Finance Effectiveness Consulting

The „Insight‟ Dimension

Finance Effectiveness – Insight 2012

PwC

Insight

Compliance & Control

Efficiency

Finance Vision &

Organisation

Enablers (People & Technology)

Key Finance dimensions

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PwC

Contents

1. Insight – An Overview 4

2. Our Services 11

3. Case Studies 16

Page

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PwC

Section 1 Insight – An Overview

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PwC

Insight

At the heart of the future finance function vision is Insight. It involves enhancing effectiveness of corporate strategy and comprises:

• Business Strategy & Strategic Planning

• Budgeting & Forecasting

• Management Reporting

• Business Analysis

• Performance Improvement

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Section 1 - Insight – An Overview

PwC

Business Strategy & Strategic Planning

Business strategy & strategic planning: Strategy and planning includes finance‟s participation in formulating business strategy, and developing the organisation‟s strategic business plan.

Features of good practice:

• Finance function has established an integrated approach to planning, budgeting and forecasting with a formal

framework that documents the objectives, scope, expected accuracy, time horizon, extent of scenario analysis, potential

issues and review procedures that need to be considered while developing the business plan.

• Senior finance leaders are proactively engaged with the CEO and the organisation‟s senior executives in the development

of the business strategy (ie 3 and 5 year plans)

• Long term and annual business plan objectives are approved by the Board linked to the achievement of the

organisation‟s mission through measurable objectives

• Finance people are involved in facilitating the strategic planning process across the organisation e.g. supporting the

business in preparation and determination of business goals, strategies and tactics

• Financial strategy encompasses tax strategy and capital structure (e.g. WACC, gearing, share buy back)

• Simplified and streamlined legal entity structure

• Contingencies built into the business plan

• Short term business plan is translated into the organisation‟s budget for next year and into a long-term forecast for the

years thereafter

• Subsequent revisions to the business plan are reviewed and approved by the Board

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Section 1 - Insight – An Overview

PwC

Budgeting & Forecasting

Budgeting & forecasting: The ability to assess and design the budgeting process including key components of a budget, developing assumptions, different budget approaches, monitoring performance against budget. Ability to assess and design the forecasting process including developing assumptions, different forecasting approaches, preparation and consolidation of outlooks/forecasts.

Features of good practice:

• Clear and comprehensive budgeting and forecasting guidelines issued to staff who have been trained on the budgeting

objectives and process to be followed

• Link between rewards and performance against budgets that discourages game playing

• Reduced time spent on budgeting – annual budgeting cycle takes less than 2 months

• Move from annual budgeting to rolling forecasts – rolling forecasts reflect market changes quicker

• Scenario planning is actively used to simulate market changes

• Trend lines are used to estimate revenues and costs

• Highly efficient and standardised recurring activity allows time for pro-active insightful analysis

• Budget preparation is tool based and integrated – budget performance/quality measures used

• Driver based budgeting process

• Organisation-wide standard formats for assumptions, data collection formats and timetable

• Budgeting lines that reflect market information - <1000 lines in the budget

• Budget to include both financial (profit) and non-financial (customer satisfaction) and internal (gross margin) and

external (market share) measures

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Section 1 - Insight – An Overview

PwC

Management Reporting

Management information (MI): The compilation and creation of management reports to support the organisation‟s management team in understanding performance against short and long-term plans and forecasts. Reporting may include traditional paper based reports, web-based reports, and balanced scorecards delivered in an Executive Information System (EIS) or a combination.

Features of good practice:

• Right information at the right time in the right place to support business needs

• Real time customer and product profitability analysis available to the business

• Governance in place to ensure ownership and integrity of management information

• One source of truth – consistent and accurate information across reports and functions

• Flexible environment to cater for new information and reporting needs

• Management information contains financial and non financial metrics

• Management information linked to performance metrics

• Internal and external information should be used e.g. external benchmarks

• Balanced scorecard designed with financial and non-financial measures to give holistic approach to performance

management

• Regular review and update of performance measures

• Standard reports are proactively used by management to aid decision making

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Section 1 - Insight – An Overview

PwC

Business Analysis

Business analysis: This is a key function in all finance functions that provides robust analysis of internal and external trends to aid decision making (e.g. Investment appraisal and cost analysis)

Features of good practice:

• Covers all areas of analysis including market overview, strategy, value creating activities and financial performance

• Supports mergers and acquisitions, divestiture and project analysis

• Clearly defined business analysis framework that is closely linked to statutory and management reporting

• Flexible to provides analysis of multi-dimensional components of the business (including customer, product, channel

etc)

• Leverages automated systems for data collation and analysis

• Interfaces to external data providers for economic and competitor analysis to help provide consistency in assumptions

• Has a broad and established network across the different components of the business

• Established standards, tools and methodology for conducting analysis

• Dedicated and trained resource within the finance function

• Spreadsheets used in for complex modelling only rather than data manipulation

• Sophisticated tools and techniques used e.g. Simulation Modelling, Decision Support System (DSS))

• Business partners able to communicate and interpret the commercial implications of the results in language the

business understands

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Section 1 - Insight – An Overview

PwC

Performance Improvement

Performance Improvement: Involved in the delivery of both finance function improvement initiatives and wider improvement opportunities within the business as subject matter expertise.

Features of good practice:

• Dedicated improvement team within the finance function with finance staff managing finance improvement initiatives

on an on-going basis

• Finance FTEs involved in finance driven business improvement initiatives and are consulted up front as subject matter

expertise.

• Finance function has succinct and clear performance measures that align with the business objectives, enabling

identification of improvement opportunities.

• Finance function has skilled resources in business improvement methodologies such as Six Sigma and Project

Management.

• Proactive business case development to initiate business improvement opportunities within the finance function and

finance driven business improvement activities such as process re-engineering.

• Effective use of external consultants with focus of knowledge and skill transfer whenever used

• Ongoing tracking and reporting of benefits linked to the business case for change

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Section 1 - Insight – An Overview

PwC

Section 2 Our Services

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PwC

Benchmarking – framework for assessing the finance function

ABC Co

Peer Group Above Median

Top Quartile Performance

Peer Group Below Median

Eff iciency

Business Insight

Compliance & Control

10 10

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© 2008 PricewaterhouseCoopers LLP. All rights reserved.

..Using key metrics to evaluate performance and inform value creation opportunity in insight, efficiency and control

Efficiency Transaction processing cost as % of revenue % of Finance FTEs in shared services No of transaction processing locations End-to-end process ownership for P2P, O2C, R2R No of ERP instances No of chart of accounts Cost per AP transaction AP transactions per FTE AP error rate AR cost per remittance AR error rate Average days to period end closing Materiality limits for inter-company transactions

Key Observations:

Decentralised structure combined with non-standard processes and technology is the key driver of high cost, long cycle times and high error rates in transactional processes

Also has implications on the quality of control and compliance on financial processes

Business Insight Business insight process FTEs as % of Finance FTEs % of Finance FTEs in business partnering roles Succession planning: % of key positions covered L&D hours per Finance FTE Finance reporting line Finance role in strategic planning End-to-end process ownership for MI Days to complete budget Average number of budget line items Management reliance on forecast Use of integrated balanced performance scorecard Single data repository for MI

Key Observations:

Staffing model must be leveraged to increase focus on decision support and align with business partnering strategy

Business complexity and “over-engineered” planning processes may be stifling business performance

Compliance and Control Compliance and control process cost as % of revenue Internal audit costs as % of revenue No of Finance locations No of legal entities Risk culture measurement Controls accountability % of key controls automated Process automation Number of key control issues outstanding at year end Days sales outstanding Cost per tax return

Key Observations:

Stakeholder awareness of control and risk remains high on the agenda

Complex business model and high level of manual controls presents a major challenge in sustaining focus on control and compliance, especially as business undergoes major structural change and realignment of processes

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Section 2 – Insight – Our Services

PwC

Enterprise Performance Management

CFOs are constantly posed certain key questions by the board, the CEO and the shareholders:

Do you have a clear picture of performance across the business?

Can you provide analysis to the Board that enables confident decision making?

Is your business strategy cascaded to business unit and team objectives through KPI‟s?

Are you able to enforce performance driven behaviour consistently throughout the organisation?

Do you have genuine foresight through predictive, risk based scenario plans?

Is your organisation making decisions that affect short and long term focus based on facts and analysis?

Is your ability to plan and monitor performance against the plan undermined by inconsistent/non-transparent information?

We help CFOs create a culture of continuous performance monitoring and improvement, which in turn enables them to answer these questions with conviction.

Our Enterprise Performance Management (EPM) capabilities span the entire strategy-to-monitor process chain - strategy development, strategy translation, budgeting/target setting, performance measurement, performance review and incentive compensation. We view EPM as a continuous process generating results and help deliver a seamless cycle of performance management. Our methodology helps us pinpoint our clients‟ issues that impact effective strategy implementation and address them by realigning the organisation‟s focus and securing the buy-in for a shared objective at the highest level in the organisation.

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Section 2 – Insight – Our Services

PwC

Enterprise Performance Management (contd.)

Strategy to Plan process cascades the organisation‟s vision into financial and non financial metrics and creates accountability to enhance business performance across the organisation.

Measure to Forecast process is the agile day to day analysis, weekly and monthly reporting, modelling and decision support activities required to adjust business objectives and the forecast.

Recognise to Reward process sets out the individual behaviours, delivery metrics and reward model to align people‟s performance to business performance.

Our strong implementation capabilities enable us to ensure sustenance of the changes we design and the value we create for our clients.

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Section 2 – Insight – Our Services

PwC

Enterprise Performance Management (contd.)

Integrated Performance & Risk Management provides insight into what value drivers a company has to excel at as well as what key risks it needs to manage to create & guard value

A well defined KPI hierarchy disintegrates enterprise level strategic goals across value and risk dimensions.

Enterprise level targets are disseminated to BU level targets , to function level targets and eventually to individual/team targets through a detailed KPI framework

The KPIs can subsequently be linked to project portfolio and KRAs to create an integrated performance management framework.

We work closely with our People & Change, Operations and Technology practices to bring in necessary subject matter expertise to our EPM delivery.

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RoCE

Section 2 – Insight – Our Services

PwC

Section 3 Case Studies

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PwC

EBITDA/ RoCE Turnaround Strategy

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Client context and challenge

A leading automobile manufacturer in India was recording consistently low EBITDA margin and RoCE compared to peers. The company wanted to drive a multi-function profitability improvement program that would help them attain a competitive EBITDA margin and RoCE. PwC was brought on board to estimate the opportunity that existed across functional areas including Procurement, Design, Production, Supply chain, Marketing, Human resource and Business planning that would feed into developing the best set of initiatives for EBITDA & RoCE transformation and also help in creating a roadmap for the transformation. The company also wanted to re-evaluate the existing project portfolio from a quantitative perspective considering opportunity, risk, resources, impact and the resultant priority.

Our approach • PwC undertook a structured approach that included directional benchmarking, gap analysis & projects assessment, to estimate the opportunities across functional areas.

• By translating the P&L and Balance sheet benchmarking into function level benchmarking, a comprehensive set of actionable gaps could be identified. These were further used to build a roadmap for transformation.

• A customized multi-factor quantitative assessment model was built for evaluating existing and new projects.

Value delivered

The approach enabled PwC to quantify opportunity areas at a functional level. 10%+ gain in EBITDA identified (each functional area contributing in the range of 1% - 3%) with potential to double RoCE. This paved way for a Transformation roadmap with:

List of new initiatives at functional level to achieve the identified potential A/B/C prioritisation of initiatives; Creation of Implementation plan Integration of initiatives with plan and budget Resource plan/ Capex plans for the initiatives

Section 3 – Insight – Case Studies

PwC

Implementing an Enterprise Performance Management framework

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Client context and challenge

The client is a leading two and three- wheeler manufacturer in India. The client had a performance governance framework which was deployed at an aggregate level and was finding difficulty in measuring performance at a brand level/ regional level/ functional level. The existing costing, budgeting and reporting system was also not integrated to provide the right supporting data to the management. The client was seeking help on improving its Enterprise Performance Management Framework that spans the entire corporate governance process from planning for performance, budgeting against the plan, setting measurable goals, measuring the performance and managing variance.

Our approach • We conducted a thorough assessment of the budgeting, costing reporting process through extensive interviews with the stakeholders and also identified the gaps from expectations as well as missing linkages in the existing governance structure

• We leveraged our Global Best Practices (GBP® ), and knowledge repository to identify process improvement opportunities in the costing hierarchy, absorption policies, dashboard sand the KPI structure

• We developed standard operating procedures along with templates for the budgeting, planning and costing processes and created workflow, authorisation matrix, approval and control points for each critical step

• Comprehensive report catalog and templates for dashboards were also prepared and delivered

Value delivered

The Enterprise Performance Management framework was integrated with the planning, budgeting and costing processes. With comprehensive reporting and dashboards, the client was able to deliver the right information to the right people at the right time for effective decision support. With a comprehensive KPI tree in place, the client was able to strengthen governance mechanism by building linkages between organisation objectives and departmental performance indicators. In addition to consolidation of existing KPIs, additional KPIs in previously ignored areas of Risk and Capital Employed helped client gain better control on entire business performance

Section 3 – Insight – Case Studies

PwC

Designing a costing and budgeting system

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Client context and challenge

The client is a global pharmaceuticals company that has acquired the formulations arm of an Indian company. The acquired facility manufactures 80 different products under four major categories. The client was interested in developing a spreadsheet based standard costing system for the product portfolio and enabling the use of the system through SAP. The standards would also form the basis for budgeting and planning. Subsequent capacity expansions within the facility and the resultant impact on costs had to be taken into consideration. Lack of reliable cost data prior to acquisition and lack of relevant expertise within the organisation were the major challenges.

Our approach • Studied operations in the current facilities and arrived at theoretical capacities for the individual production lines taking into account capacity constraints such as regulatory considerations

• Identified the allocation drivers and absorption rules for overheads • Identified routing, direct labor and machine hours per unit of output • Designed budgeting template based on the established standards • Developed a cost model to be used as a guideline for SAP reconfiguration • Prepared user manuals for the cost model, cost sheet and budget templates

Value delivered

• Ability to compare and evaluate cost impact of different scenarios with respect to capacity, cost elements and production mixes.

• Standards to serve as reference for decisions related to pricing of individual products • Easier identification of excess capacity and ability to separate the component of capacity built for future

use.

Section 3 – Insight – Case Studies

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Hari Rajagopalachari Executive Director – Consulting PricewaterhouseCoopers Office: +91 80 4079 4000 / 7000 Mobile: +91 97403 77100 Email: hari.rajagopalachari@in.pwc.com

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