Accounting for a demand-driven model

If Henry Ford walked onto the floor of a modern manufacturing plant, he might be amazed at the level of automation found there. But it's only a slight exaggeration to say, if he walked into the company's finance department, he'd feel right at home.

"Management accounting has scarcely changed since the Model T days," says Bob Parker, an analyst with Framingham, Mass.-based Manufacturing Insights, an IDC company.

Globalization and Sarbanes-Oxley (Sarbox) compliance may be the catalysts that push finance operations into the demand-driven world.

"Six Sigma principles are just now being applied to financial decision-making," says Parker. "Accounting is finally catching up to Lean and just-in-time."

To start, new technologies redefine what's possible in terms of transaction-processing efficiency and optimizing the financial supply chain. There is quantifiable bottom-line value—in terms of cash flow, capital utilization, and profitability—to be gained by, for example, automating accounts receivable (AR) and accounts payable (AP) processes, including electronic bill presentment and payment, and purchase order (PO) management.

Automating or outsourcing high-volume, low-value tasks lets finance executives focus on spend and pricing management, forecasting and reporting, and more.

"Innovative finance organizations go from performance management to performance improvement," says John Hagerty, a VP with Boston-based AMR Research. "They don't just tally up revenue inputs and cost outputs, but work collaboratively to model the financial impact of operational decisions."

According to The Hackett Group—an Atlanta-based advisory firm that benchmarks world-class and typical performance in finance, human resources, IT, procurement, and working capital—typical companies in 2006 will spend 1.26 percent of revenue on the finance function, an 18-percent increase in two years. In 13 years of Hackett benchmarking, the group says this is the first increase in percentage of revenues devoted to finance that it has recorded. Sarbox compliance and the complexity borne of globalization are the culprits, virtually erasing cost and efficiency gains of the pre-Sarbox era.

"Sarbanes-Oxley compliance is still very much a moving target," says Mark Krueger, a Hackett finance-practice managing director. "The [Securities and Exchange Commission] may make it more 'business-friendly.' Companies will welcome this, but with tighter filing deadlines and more stringent requirements for reporting of material events, it might also mean more work."

As for globalization, Krueger doesn't expect much lessening of the burden there either. "As the number of bank accounts, legal entities, suppliers, and operating countries all increase, so does the complexity of planning, reporting, and decision support," adds Krueger. "Finance operations must be tuned to a global footprint."

A recent report from Boston-based AberdeenGroup concludes, "Unlike other functions and processes, accounts payable has not successfully leveraged enterprise and Internet technologies to transform itself."

Electronic invoicing allows suppliers to submit invoices through a portal or secure network after first scrubbing the data and standardizing data formats. Most large e-invoicing providers, including Xignand OB10, have additional tools for automated three-way matching to POs, payment tracking, and invoice creation. Given relatively low up-front costs and transaction fees, e-invoicing is thought to be a viable alternative to EDI—particularly for companies with large or diverse supplier networks.

AberdeenGroup also found that one-third of companies looking at e-invoicing are motivated by "competitive pressures for cost reduction." Close behind were needs to "maximize liquidity, respond to regulatory pressures, and prevent fraud"—top concerns for about one-quarter of the 1,250 respondents.

Honeywell International, a $28-billion diversified technology and automation vendor based in Morris Township, N.J., is using a Web-based platform from Xign to eliminate paper and manual processing.

Honeywell's Specialty Materials division—which makes high-performance fluorine products, chemicals, additives, fibers, and composites—moves massive amounts of paper in handling 350,000 invoices every year. An offshoring program delivered a one-time cost-saving of 20 percent on some AP functions, but Karen Bryant-Gianiorio, director of Global Payables Strategy, knew further savings were necessary—and achievable.

"We took a long look at our operations and saw that taking out defects and digitizing were the only ways to materially change the quality of invoice presentment and payment processes and make our cost gain repeatable," she says.

Bryant-Gianiorio's team focused on broad, cross-functional processes such as purchase-to-pay, but was challenged by Honeywell's diverse operating structure; decentralized IT infrastructure (including multiple ERP instances); and huge supplier base, including many vendors that served multiple divisions. Honeywell explored building an in-house solution, but that was projected as too costly and time-consuming an undertaking. On the other hand, recruiting suppliers to join a third-party network seemed a thankless task.

Honeywell was delighted to learn that 15 percent of its suppliers already were part of the Xign network of 30,000 suppliers—with major phone, utility, and shipping companies among them. The Special Materials division today handles more than half its invoices through the Xign platform, including utility bills.

Productivity and efficiency per invoice are up 30 percent, based on the offshoring and e-invoicing programs. Calls from suppliers are all but eliminated because invoice status can be checked online.

Other Honeywell divisions are adopting the solution, with the objective to handle 100 percent of Honeywell's invoices through Xign, and to incorporate procurement processes currently handled by a separate organization.

"Xign helps us break down both internal and external walls," says Bryant-Gianiorio. "The overall impact on operations has been very positive. We now have one invoice-processing solution that works with our multiple ERP systems."

The results are typical for Fortune 100 companies, according to Xign CEO Tom Glassanos. "AR/AP has this mundane reputation, but it's often possible that profit margins of up to 1 percent to 2 percent are hiding in those processes. By taking discounts strategically and reducing the cost of capital, manufacturers put real money back into their financial supply chains."

Glassanos and others say increased visibility resulting from e-invoicing can support the creditworthiness and working capital needs of vital suppliers—especially important in financially troubled industrial sectors like automotive.

Thayer Stewart, VP of marketing at OB10, sees the network effect as a key driver of e-invoicing adoption.

"It works for companies big and small because so many suppliers are already in the system and costs are spread out and transaction-based," he says. "Plus, everyone can use their proffered programs for invoicing, from Oracle and SAP to QuickBooks, Peachtree, or niche tools."

Mohawk Industries, a Calhoun, Ga.-based supplier of residential and commercial flooring, is enjoying solid results with electronic invoicing.

According to Mark Dailey, director of financial operations and support services, Mohawk had "fairly antiquated and manual AP operations." Its finance applications included Lotus Notes, a J.D. Edwards enterprise system, and some screen-scraping tools.

Following some workflow improvements, Mohawk wanted to move toward a paperless environment. The company first evaluated EDI-based solutions, but found them to be resource-intensive and cumbersome, especially since every vendor had its own requirements and formats. Outsourcing looked like a dead end, too.

Dailey found OB10 a good fit for Mohawk. "It handles supplier enrollment and invoices of any type—from spreadsheets to basic EDI formats," Dailey says. "Those were very attractive features because they save us lots of work."

Mohawk handles roughly one million invoices every year. Its initial focus was on 1,200 vendors that submit 50 or more invoices per month, and the 75 percent of invoices linked to POs. Since 2005, more than 700 vendors have signed up with OB10, accounting for 75 percent of total invoices.

Dailey views e-invoicing as just one area where Mohawk can optimize its finance operations. He's also looking at Web-enabled reporting tools for better travel & expense reporting and management. "We have more opportunities to deploy technology to be more efficient—from check printing and payroll to budgeting," he says. "We're just scratching the surface."

Price management is another area in which better technology and Sarbox-related visibility will lead to improvements, according to AMR's Hagerty. "Companies have started automating price quoting and execution policies," he says. "It used to be cost was the main factor in determining profitably, but now manufacturers adjust the price lever, too."

Another tack is to pursue "value-engineering"—i.e., taking the market price and setting costs backward from that point.

On the other hand, IDC's Parker estimates manufacturers use nonstandard pricing 75 percent to 90 percent of the time. In other words, nonstandard pricing is the standard. "Pricing isn't just 'cost-plus' anymore," he says. "Globalization has changed that forever."

While finance optimization may not sound exciting, potential cost savings and cash-flow gains are eye-opening. According to Hackett's 2005 Book of Numbers, typical companies spend $940,000 per billion dollars of revenue on compliance management. But world-class companies spend 36 percent less than average. Overall, finance costs for world-class companies are 42 percent lower. The difference comes mainly from integrating key processes (like procure-to-pay) and fully rationalizing technology architectures.

In fact, world-class finance organizations actually spend 63 percent less on technology than typical companies because they standardize enterprise systems and use enabling technologies such as e-invoicing and payments, and online time & expense management.

By leveraging best practices, enabling tools, and technologies, finance executives can move beyond their roles as end-of-month, backward-looking scorekeepers toward a more active, strategic role.

"The finance function is in the best position to create a real-time information flow that can support scorekeeping, planning, and decision-making on a global scale," says Hackett's Krueger. "And that's what's necessary to serve effectively as the planning and financing arm of the business."