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					Reinventing the CFO –
How Finance can Add
Greater Value

IBM Cognos Finance Forum 2010

Jeremy Hope
Co-founder, BBRT
jeremyhope@bbrt.org
The story so far…




2
Where are YOU?


                         Disciplined Operators          Value Integrators
                         • Finance operations           • Performance                 Why are
    Finance efficiency



                           focused                        optimization                you not
                         • Information provision        • Predictive insights          here?
                         • Performance interpretation   • Enterprise risk managem’t
                                                        • Business decisions

                         Scorekeepers                   Constrained advisors
                         • Data recording               • Analytics focused
                         • Controllership               • Sub-optimal execution
                         • Multiple versions of the     • Fragmented data
                           “truth”


                                           Business insight
3
    Build your case for change


No time?                   Lack of skills?
Too controlling?           Too remote from business?
Too much detail?           Don’t understand the
Too much budgeting?        business or strategy?
Too much reporting?        Poor systems?
Too much admin?            Lack of timely and accurate
Too expensive?             reporting?
Too unresponsive?          Poor communication?



4
 Agree a New Vision for Finance


Today 70-80% of                              Aim is 40-50% of
    Finance          Finance Efficiency
                     Finance Efficiency          Finance
   resources          (process improver)
                     (process improver)         resources



                                                 Value
                                                Value
                  Different skills & tools     Integrator
                                              Integrator


Today 20-30% of                              Aim is 50-60% of
    Finance            Business Insight
                      Business Insight           Finance
   resources           (business partner)
                      (business partner)        resources


5
 Here’s a vision I prepared earlier

1. CREATE TIME AND CUT COSTS by making the back office
  more efficient and liberating managers from work that adds too little
  value
2. BECOME A VALUED AND TRUSTED BUSINESS
   PARTNER that provides insightful information and objective advice
3. SUPPORT BUSINESS AGILITY by redesigning performance
  management systems to enable greater visibility and faster response
4. REDUCE WASTE by using lean practices and making resource
  management decisions more dynamic
5. USE INFORMATION TO EMPOWER PEOPLE by providing
  fast, open and relevant key performance indicators
6. PROMOTE ETHICAL BEHAVIOUR AND EFFECTIVE
   DECISION-MAKING by rethinking governance and risk
6 management systems
 Vision 1 - Create time and cut costs by making the
 back office more efficient and liberating managers
 from work that adds too little value
• Liberate the organization from information overload and
unnecessary reports, administration and meetings
• Benchmark costs against comparable Finance
organizations
• Cut detail and complexity. Manage detail at a local level
(don’t roll it up through budgets and reports). Cut the number
of reports by around 50% and the number of spreadsheets by
even more.
• Cut budget/forecast lines to under 30 main headings with
4-5 lines of sub-analysis (give managers responsibility for
spending money within bigger “buckets” rather than micro-
managing many budget lines)
• Cut cost allocations and journals
• Manage cost drivers rather than cost budgets
7
 Managing cost drivers rather than cost
 budgets at Cisco
Cost Centre View            In 2008 Cisco slashed travel
Train fares        1,000    expenses from around
Air fares           800     $750m p.a. to $350m
Hotel expenses      600          Cost Driver View
Meals               500
                           Customer-driven activities 2,400
Entertaining        700
                           Internally-driven activities 3,000
Car hire            500
Fuel costs         1,000      Training & development 800

Car repairs         700
Insurance           400
 TOTAL             6,200                              6,200
8
    How to “see” the cost reduction opportunities hidden
    by budgets – An example from procurement

                            $000s    $000s     $000s         Primary reason
                            Actual   Budget   Variance
Purchasing
    Salaries                   290      270        -20 Overtime
    Expenses                   110      100        -10
Quality Assurance
    Salaries                   420      440         20 Fewer inspections
    Expenses                   170      160        -10
Warehousing costs
    Salaries                   700      660        -40 Disruption caused by fire
    Expenses                   400      380        -20 Disruption caused by fire
TOTAL COSTS                  2,090    2,010        -80
Number of Purchase Orders    5,000    4,500       -500 Volume of business
Number of inspections       10,000   10,500        500

    How would you agree next year’s target?
9
  Now let’s look at the same costs through the lens of a
  “process map” with cost drivers

Purchasing                                               6 Activities (cost drivers)
                        Plan
  Start             Procurement
                                        Purchase parts


Quality                      Certify Vendor                 Inspect parts            In
                                                                                    spec?
Assurance
                                                            Receive parts       Store parts         End
Receiving
             MINS       30        120          20           20         15              10
Total Cost      $140,000       $400,000       $260,000      $300,000        $190,000        $800,000
Units/cost          N/A       400/$1000       5,000/$52     16,000/$18 10,000/$19 16,000/$50
Errors              N/A           N/A           15%              25%          10%             N/A
              TOTAL TIME 215 minutes: TOTAL PROCESSING COST: $2,090,000

10
     Vision 2: Become a valued and trusted business
     partner that provides insightful information and
     objective advice

 2.1 Best people: Become the “employer of choice” within
    peer group
 2.2 Relationship competences: Build value-adding and
    trust-based relationships with all key partners
 2.3 Business knowledge: Improve business knowledge and
    analysis skills (aim for 50% of staff capable of business
    analysis and support)
 2.4 Communications and teaching skills: Improve
    communication and teaching skills (aim for 25% of staff
    capable of teaching finance basics to non-financial people)
 2.5 Independence: Ensure that Finance maintains an
    independent role within the business team

11
 Vision 3: Support business agility by redesigning
 performance management systems to enable greater
 visibility and faster response

3.1 Flexible planning: Improve business agility by moving
to more flexible planning systems
3.2 Rolling forecasts: Provide fast group-wide rolling
forecasts
3.3 Dynamic resource management: Provide resources
on demand
3.4 Holistic controls: Redesign the control system to
support flexible planning
3.5 Ownership of planning: Transfer ownership of
planning, forecasting and decision-making to local teams



12
 Implement a process based on rolling plans and
 forecasts

                            Year x                    Year x+1

                  1Q     2Q       3Q     4Q      1Q   2Q    3Q    4Q

     1st Review

     2nd Review

     3rd Review

     4th Review


                                                                 Annual Plan
                       Forecast        Actuals                      x+1




13
Make forecasting a fast, light touch process


     Budget             Rolling forecast
     3-6 months         4Q X 2-5 days or 12M X 1-2 days
     300 -1,500 lines   10-15 lines
     Commitment based   Basis for local decisions based
     on negotiated      on ‘baseline’ plus action for
     targets            change
     Financial plan     Driver-based models



14
     Using two forecasting cycles at Tomkins


                            Year x                        Year x+1

                  1Q     2Q       3Q      4Q     1Q     2Q        3Q    4Q

     1st Review

     2nd Review

     3rd Review

     4th Review


                                                      Annual Plan /    Annual Plan
                       Forecast        Actuals        Budget              x+1


 Cycle 1 – Flash forecast
 aimed at control             Cycle 2 – 6Q forecast aimed at
                              continuous improvement
15
 Use dedicated models rather than spreadsheets


     “Spreadsheets are great for individual productivity work but they
      cause problems when there is a lot of sharing and aggregation
      going on. Using driver-based forecasts together with dedicated
      systems and web technology enables hundreds of managers
      to work on forecasts together and aggregate the outcomes to
      the highest level thus providing more control than ever to the
      board. The new approach has enabled us to standardize on a
      single methodology and align key assumptions and algorithms
      across the organization.”



                Gary Crittenden,
                ex-CFO, American Express
16
 Vision 4: Reduce waste by using lean practices and
 making resource management more dynamic


4.1 Fixed costs: Reduce fixed costs to best practice
levels using ratios and benchmarks
4.2 Process improvement: Use lean practices to
continuously improve process speed, quality and cost to
reach best practice levels
4.3 Central services: Achieve best practice performance
levels
4.4 Resource planning: Provide analysis of value
creation across business segments within 2 years
4.5 Capital investments: Align all investments with
strategy


17
 Vision 5: Use information to empower people
 by providing fast, open and relevant KPIs

5.1 Key teams: Identify key teams around which
information will flow
5.2 Team success factors: Agree key success factors for
each team
5.3 Key performance indicators: Agree KPIs for each
type of team
5.4 Report design: Design relevant reports
5.5. Fast communication: Make all information open and
transparent




18
 Design measurement and reporting
 systems that…

 • Tell us what is going on today
 • Tell us what is the trend
 • Tell us why the trend is moving up or down
 • Tell us what will be the outcomes over the next 6-
 12 months
 • Tell us how the results compare with peers or best
 practices
 • Tell us what action to take


19
  Design reports that show trends and forecasts

                                                      History                                    Forecast                   GOAL
                                 Q0     Q1     Q2     Q3     Q4     Q5     Q6     Q7     Q8     Q9     Q10 Q11 Q12 BP
KEY FINANCIALS
Orders                            290 300 312 324 290 302 314 326 339 353 367                                  382 397       500
Sales                             280 290 300 312 324 290 302 314 326 339 353                                  367 382       500
Gross Profits                      84   81   90   87   97   84   90   91   98 102 106                          110 114       175
Gross margin                     0.30 0.28 0.30 0.28 0.30 0.29 0.30 0.29 0.30 0.30 0.30                       0.30 0.30     0.33
SG&A costs                         50   55   57   56   58   52   51   56   59   58   60                         59   61       75
Net Profit                         34   26   33   31   39   32   39   35   39   44   46                         51   53      100
Cash flow                          44   37   44   42   51   42   49   46   51   56   58                         63   66      115
KEY COST KPIs (% sales)
SG&A Costs (% sales)             0.18 0.19 0.19 0.18 0.18 0.18 0.17 0.18 0.18 0.17 0.17 0.16 0.16                           0.15
Packaging costs (% sales)        0.06 0.06 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.04 0.04 0.04                           0.03
Transportation costs (% sales)   0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.03                           0.03
IT costs (K per employee)         3.6 3.6 3.6 3.3 3.3 3.3 3.3 3.3 3.0 3.0 3.0 3.0 3.6                                        2.4
KEY OPERATIONAL KPIs
First time through rate          86%    86%    84%    85%    84%    85%    87%    87%    88%    88%    90%    90%    92%    96%
On-time delivery                 87%    87%    88%    85%    88%    89%    90%    88%    89%    90%    91%    92%    94%    98%
Customer retention               66%    67%    70%    68%    72%    74%    75%    75%    77%    80%    82%    84%    84%    80%
Inventory (number of days)       65.0   66.0   66.0   64.0   62.0   62.0   60.0   60.0   55.0   50.0   45.0   40.0   35.0   30.0
Accounts receivable days         92.0   90.0   90.0   88.0   82.0   82.0   84.0   84.0   82.0   80.0   78.0   76.0   75.0   60.0

                                                                                                     BP = Best practice
20
 The American Express Finance vision

 “An ideal finance function spends very little
 time on reconciliations and a minimal
 amount of time reporting on what has
 happened. Instead, a great organization
 spends the majority of its time trying to
 anticipate what’s going to happen in the
 future, making sure the company’s resources
 are allocated to the most important
 opportunities that it has, and to ensuring
 that the company operates with tight
 controls and great processes.”
21          Gary Crittenden, CFO, American Express
 The ultimate goal is to support the corporate vision
 (leadership values underpinned by management
 systems is critical)
            CEO Vision
            •Empowered & Accountable teams
            •Low costs
            •Strategic execution
            •Fast response             Right CULTURE
            •Ethical behaviour         (ambition, commitment,
                                       initiative, trust, sharing,
                                       accountability)
            CFO Vision
            •Finance efficiency
            •Capable people
            •Performance insights
            •Right management
            systems


22
  Overcome the resistance to change
                               The auditors won’t like it
                                                                 Group will feel
                               The regulators will object        threatened

                     We have too many other priorities      We can’t do the ROI
We don’t have enough
time/money/staff                                       I can’t sell the idea to the
                                                       board
It’s too much work                                     We’re too busy

 It’s too risky                                               It will take too long

  It’s not my                It won’t work in our culture
  responsibility                                    Our systems
                        We tried it before
                        and it didn’t work          can’t handle it

  The bosses won’t like it                        We don’t need to
                                                      change
23
         Thank You
     jeremyhope@bbrt.org


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