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Finance Transformation For the 21 st Century July 2006 Sydney, Australia

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Page 1: Finance Transformation

Finance TransformationFor the 21st Century

July 2006Sydney, Australia

Page 2: Finance Transformation

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Finance Reform

Finance Departments’ are successfully helping to steer their organisation through a turbulent business environment

Often there is little time for departments to focus on their own performance and development

Ernst & Young can assist Finance Department’s improve their effectiveness and efficiency by sharing our

Leadership

Methodologies

Experience

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Finance Reform

0

25

50

75

100

Past Future

Total Cost of Finance

Enterprise Decision SupportManage Risk & Financial Capital; Improve ControlTransaction Processing, Accounting & Reporting

Improving effectiveness and efficiency

Reduce total cost

Reduce transaction processing to reporting cost

Invest in Business Partnering & Enterprise Decision Support

Effectiveness & Efficiency Impact of Financial

Reform

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Finance Functions

Strategy and

Planning

Reporting and

Analysis

Stewardship and

Compliance

Transaction Processing

Strategy, mergers and acquisitions, business and financial structure, operations planning, budgeting, VBM

Board, Statutory and management reporting, forecasting, PI, business case and performance analysis, ABC/ABM

Tax, IFRS, ASX, external and internal audit, approvals procedures, internal controls, risk management

General accounting, asset register, payroll, accounts payable and receivable

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Path to Functional Excellence

People

Processes

Information Systems

Current State Best Practice

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GovernanceTransactional

Centralised Shared Services

Simple Standard

Vanilla ERP

Generalists Lower Capability

STRATEGY

STRUCTURE

PROCESS

SYSTEMS

PEOPLE

Decision Making Value-Add

Decentralise COE

Innovative Flexible

Additional Tools

Specialists Higher Capability

Getting the Strategy Answer the Questions?

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Traditional Finance Function

In your organisation… Is the operations plan aligned with strategy? Is budgeting an onerous process? Do Board, Statutory and management reports and the ITR logically flow into each other? Does your business know; customer profitability; whole of life asset costs; process costs? Does Finance analyse all significant business decisions; approve all operating and

capital projects? Do reports contain leading and lagging, financial and non-financial metrics? Do your systems do most of the work for monthly reporting? Are transaction approval processes duplicated; are they effective? Does your department cost more than it should?

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Path to Functional Excellence

Leadership Understands & committed to

organisation’s strategic context

Apolitical & diplomatic

Initiates change & continuous improvement

Committed to helping staff realise their full potential

People

Processes

Information Systems

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Path to Functional Excellence

Culture & Attitude Purpose is to serve the

organisation

Understand and interested in the business

Maintain close relationships across the organisation

Equal partner in developing solutions to business issues

People

Processes

Information Systems

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Path to Functional Excellence

Capability Appropriate technical skills

Capacity and willingness to learn

Comfortable working outside traditional accounting boundaries

Continuous learning / skills maintenance

People

Processes

Information Systems

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Processes Support the business; not a

bureaucracy

In control

Simplified, e.g. no duplication of effort

Leverage interdependencies between processes

Finance has authority to enforce

Selective use of Shared Services & Outsourcing

People

Processes

Information Systems

Building Blocks of Functional Excellence

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Path to Functional Excellence

Information System Data analysis tools usable by

non-finance staff

Data warehouse for financial and non-financial data

Maximum automation of routine processes

Reliable interfaces

People

Processes

Information Systems

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Our Approach to Finance Reform

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Our Approach to Finance Reform

Finance Reform is the term we use for engagements aimed at improving the performance of an organisation’s Finance Department.

Reform consists of many variations, including:

Formulating the department’s strategy

Reviewing IT architecture

Formalising governance structure

Full process re-design & organisation restructure

Shared Services Centre or Outsourcing implementation

We offer our:

Leadership

Methodologies

Experience

We are not associated with any business solution or software vendors.

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Our Approach to Financial Reform

Our approach of combining strategy with shop-floor process improvement has proven to be the most successful approach to delivering sustainable improvement. It harnesses the wealth of knowledge that exists on the shop-floor and ensures the right changes are made.

Top down direction setting

Cross-functional process redesign

Bottom-up problem solving

People

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People

Processes

Information Systems

Finance Strategy formulation

Executive mentoring

Culture assessment

Organisational restructure

Change management

Staff capability reviews

Job design

Technical training

Benchmarking

Functional review

Process re-design

Governance framework

IT Advisory

Our Approach to Financial Reform

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Project Implementation

Our approach to each assignment is tailored to meet client needs.

Key features of our project implementation approach are:

Reliance on client teams

Small, highly skilled and experienced Ernst & Young team

Provision of project management, progress reports, steering committee attendance & project documentation

Discrete phases

Full and abridged implementation options

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Our Leadership

We provide two-directional leadership; top-down & bottom-up

Top-Down Work with senior management to

determine Strategy Culture Structure

Appreciation of organisational constraints

Management acceptance of change

Prevent formalisation of bad practice

Identify & address obstacles

Bottom-Up Harness shop-floor knowledge Guide client team through change

process Introduce best practice concepts Train client team in process

improvement techniques

“Raise the bar” and set the pace

Assist client-team champion the cause and address obstacles

At times, an extra pair of hands Inculcate sustainable change

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Our Methodologies – Finance Strategy

Executive interviews & short workshops

Confirm commitment to reform initiative

Ensure Finance Department’s strategy is aligned with the organisation’s

Determine where processes and functions belong in the organisation

Secure cross-functional support for process and structural improvements

Assign accountability for benefits realisation

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Our Methodologies – Governance Framework

Approvals & Compliance

Planning & Control

Reporting

Abi

lity

to im

pact

fu

ture

Freedom of

design

Purpose

Mitigate risk of malfeasance

Avoid unplanned contingent liabilities

Ensure regulatory compliance

Financial stewardship to ensure resources are utilised in an acceptable manner

Assist management maximise return on assets

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Methodologies – Process Re-design

Review

Re-design

Staff Interviews

High-Level

Mapping

Cost Analysis

Org. Chart

Review

Bench-marking

Systems Review

Detailed Process Mapping

Work Distribution Analysis

Detailed Process

Re-design

Benefits Analysis

Project Briefs

Org. Structure Re-design

Change Managemen

t Plan

New Process & Structure Implementation

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Executive Mentoring

One of our Partners or Senior Managers develop an enduring one-on-one relationship with a client Executive

We are there to listen, test ideas and offer impartial advice

Useful for discussing general issues, contemplating a major initiative and personal development

Staff Capability Review

Assess your needs and determine skills and personal attributes specific roles require

Use structured interviews, observations and peer reviews

Form objective conclusions about an individual’s capabilities and offer suggestions where they may best fit in the organisation

Our Methodologies – People

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Our Methodologies - Organisation

Change Management

Three layers of change:

Strategic – communicate department’s vision across the organisation

Operational – imbedding new processes, systems and organisation structures, transitioning people

Individual – align individual and team behaviours and performance

Cultural Assessment

Make an assessment using recognised assessment tools

Identify gap between existing and desired cultures

Develop program to shift values, beliefs and behaviours in desired direction

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Organisation Structure Review structure,

including finance work performed in other parts of the organisation

Develop new structure, based on- Finance’s strategy

& cultural objectives

- Leading practice- Process

improvements

Value add work

Transactional work

Specialist finance services

CFO80s

90s

00s

Our Methodologies - Organisation

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Our Methodologies – IT Advisory

Financials

Human Resource

s

Marketing Mgmt

Inventory Mgmt

Purchasing Mgmt

Quality Mgmt

Sales Mgmt

Product Technolo

gyStructuredQuestionnaires

StructuredInterviews

StructuredWorkshops

1. Select systems for review

2. Assess against best practice

3. Deliver recommendations

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Our Methodologies - Benchmarking

Ernst & Young has a specialised Benchmarking service line and leads the Western Australian and South Australian Benchmarking Consortiums

Two stage benchmarking exercise in Finance Reforms:

1. Quantitative analysis using standard data template to compare client performance with relevant peer group

2. Qualitative analysis using structured interviews to assess client practice with best practice

We use our global network to regularly update our quantitative and qualitative templates

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Our Experience

In recent years no or only margin savings have been realised from improvement

initiatives, common errors include:

Failure to address what actually drives the work

Failure to identify value destroying activities

Formalised or centralised poorly performing processes

Alienated the business

Sole reliance on automation

Ignored culture

Relied on Shared Services or Outsourcing as an end result

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Our Experience

Referees

Denise Dawson

Chief Financial Officer

Sydney Water Corporation

Chris Hern

General Manager – Finance & Budgeting

Telstra Corporation

Megan Enders

General Manager

Rio Tinto Shared Business Services

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Appendix:Leading Practice - Processes

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Budgeting and Forecasting – Leading Practice Features

Process Features

System Features

Strategic plan drives operational budgets, targets, milestones and timings

Provides broad economic and market trends

Includes business linked key performance indicators

Action orientated with achievable targets

Detailed budget completed in less than 6 weeks

Budgets focused on business needs eg PBB, zero based

Budgeting is extension of the business planning and long term forecasting processes

Target performance related to pay award

Budget review is focused on the strategic objectives and KPI's

Budgets are consolidated at level appropriate to business needs eg process, function, BU

People skill set enables global budget changes to be administered efficiently

Final budget communicated to budget holders quickly, before start of year

Operational and process functions are responsible for forecasts

Rolling forecasts linked to the planning and budgeting cycle

Forecasting process facilities action based planning

On-line budget guidelines and indicators set centrally

Integrated systems used to aid budget process

Software provides ability to test different budget scenarios

Flexible budget phasing facilities

Facility to hold alternative budget scenarios

Coherent budgeting systems eliminate rekeying of data

System allows automatic calculation of KPI's and holds non financial data

Data can be downloaded to final budget documents preparation or to EIS

Systems provides sensitivity analysis of data

Software supports on-line forecasting by operational management

Flexibility to allow rolling updates of forecast data

Forecasts linked to KPI's budgets and planning

System provides comprehensive on line variance reporting

Reporting includes on-line graphics and non financial data where appropriate

Set budget guidelines& targets

Prepare budgetsReview and

consolidate budgetsPrepare forecasts

Monitor and analyseperformance

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Formal credit checks applied to all new customers within 24 hours using credit bureau

Monitor credit status/terms on regular basis

Customer account managers provided with up to date credit status

Treasury policy set on late and prompt payments

Authority levels clearly defined Credit policies defined and agreed Terms and conditions agreed with

customers

Consolidated periodic invoicing for high frequency shipments

Bank remittance notices issued with sales invoices to facilitate reconciliation

Self billing invoices by high volume customers

Consider outsourcing regular invoice/payment eg utilities

Regular review of invoice queries and credit notes

Reconciliation of AR balances to GL control accounts on a regular basis

Bundle packages and portfolio. Consolidated invoices/statements easier for collection

Credit insurance arrangements evaluated periodically

Customer account managers responsible for sales and cash collection

Constant monitoring of debtor days, daily collection, ageing of debt

Customer contact records maintained

Outsource cash collection where appropriate

Determine and report on credit targets

Monitor overdue debts and take action within agreed policy

Establish credit levels

Issue sales order Issue invoiceMonitor credit/ collect

cash

System Features Consolidated credit position

for group of customers System provides on-line

customer payment history and terms

Use of workflow software to monitor process and help resolve queries

Standard credit control reports

Common SOP and AR customer database

Invoices automatically generated from SOP and shipment data

Self billing invoices automatically matched to customer orders

Multi currency invoices Automatic commitment and

accruals Automatic reconciliation

facilities between integrated SOP AR and GL systems

Sales orders prepared using pricing database with pricing profiles for products and customers

No order processed without valid customer PO reference

Delivery note acts as invoice for low-frequency shippings

SOP linked to debtors ledger to ensure customer credit limits not exceeded

Sales documents sent via EDI for all major customers

Integrated order & billing systems available on line & hard copy

Payments received electronically where possible

Automatic matching of payments to invoices

On-line diary facility to monitor calls Automatic flagging and reporting of

high risk accounts Automatic dunning letters issued

within agreed trading terms Auto routed hold/cessation of

service Integrated systems to facilitate

customer query handling Forecast cash receipts available for

treasury purposes

Accounts Receivable – Leading Practice Features

Process Features

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Authorise and set up new suppliers payment details

Maintain supplier payment details

Segregation of duties between supplier set up, voucher processing and payment processing

Accounts payable process vouchers: invoices, expense claims, credit notes, debit memos and prepayment requests

Suppliers required to use PO number on all documents and three way match wherever possible

Consolidated periodic invoicing for high frequency suppliers

Single supplier database Single employee

database Audit trail of changes to

supplier payment details

Purchase invoices transacted via EDI with major suppliers wherever possible

Electronic validation and approval of invoices

Automatic matching of invoice to order and goods received note (GRN)

Interface with General Ledger, Purchasing, Fixed Assets and Project Accounting

Use of workflow software to resolve queries and monitor process

Process Features

System Features

Maintain supplier details

Process vouchers

Optimisation of early payment discounts

Payment runs properly authorised

Electronic payments Default payment terms held on

supplier file with manual override at P.O. and invoice

Production of forward payment entry schedules to aid cash flow management

Interface with General Ledger, Fixed Assets, Project Accounting and Cash Management

Facility to suspend payments

Process payments

All transactions completed before period closed

Reconciliation of Accounts Payable activity and reconciliation with General Ledger control account

Management reports run once period is finally closed

Integration with General Ledger minimises reconciliation adjustments

Transaction processing prevented for closed periods

Evaluated Receipt Settlement

Period end processing

and reporting

Accounts Payable – Leading Practice Features

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Maintain fixedasset register

Control acquisitionsand disposals

Manage periodicasset depreciation

Verify and valueasset base

Process Features Determine asset categories

for internal and statutory purposes

Monitor asset maintenance charges

Apply insurance valuation to key assets

Ensure asset responsibility at BU level

Identify asset usage

Set up appropriate control of asset acquisition and disposals across company

Report on acquisitions and disposals on a monthly basis

Monitor tax issues related to acquisitions or CIP

Ensure BU responsibility for assets in their use and for disposal losses

Depreciate at point of asset use Apply depreciation rules to

asset classes Depreciation rates in

management accounts in line with statutory rates

Links asset depreciation to production and product costs/development

Revalue key assets on a regular basis based on book value and high risk

Comprehensive asset verification on regular periodic or rolling basis where asset cannot be verified via technical assumptions (most telco’s do not verify network assets: the fact that the network works is verification enough)

Verify non capitalised assetsSystem Features

On line asset register holding key data and current cost allocation

Cost code validation with GL Automatic links to AP and

Project Accounting system to capture acquisitions

Revaluation of features and mass transfers of assets to new cost centres

Leased asset features compliant with accounting standards

Acquisition linked to purchase order and accounts payable ledger

Disposals linked to sales ledger CIP linked to capital project

accounting Effective tax management

integrated with the fixed assets system

Depreciation charged automatically to cost centres in GL

Forecast asset depreciation for budget purposes

Variable depreciation rules for classes of assets

Assets can be grouped for depreciation rules

Variable asset valuation mechanisms eg historic, current replacement

Complete asset reports by physical location and cost centre

Report on identified or missing assets

Hold non capitalised physical assists for verification

Bar coding of assets for verification

Fixed Assets – Leading Practice Features

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Establish and maintain standing

data

Establish and applyaccounting controls

Apply andallocation rules

Produce periodicfinancial reportingand information

Produce statutoryaccounts

Process Features Common chart of accounts Minimal number of accounts

to meet information needs Regulated control of new

account creation Periodic check of inactive

accounts

All users of financial systems fully trained in standards and controls

Clearly defined procedures cover reconciliation of control accounts

Standard journal and authorised input forms are used

Clear month end cut off process

Electronic approval of journals

Clear authority levels

Management accounting information is sourced from GL (no reconciliation to financial accounts required)

Level of detail is driven by business requirements

Allocation rules are based on agreed rates or service level agreements

Consistent use of account codes across business allowing comparison of costs

Rigorous period end and year end routines to ensure accuracy of data

Detailed procedures applied to reconciliations, accruals and prepayments

Period and financial reports produced within 5 working days of period end

Flash results within 1 day Cyclical reconciliation of

balance sheet accounts Balance sheet accounts

allocated to GL staff Soft close for non quarter

months

Regular liaison with auditors to minimise ad hoc trail and reporting requirements for statutory reports

Corporation disallowable and allowable tax data controlled through use of chart of accounts

Period end timetable communicated to all relevant staff

System Features Integrated system eliminates duplication of maintenance

Local variation to common core chart of accounts

Comprehensive security and access controls

Efficient copy and editing facilities

Extra segment (s) provided for future expansion of requirements (fundamental change to business)

System allows control prior period posting

Variable journal input types such as standard, reversal, recurring

System controlled month end procedures and processes

On line training and help facilities

System provides control over combination of accounts and cost centres

Controls applied for use of balance sheet and profit and loss accounts

Real time allocation to cost centres

Automatic reconciliation of management and financial accounts

Automatic period end reports produced

Comprehensive report writer facilities to provide user defined reports

One line reporting of information and drill down

On line graphical display or links to EIS system

Screenbased exception reporting

System allows prior year postings and automatic balances carried forward

System is sole source of consolidated statutory reporting requirements and holds non financial data

Drill down facilities provides full audit trail on financial data

Additional period used solely for year end accounts

Multi-currency, multi-country consolidation

General Accounting – Leading Practice Features

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Process Features

Standardised and documented close process

Soft close

Financial information which the business has requested

Detailed analysis by business specialists

Reports preparation Variance Analysis Finance Analysis

System Features

Integrated systems that extend across all business units

Common chart of accounts Common financial language Consolidation system

Web based reports Drill down functionality on

reports

Reports centred on key performance indicators

Initial variance analysis and commentary

Standard reports Flexible systems

Management Reporting – Leading Practice Features

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Process Features Standardised and

documented close process

Soft close

Financial information which the business has requested

Detailed analysis by business specialists

System Features

Integrated systems that extend across all business units

Common chart of accounts

Common financial language

Consolidation system

Web based reports Drill down functionality

on reports

Reports centred on key performance indicators

Initial variance analysis and commentary

Standard reports Flexible systems

Financial information which the business has requested

Detailed analysis by business specialists

Web based reports Drill down functionality

on reports

Statutory Reporting – Leading Practice Features

Prepare Accounts Review Accounts Sign Accounts

Distribute Accounts

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© Ernst & Young 2006

The information in this document and in any oral presentations made by Ernst & Young is confidential to Ernst & Young and should not be disclosed, used, or duplicated in whole or in part for any purpose other than the evaluation by [Client/Company Name] of Ernst & Young for the purposes of this proposal. If an engagement is awarded to Ernst & Young, the right of [Client/Company Name] to duplicate, use, or disclose such information will be such as may be agreed in the resulting engagement contract. If an engagement is not awarded to Ernst & Young, this document and any duplicate copy thereof must be returned to Ernst & Young or destroyed.

Liability limited by a scheme approved under Professional Standards Legislation.

www.ey.com/auE R N S T & Y O U N G

Adelaide

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Adelaide SA 5000

Tel: 08 8233 7111

Fax: 08 8213 1775

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Tel: 02 9248 5555

Fax: 02 9248 5959

Canberra

51 Allara Street

Canberra ACT 2600

Tel: 02 6267 3888

Fax: 02 6246 1500

Melbourne

8 Exhibition Street

Melbourne VIC 3000

Tel: 03 9288 8000

Fax: 03 8650 7777

Brisbane

1 Eagle Street

Brisbane QLD 4000

Tel: 07 3011 3333

Fax: 07 3011 3100

Gold Coast

Level 5, 12-14 Marine Parade

Southport QLD 4215

Tel: 07 5571 3000

Fax: 07 5571 3033

Perth

11 Mounts Bay Road

Perth WA 6000

Tel: 08 9429 2222

Fax: 08 9429 2436