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BEST PRACTICES IN CREATING A STRATEGICFINANCE FUNCTION

An SAP/APQC Collaboration

SAP INSIGHT

Table of Contents

Executive Notes 1

Introduction 2

Is Cost All That Matters? 3

Whether to Outsource or Share Services 5

Conclusion: A Checklist for a Strategic Finance Function 11

BEST PRACTICES IN CREATING A STRATEGICFINANCE FUNCTIONAn SAP/APQC Collaboration

by Katharina Muellers-Patel

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1

EXECUTIVE NOTES

In the wake of recent accounting scandals and in theincreasingly competitive business environment,many CFOs and the finance organizations they leadhave started to take on new strategic roles within theenterprise. They are aiming at enforcing stricter con-trol processes to ensure legal and regulatory compli-ance, offering strategic insights into the internal andexternal business environment, and connecting thebusiness 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-practiceresearch, metrics, and measures. The participantsindicated that, three years down the road, they antic-ipate spending 30% more time on decision supportand management (see Figure 3). According to thesame research, however, in spite of their aspirations,participants have not made much progress toward agreater strategic role. Finance organizations, no mat-ter what their size, report to APQC that they stillspend almost two-thirds of their time on transactionprocessing and controls and only one-third on deci-sion support and management.

The difficulty in evolving the finance role lies inbridging the current gap between the finance func-tion that emphasizes greater efficiency and thefinance function that becomes a partner in manag-ing the business. The best companies have found thatreaching 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 financeumbrella and, in the process, free up corporateresources for other activities. As one global trea-sury manager put it, “We must develop a financefunction that is as efficient as it can be, replicate itglobally, and then use it effectively to help usquickly establish brands and enter new markets.”Companies like this one choose a variety of

approaches to streamline and automate financefunctions while ensuring that they keep cus-tomers happy (in the case of shared-servicesarrangements).

2. With the efficiency of the transaction and controlfunctions assured, these companies can turn todevising a more strategic approach for finance –giving finance not only more of a decision-making responsibility in risk management andcompliance but also a proactive role in managingthe 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. Inthe first step, the company developed a more effi-cient cash management, accounts payable, andaccounts receivable group of functions in its world-wide operations, based on greater transparency ofinformation. In the second step, the company devel-oped “straight-through processing” along every levelof the finance function, leveraging its global reach tomaximize cash management efficiency, foreign-exchange exposure, and the global supply chain tohelp fund growth, participate in new marketing anddistribution arrangements, and comply with world-wide regulations.

Given the current state of the finance function inU.S. companies, the challenges to that function, andthe road map to increasing its strategic capabilities,the following article will share the results of SAPresearch as well as APQC’s Open StandardsBenchmarking CollaborativeSM (OSBC) research. TheOSBC research is the first global set of common stan-dards for business processes and data, giving organi-zations an independent, authoritative resource forevaluating and improving business practices.

2

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 a complete spectrum, as depicted inFigures 1 and 2.

INTRODUCTION

Benchmarking is an important tool that financeorganizations use to stay competitive. It allows themto determine the value of adopting best practices andchanging business processes. To assess the trends inthe finance function and identify best practices,APQC has evaluated the performance of more than130 finance organizations as part of its OSBCresearch.1 The research included the following keyprocesses:

� 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 20052. 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

<$100 million>$10 billion

Figure 2: Organization Size by Number ofEmployees

39%

16%14%

31%

500–10,000

<500>100,000

10,000–100,000

3

Figure 4

Staffing Profile(Percentage ofFTEs of Total)4

IS COST ALL THAT MATTERS?

Despite more than 10 years of lip service paid to theidea of a strategic finance function – and the increas-ing strategic demands on finance – most companiesadmit that, while they do want to focus more ondecision support and management, they are in reali-ty still spending almost half of their time on transac-tion processing (see Figure 3).

However, some finance organizations have alreadymade significant progress on their journey tobecoming a strategic business partner, as illustratedin Figure 4. First-quartile performers allocate only30% of full-time equivalent (FTE) time to transactionprocessing, enabling them to invest 45% of theirresources in decision support and managementactivities.

The right staffing mix, however, does not necessarilyimply cost-efficient operations. From an overall costperspective, 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 thelevel of centralization) and the type of IT (thelevel 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 (seeFigure 5). Figure 3: Finance Organization Time

Allocation3

3. APQC’s OSBC research data4. APQC’s 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

4

However, within each revenue band, some compa-nies had as much as 16 times higher finance coststhan other companies with approximately the samerevenues (see Figure 6).

Among all the cost drivers, however, the extent towhich the company established shared services is thestrongest driver for cost efficiency (apart from rev-enues). It is logical that, in line with the focus ontransaction processing, personnel represent thelargest cost element, on average, comprising 65% ofall finance function costs (see Figure 7).6

SAP research has shown that leading companiesmaximize the efficiency of transactional activities asa first step on the road to a more strategic approach.One globally diversified industrial manufacturer, forexample, has been coping with the complexitiesinherent in an acquisition growth strategy thatresulted in more than 60 acquisitions and an almostequal number of divestitures (55 in all). The CEOwished to hone in on the segments in which thecompany’s product line led the market and exit

those from which it derived no competitive advan-tage. While the strategy succeeded and growth wasmaintained, operational difficulties began to showup. Each of the acquisitions brought along its owntype of IT system; each had its own finance functionand its own approach. The result was a nightmarefor the CFO. Working with a benchmarking firm todetermine which finance functions were not in thetop quartile of productivity, he found that financetransaction processes clearly needed to be changed –to mirror best practice.

The CFO decided that a shared-services arrangementwould help increase productivity, especially fortransaction-based functions. He decided to start bydeveloping a shared-services arrangement with pay-roll, which suffered from inefficient processes andlack of automation. The result was world-class. Thefinancial center now operates so effectively that ithas begun to show a profit when employees ask forextra processes (cash advances, stop payments, man-ual checks, and so forth). The internal customerswhose staff members use direct deposit and the self-service portal are charged less than those whoseemployees prefer paper transactions. The keys tosuccess are the use of service-level agreements and awell-thought-out performance management processto establish and track productivity goals with customers.

10.00%

1.00%

0.10%0.10%

0.01%

Rev

enu

e

$10 M

M

$100 M

M

$1 B

N

$10 B

N

$100 B

N

Figure 6: Total Costs as a Percentage ofRevenue

Revenue

Business UnitRevenue

SME50MM

Medium500MM

Large5B

EnterpriseRevenue

Average 5.4% 5.7% 1.1% 1.0%

Median 2.7% 0.7% 0.6% 0.8%

5. APQC’s OSBC research data6. APQC’s OSBC research data

Figure 7: Finance Function Cost Allocation

65%

6%

12%

9%

8%PersonnelSystemsOverheadOtherOutsourcing

Figure 5: Finance Costs as a Percentage ofRevenue5

5

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 bothlarge and small companies. For example, APQC’sOSBC research found that when three or more func-tions are outsourced, average costs of finance as apercent of revenue are only one-fourth of those costswithout outsourcing.

Companies normally approach outsourcing instages, with payroll and tax among the first to beoutsourced and fixed assets, general accounting, andaccounts payable and expense as part of a secondwave (see Figure 8). Finance strategy and planning,internal controls, and treasury are not typically out-sourced; revenue accounting and order to cashmight emerge as another outsourcing application inthe future.

The outsourcing strategy varies among industriesand sizes of companies. Order-to-cash functions arenot widely outsourced today, except notably in thepublic utilities and energy sectors. In these indus-tries, where the number of customer payments ishigh and customers tend to get behind in their pay-ments, many companies outsource both theiraccounts receivable and credit functions, processingall customers through outside services. At the point

when collection becomes critical, the utility canconcentrate on enforcing collection rules wherenecessary, while the outsourcing service continues todeal with the majority of customers who do notoverstep the rules.

In a similar way, small to midsize companies havebegun to outsource as a way to gain efficiencies theycannot otherwise obtain. While a shared-servicearrangement can pay off for a large company, thisapproach does not always work for a smaller firmthat does not have the volume of transactions neces-sary to gain the associated efficiencies. On the otherhand, outsourcing provides obvious advantages forcompanies that are not as complex or large.

Companies also like to use shared services: whenmanaged well, shared services can improve processeffectiveness while helping decrease costs. The OSBCresearch found that the lowest-performing compa-nies most often had not implemented shared servicesfor any function and, as a result, incurred the high-est cost of the finance function as a percentage ofrevenue (see Figure 9).

One consumer products company made the movetoward shared services and gradually improved theperformance of the finance function. The companyoptimized both IT systems and organization. Theperson in charge of finance shared services

Figure 8

Outsourcing Waves7

Order to cash has thepotential to become a morefrequently outsourcedprocess.

7. APQC’s OSBC research data

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)

Out

sour

cing

Gro

wth

(%

)

WHETHER TO OUTSOURCE OR SHARE SERVICES

6

consistently improves the function by measuringand tracking improvements. This company’s transac-tion center has become largely automated, freeingup 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 15years and simply changed the technological founda-tion. The company had developed a philosophy ofcentralization as part of its long-term strategy tostandardize, reduce costs, and increase control andeconomies of scale as it embarked on a path ofgrowth through acquisitions in the 1990s. Accountspayable has been a shared service ever since. Theprocess was run on various legacy systems but thenupgraded to an overall enterprise resource planning(ERP) system that handled the parent company’stransactions. Now, however, the company realizesthat processes cannot be made more efficient with-out changing the technology again. The company isexperimenting with a fully integrated procure-to-pay approach that will require integrating systemsand developing the omnibus measurement systemnecessary 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 customersof 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 fromother utilities around the country. The flexibility ofthe payroll shared-service system has helped thecompany streamline processes and dramaticallyreduce cycle time. The unit more quickly isolatesproblems (such as employees who do not enter therequired number of hours) and addresses thembefore a payroll run. Continual benchmarkingagainst other companies in the same industry helpsthe 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 isthat employees in the payroll function can take onother responsibilities with a longer-term impact,such as developing new-hire orientation programsand providing training programs in financial man-agement. As the finance function takes on morestrategic roles, it has been able to provide a new levelof 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

8. APQC’s OSBC research data

7

MORE EFFECTIVE IT LEADS TO MOREEFFICIENT FINANCE FUNCTIONS

APQC’s OSBC research reaffirmed that more effec-tive use of technology helps companies achievegreater levels of efficiency and gradually frees uppersonnel for more strategic tasks requiring morethought and managerial capacity. First, the OSBCresearch showed that companies with a higherdegree of automation have lower overall financecosts.9 Companies that had automated more than66% of their finance processes had average financecosts of 1.2% of revenues, while companies with lessautomation had average finance costs of 3.0% of rev-enue. For example, companies that relied on manualtechniques or spreadsheets for cost accounting andcost management had average costs three times ashigh 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 theOSBC research that while more automation meansdecreased costs, little automation even impedes

reporting. For example, more than two-thirds ofcompanies with less than 33% automated processeswere unable to provide process cost data. Only 32%of companies with more highly automated processeswere unable to provide detailed process cost data.

Looking further into the impact of automation, theOSBC research found that packaged financial soft-ware (versus custom applications or spreadsheetscombined with manual processes) is used in mostcore finance processes, including accounts receivableand payable, payroll, general accounting, and fixed-asset accounting. As a result, companies have suc-ceeded in reducing staffing levels in these areas (seeFigure 10). On the other hand, less than 40% of thecompanies that submitted data to the OSBC researchdatabase had off-the-shelf software implemented inthe areas of cash management and planning, budget-ing, and forecasting. These areas were among themost staff-intensive processes within the financefunction.

The OSBC research also found a correlation betweenthe 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-servicesunit 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 APQC’s OSBC research, a process is not considered automated if it is manual or if spreadsheets are used.

8

complexity. OSBC research participants reported thattheir average costs decreased dramatically when theyused a single instance of ERP software and a com-mon chart of accounts (see Figure 11). When theyused multiple instances or even multiple applica-tions, the cost was more than 50% higher than withthe single instance and common chart of accounts.

MORE EFFECTIVE IT ENABLES MORESTRATEGIC FINANCE FUNCTIONS

The use of an integrated ERP system by the financefunction also paves the way to a more strategicapproach. If a company establishes a more integratedprocess, planning and reporting cycle times arereduced significantly, providing data for critical deci-sions much sooner and enabling improved decisionmaking by company executives. For example, look-ing at budget preparation cycle time or closing ofmonthly accounts, APQC’s OSBC research revealedthat companies relying heavily on manual processesor spreadsheets took an average of 90 days to preparetheir annual budgets, versus an average of 62 days forcompanies relying on an ERP system. The OSBCresearch also showed that companies with a rollingforecast reduced annual budget preparation time to60 days from 85 days on average. The average OSBCresearch participant generated $330,000 in cost sav-ings each additional day the budget cycle time wasreduced (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 thetransactional aspects of the function, while theywould take over decision support and financial

10. APQC’s OSBC research data11. APQC’s OSBC research data

Vendor Package

Manual/Spreadsheet

Custom

*

*Includes A/R

Figure 10: Application Usage and LaborAllocation by Finance Function10

Planning/Budgeting/Forecasting

Cost Accounting/Cost Management

Evaluating andManagingFinancialPerformance

Single-instance accountingsoftware/ERP, commonchart of accounts

$1.60 $1.69 $1.87

Multiple instances or multiple accounting software applications

$2.62 $3.55 $3.21

Figure 11

Comparison of Single-Instance ERP versus MultipleInstances/MultipleApplications (Cost of the Process per$1,000 in Revenue)11

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

9

management activities, helping to make the financefunction more strategic. This forward thinking isrevealed in the OSBC research: despite the currentfocus on processing transactions, OSBC researchrespondents all indicated that, three years hence,they would be more involved with decision supportand management activities, underscoring the basicimportance of these more strategic capabilities (seeFigure 3).

These respondents reflect the fact that CFOs andfinance functions must deal with a wealth of newdifficulties, including many that are at the heart ofthe company’s strategic goals – such as increasingshareholder wealth. The CFO’s function has becomepivotal to a company’s health in the following ways:

� Balancing revenue generation against costefficiency

� 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 exchange-

rate fluctuations� Managing the company’s compliance process to

make certain it meets governmental regulations

Yet it is difficult for the finance function to managethe earnings flow and shareholder expectations forthose earnings, given increasing global competitionand regulatory constraints. To achieve excellence infinance requires a greater attention to balancingoperational efficiency and strategic effectiveness. Thefoundation for both is a great deal of analysis, data,and management time devoted to each, as well asmore automation of nonstrategic, operationalprocesses, freeing up staff to perform the data collection.

AN EXAMPLE OF A STRATEGICFINANCE FUNCTION

A global consumer products company has createdhighly successful strategic finance functions based on

a four-phase approach and using software from SAP.The end point: complete transparency of financialdata across all global divisions. The CFO believes thatcash 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 thecompany’s brand-building exercises; sales indicatethe strength of the brand and generate the cash thatallows 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 thecompany’s cash flow, however, the CFO realized hehad 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 symbolicfor the CFO of the root of all other evils. The processwas essentially manual, took most of the day, andresulted in many mistakes. That led to missed fund-ing opportunities in the commercial paper market,whose rates rise during the day; seizing opportunitiesrequired understanding the cash position immedi-ately at the start of the day. From there, according tothe CFO, the finance function could achieve allother strategic objectives.

In Phase One, the company standardized and estab-lished new processes to reconcile bank accountsdaily, concentrate cash, determine a final number toborrow or invest each day, improve control, enhanceaccuracy, and pare down the number of FTEsinvolved in the function. In another development,global vendor payments were integrated with thebank payment systems, and customer receipts postedto the general ledger. Each day, the company couldthen reconcile all global account information.Contracts in the ERP system were linked to the dailycash position, providing performance reporting andinvestment calculation.

In Phase Two, the CFO integrated the systems of theoffshore divisions into the main system. That tacticassures he can see the state of cash management inoperations around the world.

Phase Three involved implementation of straight-through processing, whereby payments are transmit-ted directly to the bank from payment data. A singleplatform uses payment files extracted from the SAP®accounts payable and treasury applications for alltypes of payment. In effect the central treasurydepartment has become the house bank for all of thecompany’s far-flung subsidiaries. The companybelieves straight-through processing eliminates costlyerrors caused by processing different payments in dif-ferent countries. In addition, the straight-throughprocessing of foreign exchange has cut down on diffi-culties in reconciling payments and revenues in the30 or more currencies in which the company operates.

Phase Four completed the process of developing thisstrategic approach. This final step entailed enteringall 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 doaway with all manual processing in accounting forderivative 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 complywith the Sarbanes-Oxley Act.

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The best companies, and their CFOs, recognize theimportance of ready access to the right informationto drive the right choices between different variables.To help determine whether your finance function ismoving toward a strategic approach, take a momentand decide whether your system does the following:

� Accelerates closing processes through automa-tion, workflow, and collaboration

� Improves business analysis and decision supportby providing historical and forward-lookingviews, including benchmarks

� Deploys performance management tools thatanalyze the company and its resources

� Maximizes cash flow through improved billing,receivables, collections, payments, and treasurymanagement

� Increases effectiveness of compliance effortsthrough 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 ofstrategy 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 planningprocess that integrates global strategic planningand specific operational planning problems in aclosed-loop process

In a similar way, you can also determine whetheryou are on the right track if your financial softwareprovides the following:

� A single source for financial information (a pre-requisite for managing business processesbeyond financials more effectively)

� More timely access to accurate data, improvingcommunication 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 StandardsBoard and Sarbanes-Oxley)

� Improved security and controls and reduced riskof contractual and regulatory noncompliance

� Improved predictability, particularly with budget

One CFO admitted, “Until we began to appreciatethe importance of simplicity in thinking throughour finance function and making it more strategic,we did not realize the way that technology can helpyou deal with complexity, and allow you to achievethe strategic goals finance should achieve.”

ABOUT APQC AND THE OSBCRESEARCH

The OSBC research helps executives benchmarkwithin their industry as well as with best-in-classorganizations with comparable processes. Spear-headed by nonprofit research firm APQC, the OSBCresearch standardizes the processes and measuresthat organizations worldwide use to benchmark andimprove their performance. After contributing per-formance data to the OSBC database, participantsreceive custom reports, at no cost, comparing theirpractices to top performers and relevant peers topinpoint improvement opportunities. For moreinformation, call 1-800-776-9676 or 1-713-681-4020.

CONCLUSION: A CHECKLIST FOR A STRATEGICFINANCE FUNCTION

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