kurt salmon-the finance function as value-driver-m.mercusot-m.leon

The Finance Function as Value-Driver:

Enhancing efficiency, effectiveness, and business value

FINANCE AS VALUE DRIVER

TABLE OF CONTENTS

Introduction 2

Embracing the Client Service Dimension in Finance 3 The Gap between Client Expectations and Finance Services Provided 3 The Dual Dynamic: Importance of Finance as Controller and Service Provider 4 Evolution to a Client Service Orientation within a Matrix Organization 4 How to Implement the Matrix Organization 6

Consolidating Routine Activities into a Finance “Factory” 7 Survival of the Leanest 7

Inefficiencies in Finance’s Production Effort 8 The Separation of Production and Business Analysis 9 Benefits of the Production Team 9 Another Advantage of the Production Team: Process Optimization 10

Considering Offshoring for Further Cost Optimization 10 Value for Less in a Slow Economy 10 Moving Beyond Basic Headcount Reduction to the Concept of Offshoring 10 The Methodology: Defining the Location, Risks, Business Case, and Processes to be Offshored 11 Beyond Cost Savings: A Strategic Approach to Offshoring 16

Conclusion 17

Acknowledgements 18

The Authors 18

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INTRODUCTION

The recent financial crisis, continuing market volatility, cost pressures and regulatory reform are all presenting CFOs and the Finance Function with unprecedented challenges – related not only to performing core accounting, reporting and control functions, but also to helping the overall business succeed. Finance is having to shift from a traditional stewardship role to playing the part of a strategic value-driver and business partner.

For this purpose, an effective, lean and agile Finance organization is essential, one that balances traditional core competencies and approaches with innovation and new capabilities. At financial institutions and corporations alike, transformation of the Finance function is an important strategic priority.

This paper discusses three important aspects of this transformation – three practical recommendations that can help not only with efficiency and effectiveness, but also with overall value delivered to the business:

1. Create a client service team focused on providing business-driven analysis, insight, and support

2. Consolidate all transactional, routine accounting and reporting tasks into one production-oriented team or “production factory” to enhance productivity and increase resource flexibility

3. Consider options for outsourcing or off-shoring transactional, resource-intensive activities to further improve productivity and cost efficiency and allow investment in new capabilities and strategic business support.

Kurt Salmon’s Global Financial Services practice works with CFOs and Finance teams around the world on designing and implementing Finance transformation programs, covering accounting, reporting, control, management information, risk management, regulatory compliance and Finance – business unit partnering.

We hope you find this paper useful and look forward to further engagement with you on the topic of Finance transformation in the future.

Allen Merrill President Global Financial Services

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1. EMBRACING THE CLIENT SERVICE DIMENSION IN FINANCE 1.1. The Gap between Client Expectations and Finance Services Provided One of the most challenging tasks on the CFO’s agenda is providing a consistently high level

of service to his / her internal clients and stakeholders. According to a survey conducted by McKinsey in 2009, CFOs in the financial services industry are lagging behind their peers in other industries when it comes to raising their level of service, providing value-added support to the business, and driving strategic decision-making and performance management.

Current Role of Finance at the Corporate Level, by Industry1

Kurt Salmon’s experience in working with CFOs in financial institutions also points to a gap between client expectations and the services rendered by the finance department, even when client service is an integral component of the CFO’s overall operating strategy.

Stakeholder Evaluation of a Financial Services Firm’s Finance Department on a Scale Ranging from ‘Score Keeper’ to ‘Value Driver’

1 Frank Broer, Rainer Kiefer, and Anish Melwani, “How Finance Departments are Changing,” The McKinsey Quarterly, April 2009

60%

50%

40%

30%

20%

10%

0%Total Business, legal,

professional services

Manufacturing Financial

Value Drivers

Business Partners

Process Managers

Score Keepers

Score Keepers: Focus their e�orts on reporting, compliance, and transaction managementProcess Managers: Focused on processes and risk mitigation, with competence in management reporting, tax audit, and treasuryBusiness Partners: Provide financial analysis to support management’s financial and operating decision-makingValue Drivers: Serve as an integral part of management in supporting the business through identifying opportunities and providing critical information and analysis to make strategic operating decisions

Value Driver

Business Partner

Process Manager

Score Keeper

Current Perception

The perception of the firm’s finance department by its stakeholders is distributed across the spectrum, with a concentration in the ‘scorekeeper’ and ‘process manager’ roles.

Stakeholders expressed a desire for the finance department to be a partner with the business — a positive indication that

the stakeholders do want and need involvement of finance beyond the ‘scorekeeper’ / ‘process manager’ roles.

Value Driver

Business Partner

Process Manager

Score Keeper

Target Vision


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Failure to adequately address service delivery issues may result in an inefficient operating model. Indeed, what Kurt Salmon has observed in some financial institutions is the creation of dedicated teams of finance analysts external to the finance department, working in the lines of business and producing their own reports and analytics in order to meet the demands of the business. While such an arrangement may work, particularly if the external finance teams are well organized and their structure, objectives, scope, roles, and responsibilities are clearly defined and communicated, such coexistence does not reflect positively on Finance and its effectiveness. Stakeholder set-up of external finance teams signals a lack of trust in Finance and dissatisfaction with its performance. The existence of these separate finance teams stifles productive collaboration, promotes unhealthy competition, and breeds suspicion between Finance and its stakeholders. Therefore, this dual arrangement is not only tenuous, inefficient, and damaging to the teams’ relationships, but it also relegates Finance to simply reconciling and validating its numbers with those from the business.

1.2. The Dual Dynamic: Importance of Finance as Controller and Service Provider

The finance department has long been evaluated on its performance of the standard core accounting, reporting, and control functions. Such a mind-set has shaped the finance organization – the way the group operates, how it is structured, the composition of its training program, and ultimately, the department’s outlook and approach to its role and responsibilities. However, the traditional assessment of Finance’s performance has shifted in focus from its routine accounting, control, and reporting tasks to a more business-driven, service-oriented operating model, particularly since the financial crisis. Indeed, the economic downturn has exerted significant pressure on financial services firms to devise new products / services, new transactions, and other innovative strategies for growing their business. In executing their strategies, the lines of business are becoming increasingly reliant on Finance as a partner and key advisor who can provide the following:

• In-depth, value-added analysis of financial results and business-driven reporting

• Insight and expertise in the financial, regulatory, tax, and capital implications of new products, transactions, and other business development initiatives

• Advisory capabilities in the impact of new financial regulations, particularly on capital, liquidity, and balance sheet management

• Input into the strategy of the business

• Facilitation of dialogue with regulatory bodies and credit-rating agencies

Finance is expected to meet the business needs of all its stakeholders while simultaneously executing its conventional core missions. The trend toward the finance organization’s dual role as controller and service provider will only gain momentum with heightened regulatory scrutiny and an ever-changing competitive landscape.

1.3. Evolution to a Client Service Orientation within a Matrix Organization

Kurt Salmon recommends that Finance establish a dedicated team of client service providers within the department to instill a client-oriented focus in Finance and develop a productive partnership with all its stakeholders. Implementing a matrix organization of dedicated and empowered client service professionals also helps motivate the finance team to develop the business acumen necessary for providing input into business strategy and becoming a true business partner to its constituents.


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A matrix organizational structure combines functional departments in a dual authority system rather than in a more traditional linear management structure. The matrix organization drives functional efficiencies within Finance through the creation of the Client Service Team in Finance and its interaction with both the lines of business and the rest of Finance.

In applying the matrix model to the finance department, a part of Finance would be organized around its core functions (e.g. financial reporting, management reporting, regulatory reporting, tax, etc.) and another part along business lines and support functions. Within Finance’s matrix organization, a Client Service Team dedicated to each business line / support function (i.e., the client) would intersect with each of Finance’s functional teams, signifying a direct relationship between Finance and its clients. As indicated by the matrix diagram below, some employees have a dual reporting line to two managers – one from a functional team in Finance and one in the Client Service Team.

Transition of a Typical Finance Function to a Matrix Organization with Client Service Team and Production & Control Groups

The Client Service Team consists of Finance analysts organized by the main lines of business and support functions (e.g. Operations, Human Resources, and IT). Acting as a single point of contact within Finance, the Client Service Team serves as the liaison between Finance and its clients, and facilitates the communication between the two groups. It is therefore responsible for developing a close partnership with Finance stakeholders through:

• Performing business-driven reporting and value-added analysis to provide insight and visibility into financial results (the “story behind the numbers”), as well as handling balance sheet, capital, and liquidity requirements for the business

• Evaluating new / complex products and transactions and providing guidance on financial and accounting implications of business trends and products (e.g. determining the appropriate accounting treatment and identifying relevant disclosure requirements)

• Managing the budget and forecast process for the business

The Client Service Team regularly communicates with their stakeholders to understand their needs, obtain their requirements, and ensure that their requests are met. As the pivot point between Finance and its external constituents, the Client Service Team:

• Effects the smooth, seamless coordination and execution of the finance department’s service provider function

• Maintains a consistent level of deliverable quality by, for instance, reviewing deliverables from Finance before submission to the client

• Ensures that Finance is proactive and responsive to its clients

Analysis

Production & Control

RegulatoryReporting

Policy &Controls

Projects

FinancialAccounting

FinancialAccounting

ManagementReporting Tax Regulatory

Reporting

ProductionGroup

Finance Function

Client Service Team:Analysis

Represents lines of business and support functions(IT, Ops, HR)

Policy & Controls

Projects

ManagementReporting Tax

CFO


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1.4. How to Implement the Matrix Organization

The matrix model will help Finance organizations provide a higher level of service if its implementation is effectively executed and the following best practices are applied:

• Clarify roles and responsibilities. Roles, responsibilities, priorities, expectations, and accountability must be clearly defined in a matrix structure with dual reporting lines to establish a solid foundation for the organization and avoid task redundancy. It is necessary for all the teams in Finance to review their functions, deliverables, deadlines, handoffs, and dependencies within the department and with external groups before making the transition to a matrix organization. After performing a detailed review of the interactions both within the finance function and between Finance and external groups, Kurt Salmon highly recommends documenting a RACI matrix to outline the parties who are Responsible, Accountable, Consulted, and Informed for each task. Job descriptions of all team members should be revised accordingly to identify and fill staffing gaps in terms of headcount and skills needed for the new organization.

• Ensure alignment with the organization’s values. Communicating the RACI matrix of the new organization to the staff will help Finance employees identify to whom they are accountable at key interfaces. Managers should also reinforce the teams’ understanding of their responsibilities by explaining the concept of the matrix organizational model and its dual-reporting structure. It is important to inform the staff that employees are accountable not only to their direct managers in Finance, but also to other stakeholders – both internal and external to the finance department. The core message that managers should convey to their staff is the importance of communication, collaboration, negotiation, and informal networking in a matrix organization where teams are interconnected, boundaries are porous, and the management structure is more horizontal.2 Employees should understand that they are expected to meet Finance objectives by adhering to both their functional and client responsibilities.

The matrix model is inherently a team-based organization that can drive synergism when people can work effectively across organizational boundaries (i.e. within their own Finance team and externally with their clients) and can balance conflicting objectives. Managers play a key role in embodying the values of proactive communication, responsiveness, and flexibility that are central to the matrix organization, as well as by nurturing and reinforcing the same behavior within their staff.

• Set expectations, build consensus, and secure buy-in from clients. It is critical to position people in the Client Service Team with the appropriate seniority, breadth of skills, and business experience. Accordingly, Finance should select and/or finalize the Client Service heads and team members from Finance with its stakeholders. The Client Service Team should then work with its clients to reach an agreement on its roles and responsibilities and explicitly detail and document what has finally been decided. Finance should also collaborate with its clients to not only define the scope of its responsibilities vis-à-vis its external stakeholders, but also identify the expectations of the parties involved. From the perspective of Finance, setting expectations entails preparing external stakeholders for the sequencing and timing of Finance’s transition to the matrix organization, as well as the overall staging of the Client Service Team. It also means communicating Finance’s expectations from its clients, such as the Client Service Team’s inclusion in the management meetings of the business and access to the business heads. Finance should emphasize to its clients that a reciprocal relationship with the Client Service Team is necessary for Finance to provide effective, quality service to all its constituents.

2 Jay R. Galbraith, Designing Matrix Organizations that Actually Work (San Francisco: Jossey-Bass, 2009)


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• Build the necessary capabilities. In order for Finance to provide value-added service to the business and to its other stakeholders, it is important that Finance employees enhance their knowledge of their client’s line of business. As a value driver, Finance should understand the impact of new business products and transactions, and then apply this knowledge to the opening, booking, reconciliation, and maintenance of accounts. Consequently, Kurt Salmon recommends that Finance provide and enforce staff participation in a rigorous learning and development program. Such a program targets product and business training for accountants so that the staff can develop the expertise needed to forge an effective partnership with the lines of business.

The matrix structure can deliver high organizational performance, provided people have the skills to make the matrix work. Cultivating the expertise to effectively manage the complex interrelationships among cross-functional teams and handle the complexity in dual reporting lines is fundamental to reap the advantages of the matrix organization.

• Communicate, communicate, communicate. Communication is essential for the implementation of any organization. However, the inherent complexities of the matrix organization require a more extensive communication campaign. Employees faced with a move to a matrix organization may be disturbed by the ambiguity in roles, lack of clarity in the chain of command, and uncertainty of who is in charge. It is therefore critical for managers to explain the structure of the matrix organization and how it will function. Managers should also engage in regular discussions with their staff to address their questions and concerns, as well as anticipate and properly respond to feelings of resistance, fear, and skepticism. Motivating staff and selling the new organization will depend on the managers’ own level of involvement, alignment, and commitment to the demands of the matrix organization. Accordingly, it is important that managers embrace the matrix structure and model the organizational values of collaboration, communication, and teamwork before they can engage their team, build positive momentum, and drive the transition to the matrix structure.

2. CONSOLIDATING ROUTINE ACTIVITIES INTO A FINANCE “FACTORY”

2.1. Survival of the Leanest

The global economic downturn has put significant stress on the finance department: in addition to maintaining the rhythm of its core missions, Finance must also keep pace with the changing regulatory landscape and help meet the needs and priorities of the business. A cost-cutting mentality further exacerbates Finance’s increasing workload as it faces shrinking capacity from hiring freezes and headcount reductions.

Embrace and model the values behind the matrix organization. The matrix operating model fulfills many of Finance’s key objectives — align Finance’s services with the expectations of its clients, build a stronger, more productive partnership with all external parties, and ultimately, become a value driver for the business. Nonetheless, the matrix organization is but a structure that, by itself, solves nothing: the potential of the organization can be unleashed only if the people within it embrace, embody, and enforce its values and collaborative behaviors.


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Against this backdrop, it is critical for the finance department to enhance its scalability, as well as its operational efficiency and effectiveness, in order to manage a widening scope of work. It is therefore important for CFOs to build efficiency, flexibility, and resiliency into their finance teams in order to weather the challenges wrought by the economic crisis.

2.2. Inefficiencies in Finance’s Production Effort

The finance department’s operational efficiency and effectiveness depend on a number of factors, including the capabilities of its staff, the systems supporting its functions, the level of automation in its processes, and the complexity of the company’s business. In general, however, many finance departments are burdened by the heavy production aspect of their functions. In Kurt Salmon’s experience, many finance departments spend a disproportionate amount of time on activities that do not contribute tangible value. Indeed, our Global Financial Services practice has seen many finance departments engaging in production activities that are:

• Redundant – multiple calculations by different teams of the same data; endless loops in the budget and forecasting process; overlapping responsibilities

• Manually intensive – data entry, extraction, formatting, manipulation, and reconciliation

• Non-value-added – customizing the layout of the same types of reports for different groups

• Unnecessary and wasteful – regularly generating reports that are not needed, read, or used

One reason for these inefficient and unproductive activities may be attributable to accounting processes and finance tools / systems that are onerous, complex, and inefficient. Finance can also get caught up in time-consuming “busy work,” which continues to be produced because the team has never challenged or critically evaluated its relevance or usefulness. As a result, Finance departments do not expend enough time and effort on increasing quality and productivity, therefore leaving limited time, at best, for analytical review and data synthesis.

Production v. Analysis Split by Function

Financial Accounting x

Regulatory Reporting x

Accounting – Subs and Broker-Dealer x

Accounts Payable x

Assets and Liability Management x

Financial Control x

Tax x

Budgeting x

Financial Performance Management x

HR Finance x

Financial Analysis x

Total 100

Department Headcount Change Run the Bank Production Analysis

Time Distribution (%) Run the Bank – Type (%)

70 30

80 20

80 20

70 30

90 10

90 10

60 40

30 70

60 40

80 20

50 50

70 30

20 80

20 80

10 90

10 90

20 80

30 70

10 90

10 90

20 80

10 90

20 80

20 80


2.3. The Separation of Production and Business Analysis

Finance can improve its efficiency and effectiveness by grouping all production-related tasks under one team, a “production factory,” while assigning business-focused analysis to another team within Finance. In our matrix organizational model, we designate responsibility of business-driven analysis to the Client Service Team.

The Matrix Organization with its Dual Dynamic of Analysis and Production

In order to set up the production team, Finance should identify production-oriented tasks and separate them from those that involve business-oriented data analysis. Production tasks consist of Finance’s core management and financial reporting missions and involve such responsibilities as:

• Accounting and maintaining the general ledger (i.e. book to the financial ledgers; reconcile and monitor accounts; resolve breaks; and review daily account activity, transactions, unusual events)

• Reporting – externally (regulatory, statutory, legal entity) and internally (e.g. for senior management, other departments, and internal Finance stakeholders like the Client Service Team)

• Budgeting and forecasting

• Instilling rigorous governance and quality control to enforce data validity, completeness, consistency, and reliability, as well as to ensure compliance and risk management

2.4. Benefits of the Production Team

A dedicated production team can help ensure reliability of the numbers, provide insight into the financial results, and contribute to bolstering Finance’s client orientation by:

• Demonstrating consistency and sustainability in the basics – data accuracy, completeness, transparency, reliability, and timeliness

• Aligning service delivery, processes, people, tools, and technology to increase operational efficiency and deliver value to Finance stakeholders

• Building scalability to ramp up and respond to the business’ appetite for growth without compromising quality or risk

• Focusing on continuous improvement through regular benchmarking and measurement of key performance drivers and service delivery levels against targets

CFO

Production & Control:“Production Factory”

Clie

nt S

ervi

ce T

eam

:A

naly

sis

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Kurt Salmon expects that setting up a production team that assumes full ownership of implementing process enhancements will yield a leaner, more effective finance group that can provide timely, accurate data, reports, and other deliverables to the Client Service Team. This, in turn, enables the Client Service Team to:

• Address key client requirements by providing timely, quality, business-driven insight, analysis, and advisory services

• Align with stakeholder expectations and overall corporate objectives

• Effectively contribute to operational and strategic decision-making

2.5. Another Advantage of the Production Team: Process Optimization

Bringing together all production related to financial, management, and regulatory reporting into one cohesive unit under the same manager enables greater functional convergence, alignment, and synergism, as well as increased opportunities to enhance the processes involved. In fact, one of the production team’s priorities is to streamline and optimize its processes.

The team should be led by a manager who has experience in mapping and assessing accounting processes end to end, examining the relevance and value of the team’s activities, and determining how further value can be created. The head of the production team should cultivate within his / her staff a mind-set of continuous improvement. Accordingly, employees in the production team should be encouraged to challenge the status quo and constantly look for opportunities to minimize, streamline, and automate inefficient tasks, as well as discontinue unnecessary or non-value added activities. Production staff may also apply Lean and Six Sigma principles to generate further efficiencies. If the production team eliminates waste, drives productivity, and enhances the team’s overall performance, it is able to achieve superior execution of its missions, thereby enabling Finance to better serve the needs of their stakeholders – both internal (e.g. the Client Service Team) and external (e.g. the lines of business).

3. CONSIDERING OFFSHORING FOR FURTHER COST OPTIMIZATION

3.1. Value for Less in a Slow Economy

CFOs have been challenged to step up the performance of their finance team as they juggle a number of pressing priorities, including the strategic direction of the business, the complexity of the regulatory overhaul, and value creation in a sluggish economy. As organizations have settled into a “hunker down” mentality and a routine of operating with less, CFOs are expected to lead by example and ensure that the finance function is as efficient, effective, and value-creating as every other part of the business.

3.2. Moving Beyond Basic Headcount Reduction to the Concept of Offshoring

One way for the finance function to satisfy its cost-reduction imperatives is to offshore low value-added, resource-intensive processes to a lower cost country. Based on Kurt Salmon’s experience, finance functions that have successfully implemented the offshoring concept are realizing cost savings in the range of 20% to 30%.

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However, an offshoring model is not simply about minimizing labor costs. Unlike the usual tactic of downsizing the finance department, an offshoring model enables Finance to increase its flexibility and scalability if offshoring is executed well. When Finance leverages offshore resources for process reengineering, for instance, the large, low-wage labor pools in offshore locations can unleash the economies of scale to drive process optimization and industrialization at higher value for the money. Such an approach not only boosts cost savings and operational efficiency, but it also enables onshore staff to focus their efforts on such higher value functions as client support, business analysis, and operational risk monitoring.

3.3. The Methodology: Defining the Location, Risks, Business Case, and Processes to be Offshored

As with any organizational model, careful planning and methodical execution are instrumental in implementing an offshoring strategy that works. Dissatisfaction with the results of offshoring stem from inadequate planning and preparation. Many firms do not anticipate cost overruns and cultural differences, or account for difficulties in recruiting and talent retention in the offshore location. By following the process below, finance organizations can help ensure that offshoring delivers the desired results.

• Perform an assessment of possible offshore locations. The question of the offshore location is often dictated by cost advantage. However, some companies are moving from low-end task-level offshoring to relocating less transactional work and improving processes. The specific objectives of Finance must be factored in when determining the best location for the process / function (onshore / in-house vs. offshore or near-shore). Kurt Salmon recommends that the following criteria should be considered in addition to labor cost:

Other factors to keep in mind include time-zone advantages and proximity to the key markets of the financial institution.

• Prepare the business case to understand the total value on offer. Evaluating the business case for offshoring is critical in determining the cost differential between the domestic and offshore location and by extension, whether the cost savings are adequate to pursue offshoring.

Preparing the business case involves capturing the full spectrum of cost categories, which are listed in the table below. It is important to establish the specific units corresponding to these costs3 and the timeline over which offshoring costs / savings will occur.

Criteria for selecting offshore locations

Labor market

Infrastructure

Business and legal environment

Language

Quality of life

Cultural adaptability

Size and growth of labor pool, availability of skilled employees, rate of attrition

Quality and reliability of the location’s information technology, telecommunications, and transportation network

Business friendliness, political stability, economic growth rate, security and legal enforcement (e.g. protection of intellectual property), lack of red tape and bureaucracy

Proficiency and fluent communication skills in English and any other required language

Propensity for natural disasters, crime rate

Presence of other financial services institutions

3 Salary costs would be dollar amount per employee, whereas training costs for offshore staff would most likely constitute a lump sum.


Note that the cost categories in the table may not be relevant or material if other departments within the firm (e.g. IT) have already set up operations in the offshore location, thereby enabling the finance organization to reap “co-location synergies.”

In calculating offshore labor costs, Kurt Salmon believes that it is critical to analyze the impact of offshoring on headcount. It is a common misconception that one onshore employee can be replaced by one offshore employee at go-live – i.e. that the ratio is 1 for 1. Offshore resources need time to learn their tasks and perform at the same level as the onshore staff. We therefore recommend factoring in this transition time and multiplying the number of offshore resources by a conversion or “productivity” ratio, which is used to convert the number of onshore workers to the equivalent number of offshore staff. If we assume our productivity ratio is 1.3, this means that the work of one onshore employee is equal to the work of 1.3 offshore resources. The productivity ratio reflects the lack of direct substitution by offshore staff for onshore employees due to an initial learning and transition phase. Indeed, we do not encounter major productivity gains at inception of an offshoring initiative given the logistical difficulties, as well as the adjustment to both geographical distance and the dispersion of finance processes. As such, the productivity ratio must be applied to head-count numbers in the initial stages of offshoring. This conversion ratio can range from 1.1 to 1.5, depending on the maturity of the finance organization, the processes being offshored, and the stage of process optimization. Over time, however, the ratio should converge to 1 or even drop below 1 if the offshore team executes tasks more efficiently and effectively than the onshore team in the past.

Finally, all offshore costs should be adjusted for the exchange rate applicable to the currency of the offshore location. Other factors to consider include the rate of inflation over time and any tax benefits that the offshore government would provide to firms for relocating their operations under its jurisdiction.

• Evaluate the processes to be offshored, including feasibility and risk of offshoring. In Kurt Salmon’s experience, most companies do not carefully evaluate which processes they should offshore and which they should not. Without a systematic methodology for differentiating processes, it is difficult to distinguish among core processes that provide strategic value and commodity processes that are less valuable and can easily be offshored. A systematic approach in ranking functions provides a basis for comparing processes and determining which ones can be offshored.

Offshoring Costs

Offshore labor costs

Onshore separation costs (for headcount reduction onshore)

Infrastructure and overhead

Tax and regulatory costs

Ramp-up costs

Migration and transition costs

Compensation and benefits, projected salary growth, capacity to absorb employment churn

Severance pay and benefits, career counseling and outplacement services, retention bonus to prevent defections of impacted staff before knowledge transfer and offshore migration are completed

Lease, facilities, telecom, electricity; travel cost from domestic location to offshore destination

Corporate tax rate, exchange rate movements, financial incentives

Travel to offshore location for set-up, recruiting, offshore training, project management

External project management, system development, parallel run and support before full transition to the offshore team

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A Harvard Business Review article, “Getting Offshoring Right,” written by Ravi Aron and Jitendra V. Singh, details the approach of evaluating the processes to be offshored. Kurt Salmon agrees with their methodology and the criteria, and has therefore summarized their approach in the illustration below:

In performing an overall assessment of the opportunity for offshoring an activity, Kurt Salmon recommends building a matrix to combine its desirability ranking, level of operational risk, as well as any regulatory considerations that may hinder offshoring the activity. Refer to the grid below for further details.4

Example of a Grid that Illustrates Offshoring Opportunity by Function

4 Ravi Aron and Jitendra V. Singh, “Getting Offshoring Right,” Harvard Business Review, December 2005

■ Value for client: rank processes and activities according to their value provided to the client■ Value for group: rank processes and activities according to their value provided to the group■ Core vs. Non-Core: rank processes and activities according to their importance to the group’s core mission

■ Standardized/Codified: indicate the level of standardization and ‘codifiability’ of the process / activity (High — Medium — Low) — whether the process is easily documented and is not reliant on deep institutional or domain experience* *In our experience, a “retention bonus” may be oered to stave o sta defections and prevent the loss of institutional knowledge before the transition of tasks oshore has been completed■ Quality Metrics/Measurement: indicate the type of measure available to evaluate the quality of the process / activity (quantitative [precise/ objective] or qualitative [imprecise/subjective], or non-existent)

■ Interactions: define type of interactions involved (Client/External – Internal)■ Time sensitivity and time constraint: define time sensitivity and time constraint of process or activities■ Other operational constraint, limitation or prerequisite

■ Regulatory constraints or limitations

■ Matrix, measuring o�shoring opportunity by function: Combine desirability ranking, level of operational risk, as well as any regulatory considerations that may hinder o�shoring the activity to evaluate its “o�shorability”

Identify Opportunity and Desirability to O�shore(lower value, non-core / “commodity”activities tend to be o�shored)

Assess Operational RiskSetting tolerance limits for errors,defining completion times andproductivity norms, and measuringperformance can mitigate the risk ofmoving processes o�shore

Identify / Check for Operational and RegulatoryConstraints

OFFSHORING CRITERIA:

Build the Matrix to AssessOverall O�shoringOpportunity

Limited

Limited

ModerateHigh

HighHighest

Product ValuationNew Product CommitteeRegulatory Reporting(expertise)Regulatory / audit preparation

Regulatory Reporting(daily / weekly reporting)

Certification of Accounts

Accounts PayableInter-company reconciliations

LowestLow

Low

Des

irab

ility

to

O�

shor

eH

IGH

ME

DIU

MLO

W/N

ON

E

LOW MEDIUM HIGH

Operational Risk

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• Formulate the implementation plan to execute the offshoring initiative. Offshoring happens over a number of years and entails significant commitment in resources and capital. The key to success in offshoring is the quality of transition planning and execution.

An implementation plan should:

a. Reflect management’s vision and strategy for offshoring

b. Clearly describe the transition methodology, which includes cross-training / knowledge transfer, risk mitigation, business continuity management, and contingency planning

c. Identify HR involvement in terms of onshore staff mobility / redeployment, logistics of recruiting and training offshore staff, and provisions for early staff departures

d. Formalize the offshoring governance and operating structure (project organization, “end state” operating model, service level agreements, supervisory structure)

e. Map out major milestones (executive “road shows” to communicate the offshoring initiative and its progress, mobilization of offshore teams, parallel run, go-live, …)

f. Account for dependencies and prerequisites (e.g. alignment with all teams in Finance, coordination with offshoring initiatives of other teams in the firm)

g. Determine the timing of events: evaluate the level of critical mass for synchronizing the shift of tasks offshore, sequence offshoring “waves,” and designate target delivery dates

h. Outline other components of the change management program (e.g. evaluate service level, monitor results, identify further offshoring opportunities, …)

To increase the likelihood of a smooth transition offshore, management should concentrate on specific elements of the implementation plan, as follows:

a. Governance and operating model: Management should clearly define the split of operations offshore and finalize roles, responsibilities, and reporting lines of all team members. It is particularly important for management to ensure that accountability for the offshored processes is clearly defined – whether accountability will remain onshore or get transferred offshore.

b. Risk mitigation: It is critical that a robust operating framework is in place to set up appropriate control and risk oversight from a distance. The framework should include:

• A clear organizational structure with well-defined roles and lines of responsibility for the finance teams

• Effective processes and strong internal control mechanisms to identify, manage / mitigate, monitor, and escalate the risks to which the teams may be exposed (e.g. staff coverage to mitigate against execution risk and ensure operational resilience)

• An updated business continuity plan to factor in the offshoring project (i.e. backup provisions to mitigate business disruption offshore)

c. Communication plan: As with any organizational transformation effort, management needs to maintain clear, open, and regular communication with staff to ensure that they are kept

Based on Kurt Salmon’s experience in performing the process analysis described for our clients, we conclude that CFOs should retain onshore those functions that are mission-critical or complex, requiring: • Considerable judgment, analysis or expertise • Daily / face-to-face interaction with the lines of business and regulators • Prompt / immediate task execution and response

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informed throughout the offshoring process. It is important for management to articulate its vision and reinforce its commitment to the offshoring initiative. Another component of the communication strategy is to facilitate discussion with the staff to ease their anxiety and help retain their focus, energy, and morale.

Example of a High-Level Offshoring Execution Plan

• Mobilize project team

• Determine project organization and liaison / integration with other o�shoring programs in the firm

• Structure overall project governance framework w/ risk oversight and escalation procedures

• Update business continuity plan for o�shoring project

• Perform knowledge transfer and training of new o�shore team

• Organize and provide onshore go-live support to o�shore team

• O�shore project manager• Stream leaders• Onshore finance management• Process owners

• O�shore project manager / stream leaders• Onshore management• Process owner• HR / O�shore mgmt• O�shore team leader

• Onshore process owner• O�shore team leader and sta�• Stream leader

• Onshore process owner and team• O�shore team leader and sta� • Stream leader

• Onshore process owner• Stream leader

• Execute parallel run for 1-3 cycles (depending on level of process complexity and progress of o�shore team)

• Start benchmarking against KPIs

• Share lessons learned and engage in iterative improvement process

Transition Preparation &Coordination

Training of O shore Team

Go-LiveSupport

Parallel Run / IterativeImprovement

Scoping & Organization

CommunicationMessage from o�shoring project sponsors to Finance sta�, stakeholders, regulators,…

Op

erat

iona

l Tas

ks /

Del

iver

able

sC

ont

rib

uto

rs

HRSta� redeployment, training & development, o�shore sta�ng, and provisions for early sta� departures

• Establish organizational / operating framework for each Finance stream (RACI, training, sta�ng,…)

• Document procedures and KPIs of tasks to be o�shored

• Prepare job descriptions; recruit and interview sta� for o�shore team

• Oversee process shadowing by o�shore team leader (2 cycles)

• Coordinate logistics (system access o�shore)

• Formulate onshore sta� coverage / contingency measures to ensure operational resilience

• Prepare training materials

15


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3.4. Beyond Cost Savings: A Strategic Approach to Offshoring

Although offshoring can yield average cost savings of 20-30%, these cost reductions may not be generated immediately: in Kurt Salmon’s experience, it can take up to 3 years to complete a move offshore and costs at inception may be higher than expected in quality control, compliance, transition to offshore facilities, demands of training / redeploying staff.

It is therefore advisable to consider other drivers of an offshoring effort beyond cost reduction. The offshoring operating model extends beyond headcount reduction and labor cost arbitrage by generating strategic pay-offs for the finance function and the financial institution as a whole. If offshoring is properly executed, it can deliver operational efficiencies, maximize the finance function’s flexibility to meet business needs, and free up capacity to focus on more strategic, value-added tasks. Moreover, offshoring

yields cost savings that can be plowed back to finance other business opportunities. Finance departments should therefore look beyond tactical economic arbitrage and make the transition to a more strategic approach to deliver quality and process improvements, as well as efficiency gains.

Example of an Offshoring Model and Localization Strategy

List of Offshoring Best Practices

Listed below are some offshoring “best practices” to keep in mind:

✓ Set up service benchmarks. Before offshoring a process, make sure that appropriate service / performance levels and requirements are defined in qualitative and quan-titative terms. Knowing the service benchmarks for offshored functions will help in measuring the progress of the offshoring initiative.

✓ Ensure tight security and controls. Firms must dem-onstrate to regulators that they have as much – if not, more – control over their activities as they did before they were offshored.

✓ Maintain standards of compliance and governance. Regulators will expect firms to be transparent and to show active management of risk, both operationally and contractually.

✓ Reward outstanding staff. To deliver ongoing value from offshore operations, implement performance-based compensation for offshore staff. Also develop clear progression paths to reduce turnover and retain outstanding employees.

✓ Keep regulators in the loop and seek their guidance, particularly since regulatory scrutiny will increase as offshoring becomes more widespread.

• Local management• Functions with extensive

interaction with business line and/or regulators

• Tasks and processes requiring (i) work to be performed during US business hours AND (ii) specific skill set and experienced personnel

• Shared platform for finance worldwide to build strong competency center in accounting and finance

• Functions with no or limited direct interaction with business line and regulators


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CONCLUSION The finance department has evolved from being transaction-oriented to becoming increasingly client-focused. Finance is expected to balance its traditional stewardship role with its capacity as business partner and strategist; accordingly, it is essential that Finance create and drive value for the organization while maintaining efficiency, effectiveness, and control in performing its customary accounting and reporting functions.

Kurt Salmon has explored three ways by which Finance can accomplish the objective of creating value for the organization:

1. Improve alignment with overall business objectives and become a business partner that helps drive strategy, informs operational business decisions, and delivers value-adding activities and services.

2. Focus on organization and process to enhance Finance’s operating model through the creation of two teams – one serving client needs and the other, functioning as a “production factory.”

3. Offshore processes to generate cost savings, increase productivity, and boost operational flexibility and effectiveness.

Against a background of business complexity, regulatory change, and increasing stakeholder demands, continuous value creation can pose a significant challenge to finance organizations. To respond to this challenge, it is essential to recruit, develop, and retain high-caliber personnel with the appropriate skills and business acumen. Staff training and mentorship, a clear definition of the career path in Finance with incentive-based compensation, and a “top talent” program to nurture high-achieving employees are all needed to attract and retain talent in the finance organization.

ABOUT KURT SALMON Kurt Salmon, formed by the merger of Kurt Salmon Associates and Ineum Consulting, is a global management consultancy of more than 1,600 consultants with offices throughout the world.

Kurt Salmon is focused on helping clients in financial services, retail and consumer products, health care, and other industries with business growth strategies and operational and financial performance improvement.

Kurt Salmon’s Global Financial Services practice works with the world’s leading retail, corporate and investment banks, consumer finance companies, asset managers and investment funds, insurance companies, payments businesses and financial sector regulators. Our global team brings deep industry knowledge and experience, strategic insight and operational expertise, and a passion for delivering measurable bottom line results.

We understand well the forces at work in the financial services industry, such as the need for improved asset quality and risk management, the imperative of further operational efficiency, the inter-relationships between core funding and deposit gathering and payment transactions, as well as the opportunities related to mobile payments. We also bring unique insight into the cross- industry issues and opportunities facing financial institutions, consumer and retail companies and health care payors and providers.

Kurt Salmon’s Global Financial Services is unique in its ability to help clients respond to and capitalize on these industry forces at work, and successfully position themselves for competitive, operating and financial success.

Kurt Salmon is a company of Management Consulting Group (MMC-London Stock Exchange).


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WITH ACKNOWLEDGEMENT: The underlying research, analysis, and perspective for this point of view were developed by the co-authors, Michelle Leon and Matthieu Mercusot. We would like to extend our appreciation to the CFOs who have provided their guidance and shared their insight. We would also like to recognize the valuable contributions of Julie Nicholson and Tricia Viola.

THE AUTHORS: Matthieu Mercusot is a partner at Kurt Salmon where he leads the Global Financial Services practice in North America.

Specializing in Capital Markets, Matthieu has 13 years of experience in management consulting and has led multiple large-scale transformation projects involving organization, process and system assessment, end-state design, roadmap definition and target implementation for leading financial services firms.

Matthieu began his career with Deloitte Consulting in Paris. He joined Ineum Consulting (now Kurt Salmon) in Paris and later moved to New York in 2006 as a senior manager to launch Kurt Salmon’s Global Financial Services practice in the United States.

Matthieu obtained his five-year post graduate diploma in Management & Information Systems from INT Management. He also holds his master’s degree in finance from Paris IX – Dauphine.

Michelle Leon is a senior manager in Kurt Salmon’s Global Financial Services practice in New York. She is a Certified Public Accountant with five years of experience in the financial services industry and six years’ experience in financial services consulting. Michelle has led regulatory compliance, risk management, finance strategy and process optimization initiatives, helping CFOs implement the appropriate organizational structure, technology, and processes to drive results.

Prior to joining Kurt Salmon, Michelle worked in BearingPoint’s Global Markets practice. She was also employed by Goldman Sachs as a senior financial analyst in Regulatory Reporting, and by PricewaterhouseCoopers as a senior associate in auditing.

Michelle received her Bachelor of Science in Economics from the University of Pennsylvania’s Wharton School of Business and her masters in business administration from New York University’s Stern School of Business.


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Matthieu Mercusot Partner, Global Financial Services Cell: +1 917 239 8128Office: +1 212 521 0221Fax: +1 212 319 [email protected]

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Economy & Finance

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