Drawing data from the same well.

Are you still struggling to free your treasury department from "transaction" mode? Read how Merck's new data warehouse lets treasury spend more time advising its line customers.

Three years ago, Merck's operating units had a hodgepodge of stand-alone information systems, says Caroline Dorsa, treasurer of Merck in Whitehouse Station, N.J. But now that finance and management information systems have developed a central information repository, everyone at Merck sees a consistent set of financial data. In an interview with Financial Executive, Dorsa describes how the data repository, the nexus of an overall financial re-engineering effort, allows treasury to get out of the error-correction business and advance to a more consultative role. You can reach Dorsa at [phone].

FINANCIAL EXECUTIVE: Can you sketch out the different components of your information system?

DORSA: Sure. We use our system for both historical and projected purposes. Its core is a database from which we can generate and create reports based on the details and specifications we want. On the reporting side, we have tremendous flexibility to drill down through information layers and view different dimensions. For example, we can drill down in the interest expense area from global interest expense, to interest expense in Europe, to interest expense in France. We can also view interest expense across divisions, entities, regions, markets or departments.

In treasury, we also do entity-based planning and forecasting. The system allows us to look at the entity balance sheets and profit-and-loss statements over a forecast period, both at the lowest level of detail at the entity, or rolled up. That's very helpful when we're doing modeling for our various subsidiaries and want to ensure we're capturing the information correctly. And, of course, it's also important for the reporting purposes of the corporation as a whole.

FINANCIAL EXECUTIVE: Is the database companywide, or is it limited to the treasury area?

DORSA: The database contains worldwide detailed financial and operational historical information and can be accessed companywide. Anyone with proper authorization can tap into the database from anywhere in the world and view the data they've been granted authority to review. Treasury is a key customer and has played an important role in designing the database and in the integration to our area-specific systems, such as the entity planning model.

FINANCIAL EXECUTIVE: What made you decide to revamp your information systems?

DORSA: For the finance area to remain an effective partner with the other areas within Merck, we needed to develop business processes and information systems that delivered timely information throughout the company, as well as the ability to respond quickly to information demands brought on by the challenges of our changing industry. This, when coupled with recent advances in technology, provided the perfect opportunity to redesign our business processes and information systems. We also saw opportunities to streamline redundant systems that had evolved over time within different divisions.

About three years ago, we started a major re-engineering effort, an initiative spearheaded by the controller's area. Our approach is to focus on decisions, to understand the information necessary to support decision analysis. The effort is process-driven and spans across Merck's divisions. We believe that creating a central, standardized, global repository of information is the best way to control the efficient collection, processing and delivery of data to support finance and operational requirements. We wanted to get away from the stand-alone systems that are difficult to maintain and even harder to integrate. As a result, we created a robust and flexible infrastructure with a global repository in the center, local repositories to collect data and standard access tools. Treasury leveraged this architecture by linking into the infrastructure and feeding data into our forecasting model for entity planning, making it easy to collect high-quality data that ties into the company's chart of accounts.

FINANCIAL EXECUTIVE: Now everyone's speaking the same language.

DORSA: That's exactly right. And our repository is set up so that the front end of the system is a spreadsheet program that everyone in Merck is already familiar with. Employees don't have to be computer experts to figure out how to extract the data they need to compile reports. That's really minimized the amount of training we've had to do and simplified our transition to the new system.

FINANCIAL EXECUTIVE: How timely is the data you use?

DORSA: The data is updated every month, when Merck closes its books. The forecast planning runs on regular annual cycles, and this is quite detailed. At least once a year we do a very detailed company plan for the upcoming year - balance sheets, profit and loss statements and that sort of thing. During the year, we do updates to the profit plan.

FINANCIAL EXECUTIVE: Who was responsible for developing the system?

DORSA: The project team consisted of a cross-divisional group, including members of finance, operations and computer resources professionals. Our corporate computer resources department, a group that's separate from the finance area, played a key role in developing the system. The project team, while made up of a group of people from very different areas, had the same objective: to make our business process and supporting information systems deliver timely, accurate data efficiently to those who need it. That's why the project is a great example of how leveraging expertise across the company, and externally, can result in benefits that extend beyond the finance area and have a positive impact on the whole company.

FINANCIAL EXECUTIVE: How does this project fit in with the overall information-technology strategy?

DORSA: The infrastructure being developed in the finance area is part of a global effort to develop a network of related systems. The corporate computer resources department's mission is to "create value from information." With this in mind, the department is developing an architecture and standards to promote the ability to integrate systems worldwide. It's not a management information systems organization that creates solely individualized solutions for any customer who calls on them to solve a problem. Not only does the group set the standards for Merck's technology, it also implements the technology companywide.

FINANCIAL EXECUTIVE: How long did it take you to implement the system?

DORSA: Putting in treasury's entity forecasting system has taken us about a year and a half, and we're planning to finish our rollout by the end of the year. The broader financial re-engineering project group took a year and a half to develop the global repository, populate it with detailed worldwide information and "go live" with the new related business process. It's taken approximately another year and a half to enhance and redesign the company's closing process.

FINANCIAL EXECUTIVE: How do your entity planning systems better enable you to work with your operating units?

DORSA: Our old system was mainframe-based and didn't allow field users to do forecast modeling directly. The users could create scenarios on their own systems, but they couldn't work with them to assess various alternatives; they had to send the scenarios to us. Then we had to load the scenarios onto our system, work with the data, make changes, view alternative scenarios and get back to the operating people with our recommendations.

With the new system, field offices can construct and work with their own scenarios, so they now have a planning tool, instead of being limited to a template that they filled out with their answers and sent back to us. Now the field units electronically send us the scenario they think is the best characterization of their areas, and we'll talk to them about different options. We share far more insights this way, and that's really much better for everyone involved, because the knowledge we acquire from our modeling and planning software should be available to everyone, not just treasury.

FINANCIAL EXECUTIVE: Does this allow treasury to take the emphasis off having to do the mechanics and allow you to spend more time with the units on strategy?

DORSA: Yes, it certainly does. We'd prefer not to be seen as the modelers. We want to help the field think about optimizing their opportunities, but we also have to help them understand the issues we're grappling with at headquarters. Our job is to view the scenario in the context of the entire company's worldwide plans.

Take consolidated capital structure, for example. That's really a treasury matter, and we have to evaluate the scenarios from our divisions for their impact on the whole corporation. This is where treasury's broad perspective comes in handy for figuring out the rest of the puzzle. Our technology has furthered that mission by taking us out of a data processing role and putting us in much more of a consultative role.

We still retain control of which scenarios ultimately become part of the information repository, because treasury is the only area that can view the companywide database for modeling purposes. That's because we need to have one set of consistent information that reflects the full future plans of the company.

But because of the flexibility of the system, the units can look at many alternative scenarios at their own computers without affecting the main repository of data, and then send their most likely selections to us electronically. Once we agree with the units on what the right scenarios are, we upload the forecast into the main repository of data, where it becomes part of the companywide forecast.

FINANCIAL EXECUTIVE: Now that your upgraded entity planning system is about to be disseminated across the entire company, have you been able to eliminate or restructure any data-entry or data-processing positions?

DORSA: We haven't eliminated any positions, but we've been able to move our professionals away from the checking and error-correction business and into planning and analysis, which, for my money, is exactly right. We always need to find ways to enable our people to better provide analysis, which is really what we do much much more of now. That's a huge benefit for us.

FINANCIAL EXECUTIVE: What are some other ways you leverage the capabilities of your new system?

DORSA: Our overall use of information systems helps us track our cash-management benchmarks more accurately. We usually measure our benchmarks monthly, and since we have direct data feeds from electronic news and wire services, it's pretty easy to download market performance measures or to create customized benchmarks by taking bits and pieces of publicly available benchmarks - half of this benchmark or half of that benchmark.

Other systems allow us to model new financial products or customized uses of existing products to examine the changes in the value of that product from variables like volatility, interest rates or foreign-exchange rates. That means we can see the product not just under normal circumstances but under extreme market conditions of volatility or variability. So before we enter into a transaction, we're better able to understand the potential exposures in a more volatile environment. In that way, we can look at what our real risks are and pick only those products that fit our risk profile.

FINANCIAL EXECUTIVE: What's your overall philosophy on evaluating and selecting the right technologies for treasury?

DORSA: We believe in using cutting-edge technologies, but we don't use black boxes. We're not interested in buying off-the-shelf analytical systems we can't understand. The calculations and the approaches must be either customizable or transparent, because if we're going to make decisions based on the models, we want to make sure we understand exactly what the models are doing.

When we choose our software wisely, it helps us make better decisions. For example, we've used software to do Monte Carlo models, but it's customizable to some extent. We're now testing a new software originally developed for aerospace as a way to better model foreign-currency options, because some of the dynamics of those options lend themselves to the very complicated math used in physics. But we don't buy software in which you plug in the numbers and it simply provides the answer, because we have to understand the dynamics of our financial instruments.

Analytical tools alone can't and shouldn't drive decision-making absent a consistent risk strategy. Unless you have a well-thought-out approach to your treasury activities, how can you decide whether the scenarios you're looking at on your screen are good for the company or not?

You need to create your philosophy up front. Don't wait until the information tools are there to say, "Well, we have these great tools, so we should probably have a risk-management philosophy." Your objectives should be clear, and people should understand what they are. For example, we use cash-management benchmarks, but we don't reward our staff for beating the benchmark by some specific percentage. That's important, because I don't want somebody who might be at benchmark or slightly below it near the end of the year thinking, "I could take this risky position and really boost that performance, and, therefore, my own compensation." It's extremely important to understand what your risk-management goals are and to select your information and measurement tools carefully, not because they're popular.

FINANCIAL EXECUTIVE: What's the next step in the evolution of your information-management systems?

DORSA: Many of the tools I've described are upgrades to existing technologies that have been implemented at Merck for many years. As we have in the past, we'll probably find lots of ways we can expand their use. As we look out to the future, we can consistently uncover new areas we can optimize. And as new financial and risk-management products continue to develop, we'll be able to examine them and choose the ones that may enhance value. This should allow us to be at the leading edge of risk management.

RELATED ARTICLE: HOW TREASURY LEVERAGES THE INTERNET

The Internet is very helpful to Merck's treasury organization, according to Caroline Dorsa, treasurer of Merck in Whitehouse Station, N.J. She reports, "We go to some Internet sites for historical market information, such as U.S. treasury security prices or foreign-exchange prices. We also use the Internet to get SEC filings for various companies and learn how they use financial instruments." Even for data readily available through other channels, speed is a big plus in the Internet's favor, she notes, observing, "You can get 10-K filings on the Internet much faster than you can get them on paper."

On the human-resource side, Merck has used the Internet to visit other companies' home pages to compare their policies and practices on diversity and worklife issues, Dorsa reveals. And, she points out, "It expands the way you solve problems, because you know how to get all different sorts of data, which can sometimes lead you to a solution you might not otherwise have uncovered."