Developing a Center of                           Excellence (COE) for financial                           planning and ana...
In recent years, the pharmaceutical industry has                            Not all FP&A work is equal       experienced s...
Figure 1. Companies are centralizing selected decision support areas                                                      ...
An FP&A COE offers many potential benefits                                 A global manufacturer sought to streamline and ...
use of COEs and shared services centers for transactional             finance executives who are very protective of local ...
Realizing partial FTE efficiencies                                        Fear of going it alone    When migrating transac...
Toward a brighter future for life sciences FP&ALife sciences finance executives should not wait to explore   Reducing fina...
This publication contains general information only and is based on the experiences and research of Deloitte practitioners....
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Us ft developing_a_coe_for_financial_planning_and_analysis_11102011

  1. 1. Developing a Center of Excellence (COE) for financial planning and analysis Life sciences CFOs can address growing cost pressures through decision support centralizationBy Brad Smith and Sterling BarnettDeloitte Consulting LP
  2. 2. In recent years, the pharmaceutical industry has Not all FP&A work is equal experienced significant challenges stemming from patent The FP&A function serves a critical role by delivering expirations, issues with R&D productivity, uncertainties relevant and insightful information to top executives from evolving legislative and regulatory action, and to help them make informed business decisions. FP&A considerable industry cost pressures. As a result, the personnel are typically among the most seasoned and well- industry has experienced a market capitalization erosion compensated staff members within an organization. of 30 percent since 2000.1 However, close examination of day-to-day FP&A This environment isn’t likely to improve soon. As a activities may reveal some inefficiencies. For example, result, operating cost reductions will likely continue to FP&A processes are typically fragmented with significant be a focus for many life sciences companies. Many of customization, redundancies, and inefficiencies as each these companies have already trimmed finance budgets local entity seeks to best serve its specific business through successful shared services programs that focused customers. This can lead to highly compensated FP&A on traditional transaction-processing activities, such employees’ time spent on the transactional aspects as accounts payable, accounts receivable, and general of FP&A processes. We believe that most of these accounting. Now, however, companies need to find transactional FP&A processes could be more efficiently additional savings in other areas. performed in a centralized environment. One area that holds significant cost-reduction opportunities Despite such cost-saving opportunities, the FP&A function is the financial planning and analysis (FP&A) function. has typically not been a candidate for centralization due According to Deloitte experience, FP&A functions to the high visibility and strategic nature of the work typically make up approximately 25 percent of finance performed. FP&A activities have frequently been considered spend and represent the next frontier of finance savings “untouchable” candidates for centralization given the opportunities.2 perceived level of business knowledge required to perform these activities. The FP&A function interacts directly with Within the pharmaceutical industry, the FP&A function business leaders, helps set strategy, supports decision represents an even greater opportunity. These companies making, and affects future financial performance. typically have global operations with decentralized P&L responsibility within individual countries. These localized Pharmaceutical executives should challenge this blanket business operations result in significant country-based characterization of the work performed by FP&A staff FP&A support. Based on recent analysis by Deloitte, such given the industry pressures these companies face. geographically dispersed operating models result in some Transactional, low-value-add FP&A activities can be large pharmaceutical companies allocating upwards of 30 successfully decoupled from the more strategic knowledge- to 40 percent of their finance spend to FP&A activities. based activities and centralized in an FP&A center of excellence (COE) to support a more cost-effective operating However, one effective approach which can reduce the model (Figure 1). Doing so can result in quantifiable high cost of the FP&A function, and allow skilled FP&A staff cost reductions while freeing up local FP&A resources to to spend more time on business decision support activities, perform more valuable business partnering activities. The is to move currently decentralized FP&A decision support centralized decision support model should link operational activities into centers of excellence. requirements to corporate objectives and provide a basis for functional design.Page pull quote 1 NYSE Pharmaceutical Index, December 2000 – November 2010. 2 Source: Deloitte’s Global Benchmarking Center, which has more than 800 participants in its various proprietary studies. To learn more about Deloitte’s benchmarking capabilities, please visit our Web site:
  3. 3. Figure 1. Companies are centralizing selected decision support areas General Accounting* Decision Support* Accounts Transactional External Accounts Fixed Cost Std Mgmt Budgeting / Financial Strategy T&E Payroll Payable Accounting Reporting Receivable Assets Accounting Reporting Forecasting Analysis Support Centralized 95% 95% 80% 90% 90% 90% 80% 80% 60% 50% 30% 0% 5% 5% 20% 20% 10% 10% 10% 40% 50% 20% Decentralized 70% 100% * Splits based on Deloitte experienceWhile the opportunity for centralization within Decision Support is not as large as in General Accounting, significant benefits can still be achieved. Leading organizations are movingdecision support activities to a centralized environment so that additional time can be allocated to business strategy and support. Developing a Center of Excellence (COE) for financial planning and analysis 3
  4. 4. An FP&A COE offers many potential benefits A global manufacturer sought to streamline and enhance Some of the potential benefits organizational leaders can the effectiveness of its finance function while reducing expect to achieve by implementing an FP&A COE include: operational costs. The company moved 80 percent of its corporate FP&A work to a lower cost COE, including Process standardization and automation ad-hoc reporting and analysis, balanced scorecard Transitioning activities to a centralized environment helps reporting, and management reporting and board promote process standardization. Standardization improves presentations. It also moved select business unit FP&A work an organization’s ability to train resources, develop talent, offshore, including segment profitability reporting, product and further streamline through technology deployment. profitability and profiles, and competitor analysis. Through As activities are standardized across an organization, data these transitions, the company reduced its FP&A costs by analysis, data quality, and the way in which data is used to between 50 and 70 percent. make business decisions also becomes more consistent. Span and level savings For example, a large international pharmaceutical client’s Through centralization, eliminating organizational layers and finance organization in one country identified an automated improving span of control is possible. The typical structure way to perform volume, price, and exchange analyses. of an FP&A COE would allow for a broader span of control Once this process was centralized, it became the standard that can ultimately result in a lower-cost operating model. blueprint for all regional markets, driving significant time savings across the organization. A global hospitality company wanted to reduce its SG&A spend due to increasing cost pressures from changing Local process elimination economic conditions. The finance function was an obvious Migrating activities to a centralized environment helps candidate for centralization due to the significant number eliminate custom activities that have historically been transactional activities completed by its highly compensated performed locally. Through centralization, non-value-add staff. This company identified these transactional activities local processes become more visible and can be more easily and transitioned them to a newly-created FP&A shared challenged. service center in the UK. As a result, the company was able to realize significant labor savings by better matching job As one Deloitte client began an FP&A COE implementation, requirements to staff levels. it discovered that certain balance sheet and cash-flow analyses were regularly performed by a local entity. As Economies of scale activities were evaluated for centralization, it became clear Migrating activities to a centralized environment provides that these analyses were of little value to leadership and additional cost-saving opportunities due to economies of were subsequently eliminated. scale. Activities such as data validation and standard report creation can be performed more efficiently through a Labor arbitrage centralized model and in large volumes by a team dedicated FP&A activities are typically performed by highly trained and to these specific activities. educated employees. These staff members are expensive; transitioning transactional components to a lower-cost A global consumer business company, facing significant resource pool can lead to significant savings and allow margin and price pressures, embarked on a major cost- skilled finance employees to focus on areas that are reduction initiative, as well as transformation of its commensurate with their level of expertise and pay grade. commercial operating model. To keep up with these changes, the company’s finance function reorganized around a global structure with harmonized policies, processes, data, metrics, and controls. It increased its 3 The finance talent challenge: How leading CFOs are taking charge, Deloitte, 2007.4
  5. 5. use of COEs and shared services centers for transactional finance executives who are very protective of local FP&Aand common FP&A activities, and it instituted a standard resources. Significant efforts need to be made in managingglobal framework for management reporting that enabled the change associated with centralizing these activities tosignificant economies of scale through centralized delivery. ensure that expectations are clearly set and service levels areThe result was substantial reduction in overall finance maintained.operating costs. Future leader talent developmentTalent alignment The FP&A function is often a training ground for futureLeading organizations are continually looking to identify and leaders of the finance organization. The finance talentretain top talent. However, a 2007 Deloitte study shows career ladder needs to be modified to reflect the newonly 50 percent of survey respondents believe that their operating model and allow for movement of juniorfinance organization is strong in the competencies needed employees from the FP&A COE to the more value-add localto align talent with the business.3 Moving transactional finance units.components of FP&A processes to a COE can help positionan organization’s talent more strategically and improve this End-to-end process efficiencymetric. The FP&A COE typically only performs a portion of a process and not the entire process. As a result, additional handoffsA large pharmaceutical company implemented a regional are created as activities are being performed. As activitiesdecision support COE. Shortly thereafter, senior finance are being considered for migration, they must be carefullyleaders found that they could spend more time driving evaluated to ensure that the new end-to-end process hascomplex analytics and future business decisionmaking. not created a burden for the organization. See Figure 2This not only allowed for additional time to focus on for criteria to be considered when identifying processes fordecisionmaking capabilities, but it also improved morale transition to a COE.within the finance function. The organization’s focus becamemore strategic and better aligned with the organization’sFinance service delivery model.Overcoming concerns about centralizationOrganizations have been hesitant to consider FP&A asa candidate for a COE model for several reasons. Theshared services concept is not new, but the concept ofapplying a centralized model to business-facing activitiesis. If implemented without great care, the FP&A COE couldhinder an organization’s ability to provide a critical partneringfunction to the business.Key concerns that organizations need to overcome as theyevaluate the risks associated with an FP&A COE include:Dedicated local supportThe idea of moving FP&A activities to a shared services modelhas typically been off-limits due to the significant visibility andhigh value of the end product. The output from the FP&Afunction is often used by business customers and senior Developing a Center of Excellence (COE) for financial planning and analysis 5
  6. 6. Realizing partial FTE efficiencies Fear of going it alone When migrating transactional activities from locations Finance organizations are already stretched to their with low volume, or where finance support is minimal, limits with day to day demands. Burdening them with it may be difficult to realize savings. If cost savings is the a transformational project such as evaluating and driving factor behind considering an FP&A COE, the volume implementing an FP&A COE may be beyond the current of activities migrated from local FP&A functions needs staff’s experience and could be tremendously disruptive. to be large enough to ensure that full resource savings Teaming with a service provider that has both the can be achieved. If cost savings is not the driver behind experience and resources to carry out long-term finance centralization, the additional resource capacity created by transformation initiatives can allow companies to continue migrating local FP&A activities to a COE can be used to day-to-day activities with minimal disruption while moving focus on more analytical, higher value-add activities. toward the envisioned future state organization and operating model. Figure 2. Process centralization evaluation framework Suitable Immediate Candidate Future Wave Candidate for Centralization for Centralization Process Fit Criteria • Processes that are individually • Processes that can be centralized • Specialized Skills fit and ready for centralization but require reengineering to • Language Requirements based on process maturity and minimize risk or stabilization of • Complexity of External organizational capabilities the underlying technologies and Communication processes • Process Modifications • Service Requirements/ Time Constraints • Critical Adjacencies Not Fit for Centralization • Processes that are unlikely to be centralized due to regulatory constraints, strategic importance, or specialized needs Not Suitable Now Future Migration Readiness Criteria • Process Maturity • Training • Process Stability • Technology Requirements • Process Documentation • Connectivity/Security When considering processes to be centralized into a COE, an assessment must be made as to whether they are “fit and ready” for migration in the near or long term.6
  7. 7. Toward a brighter future for life sciences FP&ALife sciences finance executives should not wait to explore Reducing finance operating costs by 25 percent atthe possibility of creating an FP&A COE. The FP&A CoEmodel has proven successful at a select group of leading a global pharmaceutical companycompanies and many more are now beginning to assess A major global pharmaceutical company asked Deloitte to help implement a decisionhow to implement it within their own organizations. support center of excellence (COE) that targeted management reporting, planning,The high potential for reducing costs, improving FP&A budgeting, and forecasting activities. Initially, a finance group developed a proof-of-effectiveness, and adding to the bottom line make this concept operating model, which indicated that 20 to 30 percent of FP&A employeesan opportunity at a time when life sciences companies perform transactional, low-value-added work that could be migrated to a COE. Deloitteare under significant performance pressures. Finance then conducted more than 20 global workshops to further define an operating modelexecutives should challenge their company’s traditional that aligned with corporate objectives, create a governance structure, and develop aFP&A organizational structure and explore a solution that road map for implementation across multiple international markets and business units.could make their organization more efficient, flexible, andstrategic. Each market’s implementation began with a series of meetings designed to explain the concept of the COE and gain leadership buy-in. The next step was to gather anList of FP&A activities that can be prime candidates inventory of activities in management reporting, forecasting, and operating planfor COE transition: processes from local subject matter experts. Using an agreed-upon decision framework,• Market/Segment Profitability Reporting Deloitte analyzed each activity to determine if, and to what extent, the processes could• Product Profitability and Profiles be decoupled. The team identified transactional, noncustomer-facing components of• Management Reporting and Standardized Presentations these activities for migration to the COE.• Data Validation and Standard Report Creation• Ad Hoc Reporting and Variance Analysis Activities like data validation, basic variance analysis, and standard reporting• KPI Performance Monitoring comprised a significant portion of the activities that met the decision criteria. The team• Baseline Modeling for Budgeting and Forecasting Activity documented these migrating activities with detailed step-by-step work instructions for• Standardized Volume Price and Exchange Analysis COE staff hired in regional support centers located in low-cost areas. Before migrating• Balance Sheet and Cash Flow Analysis these activities, the team conducted a series of parallel runs to ensure that the COE staff• Competitor Analysis could produce the same results as the original FP&A colleagues.Consider migrating these FP&A functions: Post go-live, the COE addressed continuous improvement opportunities, including• Volume, price, and exchange analyses standardizing reporting activities and offshoring highly standardized FP&A processes. In• Balance sheet and cash-flow analyses aggregate, these activities led to approximately 25-percent reduction in overall finance• Ad-hoc reporting and analysis operating costs, as well as increased FP&A efficiency and effectiveness.• Balanced scorecard reporting• Management reporting and board presentations Based on the success of this global implementation, other pharmaceutical companies• Segment profitability reporting are exploring implementing a COE. A critical first step for interested companies is to• Product profitability and profiles review which activities within their organization are candidates for transition to a COE.• Competitor analysis This can help them assess the potential impact and savings for their organization.• Data validation and standard report creation Developing a Center of Excellence (COE) for financial planning and analysis 7
  8. 8. This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by meansof this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for suchprofessional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decisionor taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shallnot be responsible for any loss sustained by any person who relies on this publication.As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see for a detailed description of thelegal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations applicable tothe practice of public accounting.Copyright © 2011 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited