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Impact of End2End IT transformation on Financial
Planning & Analysis (FP&A) processes
By: Inderdeep Singh
Student Number: 10442952
Thesis Supervisor: Prof. Dr. Martijn Rademakers Course: MBA Fulltime Amsterdam Business School University of Amsterdam
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Table of Contents
Impact of End2End IT transformation on Financial Planning & Analysis (FP&A) processes ... 1
Executive Summary:
Philips business is global and operates in dynamic markets. In a global organization like Philips, Financial Planning and Analysis (FP&A) department are in continuous pressure to improve responsiveness and quality towards Markets and Business whilst bringing the cost base down. IT plays a crucial role in improving the efficiency and operational excellence. Financial systems will guide Philips to create deep customer relationships and brining cost base in line with competitors.
Currently, Philips IT systems are separated towards Market and Business expectations which create decentralization and reduce responsiveness of information towards customers. Both sides of Philips retrieve the information from source in a different way. This paper gives a general overview of problems faced within FP&A and how other companies are dealing with similar situation. Moreover, providing recommendations on how strong IT integration with FP&A would improve time-to-decision. IT integration would play a pivotal role in the simplification and standardization of the business processes. Business and IT should always go hand-in-hand to help the organization realize value in a customer centric and agile way.
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1. Introduction:
1.1 Characteristic of Study:
Philips FP&A is facing ongoing challenges in providing faster decision support and enable business leaders to quickly access management information from different sources. This paper deals with the analysis of the operational gaps in Philips FP&A processes and how complexity of IT landscape impacts reliability of data published to business leaders. The challenge in Philips was how to identify technology that can address issues faced in separated FP&A processes and create recommendations to standardize planning and reporting processes across FP&A and improve analytical capabilities.
There were some key improvement areas to focus: improvement in data quality of management reporting, company-wide process standardization, reduction in time spent on building reports, cost savings, automation to increase productivity. After analysis of these components, focus was to propose the solution that would increase efficiency in FP&A process and having tight control on IT Overheads. As a recommendation, paper focuses more on Cost Leadership instead of Differentiation strategy to reduce cost base in order to achieve sustainable competitive advantage. Keeping in mind Cost-leadership strategy, flexibility in the FP&A process was also
4 taken into account. To outperform competition, changing customer demands also need to be considered.
This project focuses on how integrating IT framework for different FP&A sectors would improve time-to-market and quality whilst reducing the costs.
1.2 Project Statement:
FP&A continuously searches for technologies to streamline their reporting processes and encouraging the flow of information, eventually spending less time on manual tasks. A lack of standardized processes and separated financial systems drive more focus on administrative tasks rather than valuable insights. To ensure fast turnaround times from idea to customer and back, our business processes need to be integrated end-to-end (E2E), without any roadblocks along the way that impede time to market, cost and quality of FP&A. The biggest challenge is to improve agility and reducing the overhead costs whilst excelling in customer service and customer attention.
Statement: Analyze how integrated IT landscape facilitates faster management decisions and
ensures quality and cost controls in FP&A.
1.3 Description of the work:
Nowadays, FP&A process should be quick, flexible and dynamic, delivering plans, forecasts and analytical insights accurately to the senior management and to investors and suppliers for facilitating decision-making. Working with fragmented information systems across different business areas can be extremely difficult to manage. Philips IT has always been involved to stay close to and support the business in the best way possible. Now, Philips is moving more towards the customers and markets. Because of this, complexity of the business processes has increased to provide flexibility to the customers. Philips aim is to simplify the business models and streamline the operational models. Operational gaps in FP&A processes (Markets, Industry and Internal) were identified to help remove the roadblock for standardization and also to reduce the costs for the organization. Purpose was to detect and remove the issues in processes that have efficiency and cost impacts.
5 The solution for the process issue can be identified by following two different perspectives i.e. Inside–Out perspective and Outside-In perspective. If Inside-Out perspective is taken into consideration, focus would be to develop unique capabilities and distinctive technologies to create value to the firm and seek market opportunity where it can be applied. Company resources and core competencies become the main driver for shareholder value. But, if Outside-In strategy is considered, focus would move to more on market research and market needs and using it as framework to formulate competitive advantage for the organization.
Philips business is moving real-time, but complexity in IT leads to time-to-market issues and operational issues. Does Philips wants to only produce at a lower cost than its rivals and look into core capabilities or differentiate its products according to changing customer demands to maintain the market share? In order to achieve sustainable advantage over competitors, Philips also needs to attract the market and be flexible to customer needs. Expectations of customers have to be considered while moving forward with the recommendation. Integrated landscape is supposed to be one of good recommendation, as it will provide more standardization of the processes across FP&A. Proposed recommendation should be flexible enough to be able to manage customer expectations, as it would directly impact market growth of Philips. Also, it should ensure control on quality of the information being brought up to the customer.
Integrated IT landscape should facilitate faster management decisions and ensure quality and cost controls. Integration in IT landscape is likely to lead to the pitfall of ‘one size fits all’, which hinders agility due to misfit with business-specific circumstances. Markets, business and internal Philips may have different requirements from the same IT landscape. Strategic tensions were taken into consideration while proposing the recommendations.
2. Literature Review
2.1 The Discipline of Market Leaders - Michael Treacy and Fred Wiersema
How can company deliver continually-improving value to the customers? The Discipline of Market leaders describe a view of what Customer’s say about value:-
• Companies can no longer raise prices.
6 • Companies can no longer assume that good basic service is enough.
• Companies can no longer compromise on quality.
The article focuses on different type of customer values – Price or Unique feature or Convenience and based on that proposes three value disciplines for the companies (M. Treacy & F. Wiersema, 1995). Company needs to make a key choice about which value discipline to select. By selecting one of those disciplines, company can produce value for their customer and create sustainable advantages which are hard to replicate. To sustain its position at the top, a market leader must ensure that its operating model improves faster than the competition’s.
Operational Excellence: Focus is on end-to-end processes and minimizing the costs, hence
providing flawless service. The company needs to follow enterprise performance, quality and costs. Also, companies need to manage customer expectations.
Product Leadership: Focus is on invention and creating the leading-edge product or services via
market exploitation. Company sometimes needs to sacrifice processes to encourage innovation and customer requirements.
Customer Intimacy: Focus is on customer requirements and delivering what customer wants. The
company needs to be flexible and responsive to changing customer demands. Enterprise following this value discipline can divert focus from innovation and costs.
7 Choosing one discipline to master does not mean that a company abandons the other two; only that it picks a dimension of value on which to stake its market reputation. Any market leader, whatever value it chooses to deliver, must maintain reasonable standards in the other dimension as well.
2.2 Generic Competitive Strategies by Porter:
Porter’s five forces give a holistic view of industry and understanding structural underlying drivers of profitability. Five forces model is an Outside-in strategy that is used to determine potential attractiveness of an industry structure. The collective strength of the forces determines the ultimate performance of firm and Industry as whole. Porter described these five forces as bargaining power of customers, bargaining power of suppliers, Intensity of existing competitive rivalry, threat of new entrants and Jockeying the position.
The Porter’s five forces model emphasizes the strategy, a firm can take to earn superior profits by finding position in the industry to defend the firm from the influence of these forces. To take the competitive advantage a firm should hold a position in industry where it can limit the threat of five forces. Model helps to identify the selection of a competitive strategy and position of the company through generic strategies, to achieve a favorable market position (M. Porter, 1979).
For achieving sustainable competitive advantage and to gain market position, business has to adopt one of the three generic strategies: Cost Leadership, Differentiation and Focus on niche market (M. Porter 1985). These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side and looks at the size and composition of the market you intend to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm. The project takes into consideration the business strengths and formulates the appropriate strategy to create competitive advantage.
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Focus strategy is narrow in scope while both cost leadership and differentiation are relatively broad in market scope. A cost leadership business creates a competitive advantage by reducing the costs using core competence, exploiting all sources of cost advantage and increasing market share. In a differentiation strategy, business develops product or service features which are different from competitors and appeal to customers including functionality, customer support and product quality. A focus strategy is when a business choses a narrow segment within its industry to achieve cost leadership or differentiation within niche markets (M. Porter, 1985).
A firm must decide whether to attempt to gain competitive advantage by producing at a lower cost than its rivals or differentiate its products and services and sell them at a premium price. Then, the firm must decide whether to target the whole market (broad) with its chosen strategy or to target a niche (narrow) market.
2.3 Unbundling the Corporation - John Hagel and Marc Singer:
Traditional companies are bundle of three fundamentally business types – Infrastructure management business, Product Innovation and commercialization business and Customer relationship business. “When the three businesses are bundled into a single corporation, their
divergent economic and cultural imperatives inevitably conflict. Scope, Speed and Scale cannot be optimized simultaneously. Trade-Offs has to be made (J. Hagel & M. Singer, 1999)”.
Currently, many companies are focusing on their core capabilities and concentrate on those areas and unbundle the rest of the organization which can be outsourced to external suppliers if
9 possible. External Suppliers would be able to do the processes with higher quality and effective costs.
Interaction costs represent the money and time that are expected whenever people and companies exchange goods, services and ideas (J. Hagel & M. Singer, 1999). Firms do trade off the value of specialization against the interaction costs associated with external suppliers when they set boundaries and choose their focus. Also, when interaction costs of performing an activity internally are lower than the costs of performing it externally, a company will tend to incorporate that activity into its own organization rather than contract with an outside party to perform it. A company will organize in a way to minimize the interaction costs. Hagel and Singer proposed that the rapid change in technology has reduced the interaction costs and as a result, companies will outsource non-core processes to other specialized companies and concentrate on core process.
The secret of success in fractured industries is not only to unbundle but to unbundle and then re-bundle, creating a new organization with the capabilities and size required to win7.
2.4 Mapping the Mind of the Strategist – Ron Meyer:
In general, company is filled with conflicting demands where executives need to make difficult trade-off decisions. A strategy tension exists where an organization is confronted with two conflicting strategic pressures or demands that need to be dealt with simultaneously (Ron Meyer, 2007). The paper talks about the steps on how to arrive at the strategy perspective on each strategic issue:
• Identifying the strategic issue, analyzing the issue to uncover conflicting demands on business executive. What actions need to be taken and formulating the problems to be addressed.
• The focus of this analysis is to determine the nature of the conflicting pressures and to explore their influence on the strategic decisions that executives need to make.
• The focus of this analysis is to discover the main points of contention, conflicting assumptions and differing values between the two strategy perspectives.
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Project focuses on Business Level strategy which focuses on tension arising from conflicting demands of Market adaptation and resource leveraging (Ron Meyer, 2007). The paper presents two strategy perspectives – Inside-out and Outside-in perspective to help company analyze the best fit for their own organization. Outside-in strategy focuses on developing strategy which begins with analyzing the attractive market opportunities and position accordingly. Shifts in customer demands must be met. Inside-out strategy not focuses on external opportunities but on firm’s competency to reach competitive advantage.
2.5 Operations Strategy
According to Slack et al. (2004), there are five operations performance objectives - Cost, Quality, Speed, Dependability and Flexibility and excelling in one or more of these objectives will enable organization to pursue competitive business strategy to achieve sustainable advantage.
However, it is important to note that the success of any particular business strategy depends not only on the ability of operations to achieve excellence in the appropriate performance objectives, but crucially on customers valuing the chosen competitive factors on which the business strategy is based. The process of operations strategy concerns the way in which an organization develops
11 its operations strategy. This might be top-down (i.e. formed in pursuit of its business and corporate strategy), bottom-up (i.e. formed from the actions and decisions taken with operations), market-led (i.e. formed in response to market requirements) or operations-led (based on the resources and capabilities within its operations)(Slack, N. & Lewis, M., 2004).
3. Company information Methodology/Case Description:
Royal Philips is a diversified technology company, focused on improving people’s lives through meaningful innovation in the areas of Healthcare, Consumer Lifestyle and Lighting. The company is a leader in cardiac care, acute care and home healthcare, energy efficient lighting solutions and new lighting applications, as well as male shaving and grooming and oral healthcare1
. Philips aims to deliver more customer focus, improve excellence and speed-up decision making, while also reducing overhead cost. Philips going forward wants to get even closer to our customers and grow in the competencies.
As part of competencies, financial systems are becoming complex and expensive to run. The many integrations and system interactions dilutes data quality/reliability. Philips cannot keep pace with the market and be proactive with our customers. Problem at Philips hand was to embed
12 sustainability as innovation driver. Customers will have easier and faster access to real-time data and information, to have better and more accurate data available to the business.
This involved the company in building strategy towards delivering this approach. How is it possible to handle the tension changing customer demands and long-term system innovation?
• Operational Optimization: It’s doing the same things better.
• Organizational transformation: Creating Market opportunities. It’s doing well by doing new things. It creates shared value for multiple stakeholders and requires new business processes next to the establishment of systemic relationships to multiple stakeholders.
Integrated IT Landscape Solution:
There are two aspects where Philips focuses on – first is becoming leaner organization by continuously improving core capabilities and second is gaining deep market insights and building strong customer relationships. FP&A processes should be integrated to reach out to Markets and Business in a faster way but it would not be able to provide agility. To achieve integration in a sustainable way, back-bone capability i.e. financial systems should be integrated which can make FP&A integration easier. E2E IT integration will enable the drive towards a more agile and innovative FP&A through faster, better and leaner IT. Integrated IT framework allows for creating stable systems and a simple way of connecting applications. The integration of information streams will be the key enabler for decision making across the organization.
3.1 Method Adopted:
Financial planning and analysis (FP&A) is evolving and it is vital for FP&A to be quick, flexible and dynamic, delivering forecasts and analytical insights accurately to facilitate decision-making. This has caused Philips to rethink whether FP&A pillar is equipped with appropriate technology systems and resources needed to operate efficiently.
At the start of my internship, project scope need to be defined. The project scope comprised building a strategic plan to deliver lean operational excellence to improve effectiveness and reduce costs. A lot of steps need to be taken in order to reach the expected deliverable. Internship started with identifying the stakeholders which could help understanding the issues faced in FP&A processes. Stakeholders identified should be able to provide different perspectives of the
13 gaps i.e. gaps related to market customers, related to industry suppliers and related to Philips as a whole. A relevant strategic planning model needs to be developed. Before building the model,
information regarding the steps involved in strategic plan should be gathered.
Doing Strategic Analysis
The very first step of strategic planning process is to analyze the issues and challenges stakeholders are facing. Understanding the operational gaps and issues faced in FP&A processes by conducting interviews with various stakeholders like Head of FP&A, Market Head and Industry Head. After understanding the operational gaps, future expectations of Philips and FP&A were also discussed. Internal strengths and weaknesses and nature of external environment were considered while analyzing the issues faced. Porter’s five forces were used to identify the position where FP&A has greater potential opportunity. There were some articles and presentations which also helped to dig deep into the issues being faced within Philips FP&A. Gaps had to be approached with a new viewpoint, other than what has already been defined in articles provided. Priority was to analyze the data and coming up with the common cause faced by different teams. Business level strategy was also used to view the case from both Market and resource perspective (Ron Meyer, 2007).
Market Insights Strategic Analysis Market Insights Setting Strategic directions Strategy Implementation Review and Monitor
14 Before setting any strategic directions, market research was a crucial. It would support the project analysis to look at how other companies are handling operational issues with FP&A. Different kind of market research needs to be done e.g. what technology is being used commonly, is reorganization the best solution etc. This requires retrieving overall market data and understanding the business processes.
Setting Strategic Directions
Strategic analysis performed in the previous step gives a platform to identify the vision and objective of the project. Objective setting defines the vision which can be measured financially in terms of cash flows and income growth as well as strategically in terms of share growth and goodwill. Agreement has to be made with the stakeholders on vision and objectives of the project and also the expected impacts. “Discipline of Market Leaders” theory was also taken into consideration to identify the right value discipline for Philips and create value for the customers that can create future competitive advantage. Also, Porter’s generic competitive theory was used to determine a competitive strategy to achieve a favorable market position. Setting long term goals means rethinking about the future of the business and success of the company.
Strategy Implementation
Biggest part in strategy implementation is to understand the strategic plan and be realistic in terms of time and money. Internal and external factors should be taken into consideration to achieve competitive advantage. Implementation of strategy includes allocation of resources and procedures. Strategy should be well communicated within the company, as people not involved in the planning phase can misinterpret the objective. Tensions can arise between the objectives of different stakeholders while implementing the strategy. Article by Ron Meyer was considered to analyze the strategic conflicts.
Review and Monitor
Company’s higher management should be always informed on the progress reports of strategy implementation, just so they can support if anything goes wrong in the process. Monitoring the implementation ensures you align with the intended plan and achieving the quantifiable
15 objectives. It assures the performance of the plan and corrective actions can be taken if necessary.
3.2 Interviews:
To drive improvement on the current FP&A structure, gaps or issues in current structure needed to be analyzed. As a second step in the project, senior management of FP&A organization was interviewed to understand their view on current process, what should be the main area of concern and how they would view the future to be. Interviews were conducted with Head of FP&A, Market FP&A Head, Industry FP&A Head and Financial Systems Head. Before interviewing with different section heads of FP&A, I need to align questions relevant to the project scope. There were different perspectives taken into consideration while interviewing Market heads and Industry heads, as they are more close to customers and understand changing market requirements. Interview questions were categorized into below points:
1. Business Process: Philips FP&A is segmented into Markets, Industry and internal Group process. There is a different view of every segment on how process should be handled. This helps me understanding Philips business process from different stakeholders.
2. Current Weakness: Getting views on weaknesses in different parts of FP&A value chain. 3. Customer segmentation: There are different customer segments for Market, Industry and
Internal.
4. Capabilities: Primary challenge in FP&A is identifying the data issues in reporting coming from financial systems. Is every segment is facing the same issue or are there some other capabilities bringing the quality down?
5. Cost leader or Market driven: To identify how senior management looks into future state of the organization. Is Philips tilted towards achieving Operational Excellence or Customer driven organization?
Head of FP&A:
The purpose of this interview was to understand the operational issues faced by FP&A in Philips and also to understand the vision of Philips in coming years. Currently, Philips FP&A organization is having global presence and it is difficult to team up with all Finance and Business. Currently, there is FP&A organizations located in different time zones. In those two
16 FP&A organization, there are multiple teams which have separate way of consolidating the data and reporting out to markets and business. The segmentation drives decentralization of the process and it is biggest roadblock for bringing harmonization and cross-sector standardization.
There are three customer focused team in FP&A Philips serving E2E customers:
1. Idea to Market (I2M): Team is responsible for deploying capabilities that allow ideas to be brought to market through strong and relevant collaboration across Philips, consumers, customers, suppliers and partners.
2. Market to Order (M2O): Team is responsible for searching leads in the market place and converts them into propositions and ultimately orders and thus revenue. They need to engage with customers on daily basis and quickly convert insights in customer needs. 3. Order to Cash (O2C): Team is responsible for the processes which fulfill orders and
support financial transactions. These processes range from logistics, warehousing, products and service delivery, and the financial revenue flows.
These teams are supported by different financial systems and they are located globally, which segments the way of working. Philips is aiming for harmonized way of working and driving standardization of the processes. Creating an organization where different teams can share expertise, improve capabilities and maximize collaboration. Future of Philips FP&A should be to support stronger analytics by improving and harmonizing FP&A processes.
But, Philips is aiming to reduce the operational costs spend in Information Technology and make it more lean. Technology is evolving too fast and current financial systems are outdated. They need high maintenance and upgradation costs.
Market FP&A Head:
For Markets, driving towards customer intimacy is really important. Due to changing customer demands, Philips is moving towards creating deep customer relationships and market attractiveness. With different FP&A organization situated across global, a lot of redundant effort and time is wasted in consolidation and market reporting. Still for Market reporting, Excel is used for more than 50% of the reporting. IT systems are robust and it is tough to cope with
17 changing customer demands. If different financial systems can be integrated, it would definitely save effort on redundant work being done.
FP&A should move to automation of reporting, consolidation and improvement of data management by reducing non-value adding activities. By automation, purpose is to bring higher granular analysis in a fast way and increasing the added value for the customers. FP&A organization should be connected and provide real-time analysis.
Industry FP&A Head:
Factory reporting and demand forecasting is the key to industry performance. Financial systems are not well structured to serve the industry reporting. So, manual work is performed by various businesses to reach forecasted target. Different business present numbers in different manners which are not directly coming from the financial system. We spend a lot of time on customized reports and building business decks with different definitions.
In order to reduce manual work, IT systems should be connected with the industry to generate real-time analysis. The loss in IT connectivity is the biggest concern for Industry analysis. Philips aim is to accelerate the growth and improve performance by supporting our business partners with value adding insights and analysis. To achieve that, automation and self-service reporting should be the future of FP&A.
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Source: Tom Bloemers (2013). “FP&A Transformation Overview” (Philips Internal). Financial Systems Head:
IT structure is too complex because of global presence. 17 Markets and 9 Businesses in Philips use different financial systems. Because of that, financial systems are not connected with the business process. IT should become source of efficiency and operational excellence. FP&A process should be more connected to Finance IT to assure compliance, drive efficiency and improve transparency. Stronger focus on IT is critical to increase efficiency of our processes. Also, currently there is a lot of spending involved in IT systems upgradation. The future state should be able to reduce the operational costs of Information Technology landscape.
3.3 Recommendations
Redesigning FP&A organization
Currently, FP&A is decentralize and causing inefficiency in the process. Centre of Excellence team in FP&A is set to drive harmonization and process improvement. There are center of excellence teams in different part of the globe, which causes connectivity issue and delay in reporting out to Markets and Business. Next step questioned were raised in the interview like:
• Where are the synergies?
• Where are the dependencies?
• How to connect across teams and only do things once?
• How to further strengthen key market support and insights?
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Source: IT Vision and and Operating Model Guidelines 2011 (Philips Internal).
Costs could be brought down if FP&A organization could be built in cross-sector platform to enhance standardization and quality improvement. There was already suggestion provided by Head of FP&A on how future FP&A organization would look like.
New Operating model would definitely help in bringing:
• Clear roles and responsibilities as defined by FP&A pillars: By clarifying the responsibilities across FP&A Centre of Excellence, Market FP&A and Industry FP&A, duplication of efforts will be prevented and organization structure will be much simpler. Clarification will help in running more efficient process and deliver more value adding impact.
• Connectivity across FP&A: Consolidation of different FP&A teams across Markets and Industries will leverage skillset and build collaborative learning opportunities. This will help in centralizing the planning, reporting and analysis process.
• Smooth process for Customers: One consolidated FP&A platform will deliver cross-sector standardization and lead to improving the execution of budgeting and planning as well as processes across markets and industries. This in turn supports in making better decisions through forward looking analytics and insights.
Restructuring FP&A will definitely drive connectivity in the organization. But, this means work will be shifted from Markets and Business to the central organization. Because of increasing expectations from customer, market facing FP&A organization will become more flexible to serve the customers in a better way. This will not drive the costs down by huge margin. This reorganization will only cause more burdens to both Market FP&A and central organization. Redundancy and manual errors will definitely be reduced, as the whole process will be centralized. Connectivity between processes will be established, but there will be disconnection between tools.
Main issue being faced is financial systems, which needs to be resolved. Business should be more connected to financial framework to increase productivity and having 14 different financial systems running the organization back-end should be connected internally for quicker access to
20 information. Other recommendations need to be further investigated before finalizing the implementation plan.
Revisiting IT systems to Cloud Computing
Complexity in IT systems is resulting in high cost and lack of agility. Eventually, it leads to time-to-market issues and data quality issues. Philips currently allocates over 80% of its IT budget to running IT operations, rather than transforming or growing the business19.
Cloud based technologies can be the answer to this problem for Philips.
Source: http://erpcloudnews.com/2012/12/history-of-cloud-erp-crm/
Cost Benefit: Buying servers and implementing IT infrastructure including hardware costs a lot
more and require specialized skillset to maintain. Could computing is able to drive operating costs, also increases flexibility and agility. Cloud opens up the outsourcing possibility for IT with minimum experts required internally driving the costs down and also managing a large set of databases is also easy10.
Quick Innovation: In current changing market, companies need to maintain competitive
advantage by innovating quickly. Cloud gives the possibility to reach faster to any evolving technology and also gives flexibility to change. Costs involved in driving the change are also low, because of the IT skillset.
21 This will definitely help Philips to improve current financial systems minimizing mistakes from manual processes. IT is under constant change, which leads to uncertainty and risk. Cloud solutions will help driving continuous change to meet customer demands quickly9.
The biggest concern to move to Cloud solutions is Security of the data. Philips will lose control of the databases and security of the information stored in cloud will be at stake. For global organization, it is tough decision to move to cloud based approach.
Second concern was that it did not solve the connectivity of different SAP systems around the globe. I need to think of other recommendations so that connectivity issue can be resolved.
Information Technology Landscape Integration
Above two recommendations were based on organizational structure and old IT systems being updated. Those recommendations can either improve the operational cost structure or increase connectivity within processes. This particular point raises the idea of integrating all 14 different financial systems running the organization. Main purpose of proposing this recommendation is to create one common IT platform for planning, reporting and analysis. If financial systems are integrated, higher management would have the possibility of integrating FP&A processes which can drive faster response time to markets and businesses which was not being achieved as a decentralized organization.
Philips aim to achieve competitive advantage by addressing few initiatives:
Customer Centricity: Moving towards customer demands in our markets to drive attractiveness
and gain market share. Philips aim to achieve more than 95% in customer service and reduce Time-to market by 40%15.
Operating Model: Driving lean and simplified IT landscape which can enable higher speed and
excellence to outperform competition. Philips aim to reduce 25% of the costs by this initiative across global FP&A15. The purpose is to adopt common data models and eventually tilt towards building common business processes.
Creating an Integrated landscape means establishing platform which collaborates information from different ERP and CRM systems.
22 To consider an integrated framework for Philips, different IT building blocks need to be taken into consideration. These IT Building blocks support the business models value chain, business processes and database. This defines the value chains and connectivity of the associated detailed business processes. Before defining different IT blocks, functionality of each IT system needed to support the process capability should be taken into consideration. Jointly with Business Process Owners, different financial systems were identified.
After having discussions with different stakeholders and financial systems head, few mandatory requirements were listed that should be facilitated by Integrated IT solution:
• Solution should facilitate the simplification and standardization of business processes. • It should enable End 2 End Integration of information and critical processes.
• Data should be consistently managed and processes in real-time to ensure proper flow through the value chain and to support right-time management and provide business insight.
• Aligning with development and deployment of IT capability with the business and market needs.
• It should provide the possibility to validate whether requirements can be fulfilled and is in line with overall Philips strategy.
Above requirement can be achieved by using a relational database system. A relational database system can be used to integrate many concurrent systems running on different platforms. It is the software which controls the storage, retrieval, security and integrity of the data. Relational databases offer reliable performance in both transaction processing and business intelligence applications.
There were few options considered for Relational database systems like IBM, Oracle, Netezza and Teradata. Increase in use of Teradata and Oracle among companies drove us to see the benefits of using Teradata and sustainability with the organization structure.
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Source: http://dwbianalytics.blogspot.nl/2013/02/magic-quadrant-for-data-warehouse.html
Using Teradata platform
Teradata had many advantages over using Oracle. Teradata provides faster innovation with the ease of flexibility and scalability. Also, response time of getting information is much faster. End users have a single view of the business for faster decision making20.
Teradata:
• Integrates information from different platforms e.g. ERP or CRM.
• Connects all the system information in one large database and provide consistent view of information. This means providing consistent data across whole organization.
• Provides low cost, high performing and powerful database solution.
• Being a large database, managing information can be a big concern. But, Teradata provides with in-database analytics, which drives actionable insights and decision based analytics. Also, extraction of data and managing information inside can be done in parallel.
• As different systems are connected, real-time information can be extracted at any point. • Simplify the IT architecture across End 2 End chain.
24 • Information security and data protection features drives more efficiency and makes it
much more reliable for large organizations to adopt.
Source:http://www.teradata.com/products-and-services/Integrated-Data-Warehouse-Overview/?ICID=Povw
The simplification of IT Landscape and eventually standardization of supporting services will significantly contribute to driving the costs down for maintaining and execution in future. The standardization of IT services will also enable the decommissioning of legacy applications, both global and local and the related infrastructure and operations elements.
The integration platform should ensure that all components operate with each other to enable value chains and end to end flow of transactions and information. Integration should weave together the deployable units of the platform group building blocks to ensure End2End flows are seamless in support of the business process. Integration should also allow us to connect to our customer and suppliers.
Integration affecting FP&A functions
Idea to Market: This platform group delivers the IT solutions that support the core platform for Product Life-cycle Management and related functionality like open innovation, Portfolio & Project Management. Benefits of the integrated solution would include improving the time to market through multisite collaboration. Leveraging Philips procurement power and the ability to
25 use a common platform delivers increased efficiency and improved design. This involves going from 17 systems to a single platform, with an associated reduction in IT costs.
Market to Order: This platform group supports the connection of Philips with its prospects, customers and consumers. This solution would help shift from our traditional ‘channel’ perspective to new consolidated environment improving the choice and effectiveness of the engagement of Philips with the customers and consumers. This also includes the Connected Products Platform to support connected Philips products. Teradata flexibility gives the opportunity to attract the market.
Order to Cash: This platform group delivers a core transaction platform across our organization e.g. SAP ERP modules. Integration would provide essential order processing and workflow to support business value chains. Teradata would also provide the factory information, data modeling tools and analytics that enable Philips to collect, manage and provide information in a more timely and efficient way. Data will be managed separately from the applications and data streams in real-time from and to the Factories. This would definitely support a consistent approach to company-wide performance management and reporting.
Source: IT Vision and and Operating Model Guidelines 2011 (Philips Internal).
Financial Systems: The weaving of the various IT solution components together to support End2End winning value chains across I2M, M2O and O2C processes. The ‘weaving’ will encompass solutions, data and information flows across platforms.
26 To achieve sustainable competitive advantage in markets, IT landscape should be easily adaptable to the specific customer needs to win in those markets. Also, agreed integrated IT landscape should allow for scalability and provide flexibility in the architecture to support any changes in organizational governance.
3.4 Challenges:
Going ahead with IT Integrated landscape, Philips should always keep technology, approach and governance into consideration at every step of the implementation. A structured delivery approach should be taken consistent with the End2End winning value chain methodology and also adopting business processes. The release of the tool should be always part of an End2End Capability Release that combines competency building (training), process description (Philips Process Models) and information models (data models, KPIs). From an integrated IT perspective the release need to consider the impact on the available business processes and technical landscape. Integration should be done at level to support seamless operation across applications as well as to support existing systems if needed. Robust deployment strategy should be followed to ensure success.
But there are few challenges which can be faced during the implementation:
Changing from decentralized systems architecture to more common shared systems architecture requires change in IT governance and IT processes. Integration should work under robust governance, ensuring selection of the business model and investment maximizes the business value for Philips and also for its customers.
The key to reducing the IT costs with the delivery of Integrated IT landscape, concurrent with the elimination of the current legacy IT systems and infrastructures. Failing to replace legacy financial systems will result in increasing the IT Costs.
4. Discussion, Findings and analysis
4.1 Discussion:27 In FP&A, processes and technology should work together. In current framework, IT tools and landscape is designed to cater individual requirements and not having synergies.
Project takes into consideration the Cost Leadership strategy and Differentiation strategy by Porter in order to reach different solutions. Also, depending on the company’s strategy defining which value discipline to select – Customer Intimacy, Operational Excellence or Product differentiation. Operational excellence would drive lower cost structure and eventually lower price offer for the market which fits into Cost Leadership strategy. But to meet continuously changing market demands and being ready for the future, company needs to be flexible and should be able to adopt accordingly. Company should aim to achieve efficiency in combination with good customer relationship.
Strategic tensions played a major role in the project. Inside-out and outside-in perspectives was considered to find the best fit for the company’s strategy. Due to strategic tensions, trade-offs were performed after understanding the main objective of the project. For understanding the objective, various interviews and analysis was performed. It helped to come up with recommendations based on different personal objective of different FP&A Team and also common objective for Philips.
4.2 Main Findings
Market Analysis:
Main objective behind doing this was to understand if other big companies went through a similar situation and how they have tackled the shortcomings in the process. It was really important step after having discussions with different team leads and head of FP&A. Market research helped to analyze different solutions which can be used for process improvement.
Market research was done where different companies’ like L’Oréal, Pfizer, Caterpillar, IBM etc were considered. Analysis showed issues faced in FP&A organization of different sector e.g. Product based and Service based industries. Also, analysis showed the approach taken for resolution. Market research and interviews helped to derive few solutions which can be used for Philips FP&A.
28 For few companies like L’Oréal, that can come via simply upgrading old IT infrastructure with the latest one. It supported the direction which was being taken because other multinational companies have gone through a similar process. They all emerged leaner, better, more competitive. For example Caterpillar moved from 85% customized to 80% configurable and dramatically lowered Total Cost of Ownership of doing business18.
Source: “The Road to Our Future - Business Partners and Financial Planning & Analysis” (Philips Internal Sharepoint).
Interview Findings:
After interviewing the senior FP&A management, few big concerns came up from all FP&A heads. One of the biggest concerns was the segmentation of IT systems used across FP&A which increases redundant work for both Market and Industry and slows down time-to-market information. Main issue here got leaned towards backbone of FP&A i.e. framework of financial systems. For different FP&A processes, different financial systems were used. Data flowing from different sources increases the complexity in consolidation for management reporting and reduces response time of delivering information.
Another worry for Philips was bringing the cost base down for IT systems to be in line with competitors. This brought to another concern raised by Market Head of meeting customer requirements while bringing IT costs down. This gives the understanding of what kind of recommendation is expected.
29 The solution should look to improve the effectiveness of FP&A organization while providing standardized and simplified end–to–end processes. According to the analysis done, an integrated IT system framework should be chosen to reduce the complexity of retrieving the business information. Integration removes barriers to exchanging information and allows faster access to information.
Recommendation Analysis:
There were two recommendations considered before finalizing the recommendation: first recommendation was to redesign FP&A organization – it improves the connectivity between FP&A by reducing the redundant tasks done within Markets and Business, but this will not solve the IT complexity and standardization issue. This was proposed to reduce duplication and drive automation cross-sector for speed and faster time to market. Second was to revisit IT systems to cloud computing – it simplifies the complexity of the IT systems and give flexibility for changing technology demands, but security of the information and connectivity was the biggest concern. This would not have brought tight control on IT overheads. Final recommendation was to find a solution which helps integration of whole IT framework. Reason for this recommendation was that integration would provide agility to the back-bone of FP&A process. An agile delivery model helps ensure we remain close to the business and their requirements will deliver increasing value over time. Cost base will definitely become down and complexity of the delivering information from different IT systems will reduce. The issue now arose that integration of IT framework would bring robustness to the infrastructure and FP&A would not be able to cope up with the market attractiveness. Operational excellence via proposed solution would create burden in FP&A processes on customer expectation and vulnerable to technological changes. At first, it was proposed to pre-align with customers on limited variety of services/products. But, Philips also needs the solution to bring faster market decisions and supporting customer demands.
Teradata was the perfect recommendation which could redesign FP&A processes as connected and real-time company. Teradata provides integrated data warehousing solution which reduces IT complexity by driving one source of information for Industry, Markets and Internal Philips. Real-time and consistent information will be retrieved as all ERP and CRM systems are integrated. This would help to reach leaner FP&A organization, which drives simplification and
30 standardization. Also, it provides multiple features to bring flexibility in the IT landscape. Teradata will adopt common shared solutions and would be able to deliver high performing plug and play company. This will enable customer value chains to become more effective and efficient by developing standard building blocks and adopt common business processes where possible. IT is crucial for the creation of winning value chains. This will help providing deep insights into customer needs and our ability to bring meaningful innovation. To ensure that increasing value is derived from IT landscape over time, an agile approach and mindset should be adopted by Philips.
5. Conclusion
Rigorous research and analysis was done to create proper case which support the project statement of IT providing quality and cost control in FP&A and how this can be achieved by integrated IT landscape. Article by Michael Treacy and Fred Wiersema (1995) helped to focus on the strategic choice Philips has – whether its customer centricity, product innovation or operational excellence. Philips aim is to bring down cost base to be in line with best in class competitor by achieving operational excellence via applying lean processes. Due to constantly changing demands from customer, standardizing may increase response time to customer. This created strategic tensions between customer service and standardization strategy being used. Business level strategy supported the case to view from both Market and resource perspective (Ron Meyer, 2007). It helped to identify the focus strategic area for Philips. Outside-in strategy was taken into account whilst sustaining focus of value discipline. Also, “Unbundling the Firm” article gives a good overview what currently firms are pursuing as a winning strategy to achieve customer centricity with keeping their costs down. It guided to a different view of doing trade off of specialization against the interaction costs associated with external suppliers and choosing their focus, which guided us to the recommendation of choosing an external supplier for IT Integration (J. Hagel & M. Singer, 1999).
Outcome of the recommendation was to analyze how integrated IT landscape facilitates faster management decisions and enables cross business and markets learning. IT Integration removes barriers to exchanging information and sharing learnings across functions, markets & businesses, which could be one of the biggest advantages for Philips. It will allow easier and faster access to real-time data and information freeing up time to spend on driving true value. IT Integration
31 reduces time and money spent on designing tailor-made processes or reviewing new IT platforms. Fewer people and less time will be spent on digging for data – all info will be available from one single, accurate, real-time source. The adoption of integrated reporting at Philips can be attributed to three motivating factors - increased efficiency, reduced cost and improved communication. Standardization is the first step to achieve operational efficiency. To achieve long-term success, Philips should leverage operational value by using customer insights and in turn enhancing customer relationships. Both business and IT should work together towards common strategic and operational goal. Having a standardized model across Philips will always help removing the decentralization and lead to reducing costs.
32
References
1. http://www.philips.com/about/company/index.page
2. Treacy, M., F. Wiersema, The Discipline of Market Leaders, 1995. 3. Porter, Michael, How Competitive Forces Shape Strategy, 1979. 4. Porter, Michael, Competitive Advantage, 1985.
5. Meyer, R.J.H., Mapping the Mind of the Strategist, (2007).
6. Hagel, J. & Singer, M. (1999, March-April). Unbundling the Corporation. Harvard Business Review. 7. http://www.mckinsey.com/insights/strategy/unbundling_the_corporation
8. Slack, N. & Lewis, M. (2004). Operations Strategy.
9. http://www.theddcgroup.com/index.php/news-events/97-how-cloud-computing-is-changing-the-landscape-of-technology
10. http://erpcloudnews.com/2012/12/history-of-cloud-erp-crm/
11. http://www.teradata.com/products-and-services/Integrated-Data-Warehouse-Overview/?ICID=Povw
12. HBS Article by Robert G. Eccles, Beiting Cheng, Daniela Saltzman (2010). “The Landscape of Integrated Reporting Reflections and Next Steps”.
13. Tom Bloemers (2013). “FP&A Transformation Overview” (Philips Internal). 14. Philips Finance Transformation (2012). Global Webcast (Philips Internal). 15. Launching our new FPandA organization (2015). (Philips Internal) 16. Finance Transformation (Philips Internal Sharepoint).
17. Key Healthcare FP&A transformation projects 2014 (Philips Internal Sharepoint).
18. “The Road to Our Future - Business Partners and Financial Planning & Analysis” (Philips Internal Sharepoint).
19. IT Vision and and Operating Model Guidelines 2011 (Philips Internal).
20. http://assets.teradata.com/resourceCenter/downloads/Brochures/Why_Companies_Take_The_Leap_from_ Oracle_to_Teradata_EB6942_2.pdf?processed=1
