Best Practices in Creating a Strategic Finance Function

SAP INSIGHT

BEST PRACTICES IN
CREATING A STRATEGIC
FINANCE FUNCTION

An SAP/APQC Collaboration

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 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
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additional warranty.

EXECUTIVE NOTES

In the wake of recent accounting scandals and in the approaches to streamline and automate finance
increasingly competitive business environment, functions while ensuring that they keep cus-
many CFOs and the finance organizations they lead tomers happy (in the case of shared-services
have started to take on new strategic roles within the arrangements).
enterprise. They are aiming at enforcing stricter con-
2. With the efficiency of the transaction and control
trol processes to ensure legal and regulatory compli-
functions assured, these companies can turn to
ance, offering strategic insights into the internal and
devising a more strategic approach for finance –
external business environment, and connecting the
giving finance not only more of a decision-
business strategy with daily operations through per-
making responsibility in risk management and
formance tracking.
compliance but also a proactive role in managing
The trend toward a more strategic role is echoed by the daily cash position and thus increase resources
the responses of participants in recent research con- for quick strategic moves.
ducted by APQC, an internationally recognized non-
One global consumer products company took a two-
profit organization that provides best-practice
step approach to a more strategic path for finance. In
research, metrics, and measures. The participants
the first step, the company developed a more effi-
indicated that, three years down the road, they antic-
cient cash management, accounts payable, and
ipate spending 30% more time on decision support
accounts receivable group of functions in its world-
and management (see Figure 3). According to the
wide operations, based on greater transparency of
same research, however, in spite of their aspirations,
information. In the second step, the company devel-
participants have not made much progress toward a
oped “straight-through processing” along every level
greater strategic role. Finance organizations, no mat-
of the finance function, leveraging its global reach to
ter what their size, report to APQC that they still
maximize cash management efficiency, foreign-
spend almost two-thirds of their time on transaction
exchange exposure, and the global supply chain to
processing and controls and only one-third on deci-
help fund growth, participate in new marketing and
sion support and management.
distribution arrangements, and comply with world-
The difficulty in evolving the finance role lies in wide regulations.
bridging the current gap between the finance func-
Given the current state of the finance function in
tion that emphasizes greater efficiency and the
U.S. companies, the challenges to that function, and
finance function that becomes a partner in manag-
the road map to increasing its strategic capabilities,
ing the business. The best companies have found that
the following article will share the results of SAP
reaching the goal of a more strategic finance func-
research as well as APQC’s Open Standards
tion warrants a two-step approach, as follows:
Benchmarking CollaborativeSM (OSBC) research. The
1. These companies improve the efficiency of the OSBC research is the first global set of common stan-
various functions that come under the finance dards for business processes and data, giving organi-
umbrella and, in the process, free up corporate zations an independent, authoritative resource for
resources for other activities. As one global trea- evaluating and improving business practices.
sury manager put it, “We must develop a finance
function that is as efficient as it can be, replicate it
globally, and then use it effectively to help us
quickly establish brands and enter new markets.”
Companies like this one choose a variety of

1

INTRODUCTION

Benchmarking is an important tool that finance Financial strategy and planning
organizations use to stay competitive. It allows them Internal controls
to determine the value of adopting best practices and Treasury
changing business processes. To assess the trends in Revenue accounting (order to cash)
the finance function and identify best practices, General accounting
APQC has evaluated the performance of more than Fixed assets and project accounting
130 finance organizations as part of its OSBC Accounts payable and expense reporting
research.1 The research included the following key Tax
processes: Payroll

>$10 billion <$100 million >100,000
<500
19% 14% 16%
$100 million–
29% $1 billion
13%

31%
39%
10,000–
39%
100,000
500–10,000

$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.

2

IS COST ALL THAT MATTERS?

Despite more than 10 years of lip service paid to the However, some finance organizations have already
idea of a strategic finance function – and the increas- made significant progress on their journey to
ing strategic demands on finance – most companies becoming a strategic business partner, as illustrated
admit that, while they do want to focus more on in Figure 4. First-quartile performers allocate only
decision support and management, they are in reali- 30% of full-time equivalent (FTE) time to transaction
ty still spending almost half of their time on transac- processing, enabling them to invest 45% of their
tion processing (see Figure 3). resources in decision support and management
activities.

17%
The right staffing mix, however, does not necessarily
+15% 26%
imply cost-efficient operations. From an overall cost
18% perspective, the survey identified three important
+7%
21% highlights, as follows:
21%
Finance costs tend to be relatively lower for
+3% larger companies.
23%
Among companies with comparable revenues,
there are still significant cost differences.
44%
-11%
30%
The main source of differences are the types of
organizational structure for finance (for exam-
ple, whether there are shared services and the
Today In Three Years level of centralization) and the type of IT (the
Decision Support
level of automation or degree of systemic
integration).
Management

Control
The first insight is not surprising, as larger compa-
Transaction Processing nies would be able to leverage economies of scale (see
Figure 3: Finance Organization Time
Figure 5).
Allocation3

First
Figure 4 Quartile
30% 25% 25% 20%

Staffing Profile
Transaction Processing
(Percentage of
Control
FTEs of Total)4 Average 44% 21% 18% 17%
Management
Decision Support

Fourth
60% 20% 10% 10%
Quartile

3. APQC’s OSBC research data

3

those from which it derived no competitive advan-
Business Unit SME Medium Large Enterprise
Revenue 50MM 500MM 5B Revenue tage. While the strategy succeeded and growth was
Average 5.4% 5.7% 1.1% 1.0% maintained, operational difficulties began to show
Median 2.7% 0.7% 0.6% 0.8% up. Each of the acquisitions brought along its own
type of IT system; each had its own finance function
Figure 5: Finance Costs as a Percentage of and its own approach. The result was a nightmare
Revenue5 for the CFO. Working with a benchmarking firm to
determine which finance functions were not in the
However, within each revenue band, some compa-
top quartile of productivity, he found that finance
nies had as much as 16 times higher finance costs
transaction processes clearly needed to be changed –
than other companies with approximately the same
to mirror best practice.
revenues (see Figure 6).
10.00%
6%
Revenue

Personnel
8% Systems
1.00% Overhead
Other
9% Outsourcing
0.10%
65%
12%
0.01%
$10 MM

$100 MM

$1 BN

$10 BN

$100 BN

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
The CFO decided that a shared-services arrangement
strongest driver for cost efficiency (apart from rev-
would help increase productivity, especially for
enues). It is logical that, in line with the focus on
transaction-based functions. He decided to start by
transaction processing, personnel represent the
developing a shared-services arrangement with pay-
largest cost element, on average, comprising 65% of
roll, which suffered from inefficient processes and
all finance function costs (see Figure 7).6
lack of automation. The result was world-class. The
SAP research has shown that leading companies financial center now operates so effectively that it
maximize the efficiency of transactional activities as has begun to show a profit when employees ask for
a first step on the road to a more strategic approach. extra processes (cash advances, stop payments, man-
One globally diversified industrial manufacturer, for ual checks, and so forth). The internal customers
example, has been coping with the complexities whose staff members use direct deposit and the self-
inherent in an acquisition growth strategy that service portal are charged less than those whose
resulted in more than 60 acquisitions and an almost employees prefer paper transactions. The keys to
equal number of divestitures (55 in all). The CEO success are the use of service-level agreements and a
wished to hone in on the segments in which the well-thought-out performance management process
company’s product line led the market and exit to establish and track productivity goals with
customers.

4

WHETHER TO OUTSOURCE OR SHARE SERVICES

If you want to reduce costs or improve service levels, when collection becomes critical, the utility can
should you move to outsourcing, or is shared ser- concentrate on enforcing collection rules where
vices the answer? Outsourcing is becoming increas- necessary, while the outsourcing service continues to
ingly prevalent as a way to decrease costs for both deal with the majority of customers who do not
large and small companies. For example, APQC’s overstep the rules.
OSBC research found that when three or more func-
In a similar way, small to midsize companies have
tions are outsourced, average costs of finance as a
begun to outsource as a way to gain efficiencies they
percent of revenue are only one-fourth of those costs
cannot otherwise obtain. While a shared-service
without outsourcing.
arrangement can pay off for a large company, this
Companies normally approach outsourcing in approach does not always work for a smaller firm
stages, with payroll and tax among the first to be that does not have the volume of transactions neces-
outsourced and fixed assets, general accounting, and sary to gain the associated efficiencies. On the other
accounts payable and expense as part of a second hand, outsourcing provides obvious advantages for
wave (see Figure 8). Finance strategy and planning, companies that are not as complex or large.
internal controls, and treasury are not typically out-
Companies also like to use shared services: when
sourced; revenue accounting and order to cash
managed well, shared services can improve process
might emerge as another outsourcing application in
effectiveness while helping decrease costs. The OSBC
the future.
research found that the lowest-performing compa-
The outsourcing strategy varies among industries nies most often had not implemented shared services
and sizes of companies. Order-to-cash functions are for any function and, as a result, incurred the high-
not widely outsourced today, except notably in the est cost of the finance function as a percentage of
public utilities and energy sectors. In these indus- revenue (see Figure 9).
tries, where the number of customer payments is
One consumer products company made the move
high and customers tend to get behind in their pay-
toward shared services and gradually improved the
ments, many companies outsource both their
performance of the finance function. The company
accounts receivable and credit functions, processing
optimized both IT systems and organization. The
all customers through outside services. At the point
person in charge of finance shared services

40% Wave 2 Outsourcing
Figure 8 Fixed Assets/
Outsourcing Growth (%)

Project Accounting

Outsourcing Waves7 General
Accounting
AP/Expense
Order to cash has the 20%
potential to become a more Not Typically Outsourced Wave 1 Outsourcing
frequently outsourced Revenue Accounting
(Order to Cash)
process.
Treasury Payroll
Financial Strategy Internal Tax
0% and Planning Controls
0% 30% 60%
Outsourcing Penetration (% Participants)


5

consistently improves the function by measuring efficiency. The utility, which serves a large metropol-
and tracking improvements. This company’s transac- itan area, is diverse and decentralized. The customers
tion center has become largely automated, freeing of the shared-services center pay for its costs in pro-
up finance employees to perform more value-added, portion to the benefits they gain. Performance mea-
customer-oriented financial work. sures are based on the results of shared services from
other utilities around the country. The flexibility of
Another example is a global pharmaceutical compa-
the payroll shared-service system has helped the
ny that has used shared services for more than 15
company streamline processes and dramatically
years and simply changed the technological founda-
reduce cycle time. The unit more quickly isolates
tion. The company had developed a philosophy of
problems (such as employees who do not enter the
centralization as part of its long-term strategy to
required number of hours) and addresses them
standardize, reduce costs, and increase control and
before a payroll run. Continual benchmarking
economies of scale as it embarked on a path of
against other companies in the same industry helps
growth through acquisitions in the 1990s. Accounts
the utility firm find places to consolidate and elimi-
payable has been a shared service ever since. The
nate duplication of effort.
process was run on various legacy systems but then
upgraded to an overall enterprise resource planning Besides the cost efficiency inherent in these improve-
(ERP) system that handled the parent company’s ments, an unforeseen benefit of shared services is
transactions. Now, however, the company realizes that employees in the payroll function can take on
that processes cannot be made more efficient with- other responsibilities with a longer-term impact,
out changing the technology again. The company is such as developing new-hire orientation programs
experimenting with a fully integrated procure-to- and providing training programs in financial man-
pay approach that will require integrating systems agement. As the finance function takes on more
and developing the omnibus measurement system strategic roles, it has been able to provide a new level
necessary to track transactions. of incentives for its employees and has seen its histor-
ically high turnover rate moderate over time.
In another case, a large utility turned to shared
services with the initial intent of increasing cost

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

Figure 9

Impact of Shared Services
on Overall Finance Costs8


6

MORE EFFECTIVE IT LEADS TO MORE reporting. For example, more than two-thirds of
EFFICIENT FINANCE FUNCTIONS companies with less than 33% automated processes
were unable to provide process cost data. Only 32%
APQC’s OSBC research reaffirmed that more effec-
of companies with more highly automated processes
tive use of technology helps companies achieve
were unable to provide detailed process cost data.
greater levels of efficiency and gradually frees up
personnel for more strategic tasks requiring more Looking further into the impact of automation, the
thought and managerial capacity. First, the OSBC OSBC research found that packaged financial soft-
research showed that companies with a higher ware (versus custom applications or spreadsheets
degree of automation have lower overall finance combined with manual processes) is used in most
costs.9 Companies that had automated more than core finance processes, including accounts receivable
66% of their finance processes had average finance and payable, payroll, general accounting, and fixed-
costs of 1.2% of revenues, while companies with less asset accounting. As a result, companies have suc-
automation had average finance costs of 3.0% of rev- ceeded in reducing staffing levels in these areas (see
enue. For example, companies that relied on manual Figure 10). On the other hand, less than 40% of the
techniques or spreadsheets for cost accounting and companies that submitted data to the OSBC research
cost management had average costs three times as database had off-the-shelf software implemented in
high for that process ($2.21 per $1,000 of revenue) the areas of cash management and planning, budget-
than companies with an automated process (only ing, and forecasting. These areas were among the
$0.72 per $1,000 of revenue). most staff-intensive processes within the finance
function.
Even more interesting, APQC found through the
OSBC research that while more automation means The OSBC research also found a correlation between
decreased costs, little automation even impedes 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
Defining Shared Services External benchmarks

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

7

complexity. OSBC research participants reported that MORE EFFECTIVE IT ENABLES MORE
their average costs decreased dramatically when they STRATEGIC FINANCE FUNCTIONS
used a single instance of ERP software and a com-
The use of an integrated ERP system by the finance
mon chart of accounts (see Figure 11). When they
function also paves the way to a more strategic
used multiple instances or even multiple applica-
approach. If a company establishes a more integrated
tions, the cost was more than 50% higher than with
process, planning and reporting cycle times are
the single instance and common chart of accounts.
reduced significantly, providing data for critical deci-
sions much sooner and enabling improved decision
% of Total Payments for Application Usage – Bar
Chart; Average Headcount Allocation – % in Circles making by company executives. For example, look-
ing at budget preparation cycle time or closing of
*
monthly accounts, APQC’s 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 sav-
ings each additional day the budget cycle time was
Custom
Manual/Spreadsheet
reduced (through technology and improved
Vendor Package processes).
*Includes A/R

Given the improvements possible through the effec-
Figure 10: Application Usage and Labor
tive use of ERP, finance professionals confirmed that,
Allocation by Finance Function10
moving forward, IT would take over more of the
transactional aspects of the function, while they
would take over decision support and financial

Figure 11 Planning/ Cost Accounting/ Ev aluating and
Budgeting/ Cost Management Managing
Forecasting Fi nancial
Comparison of Pe rformance
Single-Instance ERP Single-instance accounting
versus Multiple software/ERP, common
chart of accounts
$1.60 $1.69 $1.87

Instances/Multiple
Multiple instances or
Applications multiple accounting $2.62 $3.55 $3.21
software applications
(Cost of the Process per
$1,000 in Revenue)11


8

management activities, helping to make the finance a four-phase approach and using software from SAP.
function more strategic. This forward thinking is The end point: complete transparency of financial
revealed in the OSBC research: despite the current data across all global divisions. The CFO believes that
focus on processing transactions, OSBC research cash generation is the lifeblood of a consumer prod-
respondents all indicated that, three years hence, ucts company, affecting all parts of the organization.
they would be more involved with decision support Cash, in fact, is the barometer of the success of the
and management activities, underscoring the basic company’s brand-building exercises; sales indicate
importance of these more strategic capabilities (see the strength of the brand and generate the cash that
Figure 3). allows the company to fund its brand-building activi-
ties in new regions and new product areas. To devel-
These respondents reflect the fact that CFOs and
op the capability to monitor and understand the
finance functions must deal with a wealth of new
company’s cash flow, however, the CFO realized he
difficulties, including many that are at the heart of
had to take care of endemic and chronic inefficien-
the company’s strategic goals – such as increasing
cies and data difficulties in the following areas:
shareholder wealth. The CFO’s function has become
pivotal to a company’s health in the following ways: Cash management
Foreign-exchange processes
Balancing revenue generation against cost
Funds transfers
efficiency
Month-end closing and accounts receivable
Assessing risk daily
Siphoning off risk into the future through The problems with cash management were symbolic
sophisticated use of derivatives for the CFO of the root of all other evils. The process
Managing earnings expectations and the need to was essentially manual, took most of the day, and
create shareholder value resulted in many mistakes. That led to missed fund-
Mitigating the deleterious effects of exchange- ing opportunities in the commercial paper market,
rate fluctuations whose rates rise during the day; seizing opportunities
Managing the company’s compliance process to required understanding the cash position immedi-
make certain it meets governmental regulations ately at the start of the day. From there, according to
the CFO, the finance function could achieve all
Yet it is difficult for the finance function to manage other strategic objectives.
the earnings flow and shareholder expectations for
In Phase One, the company standardized and estab-
those earnings, given increasing global competition
lished new processes to reconcile bank accounts
and regulatory constraints. To achieve excellence in
daily, concentrate cash, determine a final number to
finance requires a greater attention to balancing
borrow or invest each day, improve control, enhance
operational efficiency and strategic effectiveness. The
accuracy, and pare down the number of FTEs
foundation for both is a great deal of analysis, data,
involved in the function. In another development,
and management time devoted to each, as well as
global vendor payments were integrated with the
more automation of nonstrategic, operational
bank payment systems, and customer receipts posted
processes, freeing up staff to perform the data
to the general ledger. Each day, the company could
collection.
then reconcile all global account information.
AN EXAMPLE OF A STRATEGIC Contracts in the ERP system were linked to the daily
FINANCE FUNCTION cash position, providing performance reporting and
investment calculation.
A global consumer products company has created
highly successful strategic finance functions based on

9

In Phase Two, the CFO integrated the systems of the Phase Four completed the process of developing this
offshore divisions into the main system. That tactic strategic approach. This final step entailed entering
assures he can see the state of cash management in all foreign-exchange and commodities hedging con-
operations around the world. tracts into the system, enabling the company to rec-
oncile them itself without going through a third-
Phase Three involved implementation of straight-
party processor. The company went so far as to do
through processing, whereby payments are transmit-
away with all manual processing in accounting for
ted directly to the bank from payment data. A single
derivative contracts, as well. Not only did the compa-
platform uses payment files extracted from the SAP®
ny reduce costs, but it also created the type of trans-
accounts payable and treasury applications for all
parency and audit trail necessary to truly comply
types of payment. In effect the central treasury
with the Sarbanes-Oxley Act.
department has become the house bank for all of the
company’s far-flung subsidiaries. The company
believes straight-through processing eliminates costly
errors caused by processing different payments in dif-
ferent countries. In addition, the straight-through
processing of foreign exchange has cut down on diffi-
culties in reconciling payments and revenues in the
30 or more currencies in which the company
operates.

10

CONCLUSION: A CHECKLIST FOR A STRATEGIC
FINANCE FUNCTION
The best companies, and their CFOs, recognize the In a similar way, you can also determine whether
importance of ready access to the right information you are on the right track if your financial software
to drive the right choices between different variables. provides the following:
To help determine whether your finance function is
A single source for financial information (a pre-
moving toward a strategic approach, take a moment
requisite for managing business processes
and decide whether your system does the following:
beyond financials more effectively)
Accelerates closing processes through automa- More timely access to accurate data, improving
tion, workflow, and collaboration communication between finance and operations
Improves business analysis and decision support Increased alignment between front- and back-
by providing historical and forward-looking office applications, enabling management to bet-
views, including benchmarks ter administer and track business strategy and
Deploys performance management tools that decisions
analyze the company and its resources Reduced cost of compliance with industry regu-
Maximizes cash flow through improved billing, lations (U.S. Financial Accounting Standards
receivables, collections, payments, and treasury Board and Sarbanes-Oxley)
management Improved security and controls and reduced risk
Increases effectiveness of compliance efforts of contractual and regulatory noncompliance
through comprehensive auditing, deeper report- Improved predictability, particularly with budget
ing, and management of internal controls
(Sarbanes-Oxley)
One CFO admitted, “Until we began to appreciate
the importance of simplicity in thinking through
In addition, a truly integrated systemic foundation our finance function and making it more strategic,
should help you achieve the following: we did not realize the way that technology can help
you deal with complexity, and allow you to achieve
Develop a closed-loop management process of
the strategic goals finance should achieve.”
strategy formulation, communication of goals,
and measurement
Monitor the performance of strategic key suc-
ABOUT APQC AND THE OSBC
cess factors using external and internal
RESEARCH
benchmarks
Use tools that support a financial planning The OSBC research helps executives benchmark
process that integrates global strategic planning within their industry as well as with best-in-class
and specific operational planning problems in a organizations with comparable processes. Spear-
closed-loop process headed 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 per-
formance data to the OSBC database, participants
receive custom reports, at no cost, comparing their
practices to top performers and relevant peers to
pinpoint improvement opportunities. For more
information, call 1-800-776-9676 or 1-713-681-4020.

11

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Best Practices in Creating a Strategic Finance Function

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