session 3 - reengineering the finance organization

Reengineering the Finance Function Lean Finance Conference:

Session 3 Master Class Series

© Copyright 2011 Stephen G. Lynch, All Rights Reserved

About Today’s Facilitator

•  Stephen G. Lynch

•  Principal at CSC Consulting in Finance Transformation and Shared Services

•  Focus on Finance Delivery Strategy, Process Optimization and Organizational Design

•  Served as a Public Accounting Auditor and as a Corporate Controller

•  Publish the Global Finance 360 blog (www.globalfinance360.com)

•  Live in Colorado, United States


Overview of the Master Class Series

v  The Value-Adding Finance Organization

v  Lean Assessment of the Finance Organization

v  Reengineering the Finance Organization

v  Transforming the Finance Professional


Goals for Workshop 3: Reengineering the Finance Organization

§  UnderstandFounda-onalReengineeringPrinciples

§  TheTransforma-onFramework

§  TheRoleofSharedServicesinFinanceTransforma-on

§  TheRoleofOutsourcinginaComprehensiveDeliveryModel

§  TrendsinGlobalServiceDelivery§  ManagingChangeinTransforma-on


Reengineering for Effective

Transformation


What is Reengineering?

The fundamental rethinking and radical redesign of core business processes to achieve dramatic improvements in critical performance measures

such as quality, cost, and cycle time.

Source: Adapted from Hammer and Champy, Reengineering the Corporation, 1993


•  Organize around outcomes, not tasks

•  Have those who use the output of the process to perform the process

•  Subsume information processing work into the real work that produces information

•  Treat geographically dispersed resources as though they were centralized

•  Put decision points where the work is performed and build controls into the process

•  Capture information once and at the source

Principles of Reengineering

Source: Michael Hammer, “Reengineering Work: Don’t Automate, Obliterate,” Harvard Business Review, July-August, 1990, pp. 104-112.


Finance Organizations Face Multiple Challenges

Poor Data Quality

Disparate Technology

Disparate Processes

High Complexity

Disparate Delivery Model

•  Lack of data standards

•  Manual intervention to create acceptable data quality

•  Multiple, redundant controls

•  GL used for detailed mgmt. reporting

•  Complex budgeting and forecasting process

•  Processes vary by SBU or location

•  Weak policies and procedures

•  Poorly trained workforce

•  Model varies by SBU

•  Hidden FTEs embedded in BUs

•  High cost structure due to poor delivery strategy

•  Non-integrated systems

•  Multiple instances •  Poor business

intelligence architecture

Many organizations have failed to realize expected ROI on investments due to disparate technology,

processes and organizational structure.


High-performing companies relentlessly pursue efficiency

Strong data Governance

Common Technology

Standard Processes

Reduced Complexity

Global Delivery Model

•  Data definitions

•  Data quality

•  Eliminate redundant controls

•  Decrease COA •  Decrease budget /

forecast line items

•  Eliminate variation

•  Focus on materiality

•  Reduce manual input

•  Onshore •  Offshore •  Distributed •  Captive SSC •  Virtual captive •  Outsource

•  ERP •  Business

intelligence

High-performing companies focus on the integration of organizational alignment, technology enablement,

and process optimization.


Reengineering can Drive Transactional Efficiency and Provide Resources for Strategic Efforts

Source: American Quality & Productivity Survey

FTEs as a Percentage of Total Finance FTEs



Reengineering Must Address How Organizational Labor is Used Managing labor costs is critical to managing overall Finance cost



Reengineering Typically Leverages Technology in the Drive for Efficiency


The Transformation

Framework


Incorporate the Levers of Transformation into the Transformation Framework

•  Vision

•  Strategy

•  Corporate Governance

•  Organizational Structure

•  Processes

•  People & Competencies

•  Infrastructure (Technology, Applications & Data)

•  Culture

Define Activities that are Core to a Company’s Strategy

Leading companies standardize and automate transaction processing to focus on value-added analysis and insight


The Transformation Framework

Project Launch and

Current State

Review

Detailed Transformation

Roadmap

“Focus and Mobilize” “Design and Launch”

“Transition and Realize”

Transformation Execution and Management

“Measure and Refine”

Strategic Direction

Process

Organization

Technology/Applications

Management and Controls

•  Crucial for setting the correct priorities

•  A core competitive strength of a asset intensive company

•  Organizational issues can create roadblocks

•  The enabler of integrated processes

•  Establish baseline — manage, measure and adjust the course

Change in Emphasis throughout the Transformation Lifecycle


Focus and Mobilize – Key Activities

•  Focus –  Business vision created or refined –  Strategy defined and aligned with business vision –  Management, stakeholders, and partners identified and aligned

(including sponsors)

–  Engagement business or functional areas identified and prioritized –  Program Office established, including representative stakeholders

from business areas, technical functions, and solution architecture.

•  Mobilize –  Business area stakeholders engaged and mobilized –  Project risks identified (including change implications) –  Gap analysis performed against current-state processes –  Data integration and conversion strategy defined

–  Technical infrastructure architecture to support development, testing, and target ERP environments

–  Training strategy and organizational architecture defined

–  Testing and IT security strategy and approaches defined –  Development approach and release strategy defined –  Business case and estimates refined


Focus and Mobilize – Key Deliverables

•  Project Plan

•  Change Management Plan

•  Communication Plan

•  Project Tools and Templates

•  Initiative Kick-off Presentation

•  Benchmark Analysis

•  Current State Process Flows

•  Current State Process Narrative

•  Current State IT Architecture

•  Current State Application Architecture

•  Current State Data Architecture


Design and Launch – Key Activities

•  Design –  Business process changes defined

–  Role definitions changed or added, and communicated and coordinated among programmers, stakeholder management, and project teams.

–  Competencies changed or updated

–  Organizational structure changes designed and developed

–  Training materials developed

–  Transition plan defined

–  System documentation provided and enhanced

–  Data conversion/cleansing and population plan created

–  Production environment defined and implemented Integration

–  Finalize Service Level Agreements

–  Hire SSO personnel


Design and Launch – Key Activities

•  Launch –  User and support roles and staff changes implemented

–  Users and support staff trained

–  Organizational structure changes implemented

–  Interventions and enablers implemented

–  System management, security and contingency procedures implemented

–  Deployment plan implemented (organizational transition)

–  System cut-over plan implemented

–  User acceptance tests developed and performed

–  Service level agreement defined and implemented (if long-term contract)


Design and Launch – Key Deliverables

•  Future State Process Flows

•  Future State Process Narratives

•  Future State IT Architecture

•  Future State Application Architecture

•  Future State Data Architecture

•  Future State Organization Design

•  Data Migration Strategy

•  Updated Job Descriptions

•  Future State Security Profiles

•  Training Plan


Transition and Realize – Key Activities

•  Transition –  User and support roles and staff changes implemented –  Users and support staff trained –  Organizational structure changes implemented –  System management, security and contingency procedures

implemented –  Deployment plan implemented (organizational transition) –  System cut-over plan implemented –  User acceptance tests developed and performed –  Service level agreement defined and implemented (if long-term

contract)

•  Realize –  System production cutover accomplished –  Knowledge transfer to support resources completed –  ERP environment operating, supported, and continuously improved –  Performance metrics collected and compared to established

expectations –  Governance program identifies performance shortfalls and issues

corrective action


Transition and Realize – Key Deliverables

•  Completed Training

•  Organizational Transition Plan

•  Post-implementation Support Plan

•  Service Level Agreements

•  Cutover Plan (if required)


Critical Success Factors for Transformation

§ Executive support § Alignment with corporate strategy

§ Compelling vision and business case

§ Well defined scope

§ Common governance model

§ Global process owners

§ Strong change management processes

§ Strong relationships with operating entities (“the customers”)

§ Frequent and consistent communications

§ Common technology infrastructure


The Role of Shared Services in

Finance Transformation


Shared Services – Where is the Market Heading?

Where are companies going with Shared Services?

•  Drive is towards enabling each Operations to focus on its core competency

•  Gaining efficiencies in the back office and supply chain functions where scale is critical

•  Leveraging existing shared service infrastructure to incorporate additional processes

•  Shared Services is merging with a more comprehensive delivery model that includes hybrid delivery models and selective outsourcing.

•  Cloud computing is enabling the virtualization of shared services to create a true global delivery model

Driving Results with Shared Services §  A leading glass manufacturer consolidated

its Far East back-office operations and reduced cost by over 30%

§  A multi-national commercial and defense concern leveraged existing shared service facilities to achieve greater process standardization and over $50 million per year in cost efficiencies

§  A consumer products manufacturer consolidated the back-office operations from multiple acquisitions reducing costs by more than 25%



Deployment of Shared Services can Reduce Cost


Shared Services is more than Centralization

• Services provided centrally by Corporate • Costs charged back using blanket

allocation methods

• Businesses have little involvement in determining service standards/levels

• Businesses are seen as users rather than customers

• Shadow activity remains in businesses (“just to make sure”)

• Little incentive to improve performance • No accountability with business units to

oversee internal service providers

• Standardization of processes where possible

Centralization

• Operate with an arms length relationship to its “customers”. Service levels and prices negotiated in a “market-based” approach

• Clear and agreed upon Service Level Agreements (SLA’s) in place

• Accurate, timely and informative communication to “customers”. Services groups understand their needs and partners with them for success

• Multi-dimension performance measurement and tracking with performance-based incentive structure

• Customer has identified buyer and user roles

• High effective and efficient end-to-end processes with enabling technologies

• Personnel policies/practices in place to attract, retain and develop high caliber employees

Center Of Excellence/Shared Services


Where are Companies Locating?

Company Location Scope Aetna Hartford, Connecticut National MediaNews Group Colorado Springs, Colorado National Microsoft Fargo, North Dakota Regional U.S. Bank Fargo, North Dakota National Corning Budapest, Hungary Regional SAP Sophia, Bulgaria Regional General Motors Sophia, Bulgaria Regional Bausch & Lomb Hong Kong Regional British Airways Mumbai, India Global Citigroup Manila, Philippines Regional Corning Shanghai, China Regional Dell Computers Hyderabad, India Global FedEx Singapore Regional Ford Motor Company Chennai, India Regional Alcoa Sao Paolo, Brazil Regional IBM Buenos Aires, Argentina Regional Gillette Buenos Aires, Argentina Regional


0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Order Management

Customer Service

Logistics

Purchasing

Credit and Collections

Accounts Receivable

Fixed Assets

General Ledger

Human Resources

Accounts Payable

Travel

IT

Payroll

What Processes are Moving to Shared Services?

Percentage of Respondents

Source: 2008 Technology Issues for Financial Executives Survey.

Currently Use

Plan to Use

Overall

Currently Use

Plan to Use

> $1 Billion

Shared Services adoption continues to expand


Shared Services Continue to be Viewed Positively

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


Payroll General Ledger

Accounts Payable

Accounts Receivable

Fixed Assets

Credit & Collection

Order Management

Purchasing

Human Resources

Logistics

Customer Service

Travel

IT

Highly Successful Moderately Successful Moderately Disappointing Highly Disappointing No Opinion


Centers of Scale are used for Transaction-oriented Processes

Centers of Scale will focus on transaction oriented activities that benefit from scale and standardization.

Order-to-Cash Source-to-Pay Account-to-Report

•  Customer master maintenance

•  Credit Management

•  Customer Invoicing — commercial

•  Intercompany Invoicing

•  Receivables Management

•  Collections

•  Cash Applications

•  Vendor master maintenance

•  Non-contract indirect Purchasing

•  Procurement Card Administration

•  Accounts Payable

–  Vendor invoice processing

–  Vendor payments

– Dispute Management

•  Freight Bill Audit

•  Fixed Assets Accounting

•  Project Accounting Int/Ext — Commercial (including Contract Mgmt) *

•  Day-to-day General Ledger Activity

–  Account Reconciliation

•  Monthly/Quarterly/ Annual close

•  Financial Reporting

•  Management Reporting

•  Analytics & KPI’s

Centralized Control


Cash and Banking Planning and Performance Management

•  Banking master data maintenance

•  Establish and manage bank accounts

•  Account reconciliations

•  Template development

•  Data collection

•  Data aggregation

•  Management Reporting

Centralized Control

IT

•  Software application development

•  Software application support and maintenance

•  Hardware support and maintenance

•  System and network management

•  Help Desk – first line support

Centers of Excellence will focus on transaction oriented activities that benefit from scale and standardization.

Centers of Excellence are used for Activities Requiring Expertise

Finance

•  Implementation of IFRS

•  Taxation

•  Treasury

•  General ledger maintenance

•  Sales and Use tax,

•  Business Analytics/Intelligence


Centers of Excellence are Becoming a More Important Part of the Service Delivery Model

Activities included in Shared Services

7%

24%

38%

57%

96%

0%

17%

42%

67%

100%

We do not have a sub structure

Geographic alignment

Customer contact centers

Competence centers / centers ofexpertise / centers of excellence

Transaction processing centers

2010 2009

8%

28%

41%

55%

93%

0%

11%

44%

78%

100%

We do not have a sub structure

Geographic alignment

Customer contact centers

Competence centers / centers ofexpertise / centers of excellence

Transaction processing centers

Peer Group

World-Class

Source: 2010 Hackett Global G&A SDM Study


Outsourcing as Part of a Comprehensive Delivery Model


Common Reasons for Outsourcing

•  Processes are not part of a company’s core competency

•  Ability to obtain a service for a lower cost than can be delivered in-house

•  Company would like to take advantage of offshore markets but has no experience in other countries

•  Company would need to make a large capital investment in technology and would prefer to avoid the capital outlays

•  A 3rd party service provider has built specific competitive advantages (e.g. proprietary software) that are difficult to recreate


Outsourcing Continues to get Good Grades

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


Payroll

Human Resources

Customer Service

Production

Logistics

Accounting

IT

Research & Development

Sales & Marketing

Purchasing

Highly Successful Moderately Successful Moderately Disappointing Highly Disappointing No Opinion


0% 10% 20% 30% 40% 50% 60%

Purchasing

Sales and Marketing

Accounting

Customer Service

Research and Development

Human Resources

Logistics

Production

IT

Payroll

Payroll and IT are the Most Commonly Outsourced Activities

Percentage of Respondents


Currently Outsourcing

Outsourcing Planned

Overall

Currently Outsourcing

Outsourcing Planned

> $1 Billion


Trends in Global Service

Delivery


Trends in Global Service Delivery

•  Started with IT, Customer Service and Finance

•  Now includes HR, Procurement , Engineering, Legal, Facilities and others

•  Companies looking to leverage existing infrastructure in regions

•  Reflects needs and culture of the organization

•  Combines insourcing, outsourcing, onshore and offshore

•  No longer the exclusive domain of high-volume transaction oriented processes

•  More functions involving analysis and specialized knowledge now moving offshore

•  Countries working to enhance their value proposition

•  Demand for labor drive up costs in established countries (i.e. India)

Expansion of functions sourced

globally

Increasing focus on high skill

positions

Hybrid sourcing strategy

Additional geographies considered


High-Performing Companies Take a Portfolio Approach to Service Delivery

Decentralized in Business Unit

Captive Offshore Outsource Captive

Onshore Virtual Captive

•  Good for activities that require tight communication with business

•  Process are relatively unique to the specific business

•  Consolidate processes that benefit from scale

•  Benefits from labor arbitrage

•  Consolidate processes that benefit from scale

•  Focus on higher value activities that require specialized skills

•  Provides physical space for personnel

•  Combines in-house staff with outsourcing capabilities

•  Use selective outsourcing for processes that require skills that are too difficult or expensive to maintain in-house (i.e. legal , tax)

NoSingleApproachIsRightForEveryCircumstance


Managing Change in a Transformation Initiative


Managing Change During the Transformation

•  Stakeholder Management: Align key influencers with the stated vision

•  Manage organizational resistance

•  Develop a communication plan

•  Focus on the human element

•  Develop comprehensive transition plan

•  Invest in regular training


Obtain the Buy-in of Key Stakeholders in the Organization

•  Create stakeholder map

•  Build RACI Chart (Responsible, Accountable, Consulting, Informed)

•  Determine requirements and influence of each stakeholder

•  Include both internal and external stakeholders

•  Develop a communication strategy that effectively addresses stakeholder concerns


Clearly Understand the Handoffs between various Stakeholder Groups both Inside and Outside the Organization

•  Organizational design is comprised of structure, processes, policies and procedures that govern the movement of information through the business units, corporate groups and the Shared Service Organization

•  Process flows should be detailed enough to document tasks to be completed.

•  Narratives should accompany the process flows to provide a more detailed perspective on expected behaviors

•  Clearly capture the transfer of information between stakeholder groups

•  3rd party suppliers should be incorporated into the process design

•  Supporting technologies that enable the flow of information should be identified


Overcome Organizational Resistance

•  Resistance can be both active and passive

•  Active resistance is easier to identify and correct.

•  Passive resistance can undermine a project, especially if it comes from a key and influential stakeholder

•  Both forms of resistance must be addressed by the program leadership

•  Disciplinary action should be taken against resistors, up to and including dismissal from the program or the organization

•  Senior Management and the Executive Sponsor can do a great deal to overcome organizational resistance


RemembertoFocusontheHumanElementofChange

•  Too many companies focus on the mechanics of creating efficient processes with little thought to the human element

•  Companies that have successfully reaped the benefits of transformation understand that a comprehensive and consistent change management program is essential for the successful transition to the articulated vision

•  People throughout the organization should be invited to be involved at the appropriate stages of the transformation (e.g. recruit personnel to test processes during the development phase)

•  It is difficult to over-communicate the status of the project and the future key deliverables and dates

•  Issue a call to action when stakeholders are expected to contribute


DevelopaComprehensiveTransi;onPlanthatConsiderstheSequenceofEventsandtheKeyDependencies

•  Risk increases during the transition period. Risk must be actively managed.

•  Project plan must allocate sufficient human resources to cover processes on both ends during the transition period

•  A Help Desk should be created to handle issues and concerns during the transition period

•  Names and contact numbers of those who can assist during the transition period should be communicated as part of the Change Management process

•  Super users who have the ability to fix configuration deficiencies should be available


Invest in Regular Training

•  The job isn’t done when the first transaction takes place in the reengineered process

•  Formal training will enable processes to remain consistent over time

•  Informal training between employees is acceptable but should not displace a formal training program

•  Training should cover existing employees as they expand their skills as well as new employees who must be on-boarded

•  Employees should be educated not only in specific processes but in their role in meeting the agreed upon metrics of service as defined in the Service Level Agreement.


Case Study: Global Manufacturer in Commercial and Defense Sectors


Current State Analysis

Opportunity to increase Operating Income by more than $90 million/year Barriers to realizing this opportunity are: • Company XYZ’s multiple ERP landscape and legal structure are inherently inefficient driving up the total cost of ownership and operation in every aspect of the business. • While existing Shared Services in Company XYZ are operating at first and second quartile performance levels, only approx. 21% of “transactions” are handled by Shared Services.

–  “World Class” companies have 80%+ of “back office transactions” processed by Shared Services

• The transition from a “holding company” to an “operating company” has not reached full fruition.

–  Potential synergies and corresponding savings have not been fully realized due to the lack of “corporate standards” (“mandate” vs. “optional”)

• The lack of a “Process-Centric” organization results in considerable non-value added activities and sub-optimized processes.

–  An absence of standardization and lack of proliferation of best practices is the result • Timely, accurate, and actionable management information is not readily available.

–  No “single version of the truth” exists


Key Goals of Transformation

To ensure value creation for Company XYZ the following need to be in place to allow for the SSC’s to flourish. • The acceptance and implementation of Company XYZ’s Business & IT principles across the organization • A requirement that all business units use the Shared Service Organization for designated processes • Implementation of a common:

–  ERP system –  Master data –  Processes –  Common reporting suite leading to “one version of the truth”

• The development and implementation of a standardized Chart of Accounts • Differing processes will be required to handle Defense (ITAR) and Commercial, for example:

–  A/P for Commercial will be handled in China versus Defense on-shore –  Project Systems for Defense will be handled in COE’s


Enterprise Processes and Enabling SAP Modules

Sales & Marketing (Biz Dev)

Management

(Marketing & Sales Force Automation)

Product Development

(R&D/Engineering,

Implementation, Quality, Reg. &

Compliance Mgmt)

Manufacturing Resource

Management

(Prod. Planning & Execution,

Procurement, Warehouse Mgmt,

Distribution, Plant & Facilities Mgmt)

Information Technology (Master Data Mgmt, Customer Data, Product Data, Employee Data, Supplier Data, Financial Data)

Finance & Accounting (General Accounting, Close, Controlling, Tax Mgmt, Audit, Treasury, A/P, A/R, Payroll)

Human Resources (Recruit to Retire, Benefits, Workforce Planning, Performance Mgmt, eLearning/Certification)

Business Analytics (Business Intelligence, Reporting, Business Planning)

Customer Service

Management

(Analysis, Customer Support,

Order Mgmt, , eService, Field

Service, Contract Mgmt)

Supply Chain (Sourcing, Logistics, Indirect Procurement)

Key Processes

SD PP

FI

PM

BI

SCM SRM

QA

Current in Scope SAP Modules

MDM

HCM

CRM CRM SD

CO

MM

WM

AM

Future Scope SAP Modules

PS

PLM

GTS

Enab

ling

Proc

esse

s/

Shar

ed S

ervi

ces


Questions


Stephen G. Lynch

Contact Information:

Office: +1.719.481.2599

Toll-free (North America): 1.800.216.2512

On the Web: www.globalfinance360.com

www.stephenglynch.com

Email: [email protected]

Reengineering the Finance Function Lean Finance Conference:

Session 3 Master Class Series

session 3 - reengineering the finance organization

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