A Day Of Reckoning For Bean CountersTim Smart
When Union Carbide Corp. spun off its industrial-gases business two years ago, that prompted a companywide restructuring designed to pare some $400 million in costs. For Chief Financial Officer John K. Wulff, the exercise proved eye-opening. He decided to find out how the chemical company's costs of performing such simple finance functions as cutting checks, posting entries in accounting ledgers, and reviewing travel and expense reports compared with those of other large companies.
His conclusion? Carbide was a high-cost operation. It spent $9.45 to process a single invoice. Other companies spent an average of $8, with the best performers under $1. A journal entry cost Wulff's people $16.22--about 10 times what other large industrial companies were spending. Carbide did do some things well, with T&E forms being processed at half the average $20 cost of comparative companies. But, overall, Carbide's performance left a lot of room for improvement. "I knew mur costs were high," says Wulff. "But in certain areas, like general accounting, I was a little surprised."
Since then, Wulff has been aggressively reducing the costs of Carbide's finance operation. Some 200 positions have been eliminated, saving more than $20 million.
"SHARED SERVICES." Carbide's experience, and that of some other big American companies taking similar measures, offers surprising lessons. Carbide has spent much of its recent history redesigning manufacturing operations, managing inventories more closely, and speeding up product-development cycles. But these very same companies--zealous in their ability to cut the cost of making products--had allowed their backroom bean counters to grow very flabby. Now, though, CFOs are giving finance the same makeover that manufacturing and marketing received in the late 1980s. Companies as diverse as Johnson & Johnson and General Electric Co. are finding they can cut overhead by a third or better with new ways to bill customers, pay employees, and process checks. "This is going to be the agenda at every company within the next five years," says consultant Robert W. Gunn, who has helped such companies as Hewlett Packard, Shell, and U S West reengineer their finance shops.
In many ways, the changes afoot parallel what has happened on the shop floor. GE is using the very same techniques of mapping work processes that it uses to speed up production of appliances to increase the output of accounting clerks. But in other ways, the trend is counter to the latest dogma from management consultants. Leading-edge companies that are actively trying to push decision-making to the lowest point are just as quickly centralizing their finance functions into one or two regional data centers under a system known as "shared services." Instead of each business unit having its own CFO and accounting operations, the businesses in effect become "customers" of a centralized finance function. "Once we got control of these functions, we could reengineer them," says Walt Hazelton, manager of accounting-service operations for Xerox Corp.
IMPACT. That's exactly what happened at GE. Its far-flung businesses once used 34 different payroll systems. But over the past five years, GE has transferred work from five different regional accounting centers to one megacenter in Fort Myers, Fla. Along the way, the number of finance-department workers has fallen by 40%, to 600. "They do the work differently," says Robert Frigo, manager of GE's Financial Services Operation. "There's much more use of electronic media and local-area-network technology." And with fewer workers, notes Frigo, come fewer supervisors.
Johnson & Johnson CFO Clark H. Johnson says he saw the light in the 1980s when the company participated in a benchmarking study. The survey found most large companies spent about 2.3% of their annual sales on finance-department overhead. "We were at 2.8%, and that kind of woke us up," says Johnson.
Armed with the data, J&J began a consolidation that combined regional data centers and undertook the use of uniform ledgers and accounts-payable systems. "We had 100 manufacturing locations with 106 payroll people," says Johnson. "We're now doing our payroll of 40,000 people with 28 people." All told, J&J slashed its finance-department head count by a third, or 600 positions, even as sales increased 30%.
The cuts had a bottom-line impact. Johnson says that in the past four years, the company has reduced its worldwide finance budget by $84 million. To accommodate the downsizing, Johnson says the company used early-retirement programs and tried to move affected workers to other jobs in the company. And Johnson cut back sharply on his use of temporary workers brought in to manage the paperwork overload.
The effort encouraged Johnson to push even harder for savings. Once, it took J&J 26 days to close its books. Now, it's down to 7 days. "My target is 2 days," says Johnson. "It's really computerization as well as different attitudes." Johnson has also eliminated monthly closings, going to quarterly instead, and reduced much of the paperwork associated with a huge finance staff. "We were producing too much paper that no one has time to use," he says.
At Ford Motor Co., what began as an attempt in the mid-1980s to cut costs by 20% in its accounts-payable department soon led to a wholesale reworking of the company's procurement system. In the old days, Ford would order a part, and when the supplier shipped it, accounts-payable clerks would attempt to match the purchasing order with a form produced at the receiving dock and reconcile that with the vendor's invoice. When all three agreed, payment was made to the vendor. Armies of clerical workers were spending hours chasing missing forms.
Nowadays, a clerk orders a part, enters the order into an electronic data base, and then awaits shipment. When the part comes in, a worker in receiving checks the data base to make sure the part has been ordered and then approves it, at the same time prompting the computer to automatically issue payment to the vendor.
ENTRENCHED. The changes at Ford, J&J, GE and other companies have led to byproducts other than reduced costs and shrinking staffs. GE's Frigo says the goal is to get finance people integrally involved in overall business strategy. Instead of just checking T&E reports for errors, workers can now develop information about company spending practices that lead to better deals with vendors. "It's more than just paying the bills," says Frigo. "We're trying to push the focus from processing transactions to adding value."
But change is slow in coming in some companies, where the finance function is often a protected fiefdom. While outfits such as GE and Xerox are pacesetters, many companies are barely dealing with the growing costs of their finance units. "I would say most people are groping," says Patrick J. Keating, a business professor at San Jose State University who has studied the issue. "Most finance people are so entrenched, they can't even visualize where they are trying to go."
That's a shame. Consultant Gunn says finance staffs in large companies average nearly 5% of the total employment and in some cases account for more than 10% of the company's payroll--which creates major opportunities for big savings. Companies that seize those opportunities could get a big leg up mn global competitors, especially since reengineering of back-office operations is something that American companies are far further along on than overseas companies. "I think it's what is going to beat the Japanese," says Gunn.
That may be carrying it too far. But it's still an incentive that any American company can appreciate.
FIXING FINANCE FORD
Eliminated manual invoicing system, now pays vendors using electronic system that matches orders to supplies and automatically issues a check. By reducing paperwork and simplifying the process, Ford cut payables staff significantly.
Once had 34 different payroll systems, now has only one. Has reduced financial processing centers from five to one. This has allowed GE to cut finance operation payroll by 40%, from 1,000 people to 600, over past decade.
Xerox consolidated seven general-ledger systems into one and centralized work from four data centers to one. Changes allowed
Xerox to eliminate more than 100 positions in its finance operations.
JOHNSON & JOHNSON
Did away with monthly closing of its books; now closing occurs quarterly. J&J is also speeding up process. What used to take 26 days on average now takes 7. All told, J&J cut worldwide finance budget by $84 million.