Digitizing finance: Views from the leading edge. (Special Section: Digitizing Finance).

While "digital finance" or "digitization" as a business paradigm is undoubtedly here to stay, it is far from a monolithic, one-size-fits-all solution. It's understandable that CFOs, having invested heavily in more than a few major improvement initiatives in recent years, are wary about this new arrival on the scene. Indeed, just its mention raises questions: How can companies decide if e-Finance is appropriate, or necessary? If they decide to "go digital," how should they prioritize projects and sell them internally? And, perhaps most importantly, What kind of return on their investment should they anticipate?

These questions were asked recently of Dennis D. Powell, vice president, finance and corporate controller, Cisco Systems Inc., and Eric Duenwald, e-Finance leader at General Electric Co. -- two executives in the vanguard when it comes to using technology to make finance processes more efficient and more effective in furthering their respective corporate goals.

Without question, digitizing finance at both Cisco and GE has been an arduous, time-consuming and expensive proposition, and both Powell and Duenwald counsel companies that before embarking on initiatives to seriously consider whether gaining the ability to collaborate in real-time with internal and external partners -- the true value proposition of digitized finance -- is truly critical for gaining competitive advantage in their particular situations. "Even then, companies should initially focus on process-improvement before automating. Don't automate a broken process," warns Powell.

"Technology itself isn't the key to excellence in finance," argues Duenwald. "The question finance executives should ask is, 'How would having these capabilities help drive strategic advantage for the company?' If you can't answer that question, maybe you should look at other ways to gain that advantage."

Cisco: Improve the close process

Powell maintains that Cisco did not start off with the idea that it had to e-enable the finance group. "We began five years ago with the idea that we needed to improve our close process, and for this to happen we would have to enable delivery of better information and reduce cycle time. We recognized early on that we needed to standardize our financial reporting systems and any system relating to transaction processing, which called for a global enterprise resource planning (ERP) system. We decided that if we were going to scale up, this was the time to make the investment and get ahead in the game. Step one in this process -- the one you cannot sidestep -- is to get the basic infrastructure in place. Step two is to standardize around it."

Powell believes that Cisco's global operating business model for finance allows his team to look across geographic and/or business boundaries for functions and processes that can be combined. "Our objective from the outset was to put better processes around the transactions that posed the biggest dollar risk. Instead of looking around for things to digitize, we asked ourselves, 'How do we need to improve our processes?' As we studied transaction processing and reporting issues, we looked for technology solutions to take non-value-adding activities out of the equation."

Powell stresses the value of benchmarking as a way to unearth and deal with process-improvement needs before technology deployments begin. In Cisco's case, the needed improvements identified included redesigning finance processes to eliminate paper (thus minimizing resource-draining manual handling); introducing a single global chart of accounts; and minimizing internal cross-charging activity. Powell's team concentrated on building momentum through these and other early wins. Assuaging staff concerns in this way smoothed the way for additional process improvements.

GE: Improve processes and systems Tracing the evolution of e-Finance at GE, Eric Duenwald remarks that, "We never wanted to compromise the competitive advantage that we believe having a decentralized operating model gives us. However, we decided to focus on identifying opportunities to improve the finance processes and systems across our business units, not just within each." A baseline benchmark of GE's finance function in 2000 revealed that the company had several opportunities to enhance process efficiency through standardization and the application of technology vs. best-in-class companies. It also highlighted where GE had not imposed standards and/or lagged in technology investment. "Data from the benchmark allowed us to prioritize initiatives that would have the greatest impact on the company as a whole, a critical step to ensure buy-in and resource mobilization," says Duenwald.

"We first determined that we needed to eliminate low-value activities, then drive simplification, standardization and ensure process quality/capability prior to applying technology. Our objective was to make standard practices and processes on the biggest footprint. Travel and living, employee benefit services and e-FP&A (financial planning and analysis) were examples of areas where we gained some early high-visibility wins, driving transaction costs per unit down by over 50 percent."

Taking Action

At both GE and Cisco, opportunities for improvements in transaction processing and decision support were widespread, posing the question of how to prioritize initiatives. Both companies turned to matrix-based systems to prioritize goals, assess the size of the savings opportunity or the potential value to be gained compared to the effort required, and to create a list of "quick wins" and longer-term projects.

As GE moved past early challenges of digitization such as driving standards, moving processes to the Web and eliminating parallel processes, the focus within the finance organization shifted to creating an architecture and data-systems design and presentation that allowed it to streamline data collection and enable real-time, online information in areas such as sales, orders and costs.

Designed with automatic triggers and alarms to drive action as needed, GE's self-service 'digital cockpit' has not only enabled better, faster decision-making, but has actually transformed the business culture by making information about the customer globally consistent across entire divisions of the company through a single, consolidated report with drill-down capabilities. This approach has enabled GE to quickly and concurrently reduce risk and take advantage of opportunities, as well as the more mundane benefits achieved through eliminating paper reports and increasing manager accountability.

At Cisco, to objectively prioritize decisions about what to digitize and when, Powell and his team used an internally-developed "Internet Value Matrix" to weigh initiatives by their importance to achieving excellence in fundamentals, operations and, ultimately, establishing breakthrough strategies. Powell cautions companies wanting to use the approach to target areas in the "low-low" category on the bottom left (see illustration above).

"In the beginning, a little will happen by trial and error," says Powell. He suggests starting with something "that won't bring your business down if for some reason it takes longer than anticipated, or doesn't happen like you thought it would. Also, you want to have a project you can point to as an early win. The appetite for taking on new projects across the company will absolutely hinge on this.

"Next, while staying in 'low innovation,' you move up the criticality scale." Then, at some point, as the culture develops for using innovation and the technology, he says you can then start addressing some of the other categories that represent breakthrough strategies. Powell says the most common problem with companies that want to achieve breakthrough improvements -- like the virtual close -- is that they don't want to spend the time laying the groundwork for getting there. "That's a huge mistake, because there are a lot of steps you need to work through for it to be successful," he argues.

Duenwald points out that the early, lasting and visible support of CEOs and CFOs from GE's business units has been critical to the success of cross-enterprise initiatives such as the digital cockpit. Once tested, he says, "It is important to quickly get innovations like the digital cockpit in front of the organization to gain buy-in and support. In addition, it is critical that the cockpit include customer, shareholder and employee metrics to drive balanced benefit and focus. Wherever possible, customer-touching metrics (e.g., delivery performance vs. commitment) are updated in real-time and are accessible by customers." On the notion of giving customers visibility into GE's processes, Duenwald says, "It ensures we focus on improving our value to our customers and their ultimate profitability."

Finance-IT Link Critical

None of the improvements effected at GE or Cisco could have been achieved without strong linkage to the IT organization. Powell says finance and IT are "joined at the hip and partnered to make projects happen." He adds, "On every project, we name a business owner and an IT owner, with joint responsibility for the outcome of the project, for selling it internally, setting the deliverables, the project plan and milestones, and for monitoring against those criteria. We had some early successes with this kind of dual accountability, and understand its importance. But for companies thinking about implementing this strategy, I would say that it definitely takes an IT person who is comfortable with letting that much authority go to the business function. That said, you do have to have some oversight on making sure people are going through the right process for verifying the ROI on the project -- you need the discipline to say, 'Should this project really go forward?'"

Having reengineered key finance processes to eliminate paper and impose enterprisewide standards, ERP modules, browser-enabled software, portals and exchanges are most fundamental to the way both Cisco and GE are deploying digital finance best practices in everything from managing risk, to paying vendors and managing cash. Overall, for both firms, digitizing of the finance function has led to a 20-25 percent drop in the annual cost of processing transactions, and improved both the speed and acuity of decision-making via daily reporting on all key financial metrics.

Despite some major successes to date, the road to digital finance will most likely remain rocky and strewn with obstacles for some time to come. However, there is reason for cautious optimism. Hackett Benchmarking's most recent data on finance's performance at approximately 1,200 companies indicate that large, global companies are rethinking the advisability of having finance's structure reflect the complex operational model of the company as a whole.

The empirical data benchmarking provides is helping corporate leaders understand that the optimal way to improve their competitive positions is by enabling finance to work in real-time collaboration with the business. Indeed, to accomplish that goal, they absolutely must start by dealing with the process, organization and technology complexities -- and the related costs -- that have held them back for so long.

RELATED ARTICLE: What Did GE's e-Finance Team Learn?

* Simplify, standardize and stabilize processes and procedures before digitizing. Quality First.

* Establish clear and consistent data definitions, a data model and an information architecture to enable real-time decision-making across the organization.

* Manage data by process, not by function or location.

* Create data once, with real-time edit checks for accuracy.

* Centralize standard/non-mission-critical activities/systems into a shared services processing center with maximum scale.

* Establish targets by process, by business -- and relentlessly measure!

Christine A. Gattenio is Vice President of Hackett Benchmarking, part of Answerthink, Inc. Hackett's ongoing best practices benchmarks address a wide range of functions and areas, including finance, human resources, SG&A, strategic decision-making and IT. Contact her at cgattenio@answer think.com.