Finance Best Practice

8/3/2019 Finance Best Practice

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Table of Contents

Executive Notes 1

Introduction 2

Is Cost All That Matters? 3

Whether to Outsource or Share Services 5Conclusion: A Checklist for a Strategic Finance Function 11


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BEST PRACTICES IN

CREATING A STRATEGICFINANCE FUNCTION

An SAP/APQC Collaboration

by Katharina Muellers-Patel


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2006 by SAP AG. All rights reserved. SAP, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver, and other SAP products and services

mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other

countries all over the world. All other product and service names mentioned are the trademarks of their respective companies. Data con-

tained in this document serves informational purposes only. National product specifications may vary.

These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies (SAP

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or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the

express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an

additional warranty.


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EXECUTIVE NOTES

In the wake of recent accounting scandals and in the

increasingly competitive business environment,

many CFOs and the finance organizations they lead

have started to take on new strategic roles within the

enterprise. They are aiming at enforcing stricter con-

trol processes to ensure legal and regulatory compli-

ance, offering strategic insights into the internal and

external business environment, and connecting the

business strategy with daily operations through per-

formance tracking.

The trend toward a more strategic role is echoed bythe responses of participants in recent research con-

ducted by APQC, an internationally recognized non-

profit organization that provides best-practice

research, metrics, and measures. The participants

indicated that, three years down the road, they antic-

ipate spending 30% more time on decision support

and management (see Figure 3). According to the

same research, however, in spite of their aspirations,

participants have not made much progress toward a

greater strategic role. Finance organizations, no mat-

ter what their size, report to APQC that they still

spend almost two-thirds of their time on transaction

processing and controls and only one-third on deci-

sion support and management.

The difficulty in evolving the finance role lies in

bridging the current gap between the finance func-

tion that emphasizes greater efficiency and the

finance function that becomes a partner in manag-

ing the business. The best companies have found that

reaching the goal of a more strategic finance func-

tion warrants a two-step approach, as follows:

1. These companies improve the efficiency of thevarious functions that come under the finance

umbrella and, in the process, free up corporate

resources for other activities. As one global trea-

sury manager put it, We must develop a finance

function that is as efficient as it can be, replicate it

globally, and then use it effectively to help us

quickly establish brands and enter new markets.

Companies like this one choose a variety of

approaches to streamline and automate finance

functions while ensuring that they keep cus-

tomers happy (in the case of shared-services

arrangements).

2. With the efficiency of the transaction and control

functions assured, these companies can turn to

devising a more strategic approach for finance

giving finance not only more of a decision-

making responsibility in risk management and

compliance but also a proactive role in managing

the daily cash position and thus increase resourcesfor quick strategic moves.

One global consumer products company took a two-

step approach to a more strategic path for finance. In

the first step, the company developed a more effi-

cient cash management, accounts payable, and

accounts receivable group of functions in its world-

wide operations, based on greater transparency of

information. In the second step, the company devel-

oped straight-through processing along every level

of the finance function, leveraging its global reach to

maximize cash management efficiency, foreign-exchange exposure, and the global supply chain to

help fund growth, participate in new marketing and

distribution arrangements, and comply with world-

wide regulations.

Given the current state of the finance function in

U.S. companies, the challenges to that function, and

the road map to increasing its strategic capabilities,

the following article will share the results of SAP

research as well as APQCs Open Standards

Benchmarking CollaborativeSM (OSBC) research. The

OSBC research is the first global set of common stan-dards for business processes and data, giving organi-

zations an independent, authoritative resource for

evaluating and improving business practices.


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The research group encompasses awide sampling of organization sizes.

Although the majority of respondentsare billion-dollar-plus organizations,2

their size in terms of revenue andnumber of employees covers acomplete spectrum, as depicted inFigures 1 and 2.

INTRODUCTION

Benchmarking is an important tool that finance

organizations use to stay competitive. It allows them

to determine the value of adopting best practices and

changing business processes. To assess the trends in

the finance function and identify best practices,

APQC has evaluated the performance of more than

130 finance organizations as part of its OSBC

research.1 The research included the following key

processes:

Financial strategy and planning

Internal controls

Treasury

Revenue accounting (order to cash)

General accounting

Fixed assets and project accounting

Accounts payable and expense reporting

Tax

Payroll

Study Demographics

1. As of August 2005

2. All monetary amounts cited herein are in U.S. dollars.

Figure 1: Organization Size by Revenue

39%

19%

13%29%

$1 billion$10 billion

$100 million$1 billion

$10 billion

Figure 2: Organization Size by Number of

Employees

39%

16%14%

31%

50010,000

100,000

10,000100,000


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Figure 4

Staffing Profile(Percentage ofFTEs of Total)4

IS COST ALL THAT MATTERS?

Despite more than 10 years of lip service paid to the

idea of a strategic finance function and the increas-

ing strategic demands on finance most companies

admit that, while they do want to focus more on

decision support and management, they are in reali-

ty still spending almost half of their time on transac-

tion processing (see Figure 3).

However, some f inance organizations have already

made significant progress on their journey to

becoming a strategic business partner, as illustrated

in Figure 4. First-quartile performers allocate only

30% of full-time equivalent (FTE) time to transaction

processing, enabling them to invest 45% of their

resources in decision support and management

activities.

The right staffing mix, however, does not necessarily

imply cost-efficient operations. From an overall cost

perspective, the survey identified three importanthighlights, as follows:

Finance costs tend to be relatively lower for

larger companies.

Among companies with comparable revenues,

there are still significant cost differences.

The main source of differences are the types of

organizational structure for finance (for exam-

ple, whether there are shared services and the

level of centralization) and the type of IT (the

level of automation or degree of systemic

integration).

The first insight is not surprising, as larger compa-

nies would be able to leverage economies of scale (see

Figure 5).Figure 3: Finance Organization Time

Allocation3

3. APQCs OSBC research data


Today In Three Years

44%

30%

21%

18%

17%

23%

21%

26%

-11%

+3%

+7%

+15%

Decision Support

Management

Control

Transaction Processing

30% 25% 25% 20%

44% 21% 18% 17%

60% 20% 10% 10%

FirstQuartile

Average

FourthQuartile

Transaction Processing

Control

Management

Decision Support


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However, within each revenue band, some compa-

nies had as much as 16 times higher finance costs

than other companies with approximately the same

revenues (see Figure 6).

Among all the cost drivers, however, the extent to

which the company established shared services is the

strongest driver for cost efficiency (apart from rev-

enues). It is logical that, in line with the focus on

transaction processing, personnel represent the

largest cost element, on average, comprising 65% of

all finance function costs (see Figure 7).6

SAP research has shown that leading companies

maximize the efficiency of transactional activities asa first step on the road to a more strategic approach.

One globally diversified industrial manufacturer, for

example, has been coping with the complexities

inherent in an acquisition growth strategy that

resulted in more than 60 acquisitions and an almost

equal number of divestitures (55 in all). The CEO

wished to hone in on the segments in which the

companys product line led the market and exit

those from which it derived no competitive advan-

tage. While the strategy succeeded and growth was

maintained, operational difficulties began to show

up. Each of the acquisitions brought along its own

type of IT system; each had its own finance function

and its own approach. The result was a nightmare

for the CFO. Working with a benchmarking firm to

determine which finance functions were not in the

top quartile of productivity, he found that finance

transaction processes clearly needed to be changed

to mirror best practice.

The CFO decided that a shared-services arrangement

would help increase productivity, especially for

transaction-based functions. He decided to start by

developing a shared-services arrangement with pay-

roll, which suffered from inefficient processes and

lack of automation. The result was world-class. The

financial center now operates so effectively that it

has begun to show a profit when employees ask forextra processes (cash advances, stop payments, man-

ual checks, and so forth). The internal customers

whose staff members use direct deposit and the self-

service portal are charged less than those whose

employees prefer paper transactions. The keys to

success are the use of service-level agreements and a

well-thought-out performance management process

to establish and track productivity goals with

customers.

10.00%

1.00%

0.10%0.10%

0.01%

Revenue

$10MM

$100MM

$1BN

$10BN

$100BN

Figure 6: Total Costs as a Percentage ofRevenue

Revenue

Business Unit

Revenue

SME50MM

Medium500MM

Large5B

EnterpriseRevenue

Average 5.4% 5.7% 1.1% 1.0%

Median 2.7% 0.7% 0.6% 0.8%



Figure 7: Finance Function Cost Allocation

65%

6%

12%

9%

8%PersonnelSystemsOverheadOtherOutsourcing

Figure 5: Finance Costs as a Percentage of

Revenue5


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If you want to reduce costs or improve service levels,

should you move to outsourcing, or is shared ser-

vices the answer? Outsourcing is becoming increas-

ingly prevalent as a way to decrease costs for both

large and small companies. For example, APQCs

OSBC research found that when three or more func-

tions are outsourced, average costs of finance as a

percent of revenue are only one-fourth of those costs

without outsourcing.

Companies normally approach outsourcing in

stages, with payroll and tax among the first to beoutsourced and fixed assets, general accounting, and

accounts payable and expense as part of a second

wave (see Figure 8). Finance strategy and planning,

internal controls, and treasury are not typically out-

sourced; revenue accounting and order to cash

might emerge as another outsourcing application in

the future.

The outsourcing strategy varies among industries

and sizes of companies. Order-to-cash functions are

not widely outsourced today, except notably in the

public utilities and energy sectors. In these indus-tries, where the number of customer payments is

high and customers tend to get behind in their pay-

ments, many companies outsource both their

accounts receivable and credit functions, processing

all customers through outside services. At the point

when collection becomes critical, the utility can

concentrate on enforcing collection rules where

necessary, while the outsourcing service continues to

deal with the majority of customers who do not

overstep the rules.

In a similar way, small to midsize companies have

begun to outsource as a way to gain efficiencies they

cannot otherwise obtain. While a shared-service

arrangement can pay off for a large company, this

approach does not always work for a smaller firm

that does not have the volume of transactions neces-sary to gain the associated efficiencies. On the other

hand, outsourcing provides obvious advantages for

companies that are not as complex or large.

Companies also like to use shared services: when

managed well, shared services can improve process

effectiveness while helping decrease costs. The OSBC

research found that the lowest-performing compa-

nies most often had not implemented shared services

for any function and, as a result, incurred the high-

est cost of the finance function as a percentage of

revenue (see Figure 9).

One consumer products company made the move

toward shared services and gradually improved the

performance of the finance function. The company

optimized both IT systems and organization. The

person in charge of finance shared services

Figure 8

Outsourcing Waves7Order to cash has thepotential to become a morefrequently outsourcedprocess.


20%

40%

0%

0% 60%30%

PayrollTaxInternal

Controls

Treasury

Revenue Accounting(Order to Cash)

Financial Strategyand Planning

AP/Expense

GeneralAccounting

Fixed Assets/Project Accounting

Wave 1 OutsourcingNot Typically Outsourced

Wave 2 Outsourcing

Outsourcing Penetration (% Participants)

OutsourcingGrow

th(%)

WHETHER TO OUTSOURCE OR SHARE SERVICES


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consistently improves the function by measuring

and tracking improvements. This companys transac-

tion center has become largely automated, freeing

up finance employees to perform more value-added,

customer-oriented financial work.

Another example is a global pharmaceutical compa-

ny that has used shared services for more than 15

years and simply changed the technological founda-

tion. The company had developed a philosophy of

centralization as part of its long-term strategy to

standardize, reduce costs, and increase control andeconomies of scale as it embarked on a path of

growth through acquisitions in the 1990s. Accounts

payable has been a shared service ever since. The

process was run on various legacy systems but then

upgraded to an overall enterprise resource planning

(ERP) system that handled the parent companys

transactions. Now, however, the company realizes

that processes cannot be made more efficient with-

out changing the technology again. The company is

experimenting with a fully integrated procure-to-

pay approach that will require integrating systems

and developing the omnibus measurement system

necessary to track transactions.

In another case, a large utility turned to shared

services with the initial intent of increasing cost

efficiency. The utility, which serves a large metropol-

itan area, is diverse and decentralized. The customers

of the shared-services center pay for its costs in pro-

portion to the benefits they gain. Performance mea-

sures are based on the results of shared services from

other utilities around the country. The flexibility of

the payroll shared-service system has helped the

company streamline processes and dramatically

reduce cycle time. The unit more quickly isolates

problems (such as employees who do not enter the

required number of hours) and addresses them

before a payroll run. Continual benchmarking

against other companies in the same industry helps

the utility firm find places to consolidate and elimi-

nate duplication of effort.

Besides the cost efficiency inherent in these improve-

ments, an unforeseen benefit of shared services is

that employees in the payroll function can take on

other responsibilities with a longer-term impact,

such as developing new-hire orientation programs

and providing training programs in financial man-

agement. As the finance function takes on more

strategic roles, it has been able to provide a new level

of incentives for its employees and has seen its histor-

ically high turnover rate moderate over time.

Figure 9

Impact of Shared Serviceson Overall Finance Costs8

Finance Costs as % of Revenues with Increasing Usage of Shared Services



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MORE EFFECTIVE IT LEADS TO MORE

EFFICIENT FINANCE FUNCTIONS

APQCs OSBC research reaffirmed that more effec-

tive use of technology helps companies achieve

greater levels of efficiency and gradually frees up

personnel for more strategic tasks requiring more

thought and managerial capacity. First, the OSBC

research showed that companies with a higher

degree of automation have lower overall finance

costs.9 Companies that had automated more than

66% of their finance processes had average financecosts of 1.2% of revenues, while companies with less

automation had average finance costs of 3.0% of rev-

enue. For example, companies that relied on manual

techniques or spreadsheets for cost accounting and

cost management had average costs three times as

high for that process ($2.21 per $1,000 of revenue)

than companies with an automated process (only

$0.72 per $1,000 of revenue).

Even more interesting, APQC found through the

OSBC research that while more automation means

decreased costs, little automation even impedes

reporting. For example, more than two-thirds of

companies with less than 33% automated processes

were unable to provide process cost data. Only 32%

of companies with more highly automated processes

were unable to provide detailed process cost data.

Looking further into the impact of automation, the

OSBC research found that packaged financial soft-

ware (versus custom applications or spreadsheets

combined with manual processes) is used in most

core finance processes, including accounts receivable

and payable, payroll, general accounting, and f ixed-asset accounting. As a result, companies have suc-

ceeded in reducing staffing levels in these areas (see

Figure 10). On the other hand, less than 40% of the

companies that submitted data to the OSBC research

database had off-the-shelf software implemented in

the areas of cash management and planning, budget-

ing, and forecasting. These areas were among the

most staff-intensive processes within the finance

function.

The OSBC research also found a correlation between

the level of cost decrease and the lack of IT

A shared-services unit provides centralized management andexecution of specific activities on behalf of multiple users(such as business units or sites) using common processesand systems. Shared services acts as a business partner forits customers that are composed of different divisions andfunctions within the same company. Each customer agrees tothe quantity, quality, and cost of services provided, and costsare charged out based on usage. Most companies actuallyformalize service agreements between the shared-services

unit and its internal customers.

Shared-services units are generally evaluated on the followingperformance metrics:

Cost Customer service (cycle time, percent of errors) Utilization and productivity External benchmarksDefining Shared Services

9. In terms of APQCs OSBC research, a process is not considered automated if it is manual or if spreadsheets are used.


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complexity. OSBC research participants reported that

their average costs decreased dramatically when they

used a single instance of ERP software and a com-

mon chart of accounts (see Figure 11). When they

used multiple instances or even multiple applica-

tions, the cost was more than 50% higher than with

the single instance and common chart of accounts.

MORE EFFECTIVE IT ENABLES MORESTRATEGIC FINANCE FUNCTIONS

The use of an integrated ERP system by the finance

function also paves the way to a more strategic

approach. If a company establishes a more integrated

process, planning and reporting cycle times are

reduced significantly, providing data for critical deci-

sions much sooner and enabling improved decision

making by company executives. For example, look-

ing at budget preparation cycle time or closing of

monthly accounts, APQCs OSBC research revealedthat companies relying heavily on manual processes

or spreadsheets took an average of 90 days to prepare

their annual budgets, versus an average of 62 days for

companies relying on an ERP system. The OSBC

research also showed that companies with a rolling

forecast reduced annual budget preparation time to

60 days from 85 days on average. The average OSBC

research participant generated $330,000 in cost sav-

ings each additional day the budget cycle time was

reduced (through technology and improved

processes).

Given the improvements possible through the effec-

tive use of ERP, finance professionals confirmed that,

moving forward, IT would take over more of the

transactional aspects of the function, while they

would take over decision support and financial



Vendor Package

Manual/Spreadsheet

Custom

*

*Includes A/R

Figure 10: Application Usage and Labor

Allocation by Finance Function10

Planning/Budgeting/

Forecasting

Cost Accounting/Cost Management

Evaluating andManaging

Financial

Performance

Single-instance accounting

software/ERP, common

chart of accounts

$1.60 $1.69 $1.87

Multiple instances or

multiple accounting

software applications

$2.62 $3.55 $3.21

Figure 11

Comparison ofSingle-Instance ERP

versus MultipleInstances/Multiple

Applications(Cost of the Process per$1,000 in Revenue)11

% of Total Payments for Application Usage BarChart; Average Headcount Allocation % in Circles


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management activities, helping to make the finance

function more strategic. This forward thinking is

revealed in the OSBC research: despite the current

focus on processing transactions, OSBC research

respondents all indicated that, three years hence,

they would be more involved with decision support

and management activities, underscoring the basic

importance of these more strategic capabilities (see

Figure 3).

These respondents reflect the fact that CFOs and

finance functions must deal with a wealth of newdifficulties, including many that are at the heart of

the companys strategic goals such as increasing

shareholder wealth. The CFOs function has become

pivotal to a companys health in the following ways:

Balancing revenue generation against cost

efficiency

Assessing risk daily

Siphoning off risk into the future through

sophisticated use of derivatives

Managing earnings expectations and the need to

create shareholder value Mitigating the deleterious ef fects of exchange-

rate fluctuations

Managing the companys compliance process to

make certain it meets governmental regulations

Yet it is difficult for the finance function to manage

the earnings flow and shareholder expectations for

those earnings, given increasing global competition

and regulatory constraints. To achieve excellence in

finance requires a greater attention to balancing

operational efficiency and strategic effectiveness. The

foundation for both is a great deal of analysis, data,

and management time devoted to each, as well as

more automation of nonstrategic, operational

processes, freeing up staff to perform the data

collection.

AN EXAMPLE OF A STRATEGICFINANCE FUNCTION

A global consumer products company has created

highly successful strategic finance functions based on

a four-phase approach and using software from SAP.

The end point: complete transparency of financial

data across all global divisions. The CFO believes that

cash generation is the lifeblood of a consumer prod-

ucts company, affecting all parts of the organization.

Cash, in fact, is the barometer of the success of the

companys brand-building exercises; sales indicate

the strength of the brand and generate the cash that

allows the company to fund its brand-building activi-

ties in new regions and new product areas. To devel-

op the capability to monitor and understand the

companys cash f low, however, the CFO realized he

had to take care of endemic and chronic inefficien-

cies and data difficulties in the following areas:

Cash management

Foreign-exchange processes

Funds transfers

Month-end closing and accounts receivable

The problems with cash management were symbolic

for the CFO of the root of all other evils. The process

was essentially manual, took most of the day, and

resulted in many mistakes. That led to missed fund-ing opportunities in the commercial paper market,

whose rates rise during the day; seizing opportunities

required understanding the cash position immedi-

ately at the start of the day. From there, according to

the CFO, the finance function could achieve all

other strategic objectives.

In Phase One, the company standardized and estab-

lished new processes to reconcile bank accounts

daily, concentrate cash, determine a final number to

borrow or invest each day, improve control, enhance

accuracy, and pare down the number of FTEsinvolved in the function. In another development,

global vendor payments were integrated with the

bank payment systems, and customer receipts posted

to the general ledger. Each day, the company could

then reconcile all global account information.

Contracts in the ERP system were linked to the daily

cash position, providing performance reporting and

investment calculation.


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In Phase Two, the CFO integrated the systems of the

offshore divisions into the main system. That tactic

assures he can see the state of cash management in

operations around the world.

Phase Three involved implementation of straight-

through processing, whereby payments are transmit-

ted directly to the bank from payment data. A single

platform uses payment files extracted from the SAP

accounts payable and treasury applications for all

types of payment. In effect the central treasury

department has become the house bank for all of thecompanys far-flung subsidiaries. The company

believes straight-through processing eliminates costly

errors caused by processing different payments in dif-

ferent countries. In addition, the straight-through

processing of foreign exchange has cut down on diffi-

culties in reconciling payments and revenues in the

30 or more currencies in which the company

operates.

Phase Four completed the process of developing this

strategic approach. This final step entailed entering

all foreign-exchange and commodities hedging con-

tracts into the system, enabling the company to rec-

oncile them itself without going through a third-

party processor. The company went so far as to do

away with all manual processing in accounting for

derivative contracts, as well. Not only did the compa-

ny reduce costs, but it also created the type of trans-

parency and audit trail necessary to truly comply

with the Sarbanes-Oxley Act.

10


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The best companies, and their CFOs, recognize the

importance of ready access to the right information

to drive the right choices between different variables.

To help determine whether your finance function is

moving toward a strategic approach, take a moment

and decide whether your system does the following:

Accelerates closing processes through automa-

tion, workflow, and collaboration

Improves business analysis and decision support

by providing historical and forward-looking

views, including benchmarks Deploys performance management tools that

analyze the company and its resources

Maximizes cash flow through improved billing,

receivables, collections, payments, and treasury

management

Increases effectiveness of compliance efforts

through comprehensive auditing, deeper report-

ing, and management of internal controls

(Sarbanes-Oxley)

In addition, a truly integrated systemic foundationshould help you achieve the following:

Develop a closed-loop management process of

strategy formulation, communication of goals,

and measurement

Monitor the performance of strategic key suc-

cess factors using external and internal

benchmarks

Use tools that support a financial planning

process that integrates global strategic planning

and specific operational planning problems in a

closed-loop process

In a similar way, you can also determine whether

you are on the right track if your financial software

provides the following:

A single source for financial information (a pre-

requisite for managing business processes

beyond financials more effectively)

More timely access to accurate data, improving

communication between finance and operations

Increased alignment between front- and back-

office applications, enabling management to bet-

ter administer and track business strategy anddecisions

Reduced cost of compliance with industry regu-

lations (U.S. Financial Accounting Standards

Board and Sarbanes-Oxley)

Improved security and controls and reduced risk

of contractual and regulatory noncompliance

Improved predictability, particularly with budget

One CFO admitted, Until we began to appreciate

the importance of simplicity in thinking through

our finance function and making it more strategic,we did not realize the way that technology can help

you deal with complexity, and allow you to achieve

the strategic goals finance should achieve.

ABOUT APQC AND THE OSBC

RESEARCH

The OSBC research helps executives benchmark

within their industry as well as with best-in-class

organizations with comparable processes. Spear-

headed by nonprofit research firm APQC, the OSBCresearch standardizes the processes and measures

that organizations worldwide use to benchmark and

improve their performance. After contributing per-

formance data to the OSBC database, participants

receive custom reports, at no cost, comparing their

practices to top performers and relevant peers to

pinpoint improvement opportunities. For more

information, call 1-800-776-9676 or 1-713-681-4020.

CONCLUSION: A CHECKLIST FOR A STRATEGIC

FINANCE FUNCTION

1


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