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Finance cost reduction

With a relatively poor economy, many companies are now looking to enhance their bottom line through cost cutting. Often, the finance function is one part of G&A subject to this cost cutting exercise. This presentatio shares with you how companies are looking at finance and evaluating where and how much to cut.

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Finance cost reduction

  1. 1. Lean But Not Broken Achieving Sustainable Cost Reduction in Finance October 2, 2013
  2. 2. Agenda  Review Cost Management Survey  Role of CFO’s/Finance – Approach – Size of the Opportunity – Challenges and Lessons Learned  Q&A 1 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  3. 3. 3rd biennial cost management survey − Overview We conduct primary research on cost management trends and state of the market through annual cost survey and related conferences, to assess client’s needs, priorities and challenges, and to understand keys to success in cost management programs  Our 2012 survey is an in-depth follow-up to our breakthrough cost-improvement surveys conducted in 2010 and 2008 – The 2012 report included 153 senior executives from publicly-traded or private companies with annual revenues in excess of $1.5 billion  The Survey looks at the latest trends in cost improvement and offers practical and demonstrated insights to help companies achieve and sustain improved financial and business performance 2 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  4. 4. Companies continue to operate in a “New Normal”: reducing costs while maintaining revenue growth expectations Survey responses 2010 vs. 2012 73% Macroeconomic Factors Political/Regulatory 39% External Risks (% Reponses) 24% 58% 25% Commodity Prices 19 19 21 22 90% 59% Balance Sheet Mgmt. 2010 2012 6 Cost Reduction Product Profitability Revenue Growth 23 20 36 Strategic Priorities (Avg. 100 point allocation) Growth 76% Likelihood of cost management actions in the next 24 months 76% Growth expectations (% Reponses) 80% Cost Mgmt. Outlook (% Responses) Source: Deloitte 2012 Cost Survey Preliminary Results 3 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  5. 5. Targets for cost reduction programs have tempered but failure rates of cost programs have increased Annual cost reduction targets Greater than 20% 10% to less than 20% 0% to less than 10% 19% 11% 36% 35% 37% 52% Cost savings realization Did not meet goals Met goals Exceeded Goals 4 Deloitte’s Business Class 2012 2010 2010 2012 48% 36% 35% 33% 29% 19% © Deloitte LLP and affiliated entities..
  6. 6. Focus of cost programs has shifted to a current focus on “save to grow” compared to “save to survive” post-recession Drivers of cost management 2010 To gain competitive advantage over peer group 52% Significant reduction in consumer demand 2012 65% 1 42% 24% 2 Decrease in liquidity and tighter credit 33% Required investment in growth areas 33% Unfavorable cost position relative to peer group 12% 54% 3 22% 35% 4 Changed regulatory structure Other 17% 35% 3% 5% Cost management insights on drivers to cost management programs: 1 Gaining competitive advantage over peer group remains a major driver reflecting a “save to survive” mentality 2 Reduction of programs from liquidity and consumer demand decrease focus by 20% on average 3 Re-investment in growth areas has seen a major jump of 21% over 2010 4 Complex regulatory environment is now a significant driver for cost management increasing by 18% over 2010 5 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  7. 7. But failure rates of cost programs have increased showing ineffective scope, approach and/or implementation challenges of cost programs Insights from Deloitte cost surveys over the last six years 15.0% % GDP Change % Unemployment 10.0% 5.0% 0.0% 2012 Q2 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 2010 Q4 2010 Q3 2010 Q2 2010 Q1 2009 Q4 2009 Q3 2009 Q2 2009 Q1 2008 Q4 2008 Q3 2008 Q2 2008 Q1 2007 Q4 2007 Q3 2007 Q2 2007 Q1 -5.0% -10.0% 2008 2010 Pre-recession economic climate with a few signs of economic crisis Financial crises resulted in tighter credit and a reduction in overall demand 2012 Recovery has been slow and there is prolonged uncertainty in the business climate Typical cost action from survey results Companies focused on continuous improvement programs before the downturn Companies focused on cost programs aimed at low hanging fruit to recover from reduction in consumer demand Companies still focused on tactical changes mostly by targeting processes and organization streamlining Reported cost program failure rate 17% 34% 47% Broad restructuring and liquidity improvements Structural costs and business model changes to gain efficiency Structural cost and business model changes to fuel growth Actual response needed Deloitte Cost Management Survey 6 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  8. 8. What is the CFO’s/Finance role in cost reduction? Increasingly the CFO is expected to lead large scale cost reduction programmes to which finance must make a proportionate contribution whilst maintaining finance as a critical control function Leading the charge  The CFO is increasingly at the heart of qualifying and measuring the results of Enterprise wide cost reduction programmes, providing financial leadership in determining strategic business direction vital to future performance (Strategist)  Using finance acumen and discipline, the CFO can drive that same discipline across multiple business functions to promote the behaviours required to successfully execute against cost reduction objectives (Catalyst) Finance is no longer ring fenced from cost reduction targets. Despite the wave of regulation within the industry, Finance, like other functions is expected to do more for less By being a contributor to cost reduction efforts, finance leadership build credibility with stakeholders across the business, facilitating their role as strategist and catalyst Setting A Good Example: Lean But Not Broken  Scrutiny over Finance’s value for money has never been more intense with CFOs looking to deliver higher quality services through increasingly low cost business models that balance capability, cost and service to fulfill finance’s core responsibilities (Operator)  Finance functions are taking on increasingly high percentile cost challenges, requiring a lean organisation, yet one that does not jeopardise the quality and integrity of statutory, regulatory and other stakeholder reporting (Steward) 7 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  9. 9. How is successful, sustainable cost reduction delivered? To help meet the challenges of cost reduction in finance, there are four principal types of initiatives that span the ambition and level of sustainability of delivering finance cost reduction  Operating Model & Organisation Alignment: Highest benefit and sustainability with corresponding complexity to implement  Infrastructure Rationalisation: Great efficiency benefits derived from streamlining finance’s main and supporting systems  Business Process Optimisation: Streamlining the cost base by doing what you do efficiently and effectively  External Spend Reduction & Demand Management: Often one-off, low complexity to implement with limited sustainability Initiatives adopted by Finance to reduce cost Initiatives key Establish/extend use of shared service centres Operating Model & Organisation Alignment Extend outsourcing/off-shoring arrangements Increasing benefit & sustainability Infrastructure Rationalisation Business Process Optimisation External Spend Reduction & Demand Management Consolidate functions Transfer non-core Finance activities Review role & scope of Finance Standardise and automate finance processes Increase spans of control Implement a common financial back-office Rationalise and cleanse source systems and data Redesign processes to increase capacity/reduce cycle time De-layer organisation Streamline reporting infrastructure Eliminate waste and low value activities Implement ERP enhancements to eliminate manual workarounds Introduce/extend roll-out of self-service models Improve governance and control effectiveness Review finance project portfolio Improve utilisation and/or productivity Introduce cross-charging for services Reduce the number of temps/contractors Close all non-core vacancies and absorb work Creating a Low Cost Operating Model Streamlining the Cost Base Budgetary Quick Wins Approaches Increasing implementation time & cost 8 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  10. 10. How are finance cost reduction approaches applied? Cost reduction initiatives align well to various approaches, each of which spans the scale of sustainability and ease of implementation based on a number of key considerations Focus area Key considerations  Represents a relatively low cost, low complexity implementation  Should be delivered through good business as usual budgetary discipline Budgetary quick wins  Sustainability of cost impacts is usually poor as costs tend to creep back in to the organisation (cancelled vacancies are re-opened in next forecasting year, contractors re-engaged)  Inter-relationship of costs is often an issue – for example, planning to reduce travel expense and telephony expense in the same period  Suspending or cancelling change programmes as a result of reviewing the finance project portfolio often has the potential to put core finance requirements at risk (i.e. meeting statutory and regulatory requirements)  Requires a focussed but moderate investment to deliver desired outcomes Streamlining the cost base  Examines the cost base by business unit, function and processes  Achieved primarily through levers such as structural consolidation (centralisation and rationalisation of similar functions across the organisation) and end-to-end reengineering (generation of savings through de-duplication and process improvement, removing waste and surplus headcount)  Operating model changes offer the greatest and most sustainable cost reduction benefits  Represents a significant investment in reducing the cost base and presents the greatest complexity to implement Creating a low cost operating model  Requires management to develop a strategic top-down view of cost reduction opportunities based on organisational priorities  Reducing the cost base through structural changes requires careful management of risk and resistance in order for the programme to succeed 9 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  11. 11. What does a low cost finance function look like? To achieve high percentile cost savings, lean finance functions clearly delineate between value and efficiency drivers Value based segmentation Insight, value, proximity to business Focus High Value Activities (Business Partner) High Value Production (MI) Non – Core Finance Transaction Processing (Ops, Reporting) Control, efficiency, low cost Key questions to ask of the finance function • Are core finance activities separated from non-core finance activities (e.g. Strategy, Risk, Legal etc.)? • Is there a clear 1st vs 2nd line of support , transferring activity to the front line functions where appropriate? • Is there differentiation of the Finance Processing Group (operations and reporting) and CFO and specialist functions (e.g Partnering, Policy)? • Are processing activities leveraging low cost shared service options ? • Do transaction processing groups benefit from strong leadership, reducing the likelihood of failure? • Can Centres of Excellence (CoEs) be employed to deliver knowledge based processes more efficiently and effectively? 10 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  12. 12. How big is the opportunity? It is imperative to match the approach and application of cost reduction levers to the target level of ambition around desired savings and timeframes Whilst cost management may be achievable through minimal business impact, cost reduction presents the most sustainable and impactful means of reducing finance’s cost base. Cost management Cost reduction Magnitude of opportunity Typically 5-10% Typically 15-40% + How it is delivered Through budgetary discipline and management Through a Program (e.g. Finance Transformation, Finance Integration) Impact on the business Minimal, often focusing on belt tightening (non staff) or management of vacancies and contingent workers Significant, usually resulting in one or more rounds of redundancies and involving changes to the operating model Who gets involved Usually directed by the CFO and driven by Functional Directors and Heads of Finance Senior Executives, HR and Union representatives, Staff Consultation forums, Functional Directors and Heads of Finance, Group/Divisional Directors/Heads What it means to the CFO Depends on the visibility outside Finance. Can be a ‘housekeeping exercise’ or can be driven by CEO agenda Significant personal credibility at stake. Often this comes as part of a declaration of intent to the market How long does it take Two – three months focussed effort, cost impacts are often nearly immediate Two – three months of design and planning, execution and implementation depend on scale of change but typically in the range of 6 – 18 months to achieve full run rate savings How is it measured Usually directly linked to the budget via quarterly forecasting and cost reporting. If project driven, tends to be through project benefits tracking Either as a set of run-rate or annualized savings over X years. Tracked both within the annual budget, corporate plan and separately as part of program lifecycle reporting Sustainability Short term cost savings can eventually leak away as they are often achieved through reducing costs from all parts of the businesses resulting in unsustainable savings Through addressing the spend culture, cost reductions can be achieved on a long term basis 11 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  13. 13. What are the challenges in delivering finance cost reduction? Cost reduction programs face several significant barriers to success that bear further consideration before embarking on a finance cost reduction Barriers to cost reduction success Buy-in Lead times Dependencies If senior and operational staff do not engage with the cost reduction agenda, the program’s goals could be obstructed Underestimating lead times can lead to savings not being realised during the intended time period The absence of a robust critical path can result in contradictory plans, rework and delays to benefits realization Accountability Double counting Accurate valuations If no-one is clearly accountable for delivery, the tough decisions required to realise savings and make them sustainable can be left unaddressed Counting savings for both business units and functions can set false expectations regarding feasible savings targets If savings are over-valued, stakeholders can stop looking to identify further savings prematurely, and prioritise the wrong initiatives Defined benefits Leakage Specialist staff Where goals are not clearly defined, decision-making is not made in the context of a specific, desired outcome and the cost reduction exercise lacks direction If savings are not realised, the cost reduction exercise can become a net cost for the business The scope for cost reduction is narrowed by the existence of “sacred cows” 12 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  14. 14. What is the Deloitte approach to cost reduction? The Deloitte approach is a five stage end-to-end methodology which has been developed and refined on a global basis over several years through engagement with many clients Diagnostic Top down target Scope and define Validate and design Opportunity identification & commitment Baseline analysis/confirmation Mobilize and deliver Quantification & re-affirmation of commitment Tracking, monitoring & reporting Budgeting Cycle and Monthly/Quarterly Reporting Deliverables Activities Wider Program Reporting Cycle Top Down Target  Assign key sponsors  Validate strategy  Perform functional/industry benchmarking   Case for change High level targets by functional area 13 Deloitte’s Business Class Assess size of opportunity  Validate strategy  Formulate & analyse financial baseline  Draw up current & ‘could be’ operating models  Undertake opportunity analysis   Cost Baseline Addressable spend analysis Setting up a framework for cost reduction  Prioritise opportunities  Align and manage stakeholders  Structure the cost reduction programme  Report progress and track benefits    Initial Opportunity List Revised view of targets by functional area High Level Cost Model Validate & Design cost savings  Assess business structure  Perform ‘Deep Dive’ analysis  Formulate business cases  Perform detailed validation of initiatives  Package initiatives for delivery    Detailed Cost Savings Model Supporting organisation design and associated budgets Finalised Opportunity List Mobilize & Deliver  Mobilise change teams  Update budgets (BaU)  Implement initiatives Control & Sustain  Review & track progress  Manage benefits leakage  Revisit Opportunity List  Revise Cost Model/Benefits Tracker      Initiative lifecycle flow Initiative and release tracker Stakeholder reports Benefits dashboard Benefits map © Deloitte LLP and affiliated entities..
  15. 15. What is the Deloitte capability for finance cost reduction? Our people and experience The breadth of our practice enables us to apply a range of lenses (customer, value chain, process, function) to provide a thorough understanding of the drivers of cost and to assist in the identification of opportunities. Our people World map– Our locations Global reach Canada focus Finance & Consulting: 1500 people Process Target Operating Model (Functional Design) Systems (Automation, Processes) Change (People and HR) Support Audit Advisory (Financial Reporting) Tax, Treasury & Specialist Services (Specialist Function) ERS (Control/Function) Recognised thought leadership Depth of capability Outcome based approach  Ranked No. 1 in Finance Transformation, Operations Excellence by Gartner and Kennedy  High degree of business led intuition to deliver cost reduction while maintaining the ability for finance to deliver its core function and fiduciary duties  Structured, proven methodology driven by outcomes and shared risk of not delivering required targets  Experienced pool of subject matter experts across competencies who have participated in cost reduction programmes within Energy and Resources industry  Deep subject matter expertise to validate existing initiatives and identify further opportunities 14 Deloitte’s Business Class  Cross service capabilities with experts in tax, actuarial services and audit  Independent, objective approach − we have no predisposition to IT, hardware, software, or business process outsourcing  Provision of assistance to understand implications of entity rationalisation and entity disposal  Effective and continuous change management analysis helps deal with areas of passive/active resistance © Deloitte LLP and affiliated entities..
  16. 16. What is the Deloitte supporting capability for cost reduction? We have developed a comprehensive set of related methodologies, tools and accelerators that enable us to rapidly deploy our cost reduction approach. Target Operating Model Deep experience in target operating model design enables the build of a finance function consistent with low cost principles Customer segments e.g. HNW Organisation Design Lean Six Sigma Aligning the organisation design to the target operating model is key to ensure cost remains out of the function and HR impacts are effectively managed Lean Six Sigma focuses on the thorough elimination of waste throughout the value chain and is key tool for delivering finance process change Modeling Cost modelling capability is critical throughout the cost reduction process, particularly in establishing the baseline, the impact of cost reduction actions and tracking actuals Actuarial & Risk Reducing cost in a way that does not break the finance function is imperative and our specialist actuarial and risk capability helps to be sure cost reduction is sustainable Channels e.g. D2C Products e.g. Mortgages Processes e.g. Money In Information e.g. Customer, MI Technology e.g. Apps, Data, Hardware Organisation e.g. Contact Centres People e.g. FTEs, Roles Physical sites e.g. Buchanan Street Finance Systems Finance Systems Operating model depicts an integrated view of the relationship between data capture, processing, analysis and information 15 Deloitte’s Business Class © Deloitte LLP and affiliated entities..
  17. 17. Contact us If you would like to discuss any of the issues raised in this short piece, please do not hesitate to get in touch Marc Joiner Partner Randy Watt Partner 16 Deloitte’s Business Class Partner – Finance Transformation Western Canada 403-503-1346 Finance Transformation Leader Western Canada 403-267-0516 © Deloitte LLP and affiliated entities..