Featured Discussion on Toolbox for Finance on Wednesday, May 18, 2011

I will be hosting a featured discussion on Toolbox for Finance on Wednesday, May 18, 2011.  The topic will be globalization and its impact on the development and execution of finance strategy.  The discussion will be located in the Strategy Development group.

Please join us and contribute your questions and comments.

Transforming Finance at Unilever

I came across a case study about Unilever's Finance organization that I found interesting.  As Unilever continues to enhance its global Finance organization, they've chosen to focus on five principles to drive their organization forward.  Before I get into those five focus areas, here are some quick facts about Unilever (as quoted from their website at www.unilever.com)

We employ 163,000 people in around 100 countries worldwide. In 2009 our worldwide turnover was €39.8 billion.

• Our products are sold in over 170 countries around the world. In many countries we manufacture the products that we sell, while we also export products to countries where we do not have manufacturing operations.
• The top 25 brands in our portfolio account for nearly 75% of our sales.
• We are the global market leader in all the Food categories in which we operate : Savoury, Spreads, Dressings, Tea and Ice Cream. We are also global market leader in Mass Skin Care and Deodorants, and have very strong positions in other Home and Personal Care categories.
• In 2009 we invested €891 million in research and development.
• We have 264 manufacturing sites worldwide, all of which strive for improved performance on safety, efficiency, quality and environmental impacts, working to global Unilever standards and management systems. Around 50% of the raw materials that we use for our products come from agriculture and forestry. We buy approximately 12% of the world’s black tea, 6% of its tomatoes and 3% of its palm oil.

Supporting an organization like that is no small feat.  So here are their five focus areas:

1. World-class Finance processes
2. People and Organization
3. Financial flexibility
4. Dynamic performance management
5. Innovative business partnering

One of the characteristics of world-class companies is that they transform their Finance organization to spend less time and money on transactional services and devote more time to decision support.  That mindset is inherent in Unilever's focus areas.  While the term world-class can mean different things, it typically measures the performance of both an organization's effectiveness at delivering a particular process (such as Accounts Payable) as well as the efficiency in which it does so.  True world-class processes are in the top quartile of their peers as measured by geographic reach and organizational complexity.

Another focus area that has become far more important during the economic downturn is the concept of financial flexibility.  Companies are looking for ways to reduce fixed costs and outsourcing has become a leading mechanism for achieving that flexibility.  Outsourcing relationships typically transfer the fixed cost to the service provider, giving a company more flexibility in how it structures costs.

The third comment I'll make is Unilever's focus on innovative business partnering.  Traditional Finance organizations focus on controllership.  Innovative Finance organizations look for value-added ways to interact with the business units they support.  This includes more sophisticated decision support tools and processes to enrich product and customer profitability, understand underlying cost drivers and to provide additional insight into acquisition targets.

In a future post I'll discuss the focus areas of People and Organization and Performance Management.

Five mistakes that damage the effectiveness of Shared Services and how to avoid them - Part 1

Leading companies have leveraged captive shared service centers to drive process standardization, improve service delivery and dramatically reduce costs. Yet many companies continue to struggle with the role of a captive service organization in their overall delivery strategy. Despite upbeat predictions from their business case, some companies have failed to realize the anticipated benefits from their Shared Service Organization. How is it that some companies fail to realize the benefits of Shared Services that many other companies have successfully realized? While every organization is different, there are common traits among companies that are not achieving the goals of their captive Shared Service Organization. Five of these mistakes include:

1. Shared Services is not evaluated as part of a comprehensive delivery strategy
2. The vision for Shared Services is not clear and compelling
3. Processes are consolidated into Shared Services without the required transformation
4. Comprehensive change management is not a priority
5. A strong governance structure is not implemented

In this first post, I'll address the issue of including Shared Services as part of a comprehensive strategy:

1. Shared Services is not evaluated as part of a comprehensive delivery strategy

A Shared Service Organization developed apart from a comprehensive delivery strategy will not effectively support the company’s corporate strategy. Depending on a company's previous success handling specific activities and its overall strategy, some processes that might move to a captive service center would be better of handled by a 3rd party, either onshore or offshore.

High performing companies focus on building a comprehensive delivery strategy that incorporates both captive and 3rd party suppliers. An organization’s service delivery strategy should support the overall corporate strategy and includes a consideration of the company’s existing and planned business lines and geographic presence. It also includes an objective analysis of the supplier-side capabilities from both the captive service organization and 3rd party service providers. Another consideration is the global distribution of support services including an analysis of onshore and offshore delivery options.

One of the major steps in determining where an activity will reside is to document the end-to-end process to include not only the individual activities in the process but also the department (such as Accounts Payable) that will be performing the task.  Once the totality of the individual tasks is understood and documented, a company can make a more informed decision regarding its ability to handle those activities in-house.  A number of factors will go into this decision including the company's ability to handle that specific activity, the effectiveness of handling it and the anticipated cost.  These metrics and others can be evaluated against 3rd party service providers.   When the decision to move to Shared Services is made in conjunction with a comprehensive delivery strategy, rational decisions can be made around the placement and delivery of services.

Creating the Finance strategy that drives performance

Finance strategy is now more important than ever.  Global competition, cost pressures, sourcing alternatives, global compliance, reporting convergence, acquisition analysis and integration – today’s Finance organization must continue to find new ways to partner with their business to deliver the value-added services required to remain competitive. 

Unfortunately, in today’s complex operating environment it can be a challenge to create and execute the strategy required to accomplish these goals.  A comprehensive and mature Finance strategy should be:

• Actionable.  A strategy must be realistic and detail specific behaviors to bring the strategy to fruition.  Actionable plans at each level of the organization must cascade downwards so that personnel on the front lines understand corporate and financial objectives and how their activities support those objectives.
• Flexible.  In a world marked by globalization and quickly changing opportunities, businesses and their Finance organizations should be characterized by a flexibility that enables them to respond to those new opportunities in a pragmatic and disciplined manner.  This includes establishing the proper cost structure, balancing fixed and variable costs that maintain cost discipline yet enables the flexibility required.
• Scalable.  High performing Finance organizations have the systems, processes, organization and governance structures in place that enable them to scale as their business grows.  Acquisitions are effectively integrated into the organization and anticipated ROIs are achieved on schedule.  There is a defined approach that enables Finance to support expansion into new geographic markets.
• Supportable.  A strategy that cannot be supported by existing or planned resources is worse than ineffective; it will lead the Finance organization down the wrong path instead of generating the value-added delivery capabilities their company requires. 
• Measurable.  A well-crafted strategy has specific and measurable outcomes.  Finance strategy should have an integrated set of key performance indicators that assist in the evaluation of Finance’s effectiveness and efficiency in delivering the services that support corporate objectives.

Ultimately, an organization’s financial strategy must be aligned with the corporate strategy. It is no longer sufficient to be the scorekeeper who reports historical results.  Today’s Finance organization must be an equal partner in the formation of corporate strategy and provide the intelligence, analysis and insight necessary to support the corporate vision for growth and profitability.