Financial f of the future 31 mar 2001

Financial Cost Management
Reinventing the CFO
Transforming the Finance Function: Recent
Developments and Emerging Best Practices
Pedro San Martin
March 2001

Transforming the Finance Function
Discussion Outline
The Need for Transformation
The Context for Transformation
The New Agenda: Emerging Best Practices
The Process of Transformation

The Need for
Transformation

Transforming the Finance Function The Need for Transformation
Evidence abounds that radical change in finance is happening in
organizations around the globe.
PwC Client
Experiences
Benchmarking
CFO Forums
Evidence of Change Key Conclusions
Expectations: much higher
Role: changing dramatically
Business Acumen: required
Costs: significantly reduced

Businesses have undertaken steps to address core processes.
Balance Sheet
Restructuring
Core
Service
Technology
Downsizing Creating a High
Performance Culture
New Technology Business Process
Reengineering
Voice of the Customer
and Supplier Programs
Go to
Supplier
Go to
Customer
Supply
Chain
Management
The Need for Transformation

Until recently, there has been little fundamental change in financial
management.
1500’s
Double Entry
Accounting
Active, Dynamic Management Reporting
Process Reengineering Leadership
Risk Management
Etc...
Key Trends in Financial Management
1950’s
Cost Acctg.
Budget Control
1960’s
Mainframes
Financial Rptg.
1980’s
PCs
Mgmt. Rptg.
1990’s
Transformation
BC
Abacus

Benchmarking results conclude that approximately 80% of traditional
finance activities do not add value directly to their businesses....
First Quartile Co. Median Cost Co.
$0
$5,000
$10,000
$15,000
$20,000
$25,000
FinanceCostperMillionDollarsofRevenue
Core Processes Decision Support Control Financial Management
2%
4%
22%
72%
7%
19%
12%
62%
*Source: IMA
Over Billion Dollar Revenue Participants
50%
30%
5%
15%
Visionary Company

....and many customers do not perceive value-added involvement.
30%
5%
61%
61%
35%
63%
Is the CFO a business
partner?
Is the CFO involved
with the business?
What is the CFO's
primary role?
Business Advocate
Corporate Policeman
Comparative Perceptions of the CFO Organization
% Saying Yes
Finance Mgrs. General Mgrs.
Source: C&L "Global Finance and
Accounting Benchmarking"
August 1995

Key trends....how the role is changing.
FROM TO
Performance Projection & Management
Cost Analysis & Management
Analytical Tool & Information Development
Providing Business Advice
Understanding the Business
Broadening Access to Information
Business Unit Focused
“Enabling” Business Managers
Financial Risk Management
Challenging Assumptions
Historical Performance Reporting
Cost Reporting
Number Crunching
Providing Financial Advice
Understanding Finance
Owning Data
Accounting Operations Focused
“Controlling” Business Managers
Managing Bank Relations
Living With Old Assumptions

The basic challenge for the CFO and the finance function is to do more
with less.
Finance Transformation
Decision
Support
Reporting
& Control
Transaction
Processing
New Model
Decision
Support
Reporting
& Control
Transaction
Processing
Old Model

These challenges demand new answers to on-going questions.
 Which technology is appropriate?
 Where and how should we do things?
 How can we add more value to the business?
 How should we measure performance?
 What are the roles and responsibilities?
 How should we organize?
 What resources and skills do we need?
 How do customers view us?

The Context for
Transformation

Transforming the Finance Function The Context for Transformation
Transformation must address both cost and decision making
effectiveness.
Decision-Making
Effectiveness
Cost
Effectiveness
Improvement
Improvement
Organization
& process
redesign
Role
transformation
Benefits
Improved cost effectiveness
through:
Process redesign
Adoption of new techniques
Streamlined organization
Improved business contribution
through:
Business partnering
Value-adding activity
Balanced performance
measurement
Contribution
today

Logistics &
Distribution
Develops an understanding of the key
requirements for finance to support the
business
Business Strategies
InfrastructureMarketing Operations
Assesses the effectiveness and efficiency
of key financial operations and identifies
opportunities for improvement
Process View
Organization Policies Technology Culture
Revenue Process
Procurement Process
Planning & Management Control Process
Human Resource Processes
Cost Accounting Process
General Accounting Process
Asset Management Process
Examines the organizational alignment
and staff capabilities within finance
Organizational View
Corporate
Controller
Business
Advocate
Transaction
Processor
Technical
Expert
To adequately define the finance management model, and to begin the
path toward transformation, finance must be examined along three
critical dimensions.

Finance must mirror the needs of the business.
Generate
Demand
Develop Product
and Process
Product
Support
Manufacture
Product
 Active involvement in new
product teams.
 Production performance
feedback.
 Cash flow analysis of capital
investments.
 Project costing.
 Target costing data for
strategic programs.
 Actionable performance
measurement.
 Cash flow analysis of capital
investments.
 Timely and accurate cost data.
 Activity costs for cost
management and Life Cycle
costing.
 Transparent Accounts Payable
processing.
 Total product and customer
profitability.
 Cost of service.
 Transparent revenue
collection.
 Analysis of market potential.
 Financial analysis of
acquisition targets.
 Menu pricing for all products
and services.
 Creative financing.
 Product/customer profitability.
 Transparent revenue
collection.
 Design for low cost
production.
 Develop new products.
 Accelerate product
development.
 Improve level of automation.
 Improve process yield.
 Equate ABC name with quality.
 Standardize parts.
 Utilize Just-In-Time and
cellular manufacturing.
 Improve level of automation.
 Provide components to other
manufacturers.
 Provide fixed-price
maintenance contracts.
 Guarantee delivery of parts
within short timeframe to meet
customer requirements.
 Provide single point of contact
for customer.
 Service non-core products.
 Market globally.
 Expand commercial markets.
 Expand product line.
 Boost direct sales.
 Enhance brand equity.
Finance
Must
Provide:
For
Business
To:

The resulting finance model will address key enablers for transformation.
Financial Management Model
Structure
Process
Technology
People
What role does finance play in business?
How should finance be structured to support the business
model and future strategies?
How can overall process performance be optimized?
What level of service must be achieved to support the
business?
What impact does existing technology have on finance
processes and organization?
What additional tools are required?
What training programs and hiring practices are in place to
assure that skill sets are enhanced?
Controls Culture

The New Agenda:
Emerging Best Practices

Transforming the Finance Function The New Agenda: Emerging Best Practices
Our work suggests that best practices can be examined across six key
roles.
Business Integration
Strategy
Financing
Value Management
Cost Management
Processes & Systems

Business Integration -- CFO Role: Working directly with operations to
add value to the business.
Having the right people with the right balance of financial, operational and entrepreneurial
capabilities.
Organizing the finance function to meet the ever changing needs of the business.
Changing attitudes and beliefs.
Key Issues:
Strategy
Financing
Value Management
Cost Management
Processes & Systems

Business Integration -- Organization & People: Finance organization
capabilities and structures must meet the ever-increasing demands of the
business.
Developing and appropriate organization structure given
the Company business strategy and management
model.
Segmenting efficient back-office processing from
effective business participation and analysis.
Augmenting traditional expertise with new skills (e.g.,
value chain analysis and strategic performance
measurement).
Eliminating duplications, overlaps and redundancies.
Defining appropriate reporting relationships.
Obtaining, enhancing and retaining required skill sets.
Challenges:
Issue: Populating the organization with the right skills and
integrating finance with operations to add value directly to the
business.
Organizational View
Corporate
Controller
Business
Advocate
Transaction
Processor
Technical
Expert

Business Integration -- Skills & Development: To improve the organizational
integration of the finance staff, companies are developing new approaches to
recruiting and selection, along with distinctive training curriculums.
Personal Development
Facilitation
and Team
Building
Leadership and Change
Management
Thinking Strategically
Industry Dynamics and Drivers
Comparative Competitive Analysis
The Value Chain Today and Tomorrow
Role in the Industry
Providing Customer Service
Targeting and Getting Customers
Industry
Functional
General Accounting Transactions
Payroll and Human Resource
Procurement: Purchases, Payables
Revenue Cycle
Statutory Corporate Reporting
Financial Risk Management
Treasury and Cash Management
Business Analysis and Decision Support
Using Breakthrough Performance Measures
Benchmarking Do's and Don'ts
Activity Based Management
Competitive Cost Analysis
Business Process Reengineering Concepts

Business Integration -- Culture: Virtually all successful change within
an organization depends upon employee support and participation.
Developing communication plans and techniques.
Understanding and addressing employee attitudes.
Promoting participation and buy-in.
Educating the organization regarding transition roles
and responsibilities.
Developing a “Customer Service” attitude.
Instilling attitude of continuous improvement.
Measuring the change process.
Challenges:
Issue: Shaping organizational culture (attitudes, beliefs and
values) to achieve the long-term vision for the finance
organization.

Business Integration -- Building a vision for the OCFO requires an
understanding of emerging best practices.
 Overall, a process focus.
 Segmenting the finance function by type of process and activity: the efficient
back office distinctive from the effective business participant.
 Sharing responsibility for controls.
 Co-locating finance resources with operations.
 The cost/benefit of controls related to business objectives is known; and aimed
at understanding, preventing and mitigating undesirable risk.
 Information easily understood and available.
 Enterprise-wide strategic performance objectives and measures linked to
operating and staff unit plans.
 Analysis oriented to business values, assumptions and risks.

Business Integration -- Leading OCFOs transform themselves into
leaders of numbers, people and processes.
Olin Corporation
Johnson & Johnson
Ford
Lawson Mardon
General Electric
 Training and recruiting transformed to find staff “who are as interested
in the business as they are in the function....they must understand the
dynamics as opposed to simply reporting the results”.
 Vision statement defined to “influence the right business decisions”,
leads to finance staff partnering with the business units.
 Job training and cross practice rotations build operating knowledge
and sensitize staff to customer needs.
 Financial staff have placed out with Operations.
 Creating multi-disciplinary teams to involve finance at the start of the
product decision-making.

Strategy -- CFO Role: Providing direction through strategic analysis.
Having the right process and tools to provide leadership in strategic thinking
and planning.
Key Issue:
Strategy
Financing
Value Management
Cost Management
Processes & Systems

Strategy -- The finance function can play a key role in strategy development
and execution.
 Value Chain Analysis
Linkages
Profitability Drivers
Competitive Analysis
 Strategic Performance Measures
 Investment Analysis
 Focused Cost Management
 Etc....

Strategy -- Focusing on the value chain provides visibility over value
creating opportunities.
Transportation
Meat
Packing
Transportation
Processing
Transportation
Wholesale
Livestock
Farming
DistributionDistribution
Retail
Customer
How critical is new
product development?
Should the company concentrate
on backward integration or other
"captive" arrangements to control
costs?
How do returns compare
to the rest of the meat
processing industry?
How aggressively should
the company pursue
other customers?
Where along the value chain do costs matter most?
Is the company good at
distribution?

Strategy -- Development of a “Business Analysis Framework” can
significantly impact the organization.
Performance
Reporting
Strategy
Learning Planning
“Balanced Scorecard”
 The Anchor -- Strategic Performance
Measures (SPMs) and Key Performance
Indicators (KPIs) developed as part of
Balanced Scorecard.
 The Process -- A framework for linking
strategy, planning and performance
reporting.
 The Information -- Improved reporting of
key performance measures.

Strategy -- Drive the business with a common language based on activities
and Strategic Performance Measures.

Strategy -- Building a vision for the OCFO requires an understanding of
emerging best practices.
 Growing use of external information -- consumers, customers, competitors,
suppliers and technologies.
 A growing focus on end-to-end strategic planning, across the value chain from
suppliers through end customers.
 Linking the value chain CSF’s to value drivers for finance function.
 An emerging focus on both account and customer profitability.
 Accuracy and assumptions becoming more important than precision derived
from accounting transactions.
 Recognized importance of root-cause analysis.

Strategy -- CFOs are expected to significantly contribute to the overall
strategic direction of the business.
General Electric
Bass
Westinghouse Electric
 OCFO staff leads strategic and operational reviews.
 Designed a new approach to assess SBU contribution to
economic value.
 Designed planning models to reflect value chain and value
drivers.
 Structured strategic analyses to assess economic effects of
alternative scenarios.
 Designed planning models to reflect value chain and value
drivers.
 Designed a new approach to assess SBU contribution to
economic value.

Value Management -- CFO Role: Delivering balanced measures and
value-added analysis.
 Developing a process and measures to help guide business decisions.
Key Issue:
Strategy
Financing
Value Management
Cost Management
Processes & Systems

Value Management -- Decision making effectiveness requires “Best
Practice” information for generating competitive advantage.
Financial PerformanceResource Utilization
23%
9%
Total
Shareholder
Return
25%
19%
Return on
Equity
16%
11%
Return on
Invested Capital
1.28
1.03
Profitability
Index
6.25
4.93
Sales/Wkg.
Capital
0.92
0.87
Sales/Assets
Averages for Companies without "superior" management
reporting practices
Averages for Companies with "superior" management
reporting practices

Value Management -- Leading companies are replacing the strategic plan
and associated budgets with a dynamic performance planning process.
Monitoring/
Feedback
Strategy
Critical
Success
Factors
Measures
Resource
Allocation
Financial
Projections
Operations
Plans
Planning Cycle:
(Effort and Time)
Strategy & Planning 65%
Budgeting 35%

Value Management -- Many planning and budgeting processes don’t
drive improvement.
NET INCOME
Actual vs. LRP Projections
800
600
400
200
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Actual
$MM

Value Management -- Use Strategic Performance Measures (SPMs) to
prioritize and plan work.
Action Planning
Tactical Projects & Programs
SPM Effect
Benefit
Strategic
Plan
Budgeting
Dollars (Capital and O&M)
FTEs
Output Measures
-- by Activity and/or Project
Strategic Alignment
Vision & Mission
Critical Success Factors
Objectives/Goals
SPMs (Deployed, w/Targets)
Resource Guidance
SBU Planning
Vision & Mission
Critical Success Factors
Objectives/Goals
Deployed SPMs (w/Targets)
Execution
Plans

Value Management -- Value drivers provide the connection between
everyday business events and shareholder value.
Business Value
Cash Profit
Revenue
Operating Margin
Taxes
Working Capital
Capital
Expenditure
Cost of Capital
Investment
Required to
Support
Operations
Discount Rate
Micro DriversDeterminants of Value Value Drivers
Market Size
Market Share
Sales Mix
Retail Prices
Staffing Levels
Wage Rates
Other
Tax Effective Structures
Accounts Receivable
Accounts Payable
Contract Terms
Plant Life
Replacement Equipment
Maintenance
Scale of Operations
Cost of Equity
Cost of Debt
Leverage

Value Management -- A detailed examination of business processes and
value drivers of one company, produced several key measures of which
five were financial.
(1) Kaplan, R.S., and Norton, D.P., Harvard Business Review, Jan-Feb 1992.
Internal
Unit Cost
Cycle Time
First Run Yield
Cost of Quality
Balanced Scorecard (1)
Innovation
New Product Revenue
Revenue/Employee
Productivity
Employee Suggestion $
Staff Attitude
Financial
ROCE
Cash Flow
Profit Forecast Reliability
Operating Income
Sales Backlog
Customer
Pricing Index
Customer Ranking
Customer Satisfaction
Market Share

The New Agenda: Emerging Best Practices
Value Management -- Top-level SPMs can be aligned with lower-level
operational measures.
Strategies
Building Customer Loyalty
Acquiring New Customers
Developing New Businesses
Improving Performance
Managing Change
Business Units/Processes
Goals
Strategic Performance
Measures
Customer Satisfaction
& Loyalty Index
Strategic Performance
Measure Targets
Percentage Index Target
Business Unit
Action Plans
Action Plans
Business Unit/Process
Measures
Customer Service
Satisfaction Measure
Business Unit/Process
Measure Target
Percentage Index Target
Corporate Action
Plans
Strategic Programs/Projects
Target Actual
Significant Activities
Manage Call Center
Respond to Inquiries
Execute Work Orders
Process Improvement
Plans
Process Improvement
Projects
Activity Performance
Measures
Time to Resolution
Cost per Service Call
Activity Performance Target
Seconds Target
Unit Cost Target
Target Actual

Value Management -- Building a vision of the OCFO requires an
 Measures and reward structures are geared toward market position,
competition, product life cycle and stakeholders.
 Use of financial and non-financial performance measures -- “The Balanced
Scorecard”.
 Alignment of budgeting and strategy in the planning process.
 Planning and budgeting integrated and continual -- across all functions and
business units, focus on action plans.
 The planning process uses speedy data assembly, and cross-functional
up/down.
 Use of data warehouse and executive information systems.
 Use of EVA with linkage to compensation.

Champion
International
Federal Express
FMC
 Overhauled strategic business information.
 Measured success largely on non-financial basis.
 Developed key measures that have “Manufacturing and
Accounting in sync”.
 Replaced financial outlooks with a daily look at service quality.
 Linked MBO point system and reporting at a team level to
improvement programs and compensation.
 Developed SBU specific performance measures that reflect
competitive dynamics and cost structure.
 Developed scorecards which “are the operating performance
bridge the Corporation never had before”.
Value Management -- Innovative finance organizations have transformed
traditional management control processes to describe, link and predict
operational and value drivers of the business.

Cost Management -- CFO Role: Provide strategic cost information that
provides insight to long run process improvement and sustainable cost
management.
 Develop tools to manage, not cut costs and to manage costs relative to value.
Key Issue:
Strategy
Financing
Value Management
Cost Management
Processes & Systems

Cost Management -- Activity information provides insights by focusing on
the effort and related cost of the work that is being done.
Rationing Resources
How efficient/effective are
we in our operations?
Going to Market
What is cost of producing
new/existing products?
Performance
MeasuresCost Drivers
Resources
Activities
Processes, Products and
Customers
BPR
How can we highlight
improvement
opportunities?

Cost Management -- Developing an activity hierarchy results in an
enterprise-wide horizontal process view of the company’s work and costs.
Plant
OperationsAccounting Purchasing Engineering
Distribution
Operations
Marketing/
Sales
Activities, not resources
Processes, not functions
Continuous Improvement, not variances
Operations, not finance
Direct Assignment, not allocations
Develop & Retain Business
Procure Raw Materials
Manufacture Products
Distribute Order Management & Distribution
Manage & Support the Business
Provide Customer Service
Focus on:

Cost Management -- Development of cost management information
should be driven by the intended management action.
Measurement
Partnering
Category Management
Menu Pricing
Process Improvement
Design
Approach
Bottom Up
Top Down
Design
Focus
Internal External

Cost Management -- Improved information along several dimensions is
essential for decision making.
PROFITABILITY
IMPROVEMENT
NEW
SERVICES
CUSTOMER MIXSERVICE MIX PRICING
COST
MANAGEMENT
RATIONALIZ-
ATION OF
SERVICES
NEW
CUSTOMERS
CUSTOMER
RETENTION
VALUE
OPERATING
STRUCTURE
FUEL &
ENERGY
MANAGEMENT
PROCESS
REENGINEERING
-- CPI
-- TQM
PRODUCTS SERVICES IMAGE
Opportunity Gaps
Performance Gaps
REVENUES
COSTS

Cost Management -- Case Example (Product Cost)
Office Products Manufacturer
80
60
40
20
0
-20
-40
$1M-3M
Order Size (000s)
$6M-15M $15M$0-1M
Gross Profit
%
Traditional Costing
Activity Based Costing
$3M-5M

Cost Management -- Case Example (Customer Profitability)
Customer BCustomer A
Per Case $
Net Sales
Total Manufacturing
Freight
Warehousing & Distribution
Gross Margin
Selling
Trade Spending
Broker Commissions
Selling Expense
Marketing
Advertising
Promotions
Marketing Expense
Order Fulfillment
Hr, R&D and IT
Customer Profit
Impact of market & customer
pressures as well as mix.
$23.00
11.75
.85
.45
9.95
1.25
.15
.70
2.10
.65
.75
.35
1.75
.85
.70
4.55
18%
$19.00
11.50
1.50
.75
5.25
3.25
.65
.35
4.25
.35
.55
.15
1.05
.05
.70
(.80)
(4.2%)
One of the most profitable customers
versus
One of the least profitable customers
Reflective of proximity to
manufacturing location & geography.
Distribution complexity
Push vs. Pull
Broker Sale vs. Direct Sell
Adversarial vs. Partnering
{} Profitable product mix which received
heavy marketing support versus product
mix which focuses on price.
Vendor replenishment versus
traditional order fulfillment customer

Cost Management -- Case Example (Channel Profitability)
EVA by Channel
(InThousands)
$80,000
$60,000
$40,000
$20,000
$0
-$20,000
-$40,000
$16,000
Food
Service
-$23,000
-$ 8,500
-$ 2,500
$50,000
Specialty Club ConsolidatedRetail

Cost Management -- Case Example (Pricing & Costing Process)
Procedural
Complexity
Filters
Segmentation Hierarchy
Strategic Price
Determination
Margin Requirement
Definition
Target Cost
Definition
STRATEGIC FOCUS
BUSINESS COMPLEXITY
A strategically driven process
that segments the business
along key competitive
dimensions and establishes a
framework to create more
strategic focus
TOMORROW
A bottom-up process with
broad/unfocused tactical
guidelines that do not
adequately focus on the
front-end of the business
TODAY

Cost Management -- Case Example (Resource Allocation)
Plan Account Calls
Travel To/From Customer
Take Orders
Make Presentations to Customers
Resolve Deductions
Resolve Service Issues
Confirm Promotion Events
Present Promotion Performance
Inspect Shelf (own and competitors'
products)
Perform Sales Related Administrative
Duties
Total
Activity View
Sales Department
$ 65,000
225,000
97,500
50,000
95,000
70,000
40,000
35,000
22,500
100,000
$800,000
VA
NVA
NVA
VA
NVA
NVA
NVA
VA
VA
NVA
5% of the salesforce is focused
on the least profitable
customers
5% of the salesforce is focused
on the most profitable
customers
A B C D E F G H I
-10
0
10
20
30
40
CUSTOMER GROUPINGS
PERCENTAGE
Profit Margin % Sales Resources

Cost Management -- Target costing provides a proactive process for
managing costs.
Margin
Component Breakdown
TargetCost
Target
Margin
Margin
ProductCost
Margin
ProductCost
Target Cost Definition

Cost Management -- Building a vision for the OCFO requires an
 Use of an Activity Based Management (ABM) for management reporting and
for processes traditionally considered overhead.
 Utilizing target costing to proactively manage costs.
 Life cycle cost management for new product development, capital spending,
endowment/gift decision making.
 Significant focus on account, customer or category (brand) profitability.
 Using activity analytics (part of BPR) to uncover non-value adding tasks.
 Improving segmentation analysis of development and promotion portfolio.

Cost Management -- Many finance organizations are proactively guiding
cost management efforts.
Chrysler
H.J. Heinz
Lever
 Providing ongoing ABM information.
 Actively involved in product development.
 Driving cost reduction and process improvement with ABM.
 Adopted cost based pricing philosophy.
 Driving category management and menu pricing programs.

Processes and Systems -- CFO Role: Supporting and leveraging core
processes at optimal cost.
 Optimizing the effectiveness of basic transaction processing in support of
business processes.
Key Issue:
Strategy
Financing
Value Management
Cost Management
Processes & Systems

Processes and Systems -- Common themes about leading finance
organizations.
Separation of
transaction
processing from
business analysis.
Reduced cost of
financial operations.
Outsourcing of
non-core financial
processes.
Seamless flow of
data from initial
entry point.
Reengineered
processes focused on
customer value &
reduced variability.
Financial
Processes
Configured in
"suites" of user
driven application
software.

Processes and Systems -- Benchmarking can break established
“mindsets”.
1st Q 2nd Q 3rd Q 4th Q "As Is"
% of Revenue
Internal Audit
General Accounting
Tax Compliance
0.057
0.093
0.025
% 0.060
0.130
0.041
% 0.091
0.182
0.052
% 0.200
0.226
0.082
% 0.138
0.128
0.085
%

Processes and Systems -- Savings can be significant.
Client "As Is" Potential Savings
Conservative "To Be" ...... $15MM 28%
Aggressive "To Be" ...... $21MM 40%
Best Practice 1st Q 2nd Q 3rd Q 4th Q "As Is"
% of Revenue
Budgeting & Fin Anal
General Acctg
Financial Mgmt
Internal Audit
Accounts Payable
Cost & Inventory
Tax Compliance
Fin Support
Credit & Coll
Tax Planning
Banking & Cash Mgmt
Treasury & Trust
Fixed Asset Acctg
Cash Application
Ext/Consol Reporting
T&E
Billing
Payroll
0.059
0.054
0.034
0.034
0.018
0.014
0.004
0.002
0.001
0.006
0.006
0.008
0.005
0.001
0.003
0.001
0.009
0.017
% 0.138
0.093
0.063
0.057
0.135
0.031
0.025
0.018
0.013
0.008
0.015
0.023
0.012
0.030
0.011
0.013
0.086
0.049
% 0.229
0.130
0.076
0.060
0.178
0.115
0.041
0.019
0.074
0.016
0.020
0.051
0.024
0.043
0.017
0.023
0.093
0.061
% 0.542
0.182
0.109
0.091
0.199
0.145
0.052
0.024
0.162
0.035
0.041
0.067
0.047
0.058
0.030
0.051
0.137
0.082
% 0.928
0.226
0.336
0.200
0.263
0.243
0.082
0.094
0.245
0.064
0.071
0.072
0.100
0.137
0.049
0.090
0.705
0.113
% 0.210
0.130
0.103
0.140
0.093
0.088
0.087
0.060
0.066
0.067
0.047
0.046
0.039
0.026
0.019
0.014
0.022
0.065
%
0.061
0.200
0.013
0.017
0.051
0.074
0.115
0.130
0.229
0.109
0.041
0.047
0.064
0.094
0.082
0.086

Processes and Systems -- Financial process design should be linked to
overall strategy.
Strategy
Core Business
Processes
Objectives
Value Drivers Core Competencies
Vision for Finance
Transaction Processes Value Management
Leverage
Shared
Reengineering
Outsourcing
Elimination
Benchmarking
Activity Based
Management
Economic
Value Analysis
Key
Performance
Indicators
Reporting & Control
Decision Support
Transaction

Processes and Systems -- Many organizations are moving to a shared
services environment.
 Transaction Volumes
 Degree of Control Required
 Degree of Specialization
 Customer Service Needs
 Process Requirements
 Systems Compatibility
Criteria for Shared Service:

Processes and Systems -- Re-engineered business processes that are
aligned with business strategy should be the key driver of new
systems/technologies.
Business process requirements
drive common information
requirements.
Information requirements
drive application and
warehouse enabling
requirements.
Application requirements
drive technology and
tool requirements.
Information,
application and
technology
requirements drive
data administration
and organizational
requirements.
Where and how
to compete?
What do we
need to do
better or
differently?
How do we
implement
required
changes?
Functional
Effectiveness
Process
Reengineering
Strategic
Development
Delivery
Information
Technology
People
This approach yields a collection of inter-related architectural components
that can be progressively realized.

Processes and Systems -- Examples of better practices in accounts
payable.
 Increased utilization of automated tools, such as EDI and ERS to eliminate invoices
from being keyed; cost/benefit and vendor relations must be taken into consideration to
justify investment.
 Reduce requisition approvals to a single approval.
 Utilization of imaging work flow technology.
 Sales and use tax automated tools to assist the company with compliance as well as
recover of overpayment.
 Procurement card program that targets up to 75% of all transactions.
 Minimize vendor base, partner with primary vendors corporate-wide.
 Minimize checking accounts for the entire corporation’s A/P disbursement activity.

Processes and Systems -- Examples of better practices in T&E processing.
 Eliminate redundant reviews and approvals.
 Control processes via sample audits.
 Eliminate cash advances on company premises -- implement Corporate Card with ATM
capabilities.
 Combine T&E and payroll processing.
 Outsource expense report processing.
 Use direct-deposit methods for T&E reimbursement via payroll.
 On-line travel and expense reporting system.
 Electronically process all expense reports.

Processes and Systems -- Examples of better practices in payroll
processing.
 Minimize pay cycles to bi-weekly and/or stagger pay dates for multiple locations.
 Increase the utilization of direct deposit by all employees. Better practice employers
target 90% participation.
 Automate transmission of employee time to a central processing center.
 Integrate expense reimbursement through payroll.
 Enterprise-wide HR and payroll administration and processing.
 Outsource where economics dictate.

Processes and Systems -- Examples of better practices in collections and
cash application.
 Increased use of automated invoice matching systems.
 Automated cash application.
 Initiate business-wide EFT remittance program from customers.
 Collect all other funds via lock boxes.
 Electronic transfer of bank/remittance data to receivables.
 Raise threshold amount for write-offs of short pays.
 High level of systems integration.

Processes and Systems -- Examples of better practices in general
accounting, consolidation and financial reporting.
 Integrated enterprise information system (Data Warehousing).
 Common chart of accounts designed around management reporting with flexibility for
local and statutory reporting requirements.
 Increase materiality levels for allocations, adjustments and intra-company changes.
 Soft/early close techniques.
 Automated consolidation.
 Consolidated general ledger accounting function.

Processes and Systems -- Building a vision for the OCFO requires an
 Financial Processes measured regarding resource usage, cycle times, service levels and other value
outputs.
Internal best practices known and assured.
External best practices known and emulated.
Continual analysis of drivers and root causes.
Process dependencies known and addressed.
Skills and competencies aligned with activities.
 Financial and operations systems integrated, for example:
Purchasing and accounts payable.
Billing and accounts receivables, with collections.
Production with cost.
Logistics with inventory.
Human resources with payroll.
 Package software used without modifications, connected through database links and controls data
entered once at the source.

Processes and Systems -- Examples of “best practice” processes and
systems are readily available.
Alcoa
Motorolla
UPS
Shared services for transaction processing and skill centers.
Two day close.
Data warehouse to support management reporting.

The Process of
Transformation

Transforming the Finance Function The Process of Transformation
Our process spans assessing your current positioning through
implementation of the vision.
Commentator
FINANCE TRANSFORMATION
Adviser
Scorekeeper
Isolated Caretaker
Integrated Business Partner
Culture
Reactive
Repetitive
Process
Silo
Internally focused
Heavily controlled
Technology's Systems
Manually intensive
Framgmented independent systems
Inaccessible data
Organization & People
Technical competence
Stand alone
Culture
Proactive
Engaged
Dynamic
Process
Cross-functional
Customer-focused
Controls included in technology
Technology's Systems
Automated processes, single data capture
Integrated applications
Consistent and accessible data
Organization & People
Business and financial acumen
Team players
Time
Value Added

Starting with a broad perspective will help ensure relevant and focused
implementation plans.
Implementation Plan
 Cost/Benefit Analysis
 Action Plan
 Prioritized Quick Hits
Benchmarked
Performance
Metrics
Key Business
Drivers
Customer Input
Systems Needs
and Architecture
Best Practice
Methods
Team Approach
High Level
Process Maps

Our process is anchored along three dimensions.
Process View
Revenue Process
Procurement Process
Organizational View
Corporate
Controller
Business
Advocate
Transaction
Processor
Technical
Expert
Business Strategies
Develop
Product &
Process
Manu-
facture
Product
Generate
Demand
Product
Support

In order for finance to identify value creation opportunities and provide relevant
support to the business, it must understand customer needs. To accomplish this,
we interview key finance customers to understand strategic business initiatives
and their impact on the business model.
Customer Requirements:
Understand key strategies of the business model
Review business line plans
Interview key finance customers
Business line leaders
Business line manager
Identify impact of business strategies
Finance Priorities
Logistics &
Distribution
Business Strategies
InfrastructureMarketing Operations

Illustrative Example: Business Needs
Cost of service
Transparent
revenue collection
Total product and
customer
profitability
Generate
Demand
Not being
addressed:
Develop Product
and Process
Product
Support
Manufacture
Product
Product/customer
profitability
Active involvement
in new product
teams
Being
performed
well:
Financial analysis
of acquisition
targets
Project costing
Target costing data
for strategic
programs
Production
performance
feedback
Cash flow analysis
of capital
investments
Adequate
plans to
improve:
Menu pricing for all
products and
services
Cash flow analysis
of capital
investments
Actionable
performance
measurement
Inadequate
plans to
improve:
Analysis of market
potential
Creative financing
Transparent
revenue collection
Timely and accurate
cost data
Activity costs for cost
management and life
cycle costing
Transparent accounts
payable processing

Process analysis provides a framework for assessing performance and
developing a plan to address gaps vs. customer requirements and best
practices.
Process Analysis:
Review work analysis completed
Tailor approach for the client
Develop process metrics
Assign resources to core financial processes
Compile performance measures
Benchmark process performance
Utilize IMA* and C&L best practices database
Identify performance gaps
Develop high level process maps (where required)
Conduct process workshops
Interview Internal customers
Assess impact of current initiatives on process
Highlight process changes
Identify issues
Identify and prioritize process improvement opportunities
Develop a high level plan
Review technology, systems and policies
Process View
Revenue Process
Procurement Process
*IMA - Institute of Management Accountants

Illustrative Example: Procurement
Key Benchmark Observations
Additional Findings/Observations
Conclusions
Opportunities
The excessive effort required to process low dollar value invoices drives accounts payable
processing costs
The lack of standardization in systems and procedures drives costs up, increases resource
requirements and negatively impacts data integrity
The costs of accounts payable and cash application are increased due to the processing
treatment of intercompany transactions (failure to make efficient use of IFT entries)
Processing errors and lack of timely departmental approvals delays payments, straining vendor
relations and increasing the likelihood of foregone discounts
$2.6 million (10.3% of total finance costs) are consumed by the Accounts Payable process
58.3 FTE's (16% of total finance personnel) are consumed by the Accounts Payable process
38% of invoices are not paid within terms
75% first run yield for invoice processing
A significant percentage of the transactions are intercompany [1]
3 distinct software programs operating on two separate systems
Processing remains distributed at selected sites
Client's accounts payable feeder system does not utilize the standard chart of accounts or
cost hierarchy
EDI invoicing from only 4 suppliers
Stratify purchasing transactions to determine the optimal sourcing and settlement methods
- Procurement cards
- EDI/EFT
- Evaluated receipts
- Monthly billing from suppliers
Consolidate to one accounts payable system using client chart of accounts with consistent cost
hierarchy capabilities
Use document imaging & electronic storage for invoices
Procurement Card $350,000
Evaluated receipts $700,000
Streamline intercompany $ 50,000
EDI/EFT $300,000
-------------
$1,400,000
Improved control over purchasing through improved reporting
Support migration to preferred supplier base (rationalization)
Enable accommodation of increased volume associated with JIT manufacturing
Improve integrity of and access to source transactional data
[1] Exact percentage pending Shared Service report
Under $1000
73.1%
Over $5000
7.2%
$1000 - $5000
19.7%
Benefits (1)
(1) Potential Accounts Payable and Supply Management savings, exclusive of implementation costs
Accounts Payable Cost Benchmarks (1)
Cost as % of Revenue
(1) IMA's CIC 1995 Benchmarking
Client
Best Practices
First Quartile
Second Quartile
Third Quartile
Fourth Quartile
0%
0.05%
0.1%
0.15%
0.2%
0.25%
0.3%
0.1108%
0.018%
0.135%
0.178%
0.199%
0.263%
Transaction Percentages by Dollar Value

While process and system improvement will yield cost reductions, long
term benefit and alignment will not be realized unless organization/skills
issues are addressed.
Organizational Analysis:
Define finance organizational framework
Define roles
Identify key activities associated with each role
Review organization structure and staffing
Identify resource distribution by role
Analyze organization demographics
Experience/Tenure
Education/Certification
Evaluate finance organization HR process
Review/appraisal process
Training/development programs
Recruiting strategy
Hiring plans
Career planning/job rotation
Identify impact of current initiatives on finance roles
Define required competencies for each role
Develop conceptual Finance Organization Model
Organizational Framework
Technical Expert
Role: To supply specialized knowledge
surrounding management of risk,
minimization of liabilities and maximization of
cash flow.
Activities: Internal Audit, Tax Compliance &
Planning, Risk Management, Banking &
Cash Management, Treasury & Trust, Credit
Transaction Processor
Role: To provide low cost and transparent
data processing.
Activities: Billing, Collections, General
Accounting, Payroll, Time & Attendance,
Accounts Payable, T&E
Business Advocate
Role: To provide timely and sound financial
decision support to operating units.
Activities: Financial Analysis, Management
Reporting
Corporate Controller
Role: To monitor execution of operating
commitments, to provide the organization
with timely and accurate data, and to ensure
compliance with rules and regulations.
Activities: Budgeting & Forecasting, Cost
Accounting, Inventory Accounting,
External/Internal Reporting

Illustrative Example: Business Advocate
Key Benchmark Observations
Additional Findings/Observations
Conclusions
Benefits
Opportunities
The Finance organization resources are positioned to support the needs of the business
Finance does not possess an adequate depth of knowledge and skills throughout its ranks
Middle financial management is not given adequate latitude in supporting their customers
Finance must play a central role in guiding efforts to reduce development, production, and product
operating time and costs
Finance must be capable of determining profitability and contribution of each of Client's lines of
business and facilitating the enhancement of lagging operations
The level of MBA's and CPA's are not commensurate with the level of analysis and financial
management required by business advocates
Develop a structured training program to elevate the level of sophistication of financial
analysis, to enhance overall business knowledge and to ensure consistent decision making
throughout the entire financial organization
Increase the Finance organization's ability to assess how organizational decisions impact the
entire operating model
Use cost element building blocks to perform target and life cycle costing
Advance existing business advocacy skills through the retention of well skilled individuals from
outside the organization
Finance assigns individuals with dotted line responsibility to customer organizations which results in
increased responsiveness and awareness to organizational concerns
Financial personnel do not regularly receive training in areas such as the use of modeling tools and
techniques, diminishing the ability to provide value added financial services
Senior financial management is heavily involved in the decision making process of day to day
operations, often resulting in Finance becoming a bottleneck in the decision making process
The organization operates multiple lines of business (manufacturer, wholesaler, retailer, and service
provider for aircraft, drones and components), increasing the requirement that Finance maintain a
broad skill base to support the organization
The importance of the international market place is rapidly increasing and will result in a growing
need for finance to understand complex global markets and economic trends
Products have an average five year development lead-time, a twenty + years production life, and
sales result in a twenty + years customer relationships, heightening the importance of investments
made in new programs and the ability to assess customer profitability
Majority of costs are determined during the product and process design processes, heightening the
importance of accurately projecting product profit potential early in the development process
Product life cycles are decreasing, requiring that Finance be capable of accelerating its ability to
provide timely and proactive financial analysis
Over 50% of business advocate resources are focused on data gathering and reporting (versus
analysis)
Over 80% of all analysis and reporting is historical
Enhanced financial analysis and management capabilities
Consistent, distributed decision making capabilities
Focused allocation of resources on profitable products and customers
Enhanced knowledge of market complexities and ability to capitalize on opportunities
Business Advocate (1)
Staff per $ Billion in Revenue
(1) IMA's CIC 1995 Benchmarking
Client
Best Practice
First Quartile
Second Quartile
Third Quartile
Fourth Quartile
0
10
20
30
40
50
42.1
1.5
7.4
12.9
18.9
43.6
FTE's
Education of Finance Personnel
Acctg/Fin MBA CPA
0%
20%
40%
60%
80% 71%
12% 11%
32%
10%
20%
31.6%
2.6% 5.3%
RAC RA RAS

Develop a roadmap for moving forward.
Opportunity A
Opportunity B
Opportunity C
Time Horizon
Opportunity A
Opportunity B
Opportunity C
Opportunity A
Opportunity B
Opportunity C
Operating "Quick Hits"
Initiatives:
Strategic Initiatives:
Self-Funding Initiatives:

Further Detailed
Analysis
Project Management
Focused
Assess-
ment
Change Management & Communication
Options
Review &
Blueprint
Dvlpmt.
Gap
Analysis
Vision
for
Finance
Implement Quick Wins
TBDTBD9-14 Weeks3-4 Weeks Implementation
Review
InitialDiagnostic
Using our overall approach as a foundation, we would tailor a plan to fit
your needs.

Financial f of the future 31 mar 2001

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