The missing link in re-engineering.

Why isn't your finance department's re-engineering project making the gains, you'd hoped for? Maybe you should ask your treasurer.

By now you've probably heard a lot about financial re-engineering. You probably even have a number of change initiatives already under way in your organization. You know the challenge of re-engineering is not simply to tinker with functional processes, but to rethink the very role of the finance staff. You know the vision of world-class finance is one of driving down transaction processing costs and freeing up time for more valuable kinds of analysis. And you know many companies - perhaps even your own - are making significant strides toward that vision.

But what you probably don't know is that even though companies have made noticeable improvements, they may nevertheless be missing out on the full benefits of re-engineering finance. The reason? In the rush to transform core transaction processes like payroll, accounts payable, accounts receivable and travel and entertainment, few companies have involved the treasury side of the house, except as an afterthought. We estimate that somewhere between 70 percent and 80 percent of finance re-engineering projects ignore the treasury in the initial stages of the process. Short term that might not be a hindrance to making some process changes, but long term you risk not optimizing - or not realizing at all - the benefits that re-engineering can bring.

In The Hackett Group's first major benchmarking study of treasury best practices, we found that finance can increase cost savings and productivity gains by as much as 50 percent if the treasury is an integral part of the re-engineering team. As finance groups have begun to re-engineer their transaction processes, they've discovered their treasury departments' tools and techniques, especially those that involve electronic linkages to customers and vendors, are critical to implementing best practices. They've realized the treasury can provide more value to finance than simply cash and risk management, and they've recognized the benefits from the treasury's involvement come not only from additional labor and overhead cuts, but from reductions in fees, more efficient business processes and enhancements of cash flow.

"If I weren't a member of the team, the others might have known to consult treasury about things like payment mechanisms and lockboxes," says Rick Dudiak, who was the manager of cash management services and support before becoming a senior team member in the financial re-engineering efforts at Westinghouse Electric in early 1994. "But it was a big advantage to have been there on a full-time basis. I had expertise in the products and services that are available to achieve the team's re-engineering vision. My involvement shortened the learning curve and implementation, and it helped ensure that finance didn't come up with suboptimal solutions."

PERCEPTION VS. TRUTH

Most financial executives know that radical change is required to successfully compete in a global marketplace, to meet stepped-up demands for cost control and to provide added value to the rest of the corporation. The problem is that finance is an expensive function, and its high costs are driven by complex processes, excessive controls, organizational fiefdoms and the lack of technology investment. Plus, finance professionals hardly have enough time to add value, because they're bogged down with mundane transaction-oriented and management-reporting tasks. The vast majority of finance's internal customers see the department staff as hard workers, historical reporters and corporate cops. In fact, in a 1993 Hackett Group survey, only five percent of CEOs said that people in finance are real business partners in determining the strategic direction of the company.

Re-engineering finance, in turn, has typically involved consolidating accounting centers, standardizing policies and practices across business units, simplifying processes and eliminating outdated or irrelevant activities in order to improve the flow of work. In addition to providing significant cost savings, primarily in labor and overhead, these initiatives reduce the amount of time required for processing transactions and for stacking data, and they give finance staffers more time for value-added decision support.

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Our treasury benchmark data reveals similar attitudes and organizational problems in that function, as well as similar re-engineering opportunities.

As a subset of finance, the treasury is frequently perceived as being too narrowly focused. Its professionals are highly skilled, with an average of 19 years of experience per employee, but they have an ivory-tower image - technically oriented, cash- and risk-management focused and isolated from operations. Indeed, the benchmark data supports the treasury's image problem. Eighty-five percent of the treasury staffs time is spent on routine transaction-oriented activities, such as cash management and executing borrowing, investment and foreign-exchange transactions. Only 7 percent of the treasury's time is spent getting out and supporting internal customers in the business units, which means the department generally does a poor job of Communicating its skills and expertise to the rest of the organization.

The major cost drivers in the treasury are the lack of automation - cash management, trading, currency management and interest-rate management are all only about 50 percent automated - and the lack of best practices - electronic fund transfers (EFTs) initiated directly from the accounts payable system, electronic data interchange (EDI) and data transmission of monthly bank account analyses. And when you look at the treasury's efficiency and effectiveness, the numbers don't lie: There's a huge gap between the best and the rest. (See the chart at left.)

Looking at the treasury benchmark data in tandem with the benchmark study of finance, which has been ongoing since 1991, you can see a striking correlation between the treasury and finance best practices. [ILLUSTRATION OMITTED].

Though these findings make a strong case for having the treasury on the finance re-engineering team, the treasury is forgotten when people think of the benefits of re-engineering only in terms of labor cuts. It's an easy omission, however, given the comparative sizes of the finance department and the treasury. As an organization, finance employs 183 full-time equivalent employees, or FTEs, per billion dollars of revenue on avenge, and its overall cost is 1.5 percent of total company revenues.

Conversely, our data found there's not much overhead to cut in the treasury, no matter how inefficiently the department iS run. The treasury employs, off average, only six FTEs per billion dollars of revenue and costs 0.13 percent of company revenues. It's not invited to the table because it's hard to see where any gains can be made, which only compounds the lack of understanding of how the treasury can help improve finance processes.

The raw benchmark numbers can be deceptive, however. The treasury's labor costs as a percent of total costs are 41 percent lower than those of finance, but on a per-FTE basis, the treasury costs are actually more than twice those of finance, $218 as compared to $81. This disparity comes from the large number of fees generated by treasury services. These fees are typically not a single item on the treasury's profit-and-loss statement, but are hidden because they're charged to the business units that use the services and are also offset by compensating balances or incorporated in financial-instrument rates. Only the treasury may realize how substantial they are in aggregate.

One rationale for getting the treasury involved up front in re-engineering finance is the potential for going after these nonlabor-related costs. A second rationale is that the treasury, while it can begin to increase automation and implement best practices on its own, can only go so far with these efforts. It needs cooperation from finance to truly re-engineer its own processes. And a third rationale - perhaps the most important - is that the treasury is a key enabler to effectively re-engineer finance. After all, many of finance's best practices are treasury based, and for finance to implement these solutions without the treasury's active involvement risks that any re-engineering efforts will come up short.

For instance, part of the vision for improving payables is the use of procurement cards, EDI/EFT and services that are sold primarily by banks; that's why the treasury is quite familiar with these products. Also, in expanding the use of payroll direct deposit, finance needs the treasury's help in working with banks to develop more attractive services for employees, such as free credit cards, free checking and low-interest loans. And the treasury can be a fount of wisdom about enhanced disbursement and remittance practices such as EDI/EFT, lockboxes and other cash-management tools.

HOW THE BIG ONES DO IT

Here's how three companies - Westinghouse, W.R. Grace & Co. and BP America - have reaped tremendous benefits by making treasury an integral player in re-engineering finance. Their stories are different, as are their methodologies, but the bottom line is the same.

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"Our goal is to build effective relationships with our internal customers," says Jordan Siegel, a senior financial analyst in the treasury at W.R. Grace and a member of the company's finance re-engineering team for North America. "Re-engineering is a way to show that the treasury can add value to the organization, and once we've proven that, we'll get more calls for help in the future."

Westinghouse Electric Pittsburgh, PA

At Westinghouse, re-engineering finance was an offshoot of re-engineering the entire corporation. So it was natural that when senior executives began last February to look at transforming nine core finance transaction processes, the treasury would be a player. What was somewhat unexpected was how much the treasury's involvement helped finance meet its tight deadlines and helped give the project momentum and credibility. "The idea was originally to have a treasury representative," says Rick Dudiak, the full-time senior re-engineering team member from the treasury. "Everyone on the team had a positive impact, but I know that my involvement increased the savings and decreased the time to realize them."

Take simply the confusion many team members had about products and services. The general assumption, says Dudiak, was that wire transfers were EDI; people didn't understand that EDI refers only to data interchange and that EFT relates to the payment mechanism. They were also unaware of the impact of lockbox deposit activity - electronically receiving deposit information from the bank and having that information automatically posted to the accounts receivable system. "It was important to see that you get the biggest bang when you really change processes and cut down on paperwork and the opportunities for errors," says Dudiak.

Then there were the "quick hits," which usually come early on and help a re-engineering effort get a head of steam. For Westinghouse, these easy victories were all treasury related. For instance, by doing wire transfers at one location (they used to be initiated at multiple sites), the company will save $100,000 annually. One division expects to save another $100,000 in fees by reducing its number of lockboxes from 15 to three, and as a whole the company expects to go from 50 lockboxes to 12. "A lot of re-engineering savings are longer term," says Dudiak, "so it's important to show movement early on in order to sell re-engineering throughout the organization."

Finally, the treasury's input was critical in developing what the re-engineered processes ought to look like. For instance, Dudiak looked at travel and entertainment from a banking perspective, and he was able to show the team that on a monthly basis Westinghouse had anywhere from $12 million to $15 million in cash tied up in advances. Company travelers, who were used to taking pink vouchers to the bank and getting cash, would certainly balk at the idea of eliminating advances, but by pulling up the ledger account for cash advances, Dudiak convinced the team the system had to change.

In March, installation of the new T&E process will be completed; the number of T&E systems will be reduced from 13 to one, and up-front education has made travelers comfortable with using an employee liability card that allows for withdrawals from automated teller machines. By not tying up so much cash in advances, Westinghouse expects to save about $2 million annually.

As for other processes now ready for implementation, Dudiak says he's had a hand in exploring payment mechanisms and ways to increase the availability of funds, with an eye toward reducing the number of corporate-wide bank accounts from 300 to approximately 50. But that can be achieved only if the treasury and finance groups work together.

"Finance processes drive treasury effectiveness, and treasury tools enable finance to improve its processes," he says. "Unless you have common systems and consolidated practices, which we will have, it's hard to cut the complexity out of your banking network. Once you do re-engineer, monitoring and reconciliation is simpler and you get substantial savings in fees and cash flow."

W.R. Grace & Co. New York, NY

In late 1991, top management at W.R. Grace announced a restructuring program that called for focusing on core businesses and managing corporate functions on a global basis to leverage the company's size. The challenge prompted the treasury staff to take more of a process focus and to look at cost and productivity drivers inside and outside the treasury department. The effect was the treasury was able to build bridges with others in the organization, and when finance assembled its North American re-engineering team last summer, a treasury representative was a full-time member.

"We've been able to show that the treasury is not just traders sitting in front of computer screens," says Jordan Siegel, a senior financial analyst who was the team member from the treasury. "We've shown that the treasury can look across functional lines and make improvements in operations."

One way the treasury built bridges was by doing a companywide lockbox study in 1993, says Siegel. It seems a no-brainer, but some parts of the business were still receiving checks in the mail, opening them manually and losing days of float because the checks sat on someone's desk before being deposited. The effort required changing practices outside of the treasury and was worth it: By consolidating cash-management relationships, W.R. Grace was able to save more than $1 million annually.

A second initiative was to upgrade a treasury workstation - a management information system that helps automatically determine the company's cash position, initiate fund transfers and record journal entries of treasury activities, among other features. "It took us approximately 12 months to get operating unit buy-in, and we had to do some hand-holding," says Siegel.

"We were changing disbursement accounts, banking relationships and reducing items like authorizing signatures, but it was hard to argue against the cost savings or the process improvements. Field personnel in the receivables area used to get heat when goods weren't shipped but the customer said payment was sent. Three or four people in the treasury would try to track down the transaction, but with auto-posting the information was available, eliminating a lot of futile searching."

As a result of the treasury's success in revamping cash management and cash application, Siegel was made part of the team looking at re-engineering eight transaction processes in finance. "By demonstrating the treasury can be a consultant and a facilitator, we were asked to participate," he says. "What I was able to contribute to the team was our knowledge of banking products and services such as EDI/EFT, imaging and lockboxes. When we began to talk about how to apply these tools and techniques to our re-engineering, the proposed visions gained credibility."

BP America Cleveland, OH

In 1993, the treasury staff at BP America held its first annual cash management and banking conference. The overflow audience of business analysts, managers and vice presidents spent a day listening to presentations on treasury services, on how these services affect company performance and on the importance of optimizing cash flow and working capital. For Karen Buchanan, BP's manager of treasury services, the conference is the most obvious symbol of an effort to make the treasury more of a business partner with its internal customers. And the result of these efforts is that the treasury has helped spur many of the firm's re-engineering initiatives.

"We try to be a partner with the business operations," says Buchanan. "We have an internal customer focus, and we're bringing new ideas to our customers on an ongoing basis. That has encouraged others to involve us in re-engineering efforts up front."

For instance, more than two years ago the treasury began promoting the idea of initiating vendor payments via EFT directly out of the accounts payable system, rather than having vouchers sent up to the treasury, having them keyed in manually and then paid. Manual data entry and the passing of paperwork increased the number of people in the process and the opportunities for errors. The selling effort took time, concedes Buchanan, but by year-end this functionality will be in place and operational.

The new system envisions a variety of payment options, automatic journal entries and payment files sent electronically to the bank. The solution will improve accounting and controls, save time and cut down on manual data entry and paperwork. The savings are expected to be substantial, since finance generates 9,000 wire transfers annually on behalf of the businesses.

"The idea came from treasury," says Buchanan. "And though you can't expect an immediate response from your suggestions, you have to make sure people are aware of what's out there and what's available. This is not a one-time information sell, but when the business climate is right for change, they will include you in the process."

A REALITY CHECK

The Hackett Group's benchmark of treasury best practices offers a stark contrast to the positive experiences of the treasury professionals at Westinghouse, W.R. Grace and BP America. It reveals the extent to which treasury processes haven't been automated, banking relationships haven't been effectively leveraged, EDI and EFT aren't utilized and treasury staffers are spending too much time and energy resolving clerical glitches and not adding value to the organization as a whole.

At the same time, these studies confirm the positive experiences at these three companies, because when the treasury and finance work together on re-engineering initiatives, the benefits are big: increased re-engineering savings of 20 percent to 50 percent for core finance processes; shorter implementation time frames; faster realization of re-engineering savings and productivity enhancements; the ability to fully realize treasury re-engineering opportunities; and, just as important, an elevated reputation for the treasury among its internal customers.

Mr. Rosengard is a senior principal of The Hackett Group in Hudson, Ohio.