The Evolution of the Shared Service Model

The evolution of Shared Service model - Philips Hybrid Journey- Philips Hybrid Journey

Goh Kim LeeSingapore8th Sep 2011

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1. Philips introduction.2. Our journey of SSC: from internal to

external/hybrid3. Scope of services4. Evaluation of the first three years

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4. Evaluation of the first three years5. Next steps

26%

39%

A strong diversified industrial group leading in health and well-being

“…a global company

of leading

businesses creating

value with

meaningful

Founded in 1891Headquartered in Amsterdam, Netherlands

Sales of €22.3 billion in 20101

Growth Markets

Who we are Our businesses Our mission

2010

Confidential

35%

meaningful

innovations that

improve people’s

health and well-

being.”

Growth Markets32% of 2010 sales generated in growth markets

Globally recognized brand (world top 50)Our brand value doubled to $8.7bn since 20042

120,000 employeesSales and service outlets in over 100 countries

€1.5 billion investment in R&D, 7% of sales

2010

Healthcare

Lighting

Consumer Lifestyle

2Source: Interbrand

Healthcare

Philips Healthcare

Businesses1 Sales & services geographies1

Imaging

Systems

Home

Healthcare

Solutions

Patient Care

and Clinical

Informatics

Customer

ServicesNorth America International Growth

Markets

€8.6Billion sales in 2010

36,000+People employed worldwide in 100 countries

450+Products & services offered in over 100 countries

1 Last twelve months June 2011

8%of sales invested in R&D in 2010

45% 34% 21%38% 14% 22% 26%

Consumer Lifestyle

Philips Consumer Lifestyle

Businesses1 2 Geographies1

Personal

Care

Health &

Wellness

Domestic

Appliances

Lifestyle

Entertainment

Mature

Markets

Growth

Markets


17,000+People employed worldwide


1 Last twelve months June 2011 2 Other category (6%) is mainly license income and is omitted from this overviewNote - All figures exclude discontinued operations

60% 40%21% 12% 27% 34%

34%of green product sales in 2010

Philips Lighting

Customer Segments1

Retail Entertainment Healthcare AutomotiveHomes Offices Outdoor Industry Hospitality

Lighting

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23% 17% 15% 10% 15% 5% 3% 4% 8%


54,000+People employed worldwide in 60 countries


80,000+Products & services offered in 2010

1 Indicative split

6

Global

Cardiovascular X-ray

Unique leadership positions in many marketsExamples of current NPS leadership positions1

Global

UltrasoundGlobal

Patient Monitoring

Regional

Cardiac resuscitation

Regional (USA)

Home Monitoring

Healthcare

Global

Male electric shaving

Global

Mother and Child Care

Regional

(China)

Haircare

Regional

(LatAm, China)

Kitchen Appliances

Global

Oral Healthcare

Global

Professional Luminaires

Global

General Illumination LED

Global

Professional Lamps

Global

Automotive Lighting

ConsumerLifestyle

Lighting

1 Leadership is made up of outright leadership (outperforming the best competitor by >5%) and co-leadership (on par with best competitor, within 5%), globally or regionally

Global

Lighting Systems & Controls




8


SBS Finance

Our History1998-> Philips established standalone SSC created in Bangkok(Thailand) for

Lighting sector. India setup SSC in Culcutta in 2001.

2002 Philips established multi sectors Shared service centers in Lodz(Poland), Chennai (India) and Bangkok (Thailand) for accounting work

2007 Shared service centers divested to a BPO

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2007 Global SBS Finance created (local captive centers)

2009 Transaction based pricing introduced

2009 Introduction of BPO model in Latin America

2010 Start of rule based controlling project

BPO

Why going captive initially and not directly to outsourcing?

• Philips had 3 key attributes required to be successful:

1. The know-how with prior experiences and knowledgeable staff

2. The presence in off-shore to provide support

3. The scale to generate enough savings (>500FTEs per

10

3. The scale to generate enough savings (>500FTEs per center)

• Strength of approach:

– Capture all the savings initially (but also all the costs)

– Avoid some initial risks of outsourcing• creating a partnership together with transition,

• internal buy-in during the migration from onshore to offshore SSC

Why in 2007?

• Key migrations were done and service centers were due to shrink because of process improvements

– Impact on staff career opportunities

– Cost are no longer optimized because of lower scale

BPO

11

– Cost are no longer optimized because of lower scale

• In a still maturing market with key players still positioning themselves, Philips saw an opportunity to create extra value by divesting the shared service centers.

• Transition risks are limited as Philips hands over a mature existing business (transformations are achieved, staff remains unchanged, governance model already in place, costs are competitive)




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SBS Finance

One Service Provider concept

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O2C

P2P

Front Office

Philips

One face to the customer

3. Business Model

Confidential 13

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GM&S

R2R

P2P

(Back Office)

Harmonised processes (value chain)

SBS Finance

BPOSSC‘s

Service processes

RBCI&EB

“Judgement”Based

Controlling

Remains with the sectors

Analysis on sub

SBS FinanceScope of services

Confidential 14

“Rule Based”Controlling

Transactional Accounting

Analysis on sub process level will be the basis for a decision what to bring in scope

Must transfer to SBS F

Our Portfolio includes traditional Finance services but also Procurement and Compliance Mgt

Requisition ProcessingCatalogue ManagementAccounts PayableTravel Expenses & P-CardFreight PaymentsInter Company Accounts Payable

XXXX

XXXX

Procure To PayLocal

Regio

nal

Global

XX

XXXX

Confidential 15

CreditsAccounts Receivable and ApplicationCollectionsInter Company Accounts Receivable

Inter Company Accounts PayablePayment Services

General Accounting and ClosingFixed AssetsExternal ReportingTax AccountingTax Filing and ReportingStandard ReportingCompliance Management

XX

XXXX

XXXX

XX

XX

XXXX

XX

Invoice To Cash

Record To Report

XXXX

XX

SBS Finance

External recognition for our approach…

“The company’s (Philips) approach manifests several critical trends of world-class performance

in finance and shared services, as identified in

16

in finance and shared services, as identified in Hackett research.”

(Source: Hackett case study report on Philips, March 2008)




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• Further efficiencies: economies of scale across sectors

• Communication: the BPO contract requires one point of contact per country with

BPO.

• Scope compliance: more than 20% of the work that should be transferred to

SBS Finance

The 6 reasons why Philips decided to create a global SBS Finance organization

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• Scope compliance: more than 20% of the work that should be transferred to

BPO is still done in the sectors.

• Harmonization: the speed to reach harmonized work instructions is too low.

• Innovation: together with the Finance Excellence Network we can implement

process innovations quicker.

• People: managing knowledge (including back ups) and career opportunities.

Our Vision

We want to be recognized as an excellent

provider of financial services to all Philips

businesses worldwide.

SBS Finance

Vision & Mission

19

Our Mission

We are a business focusing on customer

needs and delivering excellent quality and

sense and simplicity in financial services at

competitive prices to all Philips businesses.

• Depend on each other

Scope: execute the Shared Business Service Finance concept by bringing all transactional accounting into the SBS Finance front office (Philips) or back office (BPO), to be ready by mid 2010. In addition, provide attractive opportunities to our internal customers to migrate rule based controlling work to SBS Finance or BPO

• Delight customers

Customer satisfaction: achieve a high level of customer satisfaction by delivering quality and “sense and simplicity” services at competitive prices.

SBS FinanceOur strategy is linked to the 4 Philips values

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• Deliver great results

Costs: support Philips in bringing the total Finance costs closer to benchmark targets by pursuing further efficiencies in our front office organizations, by actively migrating the appropriate activities to the low cost centers of BPO, by strongly driving innovation (together with the Finance Excellence Network, BPO and our customers) and through a high level of harmonization and automation.

• Develop people

People: offer a professional and customer oriented environment that provides solid career opportunities for (finance) professionals, but also safeguards essential (accounting) competencies within Philips.

BPO locations

Scope Compliance: close to 80 %

Customer satisfaction

The partnership with BPO is stable and working well

Confidential 21

�Lower cost

�Flexibility and cost variability

�Capacity for outsourcing scope expansion

�Improved service

�Improved BPO relationship management skills

�Leveraging technology

�Better staff retention and motivation

Compared with the initial outsourced objectives:

Savings 2008-2010

The 4 building blocks of SBS Finance

Increasing the efficiency within the standard scope;

De-bottlenecking and further automating processes

Completing the standard scope

Executing for accounting theagreed scope for BPO

Confidential 22

Broadening the scope

Substantial savings inaccounting and controllingby more aggressive outsourcing

Decreasing the BPO Charges

Adapt our way of working toreduce the BPO costs undertransaction based pricing

Harmonization of accounting processes

Results of assessments:

Why harmonisation in accounting:•Less complexity offers next step towards lower costs•less complex customer for BPO (better service/re-locations)•Facilitates faster process improvement

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45% of processes is more orless harmonized

25% can be harmonized withsome effort

30% will take quitesome effort

Creation of harmonizedWork instructions

a. Impact analysisb. Harmonize if possible

SAP landscapeFiscal requirementsBusiness requirements

2009 2010

Harmonization Roadmap Overview

PROCESS

CHARTER

Framework

PROCESS

DOCUMENTATION

Documentation

Completeness

COMPLIANCE

Scope compliance

Process compliance

Compliance

IMPROVEMENTS

Scope and efficiency

Confidential24

Process Charter scope completeness

Document management

Quality assessment and improvement

Compliance reliability

Process compliance

Audits

Process improvement




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Our Strategy towards World Class

Initial Cost Level

Salary Arbitrage Savings

Process Improvement Savings

Current

Confidential 26

�Salary arbitrage is the quick gain for the first few years.

�Savings thereafter would need to come from process improvement initiatives.

�Go for costs, stay for quality

Future Cost Level

World Class

Accounting

Definition RBC:

•No/less face-to-face contact

with the business functions

needed and

•can be captured in work

instructions

•are of routine nature

requiring relatively little

business knowledge

Remains with sectors

BPO is already involved in rule based controlling work on a small scale

Increase Scope of Rule Based Controlling

“RuleBased”

Controlling

“Judgement”Based

Controlling

Present scope of SBSF / BPO

27

This model allows the controller to focus on core business activities and support business functions, e.g. sales,

production rather than transactional activities.

Judgement Based Activities

Rule Based Activities1

Transactional & Accounting Activities1

RB

C P

roje

ct

Sector SBSF BPO Sector SBSF BPO

��

��

��

��

��RBC lead��

��

��

��

��RBC lead+ ��

Execute

Execute

SBS-F’s role as an analyst How the RBC project will work: business model and scope

Business PartnerScorekeeper

RBC JBC

Analyst

BPO Local FinanceSBS-F

Accounting and controlling function

Move to Shared Service

Environment

Stay with the business

function

• BPO is performing the scorekeeper role which is highly repetitive and standardized

• The analyst function within SBS-F requires also a certain degree of business knowledge forming a value adding front-office function for business reporting and analysis.

• Local finance focuses on the added value part of controlling, requiring in-depth business knowledge building on the pre-work performed by the scorekeeper and the analyst.

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The roles of finance function and its specializationBusiness skills

Business Partner

• Acts as business advisor, having the total business view

• Active support of commercial decisions• Takes ownership for and actively

manages the financial drivers of value

Analyst

• SBSF as commentator, explaining the business story in numbers and variances

• Support the sectors in their decisions, from a finance angle

SBSF Philips Sectors

2929

Process

Delivery

Finance skills

Direction

SettingCustodian• Role clearly focused on full scope rule

based accounting and controlling • Works with the business to ensure

compliance and effective controls• Custodian of assets and value

protection; leading the creation and maintenance of financial statements

• Ensure effective monitoring on BPO

Score Keeper• Role focused on repetitive work• Philips efforts to design and BPO to

execute on efficient transactional processes

• Providing standard reporting and analyses

SBSF

SBSF Philips Sectors

BPO

Recent research by Ernst & Young confirms Philips is a leading company in terms of shared services….

Confidential 3030