SAP INSIGHT

BEST PRACTICES IN CREATING A STRATEGIC FINANCE FUNCTION

An SAP/APQC Collaboration

Table of Contents
Executive Notes Introduction Is Cost All That Matters? Whether to Outsource or Share Services Conclusion: A Checklist for a Strategic Finance Function 1 2 3 5 11

BEST PRACTICES IN CREATING A STRATEGIC FINANCE FUNCTION

An SAP/APQC Collaboration by Katharina Muellers-Patel

 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 contained 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 Group) for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors 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.

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 control processes to ensure legal and regulatory compliance, offering strategic insights into the internal and external business environment, and connecting the business strategy with daily operations through performance tracking. The trend toward a more strategic role is echoed by the responses of participants in recent research conducted by APQC, an internationally recognized nonprofit organization that provides best-practice research, metrics, and measures. The participants indicated that, three years down the road, they anticipate 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 matter 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 decision support and management. The difficulty in evolving the finance role lies in bridging the current gap between the finance function that emphasizes greater efficiency and the finance function that becomes a partner in managing the business. The best companies have found that reaching the goal of a more strategic finance function warrants a two-step approach, as follows: 1. These companies improve the efficiency of the various functions that come under the finance umbrella and, in the process, free up corporate resources for other activities. As one global treasury 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 customers 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 decisionmaking responsibility in risk management and compliance but also a proactive role in managing the daily cash position and thus increase resources for quick strategic moves. One global consumer products company took a twostep approach to a more strategic path for finance. In the first step, the company developed a more efficient cash management, accounts payable, and accounts receivable group of functions in its worldwide operations, based on greater transparency of information. In the second step, the company developed straight-through processing along every level of the finance function, leveraging its global reach to maximize cash management efficiency, foreignexchange exposure, and the global supply chain to help fund growth, participate in new marketing and distribution arrangements, and comply with worldwide 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 standards for business processes and data, giving organizations an independent, authoritative resource for evaluating and improving business practices.

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

>$10 billion 19% 29%

<$100 million

>100,000 14% 16%

<500

13%

$100 million $1 billion 31% 39%

39%

10,000 100,000 50010,000

$1 billion$10 billion

Figure 1: Organization Size by Revenue

Figure 2: Organization Size by Number of Employees

The research group encompasses a wide sampling of organization sizes. Although the majority of respondents are billion-dollar-plus organizations,2 their size in terms of revenue and number of employees covers a complete spectrum, as depicted in Figures 1 and 2. Study Demographics
1. As of August 2005 2. All monetary amounts cited herein are in U.S. dollars.

IS COST ALL THAT MATTERS?

Despite more than 10 years of lip service paid to the idea of a strategic finance function and the increasing strategic demands on finance most companies admit that, while they do want to focus more on decision support and management, they are in reality still spending almost half of their time on transaction processing (see Figure 3). However, some finance 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 important highlights, 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 example, 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 companies would be able to leverage economies of scale (see Figure 5).

17% 18% 21%

+15% +7%

26%

21%

+3%

23%

44%

-11%

30%

Today
Decision Support Management Control

In Three Years

Transaction Processing

Figure 3: Finance Organization Time Allocation3

Figure 4 Staffing Profile (Percentage of FTEs of Total)4

First Quartile

30%

25%

25%

20%

Transaction Processing

Average

44%

21%

18%

17%

Control Management Decision Support

Fourth Quartile

60%

20%

10% 10%

3. APQCs OSBC research data 4. APQCs OSBC research data

Business Unit Revenue Average Median

SME 50MM 5.4% 2.7%

Medium 500MM 5.7% 0.7%

Large 5B 1.1% 0.6%

Enterprise Revenue 1.0% 0.8%

Figure 5: Finance Costs as a Percentage of Revenue5

However, within each revenue band, some companies had as much as 16 times higher finance costs than other companies with approximately the same revenues (see Figure 6).
10.00%

those from which it derived no competitive advantage. 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.
6% 8% 9%

Revenue

1.00%

Personnel Systems Overhead Other Outsourcing

0.10%

12%
0.01% $100 MM $10 MM $10 BN $1 BN $100 BN

65%

Revenue

Figure 6: Total Costs as a Percentage of Revenue Figure 7: Finance Function Cost Allocation

Among all the cost drivers, however, the extent to which the company established shared services is the strongest driver for cost efficiency (apart from revenues). 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 as a 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
5. APQCs OSBC research data 6. APQCs OSBC research data

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 payroll, 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 for extra processes (cash advances, stop payments, manual checks, and so forth). The internal customers whose staff members use direct deposit and the selfservice 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.

WHETHER TO OUTSOURCE OR SHARE SERVICES

If you want to reduce costs or improve service levels, should you move to outsourcing, or is shared services the answer? Outsourcing is becoming increasingly prevalent as a way to decrease costs for both large and small companies. For example, APQCs OSBC research found that when three or more functions 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 be outsourced 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 outsourced; 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 industries, where the number of customer payments is high and customers tend to get behind in their payments, 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 necessary 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 companies most often had not implemented shared services for any function and, as a result, incurred the highest 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

Outsourcing Waves7
Order to cash has the potential to become a more frequently outsourced process.

Outsourcing Growth (%)

Figure 8

40%

Wave 2 Outsourcing
Fixed Assets/ Project Accounting General Accounting

20%

AP/Expense

Not Typically Outsourced

Revenue Accounting (Order to Cash) Treasury Financial Strategy Internal and Planning Controls

Wave 1 Outsourcing

0% 0%

Tax

Payroll

30% Outsourcing Penetration (% Participants)

60%

7. APQCs OSBC research data

consistently improves the function by measuring and tracking improvements. This companys transaction center has become largely automated, freeing up finance employees to perform more value-added, customer-oriented financial work. Another example is a global pharmaceutical company that has used shared services for more than 15 years and simply changed the technological foundation. The company had developed a philosophy of centralization as part of its long-term strategy to standardize, reduce costs, and increase control and economies 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 without changing the technology again. The company is experimenting with a fully integrated procure-topay 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 metropolitan area, is diverse and decentralized. The customers of the shared-services center pay for its costs in proportion to the benefits they gain. Performance measures 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 eliminate duplication of effort. Besides the cost efficiency inherent in these improvements, 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 management. 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 historically high turnover rate moderate over time.

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

Figure 9 Impact of Shared Services on Overall Finance Costs8

8. APQCs OSBC research data

MORE EFFECTIVE IT LEADS TO MORE EFFICIENT FINANCE FUNCTIONS APQCs OSBC research reaffirmed that more effective 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 finance costs of 1.2% of revenues, while companies with less automation had average finance costs of 3.0% of revenue. 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 software (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 fixedasset accounting. As a result, companies have succeeded 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, budgeting, 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 and execution of specific activities on behalf of multiple users (such as business units or sites) using common processes and systems. Shared services acts as a business partner for its customers that are composed of different divisions and functions within the same company. Each customer agrees to the quantity, quality, and cost of services provided, and costs are charged out based on usage. Most companies actually formalize service agreements between the shared-services unit and its internal customers. Shared-services units are generally evaluated on the following performance metrics: Cost Customer service (cycle time, percent of errors) Utilization and productivity External benchmarks

Defining Shared Services

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

complexity. OSBC research participants reported that their average costs decreased dramatically when they used a single instance of ERP software and a common chart of accounts (see Figure 11). When they used multiple instances or even multiple applications, the cost was more than 50% higher than with the single instance and common chart of accounts.
% of Total Payments for Application Usage Bar Chart; Average Headcount Allocation % in Circles
*

MORE EFFECTIVE IT ENABLES MORE STRATEGIC 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 decisions much sooner and enabling improved decision making by company executives. For example, looking at budget preparation cycle time or closing of monthly accounts, APQCs OSBC research revealed that 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 savings each additional day the budget cycle time was reduced (through technology and improved processes). Given the improvements possible through the effective 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

Custom Manual/Spreadsheet Vendor Package

*Includes A/R

Figure 10: Application Usage and Labor Allocation by Finance Function10

Figure 11 Comparison of Single-Instance ERP versus Multiple Instances/Multiple Applications (Cost of the Process per $1,000 in Revenue)11

Planning/ Budgeting/ Forecasting Single-instance accounting software/ERP, common chart of accounts Multiple instances or multiple accounting software applications

Cost Accounting/ Ev aluating and Cost Management Managing Fi nancial Pe rformance $1.69 $1.87

$1.60

$2.62

$3.55

$3.21

10. APQCs OSBC research data 11. APQCs OSBC research data

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 new difficulties, 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 effects of exchangerate 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 STRATEGIC FINANCE 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 products 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 activities in new regions and new product areas. To develop the capability to monitor and understand the companys cash flow, however, the CFO realized he had to take care of endemic and chronic inefficiencies 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 funding opportunities in the commercial paper market, whose rates rise during the day; seizing opportunities required understanding the cash position immediately 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 established 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 FTEs involved 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.

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 straightthrough processing, whereby payments are transmitted 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 the companys far-flung subsidiaries. The company believes straight-through processing eliminates costly errors caused by processing different payments in different countries. In addition, the straight-through processing of foreign exchange has cut down on difficulties 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 contracts into the system, enabling the company to reconcile them itself without going through a thirdparty 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 company reduce costs, but it also created the type of transparency and audit trail necessary to truly comply with the Sarbanes-Oxley Act.

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CONCLUSION: A CHECKLIST FOR A STRATEGIC FINANCE FUNCTION

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 automation, 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 reporting, and management of internal controls (Sarbanes-Oxley) In addition, a truly integrated systemic foundation should 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 success 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 prerequisite 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 backoffice applications, enabling management to better administer and track business strategy and decisions Reduced cost of compliance with industry regulations (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. Spearheaded by nonprofit research firm APQC, the OSBC research standardizes the processes and measures that organizations worldwide use to benchmark and improve their performance. After contributing performance 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.

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