There are ways to improve revenue performance, if only CFOs had time to look for them.
CFO. 01 May 2006
For the first time since 1987, companies are starting to see annual productivity gains slow. Dr Frank Gelber, chief economist at BIS Shrapnel, said last year that Australian companies have cut back the fat to the point that there were no more efficiency gains to be had. He said this means companies face cost increases and either rising prices or falling company profits.
Meanwhile, the statutory and regulatory burdens on the chief financial officer’s department are increasing.
The post-Enron, Sarbanes-Oxley regime, combined with a local focus on corporate governance and triple bottom-line reporting, tend to divert precious talent away from strategic and commercial imperatives towards the bureaucratic.
This is not made any easier by a skills shortage among accounting and finance staff. Andrew Friars, partner at Accenture, said at a conference in Singapore last year that he found regional CFOs were challenged in finding good people. “There is a significant war for talent in Australia,” Friars says.
This leaves CFOs looking for ways to increase efficiency, while spearheading their own initiatives to boost net revenues.
One option is to bring in the consultants to review operations. Often they will look at what, at first glance, is the well-trodden path of outsourcing. Yet Australia lags behind the US and Europe on outsourcing and in the use of technology to automate bureaucratic jobs.
Friars says local CFOs are outsourcing just to free up senior management’s time.
“In Australia, that’s becoming increasingly important,” he says. “If you outsource, that allows you to take your scarce talent and focus it on value creation.”
The key is to look at the process-driven parts of the job, with the largest of these being accounts payable for almost every company in Australia – outside the financial services industry, that is.
Friars suggests using technology for automation of job processes can remove up to 80 per cent of full-time employees from the need to carry out those functions, allowing them to work in more value-adding operations. “If you take both of these things, I think there is upside in the Australian market in terms of driving significant efficiency gains.” Friars says.
Automation of transactions has been used with great success, for instance, by Orica’s general manager of treasury, Frank Micallef. He points out that three people who had previously worked on manually reconciling general ledger accounts with bank statements were able to be redeployed to far more rewarding work in the treasury risk area (see “Good chemistry”, CFO, October 2005, pages 58 and 59).
Invoicing is another area offering easy savings for cost-sensitive CFOs. A survey by Accenture in 2005 showed invoices can cost as much as $US40 ($55) to process in some companies. Further, there were up to 48 full-time staff dealing with invoices for every $US1 billion ($1.4 billion) of revenue.
Of the executives Accenture polled, about 70 per cent estimate the average cost of processing an invoice in their organisation at more than $US3. Worryingly, about a third of those questioned did not know how much it cost their organisation to process invoices.
Fortunately, Australia doesn’t seem to fare too badly. Friars says it can cost from $2 to $14 locally to process an invoice. The reason costs vary so wildly is inefficiency in process. Labour costs are part of the story, but it is also the number of staff contacts needed in processing an invoice. There are the actual transaction elements, plus people needed for reconciling and following up on payments and queries.
Costs can be cut by outsourcing the processing of invoices, and with the use of optical scanning and image recognition, take the physical handling of paper out of the equation. Streamlining the billing process through salesmen can also cut costs.
Another process-driven business cost is pay-roll. Australia’s employment system is one of the most complex in the world: federal legislation overlays that of the states, combined with enterprise bargaining, and now there’s the brave new industrial relations regime.
“If you look at the total cost of ownership of producing a payroll cheque today, it is somewhere around $16 per pay or $450 per employee per year,” says Terri Hosking, marketing director of ADP Employer Services, Asia-Pacific. Through outsourcing, she reckons cost can be cut to nearer $5, though it is more common to cut costs by no more than one-third.
What needs to be factored into the payroll equation is the cost of developing payroll systems and the management time involved. Hosking says that implementing SAP on a payroll could take from 18 months to three years, depending on the size of the company and the size and complexity of the system.
For a large implementation, the software company will call in the consultancy arm of one of the big four accountancy firms. Often this type of installation is customised. Hosking says that the crucial question is to what degree do companies really need these customisations.
“A lot of our clients often have this discussion about how different they are. But perhaps we are not so different today,” Hosking says. She is seeing a very strong trend among multinationals and large companies away from customisation.
With resources diverted from administration, the CFO can divert staff towards commercial imperatives such as mergers and acquisitions, management reporting and helping increase the bottom line on sales.
Pricing Insight director Ron Wood reckons that most companies can easily increase the earnings before interest and tax by undertaking a practical review of pricing strategy.
He says that any company with a turnover of more than $100 million is likely to have anomalies in pricing because of either legacies or acquisitions. By simplifying structures, margins can be increased. For one client, Wood added an extra margin of 0.2 percentage points, which translated into $3 million in EBIT for a company making $5 million EBIT.
“That didn’t require loads of consultants in there for months doing game theory,” says Wood. He says the problem for many companies is that pricing is in the hands of the sales force. Often the incentive is to drop price. It is a short-term quick fix, driving sales and earning the sales force a commission. But while these sales bring in cash flow, they erode margins.
“My advice for any CFO who is contemplating reducing margin leakage and trying to generate significant earnings growth, the fastest thing they can do is to implement a full-time pricing manager and that manager should report to the CFO.”
For a company with $200 million in revenue, a pricing manager with a team of two to three analysts should be able to find one percentage point in margin, Wood says. “You are talking about spending from $250,000 to $350,000 and you should get back a $2 million return, minimum.”