Best Practices in Creating a Strategic Finance Function
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Best Practices in Creating a Strategic Finance Function

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Many CFOs and the finance organizations they lead have started to take on new strategic roles within the enterprise. Their goal is to enforce stricter control processes to ensure legal and......

Many CFOs and the finance organizations they lead have started to take on new strategic roles within the enterprise. Their goal is to enforce stricter control processes to ensure legal and regulatory compliance, offer strategic insights into the internal and external business environment, and connect the business strategy with daily operations through performance tracking.

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  • 1. SAP INSIGHT BEST PRACTICES IN CREATING A STRATEGIC FINANCE FUNCTION An SAP/APQC Collaboration
  • 2. Table of Contents Executive Notes 1 Introduction 2 Is Cost All That Matters? 3 Whether to Outsource or Share Services 5 Conclusion: A Checklist for a Strategic Finance Function 11
  • 3. BEST PRACTICES IN CREATING A STRATEGIC FINANCE FUNCTION An SAP/APQC Collaboration by Katharina Muellers-Patel
  • 4. © 2006 by SAP AG. All rights reserved. SAP, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. All other product and service names mentioned are the trademarks of their respective companies. Data con- tained in this document serves informational purposes only. National product specifications may vary. These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies (“SAP Group”) for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty.
  • 5. EXECUTIVE NOTES In the wake of recent accounting scandals and in the approaches to streamline and automate finance increasingly competitive business environment, functions while ensuring that they keep cus- many CFOs and the finance organizations they lead tomers happy (in the case of shared-services have started to take on new strategic roles within the arrangements). enterprise. They are aiming at enforcing stricter con- 2. With the efficiency of the transaction and control trol processes to ensure legal and regulatory compli- functions assured, these companies can turn to ance, offering strategic insights into the internal and devising a more strategic approach for finance – external business environment, and connecting the giving finance not only more of a decision- business strategy with daily operations through per- making responsibility in risk management and formance tracking. compliance but also a proactive role in managing The trend toward a more strategic role is echoed by the daily cash position and thus increase resources the responses of participants in recent research con- for quick strategic moves. ducted by APQC, an internationally recognized non- One global consumer products company took a two- profit organization that provides best-practice step approach to a more strategic path for finance. In research, metrics, and measures. The participants the first step, the company developed a more effi- indicated that, three years down the road, they antic- cient cash management, accounts payable, and ipate spending 30% more time on decision support accounts receivable group of functions in its world- and management (see Figure 3). According to the wide operations, based on greater transparency of same research, however, in spite of their aspirations, information. In the second step, the company devel- participants have not made much progress toward a oped “straight-through processing” along every level greater strategic role. Finance organizations, no mat- of the finance function, leveraging its global reach to ter what their size, report to APQC that they still maximize cash management efficiency, foreign- spend almost two-thirds of their time on transaction exchange exposure, and the global supply chain to processing and controls and only one-third on deci- help fund growth, participate in new marketing and sion support and management. distribution arrangements, and comply with world- The difficulty in evolving the finance role lies in wide regulations. bridging the current gap between the finance func- Given the current state of the finance function in tion that emphasizes greater efficiency and the U.S. companies, the challenges to that function, and finance function that becomes a partner in manag- the road map to increasing its strategic capabilities, ing the business. The best companies have found that the following article will share the results of SAP reaching the goal of a more strategic finance func- research as well as APQC’s Open Standards tion warrants a two-step approach, as follows: Benchmarking CollaborativeSM (OSBC) research. The 1. These companies improve the efficiency of the OSBC research is the first global set of common stan- various functions that come under the finance dards for business processes and data, giving organi- umbrella and, in the process, free up corporate zations an independent, authoritative resource for resources for other activities. As one global trea- evaluating and improving business practices. sury 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 1
  • 6. INTRODUCTION Benchmarking is an important tool that finance Financial strategy and planning organizations use to stay competitive. It allows them Internal controls to determine the value of adopting best practices and Treasury changing business processes. To assess the trends in Revenue accounting (order to cash) the finance function and identify best practices, General accounting APQC has evaluated the performance of more than Fixed assets and project accounting 130 finance organizations as part of its OSBC Accounts payable and expense reporting research.1 The research included the following key Tax processes: Payroll >$10 billion <$100 million >100,000 <500 19% 14% 16% $100 million– 29% $1 billion 13% 31% 39% 10,000– 39% 100,000 500–10,000 $1 billion–$10 billion Figure 1: Organization Size by Revenue Figure 2: Organization Size by Number of Employees The research group encompasses a wide sampling of organization sizes. Although the majority of respondents are billion-dollar-plus organizations,2 their size in terms of revenue and number of employees covers a complete spectrum, as depicted in Figures 1 and 2. Study Demographics 1. As of August 2005 2. All monetary amounts cited herein are in U.S. dollars. 2
  • 7. IS COST ALL THAT MATTERS? Despite more than 10 years of lip service paid to the However, some finance organizations have already idea of a strategic finance function – and the increas- made significant progress on their journey to ing strategic demands on finance – most companies becoming a strategic business partner, as illustrated admit that, while they do want to focus more on in Figure 4. First-quartile performers allocate only decision support and management, they are in reali- 30% of full-time equivalent (FTE) time to transaction ty still spending almost half of their time on transac- processing, enabling them to invest 45% of their tion processing (see Figure 3). resources in decision support and management activities. 17% The right staffing mix, however, does not necessarily +15% 26% imply cost-efficient operations. From an overall cost 18% perspective, the survey identified three important +7% 21% highlights, as follows: 21% Finance costs tend to be relatively lower for +3% larger companies. 23% Among companies with comparable revenues, there are still significant cost differences. 44% -11% 30% The main source of differences are the types of organizational structure for finance (for exam- ple, whether there are shared services and the Today In Three Years level of centralization) and the type of IT (the Decision Support level of automation or degree of systemic integration). Management Control The first insight is not surprising, as larger compa- Transaction Processing nies would be able to leverage economies of scale (see Figure 3: Finance Organization Time Figure 5). Allocation3 First Figure 4 Quartile 30% 25% 25% 20% Staffing Profile Transaction Processing (Percentage of Control FTEs of Total)4 Average 44% 21% 18% 17% Management Decision Support Fourth 60% 20% 10% 10% Quartile 3. APQC’s OSBC research data 4. APQC’s OSBC research data 3
  • 8. those from which it derived no competitive advan- Business Unit SME Medium Large Enterprise Revenue 50MM 500MM 5B Revenue tage. While the strategy succeeded and growth was Average 5.4% 5.7% 1.1% 1.0% maintained, operational difficulties began to show Median 2.7% 0.7% 0.6% 0.8% up. Each of the acquisitions brought along its own type of IT system; each had its own finance function Figure 5: Finance Costs as a Percentage of and its own approach. The result was a nightmare Revenue5 for the CFO. Working with a benchmarking firm to determine which finance functions were not in the However, within each revenue band, some compa- top quartile of productivity, he found that finance nies had as much as 16 times higher finance costs transaction processes clearly needed to be changed – than other companies with approximately the same to mirror best practice. revenues (see Figure 6). 10.00% 6% Revenue Personnel 8% Systems 1.00% Overhead Other 9% Outsourcing 0.10% 65% 12% 0.01% $10 MM $100 MM $1 BN $10 BN $100 BN Revenue Figure 6: Total Costs as a Percentage of Revenue Figure 7: Finance Function Cost Allocation Among all the cost drivers, however, the extent to which the company established shared services is the The CFO decided that a shared-services arrangement strongest driver for cost efficiency (apart from rev- would help increase productivity, especially for enues). It is logical that, in line with the focus on transaction-based functions. He decided to start by transaction processing, personnel represent the developing a shared-services arrangement with pay- largest cost element, on average, comprising 65% of roll, which suffered from inefficient processes and all finance function costs (see Figure 7).6 lack of automation. The result was world-class. The SAP research has shown that leading companies financial center now operates so effectively that it maximize the efficiency of transactional activities as has begun to show a profit when employees ask for a first step on the road to a more strategic approach. extra processes (cash advances, stop payments, man- One globally diversified industrial manufacturer, for ual checks, and so forth). The internal customers example, has been coping with the complexities whose staff members use direct deposit and the self- inherent in an acquisition growth strategy that service portal are charged less than those whose resulted in more than 60 acquisitions and an almost employees prefer paper transactions. The keys to equal number of divestitures (55 in all). The CEO success are the use of service-level agreements and a wished to hone in on the segments in which the well-thought-out performance management process company’s product line led the market and exit to establish and track productivity goals with customers. 5. APQC’s OSBC research data 6. APQC’s OSBC research data 4
  • 9. WHETHER TO OUTSOURCE OR SHARE SERVICES If you want to reduce costs or improve service levels, when collection becomes critical, the utility can should you move to outsourcing, or is shared ser- concentrate on enforcing collection rules where vices the answer? Outsourcing is becoming increas- necessary, while the outsourcing service continues to ingly prevalent as a way to decrease costs for both deal with the majority of customers who do not large and small companies. For example, APQC’s overstep the rules. OSBC research found that when three or more func- In a similar way, small to midsize companies have tions are outsourced, average costs of finance as a begun to outsource as a way to gain efficiencies they percent of revenue are only one-fourth of those costs cannot otherwise obtain. While a shared-service without outsourcing. arrangement can pay off for a large company, this Companies normally approach outsourcing in approach does not always work for a smaller firm stages, with payroll and tax among the first to be that does not have the volume of transactions neces- outsourced and fixed assets, general accounting, and sary to gain the associated efficiencies. On the other accounts payable and expense as part of a second hand, outsourcing provides obvious advantages for wave (see Figure 8). Finance strategy and planning, companies that are not as complex or large. internal controls, and treasury are not typically out- Companies also like to use shared services: when sourced; revenue accounting and order to cash managed well, shared services can improve process might emerge as another outsourcing application in effectiveness while helping decrease costs. The OSBC the future. research found that the lowest-performing compa- The outsourcing strategy varies among industries nies most often had not implemented shared services and sizes of companies. Order-to-cash functions are for any function and, as a result, incurred the high- not widely outsourced today, except notably in the est cost of the finance function as a percentage of public utilities and energy sectors. In these indus- revenue (see Figure 9). tries, where the number of customer payments is One consumer products company made the move high and customers tend to get behind in their pay- toward shared services and gradually improved the ments, many companies outsource both their performance of the finance function. The company accounts receivable and credit functions, processing optimized both IT systems and organization. The all customers through outside services. At the point person in charge of finance shared services 40% Wave 2 Outsourcing Figure 8 Fixed Assets/ Outsourcing Growth (%) Project Accounting Outsourcing Waves7 General Accounting AP/Expense Order to cash has the 20% potential to become a more Not Typically Outsourced Wave 1 Outsourcing frequently outsourced Revenue Accounting (Order to Cash) process. Treasury Payroll Financial Strategy Internal Tax 0% and Planning Controls 0% 30% 60% Outsourcing Penetration (% Participants) 7. APQC’s OSBC research data 5
  • 10. consistently improves the function by measuring efficiency. The utility, which serves a large metropol- and tracking improvements. This company’s transac- itan area, is diverse and decentralized. The customers tion center has become largely automated, freeing of the shared-services center pay for its costs in pro- up finance employees to perform more value-added, portion to the benefits they gain. Performance mea- customer-oriented financial work. sures are based on the results of shared services from other utilities around the country. The flexibility of Another example is a global pharmaceutical compa- the payroll shared-service system has helped the ny that has used shared services for more than 15 company streamline processes and dramatically years and simply changed the technological founda- reduce cycle time. The unit more quickly isolates tion. The company had developed a philosophy of problems (such as employees who do not enter the centralization as part of its long-term strategy to required number of hours) and addresses them standardize, reduce costs, and increase control and before a payroll run. Continual benchmarking economies of scale as it embarked on a path of against other companies in the same industry helps growth through acquisitions in the 1990s. Accounts the utility firm find places to consolidate and elimi- payable has been a shared service ever since. The nate duplication of effort. process was run on various legacy systems but then upgraded to an overall enterprise resource planning Besides the cost efficiency inherent in these improve- (ERP) system that handled the parent company’s ments, an unforeseen benefit of shared services is transactions. Now, however, the company realizes that employees in the payroll function can take on that processes cannot be made more efficient with- other responsibilities with a longer-term impact, out changing the technology again. The company is such as developing new-hire orientation programs experimenting with a fully integrated procure-to- and providing training programs in financial man- pay approach that will require integrating systems agement. As the finance function takes on more and developing the omnibus measurement system strategic roles, it has been able to provide a new level necessary to track transactions. of incentives for its employees and has seen its histor- ically high turnover rate moderate over time. In another case, a large utility turned to shared services with the initial intent of increasing cost Finance Costs as % of Revenues with Increasing Usage of Shared Services Figure 9 Impact of Shared Services on Overall Finance Costs8 8. APQC’s OSBC research data 6
  • 11. MORE EFFECTIVE IT LEADS TO MORE reporting. For example, more than two-thirds of EFFICIENT FINANCE FUNCTIONS companies with less than 33% automated processes were unable to provide process cost data. Only 32% APQC’s OSBC research reaffirmed that more effec- of companies with more highly automated processes tive use of technology helps companies achieve were unable to provide detailed process cost data. greater levels of efficiency and gradually frees up personnel for more strategic tasks requiring more Looking further into the impact of automation, the thought and managerial capacity. First, the OSBC OSBC research found that packaged financial soft- research showed that companies with a higher ware (versus custom applications or spreadsheets degree of automation have lower overall finance combined with manual processes) is used in most costs.9 Companies that had automated more than core finance processes, including accounts receivable 66% of their finance processes had average finance and payable, payroll, general accounting, and fixed- costs of 1.2% of revenues, while companies with less asset accounting. As a result, companies have suc- automation had average finance costs of 3.0% of rev- ceeded in reducing staffing levels in these areas (see enue. For example, companies that relied on manual Figure 10). On the other hand, less than 40% of the techniques or spreadsheets for cost accounting and companies that submitted data to the OSBC research cost management had average costs three times as database had off-the-shelf software implemented in high for that process ($2.21 per $1,000 of revenue) the areas of cash management and planning, budget- than companies with an automated process (only ing, and forecasting. These areas were among the $0.72 per $1,000 of revenue). most staff-intensive processes within the finance function. Even more interesting, APQC found through the OSBC research that while more automation means The OSBC research also found a correlation between decreased costs, little automation even impedes the level of cost decrease and the lack of IT A shared-services unit provides centralized management and execution of specific activities on behalf of multiple users (such as business units or sites) using common processes and systems. Shared services acts as a business partner for its customers that are composed of different divisions and functions within the same company. Each customer agrees to the quantity, quality, and cost of services provided, and costs are charged out based on usage. Most companies actually formalize service agreements between the shared-services unit and its internal customers. Shared-services units are generally evaluated on the following performance metrics: Cost Customer service (cycle time, percent of errors) Utilization and productivity Defining Shared Services External benchmarks 9. In terms of APQC’s OSBC research, a process is not considered automated if it is manual or if spreadsheets are used. 7
  • 12. complexity. OSBC research participants reported that MORE EFFECTIVE IT ENABLES MORE their average costs decreased dramatically when they STRATEGIC FINANCE FUNCTIONS used a single instance of ERP software and a com- The use of an integrated ERP system by the finance mon chart of accounts (see Figure 11). When they function also paves the way to a more strategic used multiple instances or even multiple applica- approach. If a company establishes a more integrated tions, the cost was more than 50% higher than with process, planning and reporting cycle times are the single instance and common chart of accounts. reduced significantly, providing data for critical deci- sions much sooner and enabling improved decision % of Total Payments for Application Usage – Bar Chart; Average Headcount Allocation – % in Circles making by company executives. For example, look- ing 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 sav- ings each additional day the budget cycle time was Custom Manual/Spreadsheet reduced (through technology and improved Vendor Package processes). *Includes A/R Given the improvements possible through the effec- Figure 10: Application Usage and Labor tive use of ERP, finance professionals confirmed that, Allocation by Finance Function10 moving forward, IT would take over more of the transactional aspects of the function, while they would take over decision support and financial Figure 11 Planning/ Cost Accounting/ Ev aluating and Budgeting/ Cost Management Managing Forecasting Fi nancial Comparison of Pe rformance Single-Instance ERP Single-instance accounting versus Multiple software/ERP, common chart of accounts $1.60 $1.69 $1.87 Instances/Multiple Multiple instances or Applications multiple accounting $2.62 $3.55 $3.21 software applications (Cost of the Process per $1,000 in Revenue)11 10. APQC’s OSBC research data 11. APQC’s OSBC research data 8
  • 13. management activities, helping to make the finance a four-phase approach and using software from SAP. function more strategic. This forward thinking is The end point: complete transparency of financial revealed in the OSBC research: despite the current data across all global divisions. The CFO believes that focus on processing transactions, OSBC research cash generation is the lifeblood of a consumer prod- respondents all indicated that, three years hence, ucts company, affecting all parts of the organization. they would be more involved with decision support Cash, in fact, is the barometer of the success of the and management activities, underscoring the basic company’s brand-building exercises; sales indicate importance of these more strategic capabilities (see the strength of the brand and generate the cash that Figure 3). allows the company to fund its brand-building activi- ties in new regions and new product areas. To devel- These respondents reflect the fact that CFOs and op the capability to monitor and understand the finance functions must deal with a wealth of new company’s cash flow, however, the CFO realized he difficulties, including many that are at the heart of had to take care of endemic and chronic inefficien- the company’s strategic goals – such as increasing cies and data difficulties in the following areas: shareholder wealth. The CFO’s function has become pivotal to a company’s health in the following ways: Cash management Foreign-exchange processes Balancing revenue generation against cost Funds transfers efficiency Month-end closing and accounts receivable Assessing risk daily Siphoning off risk into the future through The problems with cash management were symbolic sophisticated use of derivatives for the CFO of the root of all other evils. The process Managing earnings expectations and the need to was essentially manual, took most of the day, and create shareholder value resulted in many mistakes. That led to missed fund- Mitigating the deleterious effects of exchange- ing opportunities in the commercial paper market, rate fluctuations whose rates rise during the day; seizing opportunities Managing the company’s compliance process to required understanding the cash position immedi- make certain it meets governmental regulations ately at the start of the day. From there, according to the CFO, the finance function could achieve all Yet it is difficult for the finance function to manage other strategic objectives. the earnings flow and shareholder expectations for In Phase One, the company standardized and estab- those earnings, given increasing global competition lished new processes to reconcile bank accounts and regulatory constraints. To achieve excellence in daily, concentrate cash, determine a final number to finance requires a greater attention to balancing borrow or invest each day, improve control, enhance operational efficiency and strategic effectiveness. The accuracy, and pare down the number of FTEs foundation for both is a great deal of analysis, data, involved in the function. In another development, and management time devoted to each, as well as global vendor payments were integrated with the more automation of nonstrategic, operational bank payment systems, and customer receipts posted processes, freeing up staff to perform the data to the general ledger. Each day, the company could collection. then reconcile all global account information. AN EXAMPLE OF A STRATEGIC Contracts in the ERP system were linked to the daily FINANCE FUNCTION cash position, providing performance reporting and investment calculation. A global consumer products company has created highly successful strategic finance functions based on 9
  • 14. In Phase Two, the CFO integrated the systems of the Phase Four completed the process of developing this offshore divisions into the main system. That tactic strategic approach. This final step entailed entering assures he can see the state of cash management in all foreign-exchange and commodities hedging con- operations around the world. tracts into the system, enabling the company to rec- oncile them itself without going through a third- Phase Three involved implementation of straight- party processor. The company went so far as to do through processing, whereby payments are transmit- away with all manual processing in accounting for ted directly to the bank from payment data. A single derivative contracts, as well. Not only did the compa- platform uses payment files extracted from the SAP® ny reduce costs, but it also created the type of trans- accounts payable and treasury applications for all parency and audit trail necessary to truly comply types of payment. In effect the central treasury with the Sarbanes-Oxley Act. 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 dif- ferent countries. In addition, the straight-through processing of foreign exchange has cut down on diffi- culties in reconciling payments and revenues in the 30 or more currencies in which the company operates. 10
  • 15. CONCLUSION: A CHECKLIST FOR A STRATEGIC FINANCE FUNCTION The best companies, and their CFOs, recognize the In a similar way, you can also determine whether importance of ready access to the right information you are on the right track if your financial software to drive the right choices between different variables. provides the following: To help determine whether your finance function is A single source for financial information (a pre- moving toward a strategic approach, take a moment requisite for managing business processes and decide whether your system does the following: beyond financials more effectively) Accelerates closing processes through automa- More timely access to accurate data, improving tion, workflow, and collaboration communication between finance and operations Improves business analysis and decision support Increased alignment between front- and back- by providing historical and forward-looking office applications, enabling management to bet- views, including benchmarks ter administer and track business strategy and Deploys performance management tools that decisions analyze the company and its resources Reduced cost of compliance with industry regu- Maximizes cash flow through improved billing, lations (U.S. Financial Accounting Standards receivables, collections, payments, and treasury Board and Sarbanes-Oxley) management Improved security and controls and reduced risk Increases effectiveness of compliance efforts of contractual and regulatory noncompliance through comprehensive auditing, deeper report- Improved predictability, particularly with budget ing, and management of internal controls (Sarbanes-Oxley) One CFO admitted, “Until we began to appreciate the importance of simplicity in thinking through In addition, a truly integrated systemic foundation our finance function and making it more strategic, should help you achieve the following: we did not realize the way that technology can help you deal with complexity, and allow you to achieve Develop a closed-loop management process of the strategic goals finance should achieve.” strategy formulation, communication of goals, and measurement Monitor the performance of strategic key suc- ABOUT APQC AND THE OSBC cess factors using external and internal RESEARCH benchmarks Use tools that support a financial planning The OSBC research helps executives benchmark process that integrates global strategic planning within their industry as well as with best-in-class and specific operational planning problems in a organizations with comparable processes. Spear- closed-loop process 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 per- formance 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. 11
  • 16. www.sap.com 50 079 590 (05/06)