Transforming the Finance Function

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• Transforming the Finance Function
• Finance Executive International
• Committee on Finance Information Technology
• December 8, 2005

PwC
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Meeting Agenda

1. Introductions and Context 5 minutes
2. Optimizing Shared Services 25 minutes
3. Plan to Perform Budget and Performance
   Management 25 minutes
4. Closing Remarks and Comments 5 minutes

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Finance Vision Evolution
Financial Analysis
Lower total cost of finance
Transaction Processing / Analysis
Business Analysis
Improve Governance Business Performance
Financial Analysis
Transaction Processing / Analysis
FA BPO
Future State
Current State
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Finance Vision Evolution
Companies following this course are defining
their paths as follows
Leading Companies
Traditional Finance Organizations
Leadership and Culture

• Business advisors providing insight on strategic
  and operational issues
• Source of business leaders Cross-pollination of
  finance and operations career modeling

• Reaction to business needs, trends, and inquiries
  historical viewpoint
• Single-track career focus
• A support executive to the business

Talent Development

• Competency framework and profiles for different
  job groups/experience
• Clear and attractive career development
• High potential talent showcased for development
  opportunities outside Finance
• Finance Academy to coordinate all development
  activity

• High caliber talent identified and hoarded
• Limited career planning
• Inconsistent coaching and career development
  (varies by supervisor)
• Unclear competencies/skills required for success

Transparency

• Broad disclosure of information beyond the
  financial statements (thought-provoking)
• Living a culture of accountability

• Reporting on what stakeholders want, rather than
  what they need
• Poorly-aligned responsibility and accountability

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Finance Vision Evolution (continued)
Companies following this course are defining
their paths as follows
Leading Companies
Traditional Finance Organizations
Transactional Processing

• Focus on analysis and problem resolution
• Standardized, globally adopted processes and
  policy
• Cost-effective and scalable processes, policies,
  and tools (e.g., shared services model)
• Management of outsourced transactional processing
• Exception-handling approach

• Focus on transactional execution
• Emphasis on data gathering and creating reports
• Disparate, locally-driven processes
• Lack of visibility into process controls
• Multi-touch approach

Simplification

• Major efforts to consolidate information from
  multiple systems and processes
• Fire fighting impedes focus on large scale
  improvement

• Structured approach to improvement
  standardization and rationalization of systems
  and processes
• Process rigor
• Wide adoption of corporate policy

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• Transforming the Finance Function
• Optimizing Shared Services
• Presented by Josh Rogowsky

PwC
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Shared Services vs. BPO Strategy
Where is your organization on this grid? What
can you leverage?
Maximum
GLOBAL REGIONAL LOCAL
Can benefits of standardization across businesses
and geography be achieved?
What improvements can be made by implementing
local best practice?
Is outsourcing feasible, beneficial and outweighs
additional risk?
Level of Benefit
Can shared service economies of scale be captured?
Minimum
Shared Services
Simplification
Standardization
Outsourcing
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Insource vs. Outsource
There may be opportunities for outsourcing
specific activities or end to end processes.
Some questions to consider .

• Are there external suppliers of this service?In
  all locations?
• Can we do it faster, better, cheaper in house?
• Do we have adequate capital investment funding to
  deliver service in an SSC?
• Can we deliver continuous improvement programs
  across all functions?
• Do we have the critical mass to implement best
  practices and technology to achieve world class
  performance?
• Do we have access to the specialized resources
  necessary to achieve best practice performance?
• Can we manage service levels internally?
• Can we manage third party relationships?
• How quickly do we want to realize benefits?
• Is this culturally acceptable?
• Do the additional benefits outweigh the increased
  risk?

High
Insource
Risk
Outsource
Low
High
Low
Strategic Importance
77 of Fortune 500 companies currently have
efforts underway to outsource some aspect of
their business support services.
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Two Models To Consider

• Centralize-Standardize-Outsource
• Centralize and standardize business processes
  prior to outsourcing
• Realize efficiency gains and cost savings before
  outsourcing
• Better manage outsourcing vendor selection and
  alignment of expectations
• Transform-Operate-Transfer
• Use of vendors to perform transformation
• Avoids costly and time consuming process redesign
• Easier to do externally

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Key Design Principles

• Run like a business customer focused
• Mainly newly recruited staff - no bad habits
  and low seniority
• Flat organization reflecting minimal management
  layers
• Organized around teams evolving to self-direction
• General management leadership skills rather than
  functional
• One leader for all shared services
• Special reward and recognition programs to drive
  behaviors
• Service Level Agreement maintained between
  provider and customer

However, Shared Service Centres have very
different characteristics from a normal
Support function
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Seven Challenging Questions

• How do we make the case for Shared Services?
• What processes should be included? What criteria
  should be used?
• Where should the Shared Service centers be
  located?
• How do we manage the customer/service provider
  relationship and ensure we deliver the
  appropriate service levels?
• What organizational model should we adopt and
  why?
• What technology do we need to support a Shared
  Services organization?
• What is the best implementation approach/sequence

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The Key Components Of Shared Service
Implementations
Service Level Agreements (SLAs) define the
relationship between the service providers and
users.

• They typically comprise of
• Definition of services offered and the Shared
  Services Centre responsibilities.
• Definition of Business Unit responsibilities e.g.
  timetable and quality of source data .
• Description of minimum service levels, response
  time, quality measures and expected performance
  levels.
• Definition of service level controls, reporting
  and governance.
• Define the disputes/issue resolution process for
  the SSC and Business Units.
• Establish the procedures to resolve service
  failures.
• Define the charge back mechanism

Service Level Agreements evolve over time - often
starting as simple informal agreements that then
migrate to a more formal arrangement after the
services have been bedded in
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The real story behind outsourcing
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The Rationale for Outsourcing is at Odds with
Market Experience
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Have You Brought Any Outsourced Services Back
In-House?
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Risks Cited
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Problems Faced by Participants with Negative
Experiences
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The Key Components Of Shared Service
Implementations
The Operating Model will also rely on the
specific customer requirements and the skills/
technology required to support the delivery of
the service
Tier 3 (Consultant)

• Forecasting
• Policy/program design

• Special studies
• Critical incident support

An example of a Tiered Service Delivery
model Note the use of self service for routine
enquiry's
COE
Tier 2 (Specialist)

• Interpretation and problem solving
• Program delivery

• Advice counsel

Tier 1 (Service Representative)

• Predefined answers
• Basic to complex inquiries

• Full range of service support
• Transaction processing

Service Center
Tier 0 (Self-service)

• Predefined answers
• Basic to complex inquiries

• Transaction processing

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• Transforming the Finance Function
• Plan to Perform Budget and Performance
  Management

PwC
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Leading Organizations Are Increasingly
Questioning The Value Of The Traditional Annual
Budget Process

• The budget is the bane of corporate America
• Jack Welch, Ex CEO General Electric
• Budgeting is an unnecessary evil
• Dr Jan Wallander, Honorary President Svenska
  Handelsbanken
• The budget is a tool of repression rather than
  innovation
• Bob Lutz, Ex CEO Chrysler
• The process of management is not about
  administering fixed budgets, it is about the
  dynamic allocation of resources"
• Lord Browne, CEO BP

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Why Is The Annual Budget No Longer Suitable For
Todays Business Environment ?
Top down targets

• The bottom up annual budget process is too slow
  and too infrequent to provide actionable
  information
• Annual performance contracts hard wired to budget
  targets, make it difficult to respond quickly
• Targets based on a single financial year may
  encourage short term thinking
• Most annual budget processes encourage and reward
  gaming  
• Last year budgeting encourages unnecessary
  spend ("Use it or lose it")
•  Stretch numbers used for target setting are
  usually unsuitable for resource planning
  purposes 
• Overly tight control from the centre may stifle
  innovation and reduce agility at a local level

Negotiation
Bottom Up Forecasts
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Is It Possible To Manage Without Budgets
Entirely?

• In the 70s, Swedish bank Svenska Handelsbanken
  abandoned its annual budget completely, choosing
  to rely on KPIs and rolling forecasts.
• A number of other companies in Scandinavia and
  other parts of Europe followed suit to form the
  much publicised Beyond Budgets movement.
• For the majority of organizations, eliminating
  budgets entirely may not be realistic, as the
  annual financial cycle is so deeply embedded in
  their culture and processes.
• Many large corporations are now applying lessons
  learned from these pioneers to create a lighter,
  less arduous annual budget and to place greater
  emphasis on rolling forecasts, KPIs and trend
  analysis as management tools.

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Increasingly Organizations Are Moving Towards A
Lighter More Continuous Process Based On Rolling
Forecasts
Top down targets
Continuous Dialogue
Bottom Up Forecasts
Bottom Up Forecasts
Bottom Up Forecasts

• In this environment, budgets and forecasts become
  part of an ongoing management dialog, rather than
  an annual negotiation

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Plan To Perform The Strategic Management Cycle
Manage track / Market Expectations
Opportunity To Action
Strategy to Execution
Evaluate Options
Strategic Planning
Scenario Modelling
Set Strategic Goals
Publish Strategy
Forecasting
Resource Allocation
Operational Management
What If Analysis
Target setting
Variance Analysis
Performance Monitoring
(Compensation/ Incentives)
(Record to report)
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As Organizations Move To A Lighter Budget, Or
Abandon It Completely, New Tools Are Emerging To
Take Its Place

• Operationalizing Strategy Strategy maps,
  Balanced Scorecards, KPIs
• Target Setting Benchmarks and relative
  targets,
• Controlling costs Exception reporting, rolling
  forecasts, war chests
• Performance Mgmt Rolling Forecasts,
  Dashboards, KPIs
• Resource planning Trends, Rolling
  Forecasts, Option trees
• Compensation Balanced Scorecards and
  qualitative evaluations
• Investor Communications Value reporting based
  on ratios and KPIs

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Systems Are A Key Enabler In Achieving A Truly
Integrated Performance Management Environment
Forecast/Budget Tools
Analysis Tools
Dashboards
Forecast/Budgeting Workflow
Common Data Structures

• Vendors such as Hyperion, Cognos, GEAC and
  OutlookSoft all currently provide Corporate
  Performance Management Solutions (CPM), with
  varying degrees of integration.
• Developments in Web Services, SOA and XBRL are
  likely to transform this space in the near future.

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Systems Are Important, But They Are Only One
Factor In Designing An Effective Performance
Management Environment
To be successful, you must develop an approach,
which is fully aligned to the culture and
structure of your organisation.
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Design Principles

• Clearly articulated strategic goals linked to
  KPIs
• Active support from top management, to reinforce
  the right behaviors
• Reliable and accurate data and effective business
  intelligence systems
• A forecasting system which is tightly integrated
  with management reporting tools
• Incentives that encourage the right decision,
  not just meeting the annual financial targets

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Contacts

• Paul Gaynor, Partner
• paul.m.gaynor_at_us.pwc.com
• [phone]
• Josh Rogowsky, Director
• joshua.d.rogowsky_at_us.pwc.com
• [phone]