Session 2 - Lean Assessment of the Finance Organization

Lean Assessment of the Finance Organization

Lean Finance Conference: Session 2 Master Class Series

© Copyright 2011 Stephen G. Lynch, All Rights Reserved

About Today’s Facilitator

•  Stephen G. Lynch

•  Principal at CSC Consulting in Finance Transformation and Shared Services

•  Focus on Finance Delivery Strategy, Process Optimization and Organizational Design

•  Served as a Public Accounting Auditor and as a Corporate Controller

•  Publish the Global Finance 360 blog (www.globalfinance360.com)

•  Live in Colorado, United States


Overview of the Master Class Series

v  The Value-Adding Finance Organization

v  Lean Assessment of the Finance Organization

v  Re-engineering the Finance Organization

v  Transforming the Finance Professional


Goals for Workshop 2: Lean Assessment of the Finance Organization

•  Define the Framework for Assessment

•  Understand the Fundamentals of Six Sigma

•  Understand the Use of Benchmarking in the Assessment Phase

•  Understand an Organization’s Capacity for Transformation

•  Prioritize Areas for Improvement

•  Identify the Common Obstacles in Lean Finance Transformation


Defining the Levers of

Transformation


Defining the Levers of Transformation

•  Vision

•  Strategy

•  Corporate Governance

•  Organizational Structure

•  Processes

•  People & Competencies

•  Infrastructure (Technology, Applications & Data)

•  Culture


Product Leadership

(Apple)

Operational Excellence

(UPS)

Customer Intimacy

(Nordstrom’s)

•  Companies must excel in one discipline year-in and year-out

•  Companies must meet the minimum thresholds in the other disciplines

Minimum Threshold

World-class Finance Organizations Align with Corporate Strategy


Transformation Lever: Governance

Governance focuses on the creation of policies and the continual monitoring of their proper implementation by the appointed governing bodies.

•  Included the rights and responsibilities of each person and group in the organization

•  Typically an area that few finance organization perform well

•  Effective governance is crucial to maintaining control over finance processes

•  Governance should exist for both organizational constructs (e.g. Shared Services) as well as processes (e.g. Procure-to-Pay)


Transformation Lever: Organizational Structure

The organizational structure of the finance organization should be consistent with the overall vision and strategy of the corporation.

•  Structure should follow the corporate and financial strategy

•  Structure should follow primary information flows in the organization

•  Highly decentralized => Finance resources report up through the Strategic Business Unit (SBU)

•  Highly centralized => Finance resources report to a central Finance group

•  In transformation, the structure can be changed relatively quickly but will not be effective unless the other transformation levers accompany the change


Transformation Lever: Processes

Processes are the primary mechanism through which work gets done and focuses on the sequential routing of tasks and activities.

Processes that differentiate in the market should be enabled by technology. Commoditized processes should generally fit the technology to improve standardization.

•  Leading companies view processes holistically, regardless of functional divisions (e.g. Procurement vs. Finance)

•  Process redesign must be accompanied by the other transformational levers, such as governance and technology.

•  Metrics should be developed to monitor the effectiveness and efficiency of processes as part of the governance program


Transformation Lever: People & Competencies

People and competencies are must align with the vision and strategy of the organization.

•  Organizational competencies should be assessed to determine current skill levels

•  Personal and departmental goals for competencies should be created and monitored

•  Gaps should be identified to form the basis of both organizational and personal development plans


Transformation Lever: Infrastructure (Technology, Applications & Data)

Process design and technology enablement should occur together since technology and application capabilities can drive standardization and efficiency in the organization.

•  Understand the architecture of the hardware, software and the underlying data

•  Determine the systems in which data is stored

•  Determine the number of instances of each application

•  Understand the master data structure for key areas such as customer, vendor and inventory records

•  Level of data commonality between in-scope entities


Transformation Lever: Culture

The values and beliefs that are shared across the organization as well as the style of the organization’s leaders and the behaviors they model.

• Culture can either be a driving force or an impediment in corporate transformation efforts

• Very little of culture is written in an employee manual; most of culture has to be observed

• Culture, as a soft lever of organizational change, can be very difficult to manage and typically occurs over a longer time-frame than the hard levers of change such as process and technology redesign


Finance Transformation

with Six Sigma


Introduction to Six Sigma

“Every defect is a treasure – if the company can uncover its cause and work to prevent it across the corporation.”

Kiichiro Toyoda, Founder of Toyota


WhatisSixSigma?

•  Originally developed by Motorola in 1986 to improve manufacturing processes

•  A performance goal, representing 3.4 defects for every million opportunities

•  Focuses on improving processes by identifying and removing defects.

•  A disciplined, fact-based approach to managing a business and its processes that incorporates specific financial goals such as cost reduction or profit maximization

•  The use of Six Sigma has expanded to processes beyond manufacturing.


Who Uses Six Sigma?


•  Evaluate data to understand root cause of performance •  Understand performance gaps with best-in-class companies •  Evaluate possible priorities for transformation

•  Customer or stakeholder for each process •  Steps in the process value chain •  Parameters of each process (beginning and end)

•  Measure performance and cost metrics

•  Develop roadmap based on opportunities and key dependencies •  Focus on Critical-to-Quality issues first (e.g. regulatory compliance)

Define

Measure

Analyze

Improve

aaa

•  Create relevant performance scorecard to monitor and control •  Implement a procedure to capture data •  Integrate scorecard metrics into personal performance plans

Control

Incorporating Six Sigma into Finance Transformation


Critical Success Factors for Six Sigma

•  Understand what the customer requires

•  Translate the needs of the customer into specific and measurable elements.

•  Of all requirements defined, understand which subset of requirements is critical to quality.

•  Focus on reducing defects that impact customers’ operations


Understanding the

Current State


Information Gathering Techniques

•  Company documents

•  Interviews

•  Surveys

•  Questionnaires

•  Observations


Current State Overview

Current state reviews are based on both quantitative and qualitative analysis

Quantitative Qualitative

• Baseline cost accumulation

• Benchmarking

• Opportunity identification

• Leadership

• Program Mgmt. capabilities

• Existing initiatives

• Resources


Benchmarking: Determining How Does Your Organization Compares to World-Class Companies

Performance / Cost ???

Delivery Effectiveness

Delivery Cost

???


Benchmarking: A working definition

A measurement of the quality of an organization's policies, products, services, programs, strategies, etc., and their comparison with standard measurements, or similar measurements of its peers. The objectives of benchmarking are (1) to determine what and where improvements are called for, (2) to analyze how other organizations achieve their high performance levels, and (3) to use this information to improve performance.

Source: Adopted from BusinessDictionary.com


Benchmarking is:

•  A useful tool for understanding the drivers of high performance

•  A set of data points that are part of a comprehensive evaluation of performance that also includes qualitative measures

•  A search for ideas that can reach beyond your own company or industry

•  A labor intensive process that requires training, time and effort


•  Identify initiatives •  Decide on scope of each initiative •  Define steps in the process value chain

•  Baseline current cost and performance metrics •  Collect relevant benchmark data

•  Compare baseline data to benchmark information •  Understand performance gaps •  Evaluate possible priorities for transformation

•  Develop roadmap based on opportunities and key dependencies •  Focus on Critical-to-Quality issues first (e.g. regulatory compliance)

Define

Measure

Analyze

Improve

aaa

•  Create relevant performance scorecard to monitor and control •  Implement a procedure to capture data •  Integrate scorecard metrics into personal performance plans

Control

Overview of the Benchmarking Process


Types of Benchmarks

•  Performance/Effectiveness benchmarks

•  Process/Efficiency benchmarks

•  Sometimes a benchmark can be both (e.g. Accounts Payable invoice cycle time)


Baseline Current Process Performance

It’s critical to capture existing performance to understand where the major opportunities are and to show that the savings promised are ultimately realized:

• Collect data on performance outcomes and cost by process

• Watch out for “shadow resources” – pockets of resources that are performing a specific function (e.g. vendor invoice entry) but are labeled differently (e.g. Operations Assistant)

• Existing performance and cost structure will be a key part of the business case for change

• The information collected will be used to document performance improvements and cost savings


The Benchmarking Process

•  Identify source of benchmark data to be used

•  Understand what costs go into the benchmark data used (e.g. Are technology support costs included in the process cost)

•  Compare baseline data to established benchmarks

•  Identify key areas where there is a potential opportunity for improvement


Sources of Benchmark Information

Library Database Internal Reviews Internal Publications Professional Associations Industry Publications Special Industry Reports Functional Trade Publications Seminars Industry Data Firms Industry Experts University Sources Company Watches Newspapers Advertisements Newsletters Original Research Customer Feedback Supplier Feedback Telephone Surveys Inquiry Service Networks World Wide Web

Source: Dr. Rick L. Edgeman, University of Idaho


Opportunity identification

Performance Gap Relative to Median and High-performing Organizations

Process Cost gap ($ 000’s)

To Median To High

Performing General accounting & external reporting 547 868 Cash Disbursements 555 754 Payroll 345 513 Revenue Cycle 698 1,023 Treasury Management 23 56 Tax Management 143 245 Compliance and Administration 48 72 Total Gap 2,359 3,531

Copyright 2011 Stephen G. Lynch, All Rights Reserved

51.5

12

FTE’s per $1 Billion in Revenue Process Cost as a % of Revenue

.25

.08

Example of a Benchmark Analysis: Account to Report (General Accounting, Cost Accounting, External Reporting)

23

.27


Challenges of Benchmarking in Opportunity Identification

•  Benchmark data is a composite of a number of companies for a particular activity

•  Numerous factors can impact the actual cost and performance of a specific company

•  Benchmark is only one data point in the decision process. Companies must look at transformation holistically


Common problems with benchmarking projects

•  Process owners are not sufficiently involved in the process or deliberately hid resources

•  Stakeholders are not sufficiently informed about the nature and benefits of the program and thus are less likely to support the program

•  Process have been poorly defined

•  Poorly defined scope

•  Project is too large for the time and resources allotted

•  Team members aren’t sufficiently trained


Critical Success Factors for Benchmarking

•  Senior Management support

•  Training for the benchmarking team

•  Clear process definition

•  Clearly defined scope

•  Information technology systems that can provide appropriate data

•  Sufficient resources, including time, personnel and budget


Assess the

Organization’s Capacity

for Transformation


Assess organizational readiness for the proposed transformation project

•  Leadership capabilities. An organization should have experienced leaders to drive a transformation effort. This is true not just at the senior management ranks but at all levels of the organization.

•  Program management capabilities. Comprised of the leadership and management capabilities of staff as well as the tools and templates used to drive the program.

•  Existing initiatives that consume organizational resources. A company must realistically assess ongoing initiatives relative to organizational capacity.

•  Staff available for the transformation program. There must be enough people dedicated to the program to ensure it stays on track. Some of these must be fully dedicated to the program with their regular job backfilled.


Leadership Capabilities

•  Understanding the role of leadership in transformation

•  Characteristics of admired leaders –  Honesty (88%)

–  Forward looking (71%)

–  Competent (66%)

–  Inspiring (65%)

–  Fair-minded (42%)

Source: Kouzes and Posner, The Leadership Challenge, 2002


Program Management Capabilities

•  Leadership with experience to handle the size and complexity of proposed initiatives

•  Tools and templates to promote standardization and efficiency across projects

•  Schedule management

•  Human resource management

•  Risk management

•  Issue management


Program Management Readiness Quiz

•  Our organization successfully completes more than 70% of its projects

•  Our project portfolio s always aligned with our business goals and objectives

•  Our senior managers know the business value and status of all active projects

•  Our managers visibly support our enterprise-wide project management process

•  Our managers have the skills to deliver business value from projects

•  Our project managers are achieving their professional development goals

•  Our managers proactively address the training needs of their project teams

Source: James P. Lewis, The Project Manager’s Desk Reference, 1999


Existing Initiatives

Existing Initiatives

Human Resource Consumption

•  Staff committed to regular operations

•  Staff committed to existing project-based initiatives

Leadership Consumption

•  Number and complexity of initiatives that tie up organizational leadership

Budget Consumption

•  Level of budget consumed by existing initiatives

•  Availability of budget for new initiatives


Staff and Skills Availability

•  Projects must include the right skills, not just warm bodies

•  Leading companies backfill key positions so that assigned staff can focus on the initiative

•  Annual performance reviews should incorporate role on projects. If the project is long enough, the Project Manager should conduct the annual review.


Workshop Exercise

•  Review the Organizational Change Management Assessment handout


Obstacles in Lean

Finance Transformation


Summary of Obstacles

•  Lack of vision

•  Inadequate leadership

•  Lack of governance

•  Political influence from powerful stakeholders

•  Funding

•  Technology enablement

•  Organizational resistance


Case Study: Proctor & Gamble

benchmarking


Proctor & Gamble benchmarking

•  Multi-national consumer products company

•  Focus of benchmark was on product packaging

•  The team selected eight key processes to study and made four site visits to companies they identified as best-in-class

•  After 9 months, the team realized they weren’t achieving the goals of the benchmark project


Proctor & Gamble challenges

•  The topic was too broad

•  The project team was not focused because they were studying too many measures and their corresponding operations

•  The best-in-class companies were chosen because of their reputation rather than demonstrated performance.

Source: Benchmarking for Best Practices, Bogan/English, 1994


Proctor & Gamble lessons learned

•  Clearly focus on the project. Clearly define scope and limit size

•  Look outside your own industry for important operating lessons

•  Focus on observable systems, practices and procedures. Don’t obsess over minutiae.

•  Many best practices require thoughtful analysis of how they can be applied to the process under review.

Source: Benchmarking for Best Practices, Bogan/English, 1994


Ques0ons


Stephen G. Lynch

Contact Information:

Office: +1.719.481.2599

Toll-free (North America): 1.800.216.2512

On the Web: www.globalfinance360.com

www.stephenglynch.com

Email: [email protected]

Lean Finance Conference: Session 2 Master Class Series

Lean Assessment of the Finance Organization

Session 2 - Lean Assessment of the Finance Organization

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Transcript of Session 2 - Lean Assessment of the Finance Organization