SAP Industry Brief

Building a Business Case for Next Generation Enterprise Financial Systems

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CONTENTS Executive Summary ………………………………………………………………………........... 4 What the Numbers Show ...……………………………… ….……………..……………...…...... 4 Getting the Best from ERP Technology …………………………….………................................... 5 Driving Change with Technology ……………….……………………......…………………….. 5 Enhancing Productivity and Collaboration with the mySAP tm ERP Application………………..................................................................................................……....…… 6 A Partnership for Growth…………………………………….………………………………… 6 Summary ……………………………………………………………………………………… 6

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EXECUTIVE SUMMARY Today’s CFOs face pressure from an array of sources. Internal stakeholders expect them to reduce costs, protect the bottom line, and do more with less. Externally, there are increasing demands from regulators and accounting bodies. Perhaps the biggest challenge comes from the Sarbanes-Oxley Act, which calls for increased transparency, more accountability, and improved governance and internal controls. As a result, CFOs face an unprecedented degree of personal risk, and the costs of making mistakes are at an all-time high. Since there are serious penalties and fines for noncompliance, Sarbanes-Oxley has been a major catalyst for finance transformation. Meanwhile, analysts and shareholders are demanding more information about present and future performance. In fact, shareholder activism is at unprecedented levels. CFOs must help assess future risks and evaluate new business opportunities. These requirements go well beyond the transparency of the traditional profit-and-loss statements and balance sheets. Through finance transformation, companies can improve their performance by making the finance organization a partner in managing the business. Finance transformation has become somewhat of a catch-all phrase. At its essence, the finance function assesses the business strategy and determines what it has to accomplish to support the corporate strategy. Finance transformation is the journey companies take to be perceived as partners to the business. It involves motivating people and reorganizing the underlying functions that support control and transactional processing (such as the recording of the debits and credits, reconciliation, and adjustments). This transformation also has a fundamental impact on technology. According to CFO magazine, the average large company has 10 different ledger systems, 12 different budgeting systems, and 13 reporting systems. Not surprisingly, supporting and maintaining all these disparate systems is a drain on resources. To this end, an important part of finance transformation is deploying next-generation enterprise financial systems that streamline and simplify the IT infrastructure to deliver value, create strategic advantages, and lower the total cost of ownership.

What the Numbers Show According to The Hackett Group’s Book of Numbers research, companies can cut their finance costs 23% by using a single enterprise resource planning (ERP) platform and by implementing common technology and data standards. Interestingly, companies that did one without the other generally did not see any significant cost savings. The Hackett Group’s research shows that the best-run financial organizations

took both approaches. This helped them spend 31% less than their peers on finance, operate with half the staff, and accelerate their monthly close. The study also revealed that high perfor mers routinely turned to several techniques to reduce costs. These include relying on a single chart of accounts, using half the number of bank accounts, and performing far fewer budget iterations. The median cost for companies with a common finance application and a high level of standardization was 0.99% of revenue – 23% less than the 1.28% level for those with multiple applications, a low level of standardization, or both. This amounts to $2.9 million in annual savings for a $1 billion company, and the savings were equally distributed between finance, labor, and technology. The best performers achieved a level of 0.74% of revenues. The IBM Business Consulting Services “Global 2005 Business Survey” found that finance departments spend 47% of their time on transactional processing. This compared to 50% in 2003 and 65% in 1999. Although finance departments have increased productivity by implementing ERP systems, the momentum has waned. Undoubtedly, compliance issues related to Sarbanes-Oxley are a key factor behind this trend. IBM’s survey also revealed that respondents spent 26% of their time on internal control and compliance activities. That only leaves 27% of their time available for strategic activities, whereas ideally, they would like to spend about 40 % of their time on this. If that is the case, the time spent on transactional processing will have to be further reduced by optimizing financial processes. Surveys conducted by the American Productivity & Quality Center (APQC) showed companies are likely to spend 30% more time on decision support and performance management over the next three years. Yet, the research indicated little progress has been made toward creating a greater strategic role for finance. Most respondents still spend more than 50% of their time on transactional processing, while high performers spend 30% on transactional processing and 45% on decision support and management activities. Several other interesting insights emerged from the APQC survey. Finance costs, for example, tended to be lower in large companies because they can benefit from economies of scale. There were significant cost differences among companies with comparable revenues. Shared services emerged as the strongest driver of cost efficiency. The average revenue of the companies surveyed was $4.7 billion, and each shared service saved an average of $3.4 million.

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The APQC survey also confirmed that using technology in the most effective way helps companies achieve greater efficiency and gradually frees up personnel for more strategic tasks. Companies that had automated more than 66% of their finance processes had average finance costs of 1.2% of revenues, while companies with less automation had average finance costs of 3% of revenue.

Getting the Best from ERP Technology A survey of finance professionals across several industries and geographies conducted by the Accenture Institute for High Performance Business found that there are clear winners and losers when it comes to finance integration. The winners have a higher degree of integration between data, systems, and processes, and they strive to attain consistent value drivers. High-performing companies are getting value and are gaining competitive advantage from their ERP solutions. They have benefited by bringing all the business segments and units onto a common platform. Moreover, they have expanded integration across the boundaries of their organizations. For instance, suppliers can use a portal to access corporate systems to check the status of the payment for an order. For these companies, transforming finance has yielded annual cost reductions of up to 20% to 40%. They also have benefited from more efficiency and increased analytical capabilities. Yet the research shows that about 50% of the companies that have deployed an ERP system are not completely integrated. Therefore, they have a higher cost of ownership than necessary, and they are not realizing the full potential of their ERP package. Only 34% of respondents are integrated with their customers, and only 15% have links with suppliers. The way in which a firm integrates its systems is as important as what it integrates. Firms need to optimize processes and implement leading best practices and standards. They also must identify specifically where they can gain competitive advantages and then customize the system in those areas. If they do that, they can derive the maximum benefit and highest ROI from their ERP implementation. Companies also can maximize their benefit by having a data warehouse and business intelligence. Having both of these components enables staff to automate low-value tasks and concentrate on high-value analytical activities. Common processes, platforms, data sets, and definitions improve decision support and analytics, while helping drive value.

Driving Change with Technology The first step is to gain a better understanding of the different categories of employees within the organization, including full-time and part-time employees as well as contractors. HR managers need to assess how employees can be leveraged as assets to achieve business results. Companies can leverage a common platform to drive process change, derive value beyond finance, and position the finance organization as a business partner. There are several reasons why finance transformation is chosen:

• The CFO and the COO may be looking to support operational excellence by implementing standard, end-to-end financial processes across the company.

• The CFO may want to gain efficiency through centralization via a shared service model. This is a way to optimize the cost structure and to enhance the quality of financial services.

• The CEO may want to enhance the company’s capability to expand through acquisition and capture cost savings available through economies of scale. A centralized platform supports this objective.

• The CFO may be concerned with reducing risk and complying with regulations. An integrated and centralized finance platform provides a strong compliance backbone along with the necessary transparency, traceability, and accountability demanded by regulators and shareholders.

• The CIO may be concerned about reducing the complexity and increasing the flexibility of the IT landscape as well as freeing up maintenance and resources for innovation.

Finance transformation involves technology, processes, and people. There is no silver bullet, but a few tactics can yield fast results. First, consolidation is a quick solution that demonstrates to the leadership that progress is underway. Consolidating locations, departments, and groups as well as sharing services can achieve a cost benefit of 10% through improved communications. After all, having a single view of the truth means less time being spent on reconciling bits of information from different sources. Continuous improvement can yield about 30% in cost savings. Motivated employees want to improve their day-to-day job and be promoted within the company. In addition, they want the company to perform well. Two factors have a bearing on motivation: management focus and an effective HR organization that works to develop and enhances employees’ skills.

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Technology that sits on top of (or is integrated with) the ERP system (such as routing and workflow tools) enables companies to improve staff performance, motivation, and productivity. By establishing and working toward documented services levels, the organization can remain focused on real priorities. CFOs need to be the champions for change. Just because it is decided that the finance organization is outdated and needs to be changed does not necessarily mean that everyone else is going to agree. In many ways, finance transformation has to be sold and not just mandated. To get started, firms can use a bottom-up approach. Some people within the company may be visionaries – they figure out how to perform processes in a better way. The CFO needs to be open to allowing a real discourse and critique to take place, letting those ideas bubble to the top. Alternatively, a top-down approach can be implemented. CFOs can reach out to peers at other organizations to find out how they tackle finance transformation. That way, they can understand where improvements can be made internally and recognize when a company is operating at peak performance. When CFOs are thinking about tackling finance transformation, it is important to lay out the vision – what the finance organization should look like in one, two, and three years. They need to think about how the organization should be weighted toward transactional processing, analytics, and decision support to achieve an ultimate operating model. By benchmarking best practices, CFOs gain an immediate indication as to where potential savings can be gained, which allows them to prioritize activities along the path of finance transformation.

Enhancing Productivity and Collaboration with the mySAP™ ERP Application mySAP ERP helps raise your operational and collaborative efficiency by extending ERP functions to virtually anyone in your bank who works on any business process. Users gain access via an intuitive, easy-to-navigate workstation portal that is carefully customized to the user’s role, making critical information instantly available to both bank personnel and customers. All parties involved in a particular process or project can collaborate swiftly and effectively.

The resulting increase in productivity leads to greater profitability and customer satisfaction. It also gives your bank a competitive edge by empowering everyone to react efficiently and respond proactively to events and trends, such as changes in market conditions or new customer demands. mySAP ERP provides decision makers with the right information in real time, giving them a deeper understanding of activities across the entire organization. With these insights, potential areas of concern and pockets of opportunity can be proactively isolated.

A Partnership for Growth In today’s increasingly complex global environment, SAP software is one of the safest, most cost-effective choices you can make. We have 30 years of experience with companies of all sizes, in countries all over the world. With deep experience in more than 25 industries, we understand best practices and can quickly adapt our products to conform to changing business models. We are committed to open standards that support the objectives of our clients, not just our own – as evidenced by our development of the SAP NetWeaver ® platform. You can trust SAP to help resolve today’s complex business challenges and to stay with you as your business needs change and grow. To learn more about mySAP ERP for banking, please visit http://www.sap.com/usa/industries/banking/index.epx.

Summary Finance transformation involves changing processes so employees can work more efficiently and sustain their motivation by working on high-value analytical tasks that contribute to the success of the firm. It entails implementing next-generation enterprise financial systems that enable the organization to balance control, transactional processing, and decision support as well as lower the total cost of ownership. In addition, it involves the deployment of tactics that allow the finance organization to get the best out of their technology solutions. This strategy enables a fundamental shift in the role of the finance organization from a cost center and scorekeeper to a key advisor to the business.

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