Download - Finance cost reduction

Lean But Not Broken

Achieving Sustainable Cost Reduction in Finance

October 2, 2013

1 Deloitte’s Business Class © Deloitte LLP and affiliated entities..

Agenda

Review Cost Management Survey

Role of CFO’s/Finance– Approach– Size of the Opportunity– Challenges and Lessons Learned

Q&A


3rd biennial cost management survey − Overview

We conduct primary research on cost management trends and state of the market through annual cost survey and related conferences, to assess client’s needs, priorities and challenges, and to understand keys to success in cost management programs

Our 2012 survey is an in-depth follow-up to our breakthrough cost-improvement surveys conducted in 2010 and 2008– The 2012 report included 153 senior executives

from publicly-traded or private companies with annual revenues in excess of $1.5 billion

The Survey looks at the latest trends in cost improvement and offers practical and demonstrated insights to help companies achieve and sustain improved financial and business performance


80%

90%

22

21

19

19

24%

39%

73%

76%

76%

36

20

23

6

25%

58%

59%

Companies continue to operate in a “New Normal”: reducing costs while maintaining revenue growth expectations

External Risks(% Reponses)

Strategic Priorities(Avg. 100 point allocation)

Cost Mgmt. Outlook(% Responses)

Survey responses 2010 vs. 2012

Macroeconomic Factors

Political/Regulatory

Commodity Prices

Balance Sheet Mgmt.

Product Profitability

Revenue Growth

Likelihood of cost management actions in the next 24 months

2010 2012

Growth

Growth expectations(% Reponses)

Cost Reduction

Source: Deloitte 2012 Cost Survey Preliminary Results


Targets for cost reduction programs have tempered but failure rates of cost programs have increased

Annual cost reduction targets

37%

36%

19%

52%

35%

11%

0% to less than 10%

10% to less than 20%

Greater than 20%

29%

35%

36%

19%

33%

48%

Exceeded Goals

Met goals

Did not meet goals

Cost savings realization 2010 2012

2010 2012


Focus of cost programs has shifted to a current focus on “save to grow” compared to “save to survive” post-recession

Drivers of cost management2010 2012

52%

42%

33%

33%

22%

17%

3%

65%

24%

12%

54%

35%

35%

5%

To gain competitive advantage over peer group

Significant reduction in consumer demand

Decrease in liquidity and tighter credit

Required investment in growth areas

Unfavorable cost position relative to peer group

Changed regulatory structure

Other

2

4

Cost management insights on drivers to cost management programs: Gaining competitive advantage over peer group remains a major driver reflecting a “save to survive” mentalityReduction of programs from liquidity and consumer demand decrease focus by 20% on averageRe-investment in growth areas has seen a major jump of 21% over 2010Complex regulatory environment is now a significant driver for cost management increasing by 18% over 2010

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1

3


But failure rates of cost programs have increased showing ineffective scope, approach and/or implementation challenges of cost programsInsights from Deloitte cost surveys over the last six years

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

2007 Q1

2007 Q2

2007 Q3

2007 Q4

2008 Q1

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

2011 Q3

2011 Q4

2012 Q1

2012 Q2

% GDP Change % Unemployment

Pre-recession economic climate with a few signs of economic

crisis

Financial crises resulted in tighter credit and a reduction in

overall demand

Recovery has been slow and there is prolonged uncertainty in

the business climate

2008 2010 2012

Typical cost action from survey results

Companies focused on continuous improvement programs before the

downturn

Companies focused on cost programs aimed at low hanging fruit

to recover from reduction inconsumer demand

Companies still focused on tactical changes mostly by targeting processes and organization streamlining

Reported costprogram failure rate 17% 34% 47%

Actual response needed Broad restructuring and liquidity improvements

Structural costs and business modelchanges to gain efficiency

Structural cost and business model changes to fuel growth

Deloitte Cost Management Survey


What is the CFO’s/Finance role in cost reduction?

Increasingly the CFO is expected to lead large scale cost reduction programmes to which finance must make a proportionate contribution whilst maintaining finance as a critical control function

Leading the charge

The CFO is increasingly at the heart of qualifying and measuring the results of Enterprise wide cost reduction programmes, providing financial leadership in determining strategic business direction vital to future performance (Strategist)

Using finance acumen and discipline, the CFO can drive that same discipline across multiple business functions to promote the behaviours required to successfully execute against cost reduction objectives (Catalyst)

Finance is no longer ring fenced from cost

reduction targets. Despite the wave of regulation within the industry, Finance,

like other functions is expected to do more

for less

By being a contributor to cost reduction efforts,

finance leadership build credibility with stakeholders across

the business, facilitating their role

as strategist and catalyst

Setting A Good Example: Lean But Not Broken

Scrutiny over Finance’s value for money has never been more intense with CFOs looking to deliver higher quality services through increasingly low cost business models that balance capability, cost and service to fulfill finance’s core responsibilities (Operator)

Finance functions are taking on increasingly high percentile cost challenges, requiring a lean organisation, yet one that does not jeopardise the quality and integrity of statutory, regulatory and other stakeholder reporting (Steward)


How is successful, sustainable cost reduction delivered?

To help meet the challenges of cost reduction in finance, there are four principal types of initiatives that span the ambition and level of sustainability of delivering finance cost reduction Operating Model & Organisation Alignment: Highest benefit and sustainability with corresponding complexity to implement

Infrastructure Rationalisation: Great efficiency benefits derived from streamlining finance’s main and supporting systems

Business Process Optimisation: Streamlining the cost base by doing what you do efficiently and effectively

External Spend Reduction & Demand Management: Often one-off, low complexity to implement with limited sustainability

Initiatives adopted by Finance to reduce cost

Incr

easi

ng b

enef

it &

sus

tain

abili

ty

Increasing implementation time & cost

Budgetary Quick Wins

Streamlining theCost Base

Creating a Low Cost Operating Model

Extend outsourcing/off-shoring arrangements

Establish/extend use of shared service centres

Review role & scope of Finance

Consolidate functions

De-layer organisation

Increase spans of control

Close all non-core vacancies and absorb work

Review finance project portfolio

Reduce the number of temps/contractors

Rationalise and cleanse source systems and data

Improve utilisation and/or productivity

Implement a common financial back-office

Redesign processes to increase capacity/reduce cycle time

Transfer non-core Finance activities

Standardise and automate finance processes

Eliminate waste and low value activities

Introduce/extend roll-out of self-service models

Introduce cross-charging for servicesImprove governance and control effectiveness

Implement ERP enhancements to eliminate manual workarounds

Operating Model & Organisation Alignment

Infrastructure Rationalisation

Business Process Optimisation

External Spend Reduction & Demand Management

Streamline reporting infrastructure

Initiatives key

Approaches


How are finance cost reduction approaches applied?

Cost reduction initiatives align well to various approaches, each of which spans the scale of sustainability and ease of implementation based on a number of key considerations

Focus area Key considerations

Budgetary quick wins

Represents a relatively low cost, low complexity implementation

Should be delivered through good business as usual budgetary discipline

Sustainability of cost impacts is usually poor as costs tend to creep back in to the organisation (cancelled vacancies are re-opened in next forecasting year, contractors re-engaged)

Inter-relationship of costs is often an issue – for example, planning to reduce travel expense and telephony expense in the same period

Suspending or cancelling change programmes as a result of reviewing the finance project portfolio often has the potential to put core finance requirements at risk (i.e. meeting statutory and regulatory requirements)

Streamlining the cost base

Requires a focussed but moderate investment to deliver desired outcomes

Examines the cost base by business unit, function and processes

Achieved primarily through levers such as structural consolidation (centralisation and rationalisation of similar functions across the organisation) and end-to-end reengineering (generation of savings through de-duplication and process improvement, removing waste and surplus headcount)

Creating a low cost operating model

Operating model changes offer the greatest and most sustainable cost reduction benefits

Represents a significant investment in reducing the cost base and presents the greatest complexity to implement

Requires management to develop a strategic top-down view of cost reduction opportunities based on organisational priorities

Reducing the cost base through structural changes requires careful management of risk and resistance in order for the programme to succeed


What does a low cost finance function look like?

To achieve high percentile cost savings, lean finance functions clearly delineate between value and efficiency drivers

Value based segmentation

Insight, value, proximity to business

Control, efficiency, low cost

High Value Activities(Business Partner)

High Value Production(MI)

Transaction Processing(Ops, Reporting)

Focu

s

Non – Core Finance

Key questions to ask of the finance function• Are core finance activities separated from non-core finance activities (e.g. Strategy, Risk, Legal etc.)?• Is there a clear 1st vs 2nd line of support , transferring activity to the front line functions where appropriate?• Is there differentiation of the Finance Processing Group (operations and reporting) and CFO and specialist functions (e.g Partnering, Policy)?• Are processing activities leveraging low cost shared service options ?• Do transaction processing groups benefit from strong leadership, reducing the likelihood of failure? • Can Centres of Excellence (CoEs) be employed to deliver knowledge based processes more efficiently and effectively?


How big is the opportunity?

It is imperative to match the approach and application of cost reduction levers to the target level of ambition around desired savings and timeframesWhilst cost management may be achievable through minimal business impact, cost reduction presents the most sustainable and impactful means of reducing finance’s cost base.

Magnitude of opportunity

How it is delivered

Impact on the business

Who gets involved

What it means to the CFO

How long does it take

How is it measured

Sustainability

Cost management

Typically 5-10%

Through budgetary discipline and management

Minimal, often focusing on belt tightening (non staff) or management of vacancies and contingent workers

Usually directed by the CFO and driven by Functional Directors and Heads of Finance

Depends on the visibility outside Finance. Can be a ‘housekeeping exercise’ or can be driven by CEO agenda

Two – three months focussed effort, cost impacts are often nearly immediate

Usually directly linked to the budget via quarterly forecasting and cost reporting. If project driven, tends to be through project benefits tracking

Short term cost savings can eventually leak away as they are often achieved through reducing costs from all parts of the businesses resulting in unsustainable savings

Cost reduction

Typically 15-40% +

Through a Program (e.g. Finance Transformation, Finance Integration)

Significant, usually resulting in one or more rounds of redundancies and involving changes to the operating model

Senior Executives, HR and Union representatives, Staff Consultation forums, Functional Directors and Heads of Finance, Group/Divisional Directors/Heads

Significant personal credibility at stake. Often this comes as part of a declaration of intent to the market

Two – three months of design and planning, execution and implementation depend on scale of change but typically in the range of 6 – 18 months to achieve full run rate savings

Either as a set of run-rate or annualized savings over X years. Tracked both within the annual budget, corporate plan and separately as part of program lifecycle reporting

Through addressing the spend culture, cost reductions can be achieved on a long term basis


What are the challenges in delivering finance cost reduction?

Cost reduction programs face several significant barriers to success that bear further consideration before embarking on a finance cost reduction

Buy-in

If senior and operational staff do not engage with the cost reduction agenda, the program’s goals could be obstructed

Lead times

Underestimating lead times can lead to savings not being realised during the intended time period

Dependencies

The absence of a robust critical path can result in contradictory plans, rework and delays to benefits realization

Accountability

If no-one is clearly accountable for delivery, the tough decisions required to realise savings and make them sustainable can be left unaddressed

Accurate valuations

If savings are over-valued, stakeholders can stop looking to identify further savings prematurely, and prioritise the wrong initiatives

Double counting

Counting savings for both business units and functions can set false expectations regarding feasible savings targets

Defined benefits

Where goals are not clearly defined, decision-making is not made in the context of a specific, desired outcome and the cost reduction exercise lacks direction

Leakage

If savings are not realised, the cost reduction exercise can become a net cost for the business

Specialist staff

The scope for cost reduction is narrowed by the existence of “sacred cows”

Barriers to cost reduction success


What is the Deloitte approach to cost reduction?

The Deloitte approach is a five stage end-to-end methodology which has been developed and refined on a global basis over several years through engagement with many clients

Cost Baseline Addressable spend analysis

Assess size of opportunity Validate strategy Formulate & analyse

financial baseline Draw up current & ‘could be’

operating models Undertake opportunity

analysis

Setting up a framework forcost reduction Prioritise opportunities Align and manage

stakeholders Structure the cost reduction

programme Report progress and track

benefits

Mobilize & Deliver Mobilise change teams Update budgets (BaU) Implement initiativesControl & Sustain Review & track progress Manage benefits leakage Revisit Opportunity List Revise Cost

Model/Benefits Tracker

Validate & Design cost savings Assess business structure Perform ‘Deep Dive’ analysis Formulate business cases Perform detailed validation of

initiatives Package initiatives for

delivery

Top Down Target Assign key sponsors Validate strategy Perform functional/industry

benchmarking

Act

iviti

esD

eliv

erab

les Case for change

High level targets by functional area

Initial Opportunity List Revised view of targets by

functional area High Level Cost Model

Detailed Cost Savings Model Supporting organisation

design and associated budgets

Finalised Opportunity List

Initiative lifecycle flow Initiative and release tracker Stakeholder reports Benefits dashboard Benefits map

Top down target Baseline analysis/confirmation

Opportunity identification &

commitment

Quantification & re-affirmation of

commitment

Tracking, monitoring & reporting

Budgeting Cycle and Monthly/Quarterly Reporting

Wider Program Reporting Cycle

Diagnostic Validate and design Mobilize and deliverScope and define


What is the Deloitte capability for finance cost reduction?

Our people and experienceThe breadth of our practice enables us to apply a range of lenses (customer, value chain, process, function) to provide a thorough understanding of the drivers of cost and to assist in the identification of opportunities.Our people

Global reach Canada focus

Finance & Consulting: 1500 people

Process

Target Operating

Model (Functional

Design)

Systems (Automation, Processes)

Change(People and

HR)

Audit Advisory(Financial Reporting)

Tax, Treasury & Specialist Services

(Specialist Function)

ERS (Control/Function)

Support

Recognised thought leadership Ranked No. 1 in Finance Transformation,

Operations Excellence by Gartner and Kennedy Experienced pool of subject matter experts

across competencies who have participated in cost reduction programmes within Energy and Resources industry Deep subject matter expertise to validate

existing initiatives and identify further opportunities

Outcome based approach Structured, proven methodology driven by

outcomes and shared risk of not delivering required targets Independent, objective approach − we have no

predisposition to IT, hardware, software, or business process outsourcing Effective and continuous change management

analysis helps deal with areas of passive/active resistance

Depth of capability High degree of business led intuition to deliver

cost reduction while maintaining the ability for finance to deliver its core function and fiduciary duties Cross service capabilities with experts in tax,

actuarial services and audit Provision of assistance to understand

implications of entity rationalisation and entity disposal

World map – Our locations


What is the Deloitte supporting capability for cost reduction?

We have developed a comprehensive set of related methodologies, tools and accelerators that enable us to rapidly deploy our cost reduction approach.

Lean Six Sigma

Lean Six Sigma focuses on the thorough elimination of waste throughout the value chain and is key tool for delivering finance process change

Reducing cost in a way that does not break the finance function is imperative and our specialist actuarial and risk capability helps to be sure cost reduction is sustainable

Actuarial & Risk

Target Operating ModelDeep experience in target operating model design enables the build of a finance function consistent with low cost principles

Finance Systems Operating model depicts an integrated view of the relationship between data capture, processing, analysis and information

Finance Systems

Technology e.g. Apps, Data, Hardware

Processes e.g. Money In

Organisation e.g. Contact Centres

Physical sites e.g. Buchanan Street

Customer segments e.g. HNW

Channels e.g. D2C

Products e.g. Mortgages

Information e.g. Customer, MI

People e.g. FTEs, Roles

Modeling

Aligning the organisation design to the target operating model is key to ensure cost remains out of the function and HR impacts are effectively managed

Organisation Design

Cost modelling capability is critical throughout the cost reduction process, particularly in establishing the baseline, the impact of cost reduction actions and tracking actuals


Contact us

If you would like to discuss any of the issues raised in this short piece, please do not hesitate to get in touch

Marc JoinerPartner

Randy WattPartner

Finance Transformation LeaderWestern [email protected]

403-267-0516

Partner – Finance TransformationWestern Canada

[email protected]

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