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1. Developing a Center of
Excellence (COE) for financial
planning and analysis
Life sciences CFOs can address growing cost pressures
through decision support centralization
By Brad Smith and Sterling Barnett
Deloitte Consulting LP
2. In recent years, the pharmaceutical industry has Not all FP&A work is equal
experienced significant challenges stemming from patent The FP&A function serves a critical role by delivering
expirations, issues with R&D productivity, uncertainties relevant and insightful information to top executives
from evolving legislative and regulatory action, and to help them make informed business decisions. FP&A
considerable industry cost pressures. As a result, the personnel are typically among the most seasoned and well-
industry has experienced a market capitalization erosion compensated staff members within an organization.
of 30 percent since 2000.1
However, close examination of day-to-day FP&A
This environment isn’t likely to improve soon. As a activities may reveal some inefficiencies. For example,
result, operating cost reductions will likely continue to FP&A processes are typically fragmented with significant
be a focus for many life sciences companies. Many of customization, redundancies, and inefficiencies as each
these companies have already trimmed finance budgets local entity seeks to best serve its specific business
through successful shared services programs that focused customers. This can lead to highly compensated FP&A
on traditional transaction-processing activities, such employees’ time spent on the transactional aspects
as accounts payable, accounts receivable, and general of FP&A processes. We believe that most of these
accounting. Now, however, companies need to find transactional FP&A processes could be more efficiently
additional savings in other areas. performed in a centralized environment.
One area that holds significant cost-reduction opportunities Despite such cost-saving opportunities, the FP&A function
is the financial planning and analysis (FP&A) function. has typically not been a candidate for centralization due
According to Deloitte experience, FP&A functions to the high visibility and strategic nature of the work
typically make up approximately 25 percent of finance performed. FP&A activities have frequently been considered
spend and represent the next frontier of finance savings “untouchable” candidates for centralization given the
opportunities.2 perceived level of business knowledge required to perform
these activities. The FP&A function interacts directly with
Within the pharmaceutical industry, the FP&A function business leaders, helps set strategy, supports decision
represents an even greater opportunity. These companies making, and affects future financial performance.
typically have global operations with decentralized P&L
responsibility within individual countries. These localized Pharmaceutical executives should challenge this blanket
business operations result in significant country-based characterization of the work performed by FP&A staff
FP&A support. Based on recent analysis by Deloitte, such given the industry pressures these companies face.
geographically dispersed operating models result in some Transactional, low-value-add FP&A activities can be
large pharmaceutical companies allocating upwards of 30 successfully decoupled from the more strategic knowledge-
to 40 percent of their finance spend to FP&A activities. based activities and centralized in an FP&A center of
excellence (COE) to support a more cost-effective operating
However, one effective approach which can reduce the model (Figure 1). Doing so can result in quantifiable
high cost of the FP&A function, and allow skilled FP&A staff cost reductions while freeing up local FP&A resources to
to spend more time on business decision support activities, perform more valuable business partnering activities. The
is to move currently decentralized FP&A decision support centralized decision support model should link operational
activities into centers of excellence. requirements to corporate objectives and provide a basis
for functional design.
Page pull quote
1 NYSE Pharmaceutical Index, December 2000 – November 2010.
2 Source: Deloitte’s Global Benchmarking Center, which has more than 800 participants in its various proprietary studies. To learn more about
Deloitte’s benchmarking capabilities, please visit our Web site: www.deloitte.com/us/benchmarking.
2
3. Figure 1. Companies are centralizing selected decision support areas
General Accounting* Decision Support*
Accounts Transactional External Accounts Fixed Cost Std Mgmt Budgeting / Financial Strategy
T&E Payroll
Payable Accounting Reporting Receivable Assets Accounting Reporting Forecasting Analysis Support
Centralized
95% 95% 80%
90% 90% 90% 80% 80%
60%
50%
30%
0%
5% 5% 20% 20%
10% 10% 10% 40%
50%
20%
Decentralized
70%
100%
* Splits based on Deloitte experience
While the opportunity for centralization within Decision Support is not as large as in General Accounting, significant benefits can still be achieved. Leading organizations are moving
decision support activities to a centralized environment so that additional time can be allocated to business strategy and support.
Developing a Center of Excellence (COE) for financial planning and analysis 3
4. An FP&A COE offers many potential benefits A global manufacturer sought to streamline and enhance
Some of the potential benefits organizational leaders can the effectiveness of its finance function while reducing
expect to achieve by implementing an FP&A COE include: operational costs. The company moved 80 percent of
its corporate FP&A work to a lower cost COE, including
Process standardization and automation ad-hoc reporting and analysis, balanced scorecard
Transitioning activities to a centralized environment helps reporting, and management reporting and board
promote process standardization. Standardization improves presentations. It also moved select business unit FP&A work
an organization’s ability to train resources, develop talent, offshore, including segment profitability reporting, product
and further streamline through technology deployment. profitability and profiles, and competitor analysis. Through
As activities are standardized across an organization, data these transitions, the company reduced its FP&A costs by
analysis, data quality, and the way in which data is used to between 50 and 70 percent.
make business decisions also becomes more consistent.
Span and level savings
For example, a large international pharmaceutical client’s Through centralization, eliminating organizational layers and
finance organization in one country identified an automated improving span of control is possible. The typical structure
way to perform volume, price, and exchange analyses. of an FP&A COE would allow for a broader span of control
Once this process was centralized, it became the standard that can ultimately result in a lower-cost operating model.
blueprint for all regional markets, driving significant time
savings across the organization. A global hospitality company wanted to reduce its SG&A
spend due to increasing cost pressures from changing
Local process elimination economic conditions. The finance function was an obvious
Migrating activities to a centralized environment helps candidate for centralization due to the significant number
eliminate custom activities that have historically been transactional activities completed by its highly compensated
performed locally. Through centralization, non-value-add staff. This company identified these transactional activities
local processes become more visible and can be more easily and transitioned them to a newly-created FP&A shared
challenged. service center in the UK. As a result, the company was able
to realize significant labor savings by better matching job
As one Deloitte client began an FP&A COE implementation, requirements to staff levels.
it discovered that certain balance sheet and cash-flow
analyses were regularly performed by a local entity. As Economies of scale
activities were evaluated for centralization, it became clear Migrating activities to a centralized environment provides
that these analyses were of little value to leadership and additional cost-saving opportunities due to economies of
were subsequently eliminated. scale. Activities such as data validation and standard report
creation can be performed more efficiently through a
Labor arbitrage centralized model and in large volumes by a team dedicated
FP&A activities are typically performed by highly trained and to these specific activities.
educated employees. These staff members are expensive;
transitioning transactional components to a lower-cost A global consumer business company, facing significant
resource pool can lead to significant savings and allow margin and price pressures, embarked on a major cost-
skilled finance employees to focus on areas that are reduction initiative, as well as transformation of its
commensurate with their level of expertise and pay grade. commercial operating model. To keep up with these
changes, the company’s finance function reorganized
around a global structure with harmonized policies,
processes, data, metrics, and controls. It increased its
3 The finance talent challenge: How leading CFOs are taking charge, Deloitte, 2007.
4
5. use of COEs and shared services centers for transactional finance executives who are very protective of local FP&A
and common FP&A activities, and it instituted a standard resources. Significant efforts need to be made in managing
global framework for management reporting that enabled the change associated with centralizing these activities to
significant economies of scale through centralized delivery. ensure that expectations are clearly set and service levels are
The result was substantial reduction in overall finance maintained.
operating costs.
Future leader talent development
Talent alignment The FP&A function is often a training ground for future
Leading organizations are continually looking to identify and leaders of the finance organization. The finance talent
retain top talent. However, a 2007 Deloitte study shows career ladder needs to be modified to reflect the new
only 50 percent of survey respondents believe that their operating model and allow for movement of junior
finance organization is strong in the competencies needed employees from the FP&A COE to the more value-add local
to align talent with the business.3 Moving transactional finance units.
components of FP&A processes to a COE can help position
an organization’s talent more strategically and improve this End-to-end process efficiency
metric. The FP&A COE typically only performs a portion of a process
and not the entire process. As a result, additional handoffs
A large pharmaceutical company implemented a regional are created as activities are being performed. As activities
decision support COE. Shortly thereafter, senior finance are being considered for migration, they must be carefully
leaders found that they could spend more time driving evaluated to ensure that the new end-to-end process has
complex analytics and future business decisionmaking. not created a burden for the organization. See Figure 2
This not only allowed for additional time to focus on for criteria to be considered when identifying processes for
decisionmaking capabilities, but it also improved morale transition to a COE.
within the finance function. The organization’s focus became
more strategic and better aligned with the organization’s
Finance service delivery model.
Overcoming concerns about centralization
Organizations have been hesitant to consider FP&A as
a candidate for a COE model for several reasons. The
shared services concept is not new, but the concept of
applying a centralized model to business-facing activities
is. If implemented without great care, the FP&A COE could
hinder an organization’s ability to provide a critical partnering
function to the business.
Key concerns that organizations need to overcome as they
evaluate the risks associated with an FP&A COE include:
Dedicated local support
The idea of moving FP&A activities to a shared services model
has typically been off-limits due to the significant visibility and
high value of the end product. The output from the FP&A
function is often used by business customers and senior
Developing a Center of Excellence (COE) for financial planning and analysis 5
6. Realizing partial FTE efficiencies Fear of going it alone
When migrating transactional activities from locations Finance organizations are already stretched to their
with low volume, or where finance support is minimal, limits with day to day demands. Burdening them with
it may be difficult to realize savings. If cost savings is the a transformational project such as evaluating and
driving factor behind considering an FP&A COE, the volume implementing an FP&A COE may be beyond the current
of activities migrated from local FP&A functions needs staff’s experience and could be tremendously disruptive.
to be large enough to ensure that full resource savings Teaming with a service provider that has both the
can be achieved. If cost savings is not the driver behind experience and resources to carry out long-term finance
centralization, the additional resource capacity created by transformation initiatives can allow companies to continue
migrating local FP&A activities to a COE can be used to day-to-day activities with minimal disruption while moving
focus on more analytical, higher value-add activities. toward the envisioned future state organization and
operating model.
Figure 2. Process centralization evaluation framework
Suitable Immediate Candidate Future Wave Candidate
for Centralization for Centralization
Process Fit Criteria • Processes that are individually • Processes that can be centralized
• Specialized Skills fit and ready for centralization but require reengineering to
• Language Requirements based on process maturity and minimize risk or stabilization of
• Complexity of External organizational capabilities the underlying technologies and
Communication processes
• Process Modifications
• Service Requirements/
Time Constraints
• Critical Adjacencies Not Fit for Centralization
• Processes that are unlikely to be centralized due to regulatory constraints,
strategic importance, or specialized needs
Not Suitable
Now Future
Migration Readiness Criteria
• Process Maturity • Training
• Process Stability • Technology Requirements
• Process Documentation • Connectivity/Security
When considering processes to be centralized into a COE, an assessment must be made as to whether they are “fit and ready” for migration in the
near or long term.
6
7. Toward a brighter future for life sciences FP&A
Life sciences finance executives should not wait to explore Reducing finance operating costs by 25 percent at
the possibility of creating an FP&A COE. The FP&A CoE
model has proven successful at a select group of leading
a global pharmaceutical company
companies and many more are now beginning to assess A major global pharmaceutical company asked Deloitte to help implement a decision
how to implement it within their own organizations. support center of excellence (COE) that targeted management reporting, planning,
The high potential for reducing costs, improving FP&A budgeting, and forecasting activities. Initially, a finance group developed a proof-of-
effectiveness, and adding to the bottom line make this concept operating model, which indicated that 20 to 30 percent of FP&A employees
an opportunity at a time when life sciences companies perform transactional, low-value-added work that could be migrated to a COE. Deloitte
are under significant performance pressures. Finance then conducted more than 20 global workshops to further define an operating model
executives should challenge their company’s traditional that aligned with corporate objectives, create a governance structure, and develop a
FP&A organizational structure and explore a solution that road map for implementation across multiple international markets and business units.
could make their organization more efficient, flexible, and
strategic. Each market’s implementation began with a series of meetings designed to explain
the concept of the COE and gain leadership buy-in. The next step was to gather an
List of FP&A activities that can be prime candidates inventory of activities in management reporting, forecasting, and operating plan
for COE transition: processes from local subject matter experts. Using an agreed-upon decision framework,
• Market/Segment Profitability Reporting Deloitte analyzed each activity to determine if, and to what extent, the processes could
• Product Profitability and Profiles be decoupled. The team identified transactional, noncustomer-facing components of
• Management Reporting and Standardized Presentations these activities for migration to the COE.
• Data Validation and Standard Report Creation
• Ad Hoc Reporting and Variance Analysis Activities like data validation, basic variance analysis, and standard reporting
• KPI Performance Monitoring comprised a significant portion of the activities that met the decision criteria. The team
• Baseline Modeling for Budgeting and Forecasting Activity documented these migrating activities with detailed step-by-step work instructions for
• Standardized Volume Price and Exchange Analysis COE staff hired in regional support centers located in low-cost areas. Before migrating
• Balance Sheet and Cash Flow Analysis these activities, the team conducted a series of parallel runs to ensure that the COE staff
• Competitor Analysis could produce the same results as the original FP&A colleagues.
Consider migrating these FP&A functions: Post go-live, the COE addressed continuous improvement opportunities, including
• Volume, price, and exchange analyses standardizing reporting activities and offshoring highly standardized FP&A processes. In
• Balance sheet and cash-flow analyses aggregate, these activities led to approximately 25-percent reduction in overall finance
• Ad-hoc reporting and analysis operating costs, as well as increased FP&A efficiency and effectiveness.
• Balanced scorecard reporting
• Management reporting and board presentations Based on the success of this global implementation, other pharmaceutical companies
• Segment profitability reporting are exploring implementing a COE. A critical first step for interested companies is to
• Product profitability and profiles review which activities within their organization are candidates for transition to a COE.
• Competitor analysis This can help them assess the potential impact and savings for their organization.
• Data validation and standard report creation
Developing a Center of Excellence (COE) for financial planning and analysis 7