You are exploring a webpage on www.juergendaum.com

Juergen H. Daum’s Best Practice Channel - Finance

Empowering Finance for E-Business

By Juergen H. Daum

New collaborative E-Business models and a highly dynamic more intangibles based new New Economy have a far reaching impact on companies and are calling also for a new concept for Finance.

After the first and second E-Business Wave (the first focusing on e-commerce: selling online; the second related to supply chain management, enabling companies to deliver what customers ordered online) the focus is back on finance. In the new New Economy companies have to learn how to manage for profit (short term) and how to create sustainable shareholder value (long term) at the same time and have to manage E-Business processes from order to cash. Organizations have to find ways to optimize the financial supply chain - the flow of cash - by leveraging E-Business in order to reduce working capital and ensure that the company is not running out of cash.

The chief financial officer (CFO), presiding over processes that cut across the business, is well placed to help the executive team face these challenging questions:

· How can we design new business models which exploit the full potential of the new New Economy and its new economics ? How can we monitor its impact on the company’s performance ?

· How can we make sure, that new strategies are translated into action fast and successfully ? How can we provide our key decision makers with real-time information that will help them identify and exploit opportunities to create value and meet our targets ?

· Which of our intangible assets – like our brand equity, customer capital, human capital, the business partner network, and the R&D pipeline – does the market value most ? How can we better exploit our intangible assets to create sustainable value for shareholders and stakeholders and generate short term profits at the same time ?

· How can we leverage financial processes across the business and across the E-business network to create competitive advantage, cut costs, reduce working capital and increase free cash flow ?

To support their company’s migration to e-business, leading CFO’s reinvent their finance functions wholesale – structure, processes, systems, and skills. They progress toward a new vision that connects virtual business and financial operations with advanced analytics to turn data into information into knowledge for use across the extended enterprise. By linking the company’s own financial processes and systems with those of e-business partners horizontally and by extending integration vertically to support value-based decision making and communication, a new type of software applications – such as SAP’s next generation mySAP Financials solution - empower finance professionals to play their role in sustaining optimal performance.

Figure 1: E-finance solutions integrate financial processes and systems horizontally across the extraprise and vertically between management levels

mySAP Financials supports the CFO and financial professionals in their four major tasks for empowering finance for E-Business and to enable their company’s to harness the full power of the new New Economy:

· Restructure the finance function to become more efficient and nimbler (leveraging finance resources across the organization through shared services for transaction processing, delegating analytic tasks into the business and enable for analytic and decision support self services)

· In their role as economic coach they have to support their company and business managers in reducing physical assets and improving operative efficiencies to built intangible assets through value chain analysis, asset disposals, working capital improvements, increasing intangible asset values and reducing operating costs. In addition they have to provide support for leveraging networks, working with business partners, entering electronic marketplaces, and developing and participating in new economic models trough competitive financing, business planning, broadening shared services, outsourcing business processes and IT applications, and attracting and allocating resources.

· Provide economic methods and tools to empower executives, managers and knowledge workers to exploit the full value of the company’s tangible and intangible assets to both generate short term profit and long term value for shareholders and stakeholder

· Reengineer financial processes, leverage the potential of new collaborative business models for the financial supply chain to reduce cost and working capital and to improve convenience and increase value for customers in interacting with the company in financing, payment and settlement transactions

The role of Finance as a company’s “Business Integration Hub”

Once upon a time you could look at a balance sheet and P&L for the essential information needed to run a business or to make investment decisions. Those days are over. Today, management and investors need a much broader, keener perspective into both financial and non-financial issues, into tangible and intangible assets. It’s the task of the CFO to provide these insights across the entire business - even if it is based on a complicated systems landscape. An E-finance solution like mySAP Financials provide the platform to do this. It integrates the diverse systems that support a business into a seamless financial supply chain, and provides a consistent accounting view on it, to support both external and internal reporting. Above this layer of integration it offers tools to access and analyze all relevant business data in a meaningful way, to support cross functional decision support – for example through predictive modeling, and for advanced strategic enterprise management (see Figure 1).

With these solutions, organizations are able to gain a complete, unified perspective of all financial and business activities – even the ones that take place outside the borders of the company. E-finance systems can integrate and tame an unruly heterogeneous systems landscape that includes legacy systems and software systems from various vendors, and in so doing:

· optimize activities within the financial supply chain,

· support a comprehensive e-business accounting approach,

· enable advanced business analytics and strategic enterprise management.

Through this integration, the CFO and management gains a unified perspective of all financial and business activities, and with that, the ability to fully measure and manage risk, reward, opportunities, and performance across not only internal functions, but across the entire business ecosystem.

Ultimately, Finance must be the hub at which all these factors converge. Moving to E-Business scenarios for long standing business functions, like SCM, CRM, HR, and so forth, doesn’t change the fact that Finance must remain the company’s business integration hub for these practices.

The value of advanced analytics and integrated “rolling” strategic enterprise management processes

Using analytic software applications, a CFO could look, for example, on the actual financial performance expectations of investors, which are already built into the company’s actual share price. He then could analyze, if a value gap exists between those expectations and existing mid and long term plans of the company’s management team. Through advanced modeling and simulation capabilities he then could run simulations to assess the impact of certain market changes and internal activities, and analyze if and how the company can close that value gap. Strategic Enterprise Management software applications (SEM) like SAP SEM, an analytics application which is part of the mySAP Financial solution, are supporting such tasks and related business performance management processes as well as as outside reporting and communication. They cover the entire strategic enterprise management process, end-to-end:

Strategic analysis
Strategy definition and its breakdown into strategic objectives
Resource allocation and budgeting
Financial consolidation
KPI-based performance monitoring based on balanced scorecards
Reporting to investors and financial analysts through an investor portal

They even offer also interfaces to an HR system to link personal scorecards directly to compensation. By adding Business Analytics, usually a suite of analytic applications (Financial Analytics, Customer Relationship Analytics, Supply Chain Analytics, Product Lifecycle Analytics, and Human Resources Analytics) the strategic enterprise management software application is extended from the strategic to the operational level. With these applications, it is now possible to control and optimize operational processes across functional borders by providing a comprehensive picture on customer-, employee-, product-, and business partner related processes. This enables managers to track customer buying patterns, then analyze customer profitability and customer life time value from a financial perspective and to link this information with the product perspective in order to finally optimize supply chain management, product development activities, and HR management in a market driven outside-in approach.

It also has enormous value to a CFO and his team that SEM enables companies to cast and automatically consolidate rolling budgets. This is because fixed budgets don’t work anymore today. A static instrument that locks businesses into something that management thought about last year can not be effective in a global economy with rapidly shifting market conditions and quick and nimble competitors. Comparing the “annual budget”, which is in essence last year’s reality, with actual revenues and expenditures on a monthly basis does not provide companies with useful information to manage a business. It merely locks them into the past. But rolling, perhaps monthly, forecasts and budgets focus managers on current and future realities. Through the monthly forecasting exercise, managers in an organization are forced to think ahead. For the company as a whole, it provides the possibility to offer realistic expectations for revenues and costs, and allows senior management to react before financial figures turn into the red. Budgets and forecasts are tools for resource allocation. Resource allocation needs to be consistent with strategy and prevailing business conditions. Therefore companies have to manage strategy as a continuous process, so that strategy can be adaptive to changing business conditions, and resource allocation can follow suit. As they execute strategy-setting tasks again and again on a monthly or even weekly basis, they need a good strategic enterprise management system that allows you to do that very efficiently.

Figure 2: Integrated management and decision-support processes drive value creation

Management processes for performance management, covered by SEM, which integrate consolidation, reporting, analysis, simulation and rolling forecasting/budgeting, play a key role in a fast changing market environment and help an organization to nimbly adapt quickly to changing market conditions. This process, the strategy and business management loop, has to be linked to the operational management loop, now supported by Business Analytics, and this one to the business execution systems, providing a comprehensive picture and decision support from strategy to transaction and across functions (see figure 2).

Optimizing the Financial Supply Chain

It is not just materials that flow up and down the length of your supply chain. Cash, for example in the form of payments, flows too. And excess working capital, required by inefficient billing, payment, collection and settlement processes, as well as related financial transactions, comes with a price tag. Bills cost money and resources to generate, resolve (when disputes arise), and collect upon. Managing and issuing payments to vendors comes at a price too. To borrowing money from the bank and other cash management and treasury activities come with a price tag. So there are ample opportunities along the length of the “financial supply chain” to cut costs with e-finance activities (see figure 3). I’ve listed two examples in Figure 1. Electronic Bill Presentment and Payment (EBPP), for example, is an e-finance solution that can reduce the overhead associated with issuing invoices by as much as 70% . For many large companies, that translates into millions of dollars of savings per year. On the accounts payable side, “payment factories” or “payment hubs” offer another avenue for huge cost savings. Some of the larger, global corporations have implemented such “payment factories” that aggregate payments to suppliers on a worldwide basis and optimize the routing of these payments through some preferred banks and financial service providers. In so doing, they have dramatically reduced the overall number of payment transactions as well as cross-country payments. The result? Significant transaction cost savings and reduced bank fees.

Figure 3: Opportunities to along the financial supply chain to cut costs, release working capital for other investments, and optimize cash flow

CFO’s who take advantage of opportunities to automate such processes using the Web can cut costs, release resources to focus on activities that add more values, and increase convenience and value for customers in interacting with the company. In addition, the use of electronic bill presentment and payment (EBPP) systems and of new financing and payment methods (electronic financing, payment and settlement – EFPS), together with online dispute resolution and self-service customer support, allows much more effective management of working capital tied up in accounts receivable and cash positions.

CFO’s who in addition outsource parts or all of these processes to external service providers and adopt new collaborative service models, are able to cut costs of financing, settlement and payment processes further. A range of service providers are positioning themselves to take on aspects of the settlement role from companies. Emerging offerings include shared service environments for accounts receivable and accounts payable, as well as services for bill production and presentment, and extraprise netting and financing and treasury services. An example is Orbian.com – a joint venture of SAP and Citibank – that provides a new electronic payment and financing model. Advanced E-finance solutions provide not only the described software solutions, for example for EBPP, dispute handling etc., but provides also the integration to related backend processes, such as accounts receivable and accounts payable, and the integration with external services such as Orbian and optimize the collaborative financial supply chain from end-to-end.

Restructuring finance

As the company positions itself for optimizing value in the New Economy, the CFO and finance function must redefine their roles within the business. What kind of organizational structure will best allow finance to fulfill its new role ? Already, most finance functions have made a significant shift – driven by investment in information systems and shared service centers – toward being less resource intensive, more efficient teams, particularly in the area of transaction processing, allowing increased emphasis on decision support. In the future, finance will be even leaner. With many tasks delegated to business managers or handled by shared service centers or external outsourcers, the finance staff will act as coordinators and offer higher value, adding more strategic services. Standardized, integrated processes and systems will be embedded within the business, and they will be available globally to users who can operate them without needing to be aware of where they are located and maintained. The critical role of decision support may be fulfilled primarily by managers outside finance. Finance professionals will adopt a new training and coaching role to transfer appropriate skills and techniques.

As the E-finance solutions, such as mySAP Financials, are based on a software component architecture – that is on components which are able to talk to each other and third party applications directly through open interfaces and Internet standard protocols such as XML and especially XBRL – this will allow users to deploy software applications step-by-step when and where needed. This also protects investments in the existing system landscape by making it part of the future and potentially allows new functionality to supplant existing systems in a phased way that does not require a big-bang replacement. This concept also allows migrating to shared services or to outsourcing of certain functions in a step-by-step approach supporting the above described migration to new structures in finance.

The Business Case for Change

What kind of return can you expect from your investment in implementing integrated financial, management and decision support processes and systems to support E-Business ?

Expert analysis, backed up by observations of the performance of real-life companies, shows that new business models can have a major beneficial impact on the key drivers of profit and value:

· A global oil company found that moving finance and accounting processes to shared service centers cuts associated costs by between 20% and 50%, depending on the region served

· A multinational telecommunications company with complex billing requirements has bolstered its redesigned collection process with electronic bill presentment and payment software. The result of these and related systems updates: a 60% reduction in customer dispute resolution cycle time, a 15% reduction in days sales outstanding.

· A global drinks manufacturer has eliminated $ 100 million in costs (mainly costs for the traditional annual budgeting process) through an initiative to globally streamline performance management processes so that targets align with strategic goals and bottom-up reporting of KPIs connects with rolling forecasts, rendering the traditional budgeting process obsolete.

· Savings of $825 million a year give the CFO of a global technology company a reputation for getting the most from integrated analytic applications. Because decision makers access real-time management information via a Web browser with no need for support staff as intermediaries, there’s been a 27% percent productivity improvement.

The two-fold challenge for the CFO and finance in a less enterprise-bounded e-business world is, to extend electronic connections horizontally across the extraprise, between the company and its customers, suppliers and partners, and vertically between transaction-oriented systems and higher-level systems for financial, strategy and business performance management.

More about Juergen Daum's Best Practice Channel on Finance:

Juergen Daum's Trend Reports related to finance

Articles, presentations etc.

Expert links

Books

You are exploring a webpage on www.juergendaum.com