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Adding Value to Your Organization Through Financial Process Improvement

Shifting Focus:

Organizations lived through ERP implementations, both Phase I and second wave. They survived Y2K. Many have completed Year 1 and 2 of Sarbanes-Oxley and are gearing up for Year 3. And while each of these initiatives was imperative to stay current with competitors or regulators, for most organizations they necessitated vast expenditures without yielding much in the way of value-add operational improvements. After years of effort, resource investment, and sunk and lost-opportunity costs, its time for an initiative that improves the bottom line. Something that adds value. Financial process improvement holds that promise for organizations willing to objectively examine their operations and design efficient processes that meet both current and future requirements processes with adaptability built in. One method of attaining that goal is by employing a financial process improvement framework, based on a proven lifecycle model. Using the framework, organizations can assess processes against best practices and define actions to increase process maturity. Using this type of approach can help organizations meet immediate requirements and create the tools necessary to adjust processes to evolving market conditions. Not only can such a framework provide an organization with immediate benefits, it also provides a pragmatic approach that helps eliminate major roadblocks to success.

facing many finance leaders today are: 1) how to gain additional value from those investments; and 2)how to improve the bottom line and financial processes that are legacies of those efforts in less time, using fewer dollars and resources. In fact, the industry is abuzz with white papers and articles on how to implement sustainable compliance programs to reduce the cost of Section 404, or gain secondary benefits from those expenditures. Gartners recently published Executive Program, 2006 CIO Agenda Report identified business process improvement as the top priority, with other top-five priorities including controlling operating costs and improving competitive advantage. Also consider that CFO magazine, in a recent reader survey, identified that respondents wanted the time spent on transaction processing to fall from 44 percent to 31 percent over the next three years, while increasing their spend on decision-support tools and processes from 18 percent to 25 percent. Clearly, organizations are seeking more value from their finance functions. Financial process improvement is not a new concept, but today its drivers are changes in the competitive marketplace, the regulatory environment, and an increased focus by business analysts, stakeholders and consumers. The challenge in this new environment is to achieve a practical, value-driven outcome, leveraging efforts to move beyond a singular focus on specific regulations or events, toward building processes that consistently deliver business benefits in a constantly changing environment. Real-world results tell the story: The best way to meet business objectives and increase stakeholder satisfaction is to execute a series of well-defined, realistic projects that build off of prior efforts and introduce efficiency and adaptability into each process. This approach produces a two-fold benefit for the organization: it brings immediate value by addressing and mitigating existing issues and

Introduction
A shift in focus is taking place among the leaders of finance organizations. That shift is away from largescale, multi-year, enterprisewide programs and toward quick-hit, focused efforts that yield less-costly, moretimely results with quantifiable benefits. The data is in on the large-scale initiatives of recent years, and many companies now realize they generated less value than originally expected. The questions

To learn more about our firm and professional services, contact your local Business Development Manager, or visit our Web site at www.jeffersonwells.com.

Adding Value to Your Organization Through Financial Process Improvement

challenges, while establishing a structure to help the organization more effectively and efficiently adapt to future changes. Approaching financial process improvement with this mindset allows an organization to establish a culture of continuous, flexible improvement. It enables it to increasingly rely on internal resources to help create significant bottom-line improvements, and allows finance leadership to shift the focus from transaction processing and compliance toward the creation of value for the business.

should consider what its processes would need to look like if it acquires a company, experiences rapid growth, expands into new markets or changes its product offerings. One key consideration is the data requirements for the process. What data are required every time a process is executed and what are optional? How does data flow from and to other functional areas? By building common data definitions and related controls over that data into each process, there is an increased capability to assure accuracy across functions, to build in support for continuous monitoring, and to create metrics and measurements to support business analytics. The carefully designed data model that supports each process, for current needs and future scenarios, leads to near-term efficiency gains by reducing errors and redundancy, while creating an environment that supports future growth and value creation. The same is true with process steps and technology. By developing a value stream that links customer requirements to specific inputs, processes, information systems and management activities, companies can quickly identify those steps that contribute to overall business performance. Once the process requirements for both the current business environment and anticipated future scenarios are identified, technology can be applied to complete those activities faster and more consistently. While these quick-hit opportunities are focused on delivering near-term benefits, it is important for them to be defined and executed so they also support the enterprises longer-term objectives. There are far too many examples of very visible projects that successfully remediated a current issue, but became throwaways when future projects were undertaken.

Adaptability Drives Value


Designing adaptability into specific processes enables organizations to continuously improve process efficiency. Adaptable processes are those that are easily modified to meet changing market and customer circumstances. These specific processes then become the building blocks for much broader efforts, providing a basis for rapid reconfiguration of core business functions and operations to meet changes in the external environment, thereby driving greater finance function value.

Unlocking adaptability
Companies that want to adapt to the current business environment need to design flexibility into processes and the supporting infrastructure. Once an organization focuses on a particular process, it must clearly articulate the processs current requirements and look at any potential environmental and business changes likely to impact that process in the future. For example, anticipating strategic acquisitions when building a payables process can help drive a company to incorporate remote workflow capabilities and expandability into the process to facilitate the future consolidation of the function. This could generate current savings by improving the speed of existing processes and providing flexibility to address future growth and changes. Adaptability requires a forward-thinking perspective so processes are designed by considering multiple potential scenarios, all driven by likely or significant business changes. In that context, the organization

Unlocking Value
Once an organization designs adaptability into its processes, it can leverage that adaptability to unlock value since adaptable processes become the basis for competitive responses to a changing environment. As a result, efficiency becomes more than a cost measure it provides a competitive weapon to improve customer satisfaction and gain market share. For example, if an insurance companys claims payment

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Adding Value to Your Organization Through Financial Process Improvement

process is labor-intensive and takes twice as long as the industry average, it not only costs more, but also reduces customer satisfaction and therefore acts as a drag on competitiveness. An operational assessment, with a significant focus on financial processes, can pinpoint those areas in each process where too many people take too much time to do too many things to produce too little value. Going further, if adaptability were designed into the process, the company could begin to leverage the process, by experimenting with alternative processes, going beyond meeting customers expectations to delighting customers. The shift in mindset would take a company beyond compliance to efficiency and the creation of real business value. Obviously, it doesnt do much good to process claims faster and at lower cost if a high percentage of claims have errors that must be corrected erasing not only any original time and cost savings, but customer satisfaction also. Effectiveness is as important as efficiency. If an accounts payable process consistently delivers late payments with a high percentage of incorrect remittances, it is not effective; no matter how quickly or cheaply it processes individual payments. The results of such a flawed process can include loss of prompt payment discounts and a reduced ability to negotiate favorable buying terms. By building and leveraging adaptability into the process, an organization can quickly respond to new regulations or customer requirements without lowering quality or losing hard-earned efficiency gains. Because it can quickly respond to shifts in the market, the organization can gain extra margin and incrementally better customer relations that its competitors cannot match. In a way, by implementing adaptable and efficient processes, companies could begin to welcome each external change as an opportunity to distance themselves from their competitors. At a basic level, financial process improvement failures demonstrate the critical importance of planning, organizing and managing these initiatives, using formal project management tools and techniques. Going beyond the basics, well-documented failures also demonstrate the need for consistent and persistent sponsorship; each initiative must be led by true agents of change, people with both the experience and interpersonal skills to effect change. It does an organization little good to design in adaptability but fail at implementation or initiate changes not aligned with the firms strategic direction.

The 4 Primary Phases of Process Improvement


While every situation is different, a structured lifecycle approach to process improvement must include at least the following four primary phases, each with appropriate tasks and activities: Phase I: As-Is Analysis Document current processes to a level of detail that is sufficient for management to gain a full understanding of the strengths and weaknesses that impact current operations Phase II: To-Be Development Define opportunities for more efficient processes, including: Considering retaining processes that currently meet objectives Improving processes that are not optimized Redesigning new processes for those that are highly ineffective Designing processes that are required but do not currently exist Phase III: Implementation Planning Prioritize identified opportunities based on impact/benefit analysis, as well as considering the organizations (and its resources) willingness to execute the required changes Phase IV: Implementation Execute the implementation plan using structured project management planning, oversight, and monitoring and assessment activities to measure the degree to which enhanced processes are meeting objectives based on a metrics plan with objective assessment criteria

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Adding Value to Your Organization Through Financial Process Improvement

Developing a Lifecycle Improvement Model


Carnegie Mellons original Capability Maturity Model (CMM) has been used as a framework for many types of assessment and improvement initiatives. The CMM provides an approach to describe the levels of efficiency, effectiveness and adaptability that actually exist in business operations (including financial operations). The table below includes the textbook definitions of each CMM level, with relevant descriptions of what managements focus should be and key activities the organization can perform to meet each level. Organizations can compare their specific situations to the levels below to determine where they are now in the Capability Maturity Model, and identify key activities necessary to move to the next level for specific processes. When management focuses on improving process maturity, the organization is empowered to develop the skills and tools that support adaptations to rapidly changing market conditions. Level
1

Description
Initial/ad-hoc: Few business processes are defined, and success depends more on individual heroic efforts than on following a process and using a synergistic team effort. Repeatable: Basic management processes are established to track efficiency, effectiveness and adaptability of business processes. Defined: Business processes are documented, standardized and integrated into a standard business operations model for the organization.

management focus
Respond; react

key activities
Respond to immediate compliance or customer need Identify growing volumes

Understand and document

Document as-is processes Eliminate errors, redundancy, waste and variation Requirements definition Process design Build in adaptability Project and change management Data architecture Business process management Tone at top Risk management Implement controls Test controls Continuous auditing Select KPIs/KRIs Monitor Data architecture Business activity monitoring Embed in culture Performance management Align rewards and recognition Execute rapid evolution for competitive gain Business intelligence

Design, develop and implement

Managed and measurable: Detailed process and product quality metrics establish the quantitative evaluation foundation. Meaningful variations in process performance can be distinguished from random noise, and trends in process and product qualities can be predicted.

Governance and operational acceptance and integration

Optimized: The organization has quantitative feedback systems in place to identify process weaknesses and strengthen them proactively. Defects are analyzed to determine causes; business processes are evaluated and updated to prevent known types of defects from recurring.

Cultural; ongoing improvement

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Adding Value to Your Organization Through Financial Process Improvement

Increasing Capacity for Change


While these are good and desirable goals, process improvement initiatives always face stumbling blocks. In their book, Why Change Doesnt Work, Harvey Robbins and Michael Finley identify the one fatal condition for any change initiative: fear. As they put it, Change initiatives cannot occur in a work environment overdosed with fright. W. Edwards Deming said much the same thing when he prescribed drive out fear as one of his 14 points for management. Those expected to willingly participate in a change initiative must have more confidence in what it will do FOR them than fear of what it will do TO them. By creating a culture of change, managers create the conditions that increase their teams capacities for future change. Documented and anecdotal evidence consistently identify common situations that are change killers, including: Failure to communicate the reasons and importance of the proposed changes A legacy of prior failed initiatives affecting managements credibility Lack of ongoing and visible leadership support, sponsorship and involvement Insufficient proactive focus on identifying and addressing political and cultural challenges Failure to develop and implement a change management strategy for the initiative and its results Unrealistic approach, schedule and expectations the solution will rarely be 100-percent perfect Over-reliance on technology it is an enabler, not a solution Too few skilled and available resources To overcome these barriers, organizations should apply proven, structured, and formal project and change

management techniques that provide appropriate leadership, direction and resources for each initiative. This includes considering several questions that can provide a basis to define, manage, control and gain buy-in for the initiative: What current shortcomings will the initiative improve? What changes will create the improvement? How will management assess the results of those changes?

Conclusions and Recommendations


Avoiding poor outcomes is not enough; to succeed in todays rapidly changing business environment, the finance organization needs to implement initiatives that provide the ability to adapt to future changes. This includes strengthening the alignment between initiatives and the organizations key strategies, creating a culture among leadership of active support for improvement and flexibility, and supporting change agents throughout the organization. In effect, each change must be seen as another preparation for future events. Process improvement efforts, like all major change initiatives, must have high but realistic expectations to help pull a reluctant, often skeptical, organization into sustained action. Success breeds success. Every time an organization experiences a successful change initiative, it increases the likelihood of success in its next attempt. For this reason, it is better to do nothing than to attempt a broad change initiative without first ensuring the conditions necessary for success are in place. Beyond the basics of process improvement, organizations need to begin to build adaptability into their processes. Taking a pragmatic approach that leverages past initiatives to create current efficiencies and prepares the organization for realistic future scenarios will enable it to create value and distance itself from its nearest competitors.

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Jefferson Wells delivers professional services in the areas of internal audit, technology risk management, tax, and finance and accounting. We serve clients, including Fortune 500 and Global 1000 companies, through highly experienced, salaried professionals working from offices across North America and Europe.

To learn more about our firm and services, contact your local Business Development Manager, or visit our Web site at www.jeffersonwells.com.

2006 Jefferson Wells International, Inc. All rights reserved. Jefferson Wells International, Inc. is not a certified public accounting firm.

6/06

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