kurt salmon-the finance function as value-driver-m.mercusot-m.leon

The Finance Function
as Value-Driver:
Enhancing efficiency, effectiveness,
and business value

FINANCE AS VALUE DRIVER

TABLE OF CONTENTS

Introduction 2

Embracing the Client Service Dimension in Finance 3
The Gap between Client Expectations and Finance Services Provided 3
The Dual Dynamic: Importance of Finance as Controller and Service Provider 4
Evolution to a Client Service Orientation within a Matrix Organization 4
How to Implement the Matrix Organization 6

Consolidating Routine Activities into a Finance “Factory” 7
Survival of the Leanest 7
Inefficiencies in Finance’s Production Effort 8
The Separation of Production and Business Analysis 9
Benefits of the Production Team 9
Another Advantage of the Production Team: Process Optimization 10

Considering Offshoring for Further Cost Optimization 10
Value for Less in a Slow Economy 10
Moving Beyond Basic Headcount Reduction to the Concept of Offshoring 10
The Methodology: Defining the Location, Risks, Business Case, and Processes to be Offshored 11
Beyond Cost Savings: A Strategic Approach to Offshoring 16

Conclusion 17

Acknowledgements 18

The Authors 18

1


INTRODUCTION

The recent financial crisis, continuing market volatility, cost pressures and regulatory reform are
all presenting CFOs and the Finance Function with unprecedented challenges – related not only
to performing core accounting, reporting and control functions, but also to helping the overall
business succeed. Finance is having to shift from a traditional stewardship role to playing the part
of a strategic value-driver and business partner.

For this purpose, an effective, lean and agile Finance organization is essential, one that balances
traditional core competencies and approaches with innovation and new capabilities. At financial
institutions and corporations alike, transformation of the Finance function is an important
strategic priority.

This paper discusses three important aspects of this transformation – three practical
recommendations that can help not only with efficiency and effectiveness, but also with overall
value delivered to the business:

1. Create a client service team focused on providing business-driven analysis, insight, and support

2. Consolidate all transactional, routine accounting and reporting tasks into one production-

oriented team or “production factory” to enhance productivity and increase resource flexibility

3. Consider options for outsourcing or off-shoring transactional, resource-intensive activities

to further improve productivity and cost efficiency and allow investment in new capabilities
and strategic business support.

Kurt Salmon’s Global Financial Services practice works with CFOs and Finance teams around the
world on designing and implementing Finance transformation programs, covering accounting,
reporting, control, management information, risk management, regulatory compliance and Finance –
business unit partnering.

We hope you find this paper useful and look forward to further engagement with you on the topic
of Finance transformation in the future.

Allen Merrill

President
Global Financial Services

2


1. EMBRACING THE CLIENT SERVICE
DIMENSION IN FINANCE

1.1. The Gap between Client Expectations and Finance Services Provided
ne of the most challenging tasks on the CFO’s agenda is providing a consistently high level
O
of service to his / her internal clients and stakeholders. According to a survey conducted by
McKinsey in 2009, CFOs in the financial services industry are lagging behind their peers in
other industries when it comes to raising their level of service, providing value-added support
to the business, and driving strategic decision-making and performance management.

Current Role of Finance at the Corporate Level, by Industry1

60% Value Drivers
Business Partners
50% Process Managers
Score Keepers
40%

30%

20%

10%

0%
Total Business, legal, Manufacturing Financial
professional
services

Score Keepers: Focus their efforts on reporting, compliance, and transaction management
Process Managers: Focused on processes and risk mitigation, with competence in management reporting, tax audit, and treasury
Business Partners: Provide financial analysis to support management’s financial and operating decision-making
Value Drivers: Serve as an integral part of management in supporting the business through identifying opportunities and
providing critical information and analysis to make strategic operating decisions

Kurt Salmon’s experience in working with CFOs in financial institutions also points to a gap
between client expectations and the services rendered by the finance department, even when
client service is an integral component of the CFO’s overall operating strategy.

Stakeholder Evaluation of a Financial Services Firm’s Finance Department
on a Scale Ranging from ‘Score Keeper’ to ‘Value Driver’

Current Perception

Value Driver The perception of the firm’s finance department by Target Vision
its stakeholders is distributed across the spectrum,
with a concentration in the ‘scorekeeper’ and
‘process manager’ roles. Value Driver
Business Partner

Business Partner
Process Manager

Stakeholders expressed a desire for the finance department
to be a partner with the business — a positive indication that Process Manager
Score Keeper
the stakeholders do want and need involvement of finance
beyond the ‘scorekeeper’ / ‘process manager’ roles.
Score Keeper

1
F
rank Broer, Rainer Kiefer, and Anish Melwani, “How Finance Departments are Changing,” The McKinsey Quarterly, April 2009
3


Failure to adequately address service delivery issues may result in an inefficient operating model.
Indeed, what Kurt Salmon has observed in some financial institutions is the creation of dedicated
teams of finance analysts external to the finance department, working in the lines of business and
producing their own reports and analytics in order to meet the demands of the business. While
such an arrangement may work, particularly if the external finance teams are well organized and
their structure, objectives, scope, roles, and responsibilities are clearly defined and communicated,
such coexistence does not reflect positively on Finance and its effectiveness. Stakeholder set-up
of external finance teams signals a lack of trust in Finance and dissatisfaction with its performance.
The existence of these separate finance teams stifles productive collaboration, promotes unhealthy
competition, and breeds suspicion between Finance and its stakeholders. Therefore, this dual
arrangement is not only tenuous, inefficient, and damaging to the teams’ relationships, but it also
relegates Finance to simply reconciling and validating its numbers with those from the business.

1.2. The Dual Dynamic: Importance of Finance as Controller and Service Provider
The finance department has long been evaluated on its performance of the standard core accounting,
reporting, and control functions. Such a mind-set has shaped the finance organization – the way
the group operates, how it is structured, the composition of its training program, and ultimately,
the department’s outlook and approach to its role and responsibilities. However, the traditional
assessment of Finance’s performance has shifted in focus from its routine accounting, control,
and reporting tasks to a more business-driven, service-oriented operating model, particularly since
the financial crisis. Indeed, the economic downturn has exerted significant pressure on financial
services firms to devise new products / services, new transactions, and other innovative strategies
for growing their business. In executing their strategies, the lines of business are becoming increasingly
reliant on Finance as a partner and key advisor who can provide the following:

• In-depth, value-added analysis of financial results and business-driven reporting
• nsight and expertise in the financial, regulatory, tax, and capital implications of new products,
I
transactions, and other business development initiatives
• Advisory capabilities in the impact of new financial regulations, particularly on capital,

liquidity, and balance sheet management
• Input into the strategy of the business
• Facilitation of dialogue with regulatory bodies and credit-rating agencies

Finance is expected to meet the business needs of all its stakeholders while simultaneously executing
its conventional core missions. The trend toward the finance organization’s dual role as controller
and service provider will only gain momentum with heightened regulatory scrutiny and an ever-
changing competitive landscape.

1.3. Evolution to a Client Service Orientation within a Matrix Organization
Kurt Salmon recommends that Finance establish a dedicated team of client service providers within
the department to instill a client-oriented focus in Finance and develop a productive partnership
with all its stakeholders. Implementing a matrix organization of dedicated and empowered
client service professionals also helps motivate the finance team to develop the business acumen
necessary for providing input into business strategy and becoming a true business partner to
its constituents.

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A matrix organizational structure combines functional departments in a dual authority system
rather than in a more traditional linear management structure. The matrix organization drives
functional efficiencies within Finance through the creation of the Client Service Team in Finance
and its interaction with both the lines of business and the rest of Finance.

In applying the matrix model to the finance department, a part of Finance would be organized
around its core functions (e.g. financial reporting, management reporting, regulatory reporting,
tax, etc.) and another part along business lines and support functions. Within Finance’s matrix
organization, a Client Service Team dedicated to each business line / support function (i.e., the
client) would intersect with each of Finance’s functional teams, signifying a direct relationship
between Finance and its clients. As indicated by the matrix diagram below, some employees have
a dual reporting line to two managers – one from a functional team in Finance and one in the
Client Service Team.

Transition of a Typical Finance Function to a Matrix Organization
with Client Service Team and Production Control Groups

Production Control
CFO

Finance Function Production
Group Policy Controls

Financial Management Tax Regulatory
Analysis Accounting Reporting Reporting Projects

Financial Management Tax Regulatory Policy
Accounting Reporting Reporting Controls
Client Service Team:
Analysis

Represents lines
Projects of business and
support functions
(IT, Ops, HR)

The Client Service Team consists of Finance analysts organized by the main lines of business and
support functions (e.g. Operations, Human Resources, and IT). Acting as a single point of contact
within Finance, the Client Service Team serves as the liaison between Finance and its clients, and
facilitates the communication between the two groups. It is therefore responsible for developing
a close partnership with Finance stakeholders through:

• erforming business-driven reporting and value-added analysis to provide insight and
P
visibility into financial results (the “story behind the numbers”), as well as handling balance
sheet, capital, and liquidity requirements for the business
• Evaluating new / complex products and transactions and providing guidance on financial and

accounting implications of business trends and products (e.g. determining the appropriate
accounting treatment and identifying relevant disclosure requirements)
• Managing the budget and forecast process for the business

The Client Service Team regularly communicates with their stakeholders to understand their needs,
obtain their requirements, and ensure that their requests are met. As the pivot point between
Finance and its external constituents, the Client Service Team:
• ffects the smooth, seamless coordination and execution of the finance department’s service
E
provider function
• aintains a consistent level of deliverable quality by, for instance, reviewing deliverables from
M
Finance before submission to the client
• Ensures that Finance is proactive and responsive to its clients

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1.4. How to Implement the Matrix Organization
The matrix model will help Finance organizations provide a higher level of service if its implementation
is effectively executed and the following best practices are applied:

• Clarify roles and responsibilities. Roles, responsibilities, priorities, expectations, and

accountability must be clearly defined in a matrix structure with dual reporting lines to
establish a solid foundation for the organization and avoid task redundancy. It is necessary
for all the teams in Finance to review their functions, deliverables, deadlines, handoffs, and
dependencies within the department and with external groups before making the transition
to a matrix organization. After performing a detailed review of the interactions both within
the finance function and between Finance and external groups, Kurt Salmon highly recommends
documenting a RACI matrix to outline the parties who are Responsible, Accountable,
Consulted, and Informed for each task. Job descriptions of all team members should be
revised accordingly to identify and fill staffing gaps in terms of headcount and skills needed
for the new organization.

• Ensure alignment with the organization’s values. Communicating the RACI matrix of the

new organization to the staff will help Finance employees identify to whom they are
accountable at key interfaces. Managers should also reinforce the teams’ understanding of
their responsibilities by explaining the concept of the matrix organizational model and its
dual-reporting structure. It is important to inform the staff that employees are accountable
not only to their direct managers in Finance, but also to other stakeholders – both internal
and external to the finance department. The core message that managers should convey to
their staff is the importance of communication, collaboration, negotiation, and informal
networking in a matrix organization where teams are interconnected, boundaries are porous,
and the management structure is more horizontal.2 Employees should understand that they
are expected to meet Finance objectives by adhering to both their functional and client
responsibilities.

T
he matrix model is inherently a team-based organization that can drive synergism when
people can work effectively across organizational boundaries (i.e. within their own Finance
team and externally with their clients) and can balance conflicting objectives. Managers play
a key role in embodying the values of proactive communication, responsiveness, and flexibility
that are central to the matrix organization, as well as by nurturing and reinforcing the same
behavior within their staff.

• et expectations, build consensus, and secure buy-in from clients. It is critical to position
S
people in the Client Service Team with the appropriate seniority, breadth of skills, and
business experience. Accordingly, Finance should select and/or finalize the Client Service
heads and team members from Finance with its stakeholders. The Client Service Team should
then work with its clients to reach an agreement on its roles and responsibilities and explicitly
detail and document what has finally been decided. Finance should also collaborate with
its clients to not only define the scope of its responsibilities vis-à-vis its external stakeholders,
but also identify the expectations of the parties involved. From the perspective of Finance,
setting expectations entails preparing external stakeholders for the sequencing and timing
of Finance’s transition to the matrix organization, as well as the overall staging of the Client
Service Team. It also means communicating Finance’s expectations from its clients, such as
the Client Service Team’s inclusion in the management meetings of the business and access
to the business heads. Finance should emphasize to its clients that a reciprocal relationship
with the Client Service Team is necessary for Finance to provide effective, quality service to
all its constituents.

2
J
ay R. Galbraith, Designing Matrix Organizations that Actually Work (San Francisco: Jossey-Bass, 2009)
6


• Build the necessary capabilities. In order for Finance to provide value-added service to the

business and to its other stakeholders, it is important that Finance employees enhance their
knowledge of their client’s line of business. As a value driver, Finance should understand the
impact of new business products and transactions, and then apply this knowledge to the
opening, booking, reconciliation, and maintenance of accounts. Consequently, Kurt Salmon
recommends that Finance provide and enforce staff participation in a rigorous learning and
development program. Such a program targets product and business training for accountants
so that the staff can develop the expertise needed to forge an effective partnership with the
lines of business.

The matrix structure can deliver high organizational performance, provided people have the

skills to make the matrix work. Cultivating the expertise to effectively manage the complex
interrelationships among cross-functional teams and handle the complexity in dual reporting
lines is fundamental to reap the advantages of the matrix organization.

• Communicate, communicate, communicate. Communication is essential for the implementation

of any organization. However, the inherent complexities of the matrix organization require
a more extensive communication campaign. Employees faced with a move to a matrix
organization may be disturbed by the ambiguity in roles, lack of clarity in the chain of command,
and uncertainty of who is in charge. It is therefore critical for managers to explain the structure
of the matrix organization and how it will function. Managers should also engage in regular
discussions with their staff to address their questions and concerns, as well as anticipate and
properly respond to feelings of resistance, fear, and skepticism. Motivating staff and selling
the new organization will depend on the managers’ own level of involvement, alignment, and
commitment to the demands of the matrix organization. Accordingly, it is important that
managers embrace the matrix structure and model the organizational values of collaboration,
communication, and teamwork before they can engage their team, build positive momentum,
and drive the transition to the matrix structure.

Embrace and model the values behind the matrix organization. The matrix operating model
fulfills many of Finance’s key objectives — align Finance’s services with the expectations of its
clients, build a stronger, more productive partnership with all external parties, and ultimately,
become a value driver for the business. Nonetheless, the matrix organization is but a structure
that, by itself, solves nothing: the potential of the organization can be unleashed only if the people
within it embrace, embody, and enforce its values and collaborative behaviors.

2. CONSOLIDATING ROUTINE ACTIVITIES
INTO A FINANCE “FACTORY”

2.1. Survival of the Leanest
The global economic downturn has put significant stress on the finance department: in addition
to maintaining the rhythm of its core missions, Finance must also keep pace with the changing
regulatory landscape and help meet the needs and priorities of the business. A cost-cutting
mentality further exacerbates Finance’s increasing workload as it faces shrinking capacity from
hiring freezes and headcount reductions.

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Against this backdrop, it is critical for the finance department to enhance its scalability, as well as
its operational efficiency and effectiveness, in order to manage a widening scope of work. It is
therefore important for CFOs to build efficiency, flexibility, and resiliency into their finance teams
in order to weather the challenges wrought by the economic crisis.

2.2. Inefficiencies in Finance’s Production Effort
The finance department’s operational efficiency and effectiveness depend on a number of factors,
including the capabilities of its staff, the systems supporting its functions, the level of automation
in its processes, and the complexity of the company’s business. In general, however, many finance
departments are burdened by the heavy production aspect of their functions. In Kurt Salmon’s
experience, many finance departments spend a disproportionate amount of time on activities that
do not contribute tangible value. Indeed, our Global Financial Services practice has seen many
finance departments engaging in production activities that are:

• edundant – multiple calculations by different teams of the same data; endless loops in the
R
budget and forecasting process; overlapping responsibilities
• anually intensive – data entry, extraction, formatting, manipulation, and reconciliation
M
• on-value-added – customizing the layout of the same types of reports for different groups
N
• nnecessary and wasteful – regularly generating reports that are not needed, read, or used
U

One reason for these inefficient and unproductive activities may be attributable to accounting
processes and finance tools / systems that are onerous, complex, and inefficient. Finance can
also get caught up in time-consuming “busy work,” which continues to be produced because the
team has never challenged or critically evaluated its relevance or usefulness. As a result, Finance
departments do not expend enough time and effort on increasing quality and productivity, therefore
leaving limited time, at best, for analytical review and data synthesis.

Production v. Analysis Split by Function

Time Distribution (%) Run the Bank – Type (%)
Department Headcount Change Run the Bank Production Analysis

Financial Accounting x 20 80 70 30
Regulatory Reporting x 20 80 80 20
Accounting – Subs and Broker-Dealer x 10 90 80 20
Accounts Payable x 10 90 70 30
Assets and Liability Management x 20 80 90 10
Financial Control x 30 70 90 10
Tax x 10 90 60 40
Budgeting x 10 90 30 70
Financial Performance Management x 20 80 60 40
HR Finance x 10 90 80 20
Financial Analysis x 20 80 50 50

Total 100 20 80 70 30

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2.3. The Separation of Production and Business Analysis
Finance can improve its efficiency and effectiveness by grouping all production-related tasks under
one team, a “production factory,” while assigning business-focused analysis to another team within
Finance. In our matrix organizational model, we designate responsibility of business-driven analysis
to the Client Service Team.

The Matrix Organization with its Dual Dynamic of Analysis and Production

CFO

Production Control:
“Production Factory”
Client Service Team:
Analysis

In order to set up the production team, Finance should identify production-oriented tasks and
separate them from those that involve business-oriented data analysis. Production tasks consist of
Finance’s core management and financial reporting missions and involve such responsibilities as:

• Accounting and maintaining the general ledger (i.e. book to the financial ledgers; reconcile and
monitor accounts; resolve breaks; and review daily account activity, transactions, unusual events)

• Reporting – externally (regulatory, statutory, legal entity) and internally (e.g. for senior
management, other departments, and internal Finance stakeholders like the Client Service Team)

• Budgeting and forecasting

• Instilling rigorous governance and quality control to enforce data validity, completeness,
consistency, and reliability, as well as to ensure compliance and risk management

2.4. Benefits of the Production Team
A dedicated production team can help ensure reliability of the numbers, provide insight into the
financial results, and contribute to bolstering Finance’s client orientation by:

• Demonstrating consistency and sustainability in the basics – data accuracy, completeness,
transparency, reliability, and timeliness

• Aligning service delivery, processes, people, tools, and technology to increase operational
efficiency and deliver value to Finance stakeholders

• Building scalability to ramp up and respond to the business’ appetite for growth without
compromising quality or risk

• Focusing on continuous improvement through regular benchmarking and measurement of
key performance drivers and service delivery levels against targets

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Kurt Salmon expects that setting up a production team that assumes full ownership of implementing
process enhancements will yield a leaner, more effective finance group that can provide timely,
accurate data, reports, and other deliverables to the Client Service Team. This, in turn, enables the
Client Service Team to:

• Address key client requirements by providing timely, quality, business-driven insight, analysis,
and advisory services

• Align with stakeholder expectations and overall corporate objectives
• Effectively contribute to operational and strategic decision-making

2.5. Another Advantage of the Production Team: Process Optimization
Bringing together all production related to financial, management, and regulatory reporting into
one cohesive unit under the same manager enables greater functional convergence, alignment,
and synergism, as well as increased opportunities to enhance the processes involved. In fact, one
of the production team’s priorities is to streamline and optimize its processes.

The team should be led by a manager who has experience in mapping and assessing accounting
processes end to end, examining the relevance and value of the team’s activities, and determining
how further value can be created. The head of the production team should cultivate within his /
her staff a mind-set of continuous improvement. Accordingly, employees in the production team
should be encouraged to challenge the status quo and constantly look for opportunities to minimize,
streamline, and automate inefficient tasks, as well as discontinue unnecessary or non-value added
activities. Production staff may also apply Lean and Six Sigma principles to generate further
efficiencies. If the production team eliminates waste, drives productivity, and enhances the team’s
overall performance, it is able to achieve superior execution of its missions, thereby enabling
Finance to better serve the needs of their stakeholders – both internal (e.g. the Client Service
Team) and external (e.g. the lines of business).

3. CONSIDERING OFFSHORING FOR FURTHER
COST OPTIMIZATION

3.1. Value for Less in a Slow Economy
CFOs have been challenged to step up the performance of their finance team as they juggle a
number of pressing priorities, including the strategic direction of the business, the complexity of
the regulatory overhaul, and value creation in a sluggish economy. As organizations have settled
into a “hunker down” mentality and a routine of operating with less, CFOs are expected to lead
by example and ensure that the finance function is as efficient, effective, and value-creating as
every other part of the business.

3.2. Moving Beyond Basic Headcount Reduction to the Concept of Offshoring
One way for the finance function to satisfy its cost-reduction imperatives is to offshore low value-
added, resource-intensive processes to a lower cost country. Based on Kurt Salmon’s experience,
finance functions that have successfully implemented the offshoring concept are realizing cost
savings in the range of 20% to 30%.

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However, an offshoring model is not simply about minimizing labor costs. Unlike the usual tactic of
downsizing the finance department, an offshoring model enables Finance to increase its flexibility
and scalability if offshoring is executed well. When Finance leverages offshore resources for process
reengineering, for instance, the large, low-wage labor pools in offshore locations can unleash the
economies of scale to drive process optimization and industrialization at higher value for the money.
Such an approach not only boosts cost savings and operational efficiency, but it also enables
onshore staff to focus their efforts on such higher value functions as client support, business
analysis, and operational risk monitoring.

3.3. The Methodology: Defining the Location, Risks, Business Case, and Processes
to be Offshored
As with any organizational model, careful planning and methodical execution are instrumental in
implementing an offshoring strategy that works. Dissatisfaction with the results of offshoring stem
from inadequate planning and preparation. Many firms do not anticipate cost overruns and cultural
differences, or account for difficulties in recruiting and talent retention in the offshore location.
By following the process below, finance organizations can help ensure that offshoring delivers
the desired results.

• Perform an assessment of possible offshore locations. The question of the offshore location

is often dictated by cost advantage. However, some companies are moving from low-end
task-level offshoring to relocating less transactional work and improving processes. The
specific objectives of Finance must be factored in when determining the best location for
the process / function (onshore / in-house vs. offshore or near-shore). Kurt Salmon
recommends that the following criteria should be considered in addition to labor cost:

Criteria for selecting offshore locations

Labor market Size and growth of labor pool, availability of skilled employees, rate of
attrition
Infrastructure Q
uality and reliability of the location’s information technology,
telecommunications, and transportation network
Business and legal Business friendliness, political stability, economic growth rate, security
environment and legal enforcement (e.g. protection of intellectual property), lack of
red tape and bureaucracy
Language Proficiency and fluent communication skills in English and any other
required language
Quality of life Propensity for natural disasters, crime rate
Cultural adaptability Presence of other financial services institutions

Other factors to keep in mind include time-zone advantages and proximity to the key markets of
the financial institution.

• Prepare the business case to understand the total value on offer. Evaluating the business

case for offshoring is critical in determining the cost differential between the domestic and
offshore location and by extension, whether the cost savings are adequate to pursue offshoring.

Preparing the business case involves capturing the full spectrum of cost categories, which are
listed in the table below. It is important to establish the specific units corresponding to these costs3
and the timeline over which offshoring costs / savings will occur.
3
Salary costs would be dollar amount per employee, whereas training costs for offshore staff would most likely constitute a
lump sum.
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Offshoring Costs

Offshore labor costs Compensation and benefits, projected salary growth, capacity to absorb
employment churn
Onshore separation Severance pay and benefits, career counseling and outplacement
costs (for headcount services, retention bonus to prevent defections of impacted staff before
reduction onshore) knowledge transfer and offshore migration are completed
Infrastructure and Lease, facilities, telecom, electricity; travel cost from domestic location
overhead to offshore destination
Tax and regulatory Corporate tax rate, exchange rate movements, financial incentives
costs
Ramp-up costs Travel to offshore location for set-up, recruiting, offshore training,
project management
Migration and External project management, system development, parallel run and
transition costs support before full transition to the offshore team

Note that the cost categories in the table may not be relevant or material if other departments
within the firm (e.g. IT) have already set up operations in the offshore location, thereby enabling
the finance organization to reap “co-location synergies.”

In calculating offshore labor costs, Kurt Salmon believes that it is critical to analyze the impact of
offshoring on headcount. It is a common misconception that one onshore employee can be
replaced by one offshore employee at go-live – i.e. that the ratio is 1 for 1. Offshore resources need
time to learn their tasks and perform at the same level as the onshore staff. We therefore recommend
factoring in this transition time and multiplying the number of offshore resources by a conversion
or “productivity” ratio, which is used to convert the number of onshore workers to the equivalent
number of offshore staff. If we assume our productivity ratio is 1.3, this means that the work of one
onshore employee is equal to the work of 1.3 offshore resources. The productivity ratio reflects the
lack of direct substitution by offshore staff for onshore employees due to an initial learning and
transition phase. Indeed, we do not encounter major productivity gains at inception of an offshoring
initiative given the logistical difficulties, as well as the adjustment to both geographical distance
and the dispersion of finance processes. As such, the productivity ratio must be applied to head-
count numbers in the initial stages of offshoring. This conversion ratio can range from 1.1 to 1.5,
depending on the maturity of the finance organization, the processes being offshored, and the
stage of process optimization. Over time, however, the ratio should converge to 1 or even drop
below 1 if the offshore team executes tasks more efficiently and effectively than the onshore team
in the past.

Finally, all offshore costs should be adjusted for the exchange rate applicable to the currency of
the offshore location. Other factors to consider include the rate of inflation over time and any tax
benefits that the offshore government would provide to firms for relocating their operations under
its jurisdiction.

• Evaluate the processes to be offshored, including feasibility and risk of offshoring. In Kurt

Salmon’s experience, most companies do not carefully evaluate which processes they should
offshore and which they should not. Without a systematic methodology for differentiating
processes, it is difficult to distinguish among core processes that provide strategic value and
commodity processes that are less valuable and can easily be offshored. A systematic
approach in ranking functions provides a basis for comparing processes and determining
which ones can be offshored.

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A Harvard Business Review article, “Getting Offshoring Right,” written by Ravi Aron and Jitendra V.
Singh, details the approach of evaluating the processes to be offshored. Kurt Salmon agrees with their
methodology and the criteria, and has therefore summarized their approach in the illustration below:

OFFSHORING CRITERIA:
■ Value for client: rank processes and activities according to their value
provided to the client Identify Opportunity and
■ Value for group: rank processes and activities according to their value Desirability to Offshore
provided to the group (lower value, non-core / “commodity”
■ Core vs. Non-Core: rank processes and activities according to their activities tend to be offshored)
importance to the group’s core mission

■ Standardized/Codified: indicate the level of standardization and
‘codifiability’ of the process / activity (High — Medium — Low) —
whether the process is easily documented and is not reliant on deep Assess Operational Risk
institutional or domain experience* Setting tolerance limits for errors,
*In our experience, a “retention bonus” may be offered to stave off staff defections defining completion times and
and prevent the loss of institutional knowledge before the transition of tasks offshore productivity norms, and measuring
has been completed performance can mitigate the risk of
■ Quality Metrics/Measurement: indicate the type of measure available moving processes offshore
to evaluate the quality of the process / activity (quantitative [precise/
objective] or qualitative [imprecise/subjective], or non-existent)

■ Interactions: define type of interactions involved (Client/External – Internal)
■ Time sensitivity and time constraint: define time sensitivity and time
constraint of process or activities Identify / Check for
■ Other operational constraint, limitation or prerequisite Operational and Regulatory
Constraints
■ Regulatory constraints or limitations

Matrix, measuring offshoring opportunity by function: Combine
■
Build the Matrix to Assess
desirability ranking, level of operational risk, as well as any regulatory
considerations that may hinder offshoring the activity to evaluate its
Overall Offshoring
“offshorability” Opportunity

In performing an overall assessment of the opportunity for offshoring an activity, Kurt Salmon
recommends building a matrix to combine its desirability ranking, level of operational risk, as well
as any regulatory considerations that may hinder offshoring the activity. Refer to the grid below
for further details.4

Example of a Grid that Illustrates Offshoring Opportunity by Function

Limited Low Lowest
Product Valuation
Regulatory Reporting
LOW/NONE

(daily / weekly reporting) New Product Committee
Regulatory Reporting
(expertise)
Desirability to Offshore

Regulatory / audit preparation

High Moderate Low
MEDIUM

Certification of
Accounts

Highest High Limited
Accounts Payable
HIGH

Inter-company
reconciliations

LOW MEDIUM HIGH
Operational Risk

4
R
avi Aron and Jitendra V. Singh, “Getting Offshoring Right,” Harvard Business Review, December 2005

13


Based on Kurt Salmon’s experience in performing the process analysis described for our clients, we
conclude that CFOs should retain onshore those functions that are mission-critical or complex, requiring:

• Considerable judgment, analysis or expertise

• Daily / face-to-face interaction with the lines of business and regulators

• Prompt / immediate task execution and response

• Formulate the implementation plan to execute the offshoring initiative. Offshoring happens

over a number of years and entails significant commitment in resources and capital. The key
to success in offshoring is the quality of transition planning and execution.

An implementation plan should:

a. Reflect management’s vision and strategy for offshoring
b. learly describe the transition methodology, which includes cross-training / knowledge
C
transfer, risk mitigation, business continuity management, and contingency planning
c. Identify HR involvement in terms of onshore staff mobility / redeployment, logistics of
recruiting and training offshore staff, and provisions for early staff departures
d. ormalize the offshoring governance and operating structure (project organization, “end
F
state” operating model, service level agreements, supervisory structure)
e. ap out major milestones (executive “road shows” to communicate the offshoring initiative
M
and its progress, mobilization of offshore teams, parallel run, go-live, …)
f. ccount for dependencies and prerequisites (e.g. alignment with all teams in Finance,
A
coordination with offshoring initiatives of other teams in the firm)
g. etermine the timing of events: evaluate the level of critical mass for synchronizing the shift
D
of tasks offshore, sequence offshoring “waves,” and designate target delivery dates
h. utline other components of the change management program (e.g. evaluate service level,
O
monitor results, identify further offshoring opportunities, …)

To increase the likelihood of a smooth transition offshore, management should concentrate on
specific elements of the implementation plan, as follows:

a. Governance and operating model: Management should clearly define the split of operations

offshore and finalize roles, responsibilities, and reporting lines of all team members. It is
particularly important for management to ensure that accountability for the offshored
processes is clearly defined – whether accountability will remain onshore or get transferred
offshore.

b. Risk mitigation: It is critical that a robust operating framework is in place to set up appropriate

control and risk oversight from a distance. The framework should include:

• A clear organizational structure with well-defined roles and lines of responsibility for the
finance teams

• Effective processes and strong internal control mechanisms to identify, manage / mitigate,
monitor, and escalate the risks to which the teams may be exposed (e.g. staff coverage to
mitigate against execution risk and ensure operational resilience)

• An updated business continuity plan to factor in the offshoring project (i.e. backup
provisions to mitigate business disruption offshore)

c. Communication plan: As with any organizational transformation effort, management needs
to maintain clear, open, and regular communication with staff to ensure that they are kept
14


informed throughout the offshoring process. It is important for management to articulate its
vision and reinforce its commitment to the offshoring initiative. Another component of the
communication strategy is to facilitate discussion with the staff to ease their anxiety and
help retain their focus, energy, and morale.

Example of a High-Level Offshoring Execution Plan

Scoping Organization Transition Preparation Training of Parallel Run / Iterative Go-Live
Coordination Offshore Team Improvement Support

• Mobilize project team • Establish organizational / • Perform • Execute parallel run for • Organize and
operating framework knowledge 1-3 cycles (depending provide onshore
• Determine project for each Finance stream transfer and on level of process go-live support to
organization and (RACI, training, training of new complexity and offshore team
liaison / integration staffing,…) offshore team progress of offshore
with other offshoring team)
programs in the ﬁrm • Document procedures
Operational Tasks / Deliverables

and KPIs of tasks to be • Start benchmarking
• Structure overall project offshored against KPIs
governance framework
w/ risk oversight and • Prepare job descriptions; • Share lessons learned
escalation procedures recruit and interview and engage in iterative
staff for offshore team improvement process
• Update business
continuity plan for • Oversee process
offshoring project shadowing by offshore
team leader (2 cycles)

• Coordinate logistics
(system access offshore)

• Formulate onshore staff
coverage / contingency
measures to ensure
operational resilience

• Prepare training
materials

• Offshore project • Offshore project • Onshore process • Onshore process owner • Onshore process
Contributors

manager manager / stream owner and team owner
• Stream leaders leaders • Offshore team • Offshore team leader • Stream leader
• Onshore ﬁnance • Onshore management leader and staff and staff
management • Process owner • Stream leader • Stream leader
• Process owners • HR / Offshore mgmt
• Offshore team leader

Communication
Message from offshoring project sponsors to Finance staff, stakeholders, regulators,…

HR
Staff redeployment, training development, offshore staffing, and provisions for early staff departures

15


3.4. Beyond Cost Savings:
List of Offshoring Best Practices
A Strategic Approach to
Listed below are some offshoring “best practices” to keep Offshoring
in mind:
Although offshoring can yield
✓ Set up service benchmarks. Before offshoring a process,
average cost savings of 20-30%,
make sure that appropriate service / performance levels these cost reductions may not be
and requirements are defined in qualitative and quan- generated immediately: in Kurt
titative terms. Knowing the service benchmarks for Salmon’s experience, it can take
offshored functions will help in measuring the progress up to 3 years to complete a move
of the offshoring initiative. offshore and costs at inception may
✓ nsure tight security and controls. Firms must dem-
E be higher than expected in quality
onstrate to regulators that they have as much – if not, control, compliance, transition
more – control over their activities as they did before to offshore facilities, demands of
they were offshored. training / redeploying staff.

✓ Maintain standards of compliance and governance.
It is therefore advisable to
Regulators will expect firms to be transparent and to consider other drivers of an offshoring
show active management of risk, both operationally effort beyond cost reduction. The
and contractually. offshoring operating model extends
✓ eward outstanding staff. To deliver ongoing value
R beyond headcount reduction and
from offshore operations, implement performance- labor cost arbitrage by generating
based compensation for offshore staff. Also develop strategic pay-offs for the finance
clear progression paths to reduce turnover and retain function and the financial institution
outstanding employees. as a whole. If offshoring is properly
executed, it can deliver operational
✓ Keep regulators in the loop and seek their guidance,
efficiencies, maximize the finance
particularly since regulatory scrutiny will increase as function’s flexibility to meet
offshoring becomes more widespread. business needs, and free up capacity
to focus on more strategic, value-
added tasks. Moreover, offshoring
yields cost savings that can be plowed back to finance other business opportunities. Finance
departments should therefore look beyond tactical economic arbitrage and make the transition to a
more strategic approach to deliver quality and process improvements, as well as efficiency gains.

Example of an Offshoring Model and Localization Strategy

• ocal management
L
• unctions with extensive
F
interaction with business line
and/or regulators • hared platform for finance
S
• asks and processes requiring
T worldwide to build strong
(i) work to be performed competency center in
during US business hours accounting and finance
AND (ii) specific skill set and • unctions with no or limited
F
experienced personnel direct interaction with business
line and regulators
16


CONCLUSION

The finance department has evolved from being transaction-oriented to becoming increasingly
client-focused. Finance is expected to balance its traditional stewardship role with its capacity as
business partner and strategist; accordingly, it is essential that Finance create and drive value for
the organization while maintaining efficiency, effectiveness, and control in performing its customary
accounting and reporting functions.

Kurt Salmon has explored three ways by which Finance can accomplish the objective of creating
value for the organization:
1. mprove alignment with overall business objectives and become a business partner that
I
helps drive strategy, informs operational business decisions, and delivers value-adding
activities and services.
2. ocus on organization and process to enhance Finance’s operating model through the
F
creation of two teams – one serving client needs and the other, functioning as a “production
factory.”
3. ffshore processes to generate cost savings, increase productivity, and boost operational
O
flexibility and effectiveness.
Against a background of business complexity, regulatory change, and increasing stakeholder
demands, continuous value creation can pose a significant challenge to finance organizations. To
respond to this challenge, it is essential to recruit, develop, and retain high-caliber personnel with
the appropriate skills and business acumen. Staff training and mentorship, a clear definition of the
career path in Finance with incentive-based compensation, and a “top talent” program to nurture
high-achieving employees are all needed to attract and retain talent in the finance organization.

ABOUT KURT SALMON

Kurt Salmon, formed by the merger of Kurt Salmon Associates and Ineum Consulting, is a global
management consultancy of more than 1,600 consultants with offices throughout the world.

Kurt Salmon is focused on helping clients in financial services, retail and consumer products, health
care, and other industries with business growth strategies and operational and financial performance
improvement.

Kurt Salmon’s Global Financial Services practice works with the world’s leading retail, corporate
and investment banks, consumer finance companies, asset managers and investment funds,
insurance companies, payments businesses and financial sector regulators. Our global team brings
deep industry knowledge and experience, strategic insight and operational expertise, and a
passion for delivering measurable bottom line results.

We understand well the forces at work in the financial services industry, such as the need for
improved asset quality and risk management, the imperative of further operational efficiency, the
inter-relationships between core funding and deposit gathering and payment transactions, as well
as the opportunities related to mobile payments. We also bring unique insight into the cross-
industry issues and opportunities facing financial institutions, consumer and retail companies and
health care payors and providers.

Kurt Salmon’s Global Financial Services is unique in its ability to help clients respond to and
capitalize on these industry forces at work, and successfully position themselves for competitive,
operating and financial success.

Kurt Salmon is a company of Management Consulting Group (MMC-London Stock Exchange).

17


WITH ACKNOWLEDGEMENT:

The underlying research, analysis, and perspective for this point of view were developed by the
co-authors, Michelle Leon and Matthieu Mercusot. We would like to extend our appreciation to the
CFOs who have provided their guidance and shared their insight. We would also like to recognize
the valuable contributions of Julie Nicholson and Tricia Viola.

THE AUTHORS:

Matthieu Mercusot is a partner at Kurt Salmon where he leads the Global Financial Services
practice in North America.

Specializing in Capital Markets, Matthieu has 13 years of experience in management consulting and
has led multiple large-scale transformation projects involving organization, process and system
assessment, end-state design, roadmap definition and target implementation for leading financial
services firms.

Matthieu began his career with Deloitte Consulting in Paris. He joined Ineum Consulting (now Kurt
Salmon) in Paris and later moved to New York in 2006 as a senior manager to launch Kurt Salmon’s
Global Financial Services practice in the United States.

Matthieu obtained his five-year post graduate diploma in Management Information Systems from
INT Management. He also holds his master’s degree in finance from Paris IX – Dauphine.

Michelle Leon is a senior manager in Kurt Salmon’s Global Financial Services practice in New York.
She is a Certified Public Accountant with five years of experience in the financial services industry
and six years’ experience in financial services consulting. Michelle has led regulatory compliance,
risk management, finance strategy and process optimization initiatives, helping CFOs implement
the appropriate organizational structure, technology, and processes to drive results.

Prior to joining Kurt Salmon, Michelle worked in BearingPoint’s Global Markets practice. She was
also employed by Goldman Sachs as a senior financial analyst in Regulatory Reporting, and by
PricewaterhouseCoopers as a senior associate in auditing.

Michelle received her Bachelor of Science in Economics from the University of Pennsylvania’s
Wharton School of Business and her masters in business administration from New York University’s
Stern School of Business.

18

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CONTACTS

Kurt Salmon North America Matthieu Mercusot Michelle Leon
650 Fifth Avenue, 30th floor Partner, Senior Manager,
New York, NY 10019 Global Financial Services Global Financial Services
Cell: +1 917 239 8128 Cell: +1 646 725 4407
www.kurtsalmon.com Office: +1 212 521 0221 Office: +1 212 521 0217
Fax: +1 212 319 9476 Fax: +1 212 319 9476
matthieu.mercusot@kurtsalmon.com michelle.leon@kurtsalmon.com

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