
and the lack of IT complexity. OSBC research participants reported that their
average costs decreased dramatically when they used a single instance of ERP
software and a common chart of accounts (see Figure 11). 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.
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
reduced significantly, 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, APQC's OSBC research 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 OSBC
research also showed that companies with a rolling
forecast reduced annual budget preparation time to
60 days from 85 days on average. The average OSBC
research participant generated $330,000 in cost savings each additional day the budget cycle time was
reduced (through technology and improved
processes).
Given the improvements possible through the effective use of ERP, finance professionals confirmed that,
moving forward, IT would take over more of the
transactional aspects of the function, while they
would take over decision support and financial
management activities, helping to make the finance
function more strategic. This forward thinking is
revealed in the OSBC research: despite the current
focus on processing transactions, OSBC research
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 (see
Figure 3).
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
- Managing the company's compliance process to
make certain it meets governmental regulations
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 balancing
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, operational
processes, freeing up staff 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 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 endemic and chronic inefficiencies and data difficulties in the following areas:
- Cash management
- Foreign-exchange processes
- Funds transfers
- Month-end closing and accounts receivable
The problems with cash management were symbolic for the CFO of 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 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 he can see the state of cash management in
operations around the world.
Phase Three involved implementation of straight- through 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
operates.
Phase Four completed the process of developing this
strategic approach. This final step entailed entering
all foreign-exchange and commodities hedging con-
tracts 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, but it
also created the type of transparency and audit trail necessary to truly comply
with the Sarbanes-Oxley Act.
CONCLUSION: A CHECKLIST FOR A STRATEGIC
FINANCE FUNCTION
The best companies, and their CFOs, recognize the
importance of ready access to the right information
to drive the right choices between different variables.
To help determine whether your finance function is
moving toward a strategic approach, take a moment
and decide whether your system does the following:
- Accelerates closing processes through automation, workflow, and collaboration
- Improves business analysis and decision support
by providing historical and forward-looking
views, including benchmarks
- Deploys performance management tools that
analyze the company and its resources
- Maximizes cash flow through improved billing,
receivables, collections, payments, and treasury
management
- Increases effectiveness of compliance efforts through comprehensive
auditing, deeper reporting, and management of internal controls
(Sarbanes-Oxley)
In addition, a truly integrated systemic foundation
should help you achieve the following:
- Develop a closed-loop management process of
strategy formulation, communication of goals,
and measurement
- 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
In a similar way, you can also determine whether
you are on the right track if your financial software
provides the following:
- A single source for financial information (a pre-
requisite for managing business processes
beyond financials more effectively)
- More timely access to accurate data, improving
communication between finance and operations
- Increased alignment between front- and back- office applications,
enabling management to better administer and track business strategy and
decisions
- Reduced cost of compliance with industry regulations (U.S. Financial Accounting Standards
Board and Sarbanes-Oxley)
- Improved security and controls and reduced risk
of contractual and regulatory noncompliance
- Improved predictability, particularly with budget
One CFO admitted, "Until we began to appreciate
the importance of simplicity in thinking through
our finance function and making it more strategic,
we did not realize the way that technology can help
you deal with complexity, and allow you to achieve
the strategic goals finance should achieve."
ABOUT APQC AND THE OSBC
RESEARCH
The OSBC research helps executives benchmark within their industry as well as
with best-in-class organizations with comparable processes. Spear- headed by
nonprofit research firm APQC, the OSBC research standardizes the processes and
measures that organizations worldwide use to benchmark and improve their
performance. After contributing performance data to the OSBC database, participants
receive custom reports, at no cost, comparing their
practices to top performers and relevant peers to
pinpoint improvement opportunities. For more
information, call 1-800-776-9676 or 1-713-681-4020.
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