Transforming the Finance Function

Finance Executive International

Committee on Finance & Information Technology

December 8, 2005

  
Meeting Agenda
1. Introductions and Context 5 minutes

2. Optimizing Shared Services 25 minutes

3. Plan to Perform – Budget and Performance Management 25 minutes

4. Closing Remarks and Comments 5 minutes

 Page 2
Finance Vision Evolution

Financial Analysis Lower total cost of finance

Business Analysis
Improve Governance &
Business Performance
Transaction Financial Analysis
Processing / Analysis

Transaction
Processing / Analysis F&A BPO

Current State Future State

 Page 3
Finance Vision Evolution
Companies following this course are defining their paths as
follows: Traditional Finance Organizations Leading Companies
• Reaction to business needs, trends,
Leadership and inquiries – historical viewpoint
• Single-track career focus
and Culture
• A support executive to the business
• High caliber talent identified and
“hoarded”
• Limited career planning
Talent • Inconsistent coaching and career
Development development (varies by supervisor)
• Unclear competencies/skills required
for success
• Reporting on what stakeholders
want, rather than what they need
Transparency • Poorly-aligned responsibility and
accountability

• Business advisors providing insight
on strategic and operational issues
• Source of business leaders Cross-
pollination of finance and operations
career modeling
• Competency framework and profiles
for different job groups/experience
• Clear and attractive career
development
• High potential talent showcased for
development opportunities outside
Finance
• Finance Academy to coordinate all
development activity
• Broad disclosure of information
beyond the financial statements
(“thought-provoking”)
• Living a culture of accountability
Page 4
Finance Vision Evolution (continued)
Companies following this course are defining their paths as
follows: Traditional Finance Organizations Leading Companies
• Focus on transactional execution
• Emphasis on data gathering and
Transactional creating reports
Processing • Disparate, locally-driven processes
• Lack of visibility into process controls
• Multi-touch approach
• Major efforts to consolidate
information from multiple systems
Simplification and processes
• “Fire fighting” impedes focus on large
scale improvement

• Focus on analysis and problem
resolution
• Standardized, globally adopted
processes and policy
• Cost-effective and scalable
processes, policies, and tools (e.g.,
shared services model)
• Management of outsourced
transactional processing
• Exception-handling approach
• Structured approach to improvement
– standardization and rationalization
of systems and processes
• Process rigor
• Wide adoption of corporate policy
Page 5
Transforming the Finance Function

Optimizing Shared Services

Presented by Josh Rogowsky



Shared Services vs. BPO Strategy

Where is your organization on this grid? What can you leverage?

Maximum

GLOBAL Can benefits of

What
improvements standardization
Level of Benefit

can be made by across

implementing businesses and Is
local geography be outsourcing
REGIONAL best practice? achieved? feasible,
Can shared beneficial
service and
economies outweighs
of scale be additional
LOCAL
captured? risk?

Minimum

Simplification Standardization Shared Outsourcing

Services

 Page 7
Insource vs. Outsource
There may be opportunities for outsourcing specific activities or
‘end to end’ processes. Some questions to consider ….
• Are there external suppliers of this service?
In all locations? High
• Can we do it faster, better, cheaper in house? Insource
• Do we have adequate capital investment
funding to deliver service in an SSC?
• Can we deliver continuous improvement
programs across all functions?

Risk
• Do we have the critical mass to implement best
practices and technology to achieve world class
performance?
• Do we have access to the specialized
resources necessary to achieve best practice
performance?
• Can we manage service levels internally? Outsource
• Can we manage third party relationships? Low
• How quickly do we want to realize benefits? Low High
• Is this culturally acceptable?
• Do the additional benefits outweigh the Strategic Importance
increased risk?

“77% of Fortune 500 companies currently have efforts underway to

 outsource some aspect of their business support services”.

Page 8
Two Models To Consider

Centralize-Standardize-Outsource
• Centralize and standardize business processes prior to
outsourcing
• Realize efficiency gains and cost savings before outsourcing
• Better manage outsourcing vendor selection and alignment of
expectations
Transform-Operate-Transfer
• Use of vendors to perform transformation
• Avoids costly and time consuming process redesign
• Easier to do externally

 Page 9
Key Design Principles

• Run like a business & customer focused

However, Shared Service Centres have very different
• Mainly newly recruited
characteristics staff
from - no “bad
a normal habits” and
“Support” low seniority
function
• Flat organization reflecting minimal management layers
• Organized around teams evolving to self-direction
• General management leadership skills rather than functional
• One leader for all shared services
• Special reward and recognition programs to drive behaviors
• Service Level Agreement maintained between provider and
customer

 Page 10
Seven Challenging Questions

• How do we make the case for Shared Services?

• What processes should be included? What criteria should be
used?
• Where should the Shared Service centers be located?
• How do we manage the customer/service provider relationship
and ensure we deliver the appropriate service levels?
• What organizational model should we adopt and why?
• What technology do we need to support a Shared Services
organization?
• What is the best implementation approach/sequence

 Page 11
The Key Components Of Shared Service Implementations
Service Level Agreements (SLAs) define the relationship
between the service providers and users.

They typically comprise of:

• Definition of services offered and the Shared Services Centre
responsibilities.
• Definition of Business Unit responsibilities e.g. timetable and quality of
source data .
• Description of minimum service levels, response time, quality measures
and expected performance levels.
• Definition of service level controls, reporting and governance.
• Define the disputes/issue resolution process for the SSC and Business
Units.
• Establish the procedures to resolve service failures.
• Service
Define Level Agreements evolve over time - often
the charge back mechanism
starting as simple informal agreements that then migrate
to a more formal arrangement after the services have
been ‘bedded in’
 Page 12
The “real” story behind outsourcing
The Rationale for Outsourcing is at Odds with Market Experience

 Page 14
Have You Brought Any Outsourced Services Back In-House?

 Page 15
Risks Cited

 Page 16
Problems Faced by Participants with Negative Experiences

 Page 17
The Key Components Of Shared Service Implementations
The Operating Model will also rely on the specific customer
requirements and the skills/ technology required to support the
delivery of the service
Tier 3 (Consultant)

■ Forecasting ■ Special studies

■ Policy/program design ■ Critical incident
support

COE
An example of a
‘Tiered Service Tier 2 (Specialist)

Delivery’ model ■

■
Interpretation and problem solving
Program delivery
■ Advice & counsel

Note the use of ‘self

service’ for routine
Tier 1 (Service Representative)
enquiry's

Service Center
■ Predefined answers ■ Full range of service support
■ Basic to complex inquiries ■ Transaction processing

Tier 0 (Self-service)
■ Predefined answers ■ Transaction processing
■ Basic to complex inquiries

 Page 18
Transforming the Finance Function

Plan to Perform – Budget and

Performance Management


Leading Organizations Are Increasingly Questioning The Value
Of The Traditional Annual Budget Process

“The budget is the bane of corporate America”

Jack Welch, Ex CEO – General Electric

“Budgeting is an unnecessary evil”

Dr Jan Wallander, Honorary President – Svenska Handelsbanken

“The budget is a tool of repression rather than innovation”

Bob Lutz, Ex CEO – Chrysler

“The process of management is not about administering fixed budgets, it is about the
dynamic allocation of resources"
Lord Browne, CEO BP

 Page 20
Why Is The Annual Budget No Longer Suitable For Today’s
Business Environment ?
Top down targets • The bottom up annual budget process is too slow
and too infrequent to provide actionable
information
• Annual performance contracts hard wired to
budget targets, make it difficult to respond quickly
• Targets based on a single financial year may
encourage short term thinking
• Most annual budget processes encourage and
Negotiation reward “gaming”
• “Last year +” budgeting encourages unnecessary
spend ("Use it or lose it")
• “Stretch numbers” used for target setting are
usually unsuitable for resource planning
purposes
• Overly tight control from the centre may stifle
innovation and reduce agility at a local level
Bottom Up Forecasts
 Page 21
Is It Possible To Manage Without Budgets Entirely?

• In the 70s, Swedish bank Svenska Handelsbanken abandoned its annual budget
completely, choosing to rely on KPIs and rolling forecasts.

• A number of other companies in Scandinavia and other parts of Europe followed suit
to form the much publicised “Beyond Budgets” movement.

• For the majority of organizations, eliminating budgets entirely may not be realistic, as
the annual financial cycle is so deeply embedded in their culture and processes.

• Many large corporations are now applying lessons learned from these pioneers to
create a lighter, less arduous annual budget and to place greater emphasis on rolling
forecasts, KPIs and trend analysis as management tools.

 Page 22
Increasingly Organizations Are Moving Towards A Lighter More
Continuous Process Based On Rolling Forecasts

Top down targets

Continuous Dialogue

Bottom Up Forecasts Bottom Up Forecasts Bottom Up Forecasts

In this environment, budgets and forecasts become part of an

ongoing management dialog, rather than an annual negotiation
 Page 23
Plan To Perform: The Strategic Management Cycle
Manage & track / Market Expectations

Strategy to Evaluate Opportunity

Options
Execution To Action
Set Strategic
Goals
Strategic Scenario
Modelling
Planning
Publish
Strategy

Resource Forecasting
Allocation

Operational
ManagementWhat If Analysis
Target setting
Variance Analysis

Performance
(Compensation/ Monitoring
Incentives)
 (Record to report) Page 24
As Organizations Move To A Lighter Budget, Or Abandon It
Completely, New Tools Are Emerging To Take Its Place
Operationalizing Strategy: Strategy maps, Balanced Scorecards, KPIs

Target Setting: Benchmarks and relative targets,

Controlling costs: Exception reporting, rolling forecasts, “war chests”

Performance Mgmt: Rolling Forecasts, Dashboards, KPIs

Resource planning: Trends, Rolling Forecasts, Option trees

Compensation: Balanced Scorecards and qualitative evaluations

Investor Communications: Value reporting based on ratios and KPIs

 Page 25
Systems Are A Key Enabler In Achieving A Truly Integrated
Performance Management Environment
Analysis Tools Dashboards Forecast/Budget Tools

Forecast/Budgeting
Workflow

Common Data Structures

• Vendors such as Hyperion, Cognos, GEAC and OutlookSoft all currently provide Corporate
Performance Management Solutions (CPM), with varying degrees of integration.

• Developments in Web Services, SOA and XBRL are likely to transform this space in the near
future.
 Page 26
Systems Are Important, But They Are Only One Factor In
Designing An Effective Performance Management Environment
People Process

Culture Level of detail

Frequency
Skills
Linkages to
Other processes

Mgmt Behaviours Business Value

Drivers
Performance
Management
Environment
Data Quality
Develoution of
Authority

Remuneration User Interface

& incentivisation

Efficient Workflow
Leadrship Style

Embedded Controls

Organisation Systems

To be successful, you must develop an approach, which is fully aligned to the culture and
structure of your organisation.
 Page 27
Design Principles

• Clearly articulated strategic goals linked to KPIs

• Active support from top management, to reinforce the right behaviors

• Reliable and accurate data and effective business intelligence systems

• A forecasting system which is tightly integrated with management reporting tools

• Incentives that encourage “the right” decision, not just meeting the annual financial
targets

 Page 28
Contacts
• Paul Gaynor, Partner
paul.m.gaynor@us.pwc.com
(678) 419-1674

• Josh Rogowsky, Director

joshua.d.rogowsky@us.pwc.com
(646) 471-3163

 Page 29