The Philips

The Philips

Payment Factory

“Growing from 150 towards 1000 entities”

Graduation Paper Floris Peeters November 2003

University of Groningen (RuG)

Management summary

Management summary

Chapter one describes Philips Corporate Treasury at Eindhoven. This is a geographical subunit of Philips International and has eight different product lines. One of these product lines is the Operational Hub which is responsible for the implementation of the Philips Payment Factory and In-House Bank.

The Philips Payment Factory (PPF) creates standard payment services that work on a global scale. Philips is becoming her own bank. The PPF handles all intercompany payments and the payments to third parties of the Philips entities. At the time of research only 150 out of the 1000 Philips entities were actively connected to the PPF. In a relatively short time the PPF had the idea to work towards a so-called ‘lights-out-factory’.

This means that no human intervention will have to take place in the paying process.

The PPF works with a software application called Auros, created and developed by Alterna and employees of Philips. Auros is a web-based application, which allows customers to monitor the postings on their IHB-account via the Philips Intranet. The working of the PPF will be discussed in chapter three.

The Production Team (PT) is responsible for the payment process within the PPF. The main tasks of the PT can be divided in PO-processing, Error Handling, Issues, and Other. In chapter three and four the time spent on the different tasks will be shown.

Also the expected time spent on these tasks will be shown, in case no changes will be carried through in the organizational structure of the PT.

With help of the stakeholders, literature, and the experience of the researcher the requirements for the future PT will be discussed in chapter five. In that same chapter the available and suggested tools will be shown with which the requirements can be met.

In chapter six a start for the design of the future PT will be made. In this chapter the requirements and the different tools are mixed with each other. Which tools can be used to meet the requirements and how should these tools be used? The answer on these questions will be given in the last part of this paper.

The most important recommendations for the future PT are:

• Put the emphasis on Education, Information, Efficiency, and Communication

• Solve problems proactively in stead of reactively

• Educate the entities in processing payments

• Improve the communication between the employees and the management in order to stimulate the creative process of the employees

• Design a good working and flexible database system for the PPF

• Educate all the entities on a country level in the form of presentations

• Create a manual in which the procedure for sending PO’s is explained step by step

• Make sure that the employees of the PPF have extra computers

• Train the employees of the PPF in customer friendliness and clearness

• Pay attention to the PPF website. Start with a good catchy website address

• The design and the content of the website need renewal

• Put initiative of solving problems at the PPF herself

Acknowledgements

Acknowledgements

I would like to thank everybody who helped me with creating this paper. These are the employees of the Philips Payment Factory, my attendants at the university, Mr.

Westerman and Mr. Ritsema, and of course my family, friends and girlfriend who kept believing in me even during hard times.

Floris Peeters

Table of contents

Table of contents

Management summary_______________________________________1 Acknowledgements_________________________________________ 2 Table of contents___________________________________________ 3 List of figures______________________________________________ 5 Abbreviations______________________________________________ 6 Chapter 1: Organizational description _________________________ 7

1.1 The multinational enterprise Philips ____________________________7 1.2 Philips Corporate Treasury ___________________________________7 1.3 Way of working of the PPF and IHB___________________________ 10 1.3.1 It all started with….______________________________________________ 10 1.3.2 The payment process_____________________________________________ 11 1.3.3 Situation at the time of research ____________________________________ 13 1.4 Software supplier Alterna and Auros ___________________________ 14

1.4.1 Alterna________________________________________________________ 14 1.4.2 Software application Auros ________________________________________ 15 1.4.3 The payment process in Auros _____________________________________ 15 1.5 Summary_________________________________________________ 17

Chapter 2: Research method _________________________________18

2.1 Research method by De Leeuw _______________________________ 18 2.2 Definition of the problem____________________________________ 18 2.2.1 What do I want to know for whom and why? __________________________ 19 2.2.2 Research Objective ______________________________________________ 19 2.2.3 Research Question_______________________________________________ 19 2.3 Theoretical concepts _______________________________________ 21 2.4 Sources of data ____________________________________________ 21 2.5 Measure and observation methods ____________________________ 22 2.6 Methods of analysis and presentation __________________________ 22 2.7 Summary_________________________________________________ 23

Chapter 3: Situation of the Production Team at the time of research 24

3.1 Tasks of the Production Team________________________________ 24

3.2 Quantitative overview of the tasks of the Production Team _________ 25

3.2.1 PO-Processing __________________________________________________ 26

3.2.3 Issues _________________________________________________________ 29

3.2.4 Other _________________________________________________________ 29

3.2.5 Production Team in Total _________________________________________ 30

3.3 Flowchart of the paying process ______________________________ 30

3.4 Summary_________________________________________________ 32

Table of contents

Chapter 4: Future expectations & organizational analysis ________ 33

4.1 Time estimations __________________________________________ 33 4.1.1 PO-processing __________________________________________________ 33 4.1.2 Error Handling _________________________________________________ 34 4.1.3 Issues _________________________________________________________ 35 4.1.4 Other _________________________________________________________ 36 4.1.5 Total overview of time spent on tasks of the PT________________________ 36 4.2 Analysis of the organizational structure_________________________ 39

4.2.1 Comparison with normative models _________________________________ 39 4.2.2 The MO-MS game ______________________________________________ 39 4.2.3 Searching for the cohesion between the problems of the AWAP’s _________ 43 4.2.4 Functional Analyses _____________________________________________ 43 4.2.5 Comparing the views on the organization of the different AWAP’s ________ 43 4.3 Summary_________________________________________________ 44

Chapter 5: Requirements & Tools____________________________ 45

5.1 Different points of view for the requirements ____________________ 45 5.1.1 Literature______________________________________________________ 45 5.1.2 Stakeholders ___________________________________________________ 47 5.1.3 Experience of the Researcher ______________________________________ 49 5.2 Available and suggested Tools________________________________ 50

5.2.1 Available Tools _________________________________________________ 50 5.2.2 Suggested tools _________________________________________________ 52 5.3 Overview of the requirements ________________________________ 53 5.3 Summary_________________________________________________ 54

Chapter 6: Design of the future Production Team_______________ 55

6.1 Design___________________________________________________ 55 6.1.1 Structure parameters _____________________________________________ 55 6.2 Meeting the requirements ___________________________________ 56

6.2.1 Communication _________________________________________________ 56 6.2.2 Efficiency _____________________________________________________ 58 6.2.3 Information ____________________________________________________ 60 6.2.4 Education _____________________________________________________ 60 6.3 The Future Production Team ________________________________ 62

6.3.1 PO-processing __________________________________________________ 62 6.3.2 Error Handling _________________________________________________ 63 6.3.3 Issues _________________________________________________________ 63 6.3.5 Future Production Team in Total ___________________________________ 65 6.4 Summary_________________________________________________ 65

Chapter 7: Conclusion & Recommendations___________________ 66

7.1 Conclusion _______________________________________________ 66 7.2 Recommendations _________________________________________ 67

References _______________________________________________ 69

List of figures

List of figures

Figure Title page

Figure 1.1 Philips Corporate Treasury 8

Figure 1.2 Philips Corporate Treasury HQ 9

Figure 1.3 Payment Factory core processes 11

Figure 2.1 Research method 18

Figure 3.1 Organizational chart of the Operational Hub 24

Figure 3.2 PO flowchart 31

Figure 4.1 Estimations of time spent by the PT 37 Figure 4.2 Average time spent per entity per day 37 Figure 4.3 Distribution of time spent per task per day 38

Figure 4.4 MO-MS game 40

Table Title page

Table 2.1 Sources of data 21

Table 3.1 Minutes spent per day on PO-processing 26 Table 3.2 Minutes spent per day on Error Handling 28

Table 3.3 Minutes spent per day on Issues 29

Table 3.4 Minutes spent per day on Other 30

Table 3.5 Minutes spent per day on PT 30

Table 4.1 Estimations of time spent on PO-processing 34 Table 4.2 Estimations of time spent on Error Handling 35 Table 4.3 Estimations of time spent on Issues 35 Table 4.4 Estimations of time spent on Issues 36 Table 4.5 Total time spent per task by the PT 36

Table 4.6 Amount of processing information 42

Table 5.1 Requirements for the PT according to the 53 Literature, the Stakeholders and the Researcher

Table 6.1 Time spent on PO-processing at 1000 entities 62

Table 6.2 Time spent on Error Handling at 1000 entities 63

Table 6.3 Time spent on Issues at 1000 entities 64

Table 6.4 Time spent on Other at 1000 entities 64

Table 6.5 Total time spent by future PT at 1000 entities 65

Abbreviations

Abbreviations

PPF Philips Payment Factory

IHB In-House Bank

PT Production Team

ITC Intercompany payment

3

3

party payment

PO Payment Order

PD Product Division

PCT Philips Corporate Treasury

AWAP Actor With A Problem

RPENV Royal Philips Electronics NV

RFC Regional Finance Centre

ERP Enterprise Resource Planning

Chapter 1 Organizational description

Chapter 1: Organizational description

In this first chapter the multinational enterprise Philips and especially the Philips Corporate Treasury department will be described. In section 1.3 the ways of working of the Philips Payment Factory and In-House Bank are explained. The software supplier Alterna is responsible for the software application Auros, which enables Philips to implement the Philips Payment Factory and In-House Bank. The origin of Alterna and the operational process of Auros are described in the final section.

1.1 The multinational enterprise Philips

The Royal Philips Electronics N.V. is a multinational enterprise established in 1891 as a small lamp factory. Nowadays it has developed into a giant global electronics company that employs 189,000 people worldwide in March 2002. The Philips Group is well known for its inventions such as the Philishave, the Audio Compact Cassette, the CD, and the DVD. The fact that sales and services take place in 150 countries, that there are 160 manufacturing sites in more than 35 countries, and that there are national sales organizations in more than 60 countries shows that the Philips Group is a very international orientated organization.

The Philips Group is divided in 6 Product Divisions with 80 different businesses. These Product Divisions (PD’s) are called Components, Consumer Electronics, Domestic Appliances & Personal Care, Lighting, Medical Systems, and Semiconductors. The sales value of the Philips Group in 2001 was EUR 32,339 million, with a net loss for the first time since years of EUR 1,371 million including special items.

As you can see the Philips Group is a big player in the business world and her operations go hand in hand with a lot of transactions. These transactions vary from very small like EUR 29.15 to the local flower supplier till intercompany settlements between PD’s with values up to EUR 15 million and more. This show there is a wide variety and a big quantity of different kind of payment flows within the Philips Group.

1.2 Philips Corporate Treasury

The Philips Group is led and managed by the Corporate Centre, existing of the board of

management and Corporate Staffs. These Corporate Staffs are organized together in

Philips International B.V. The role of the Philips Corporate Centre is best described as

that of a strategic controller, adding value by defining the strategic framework, deciding

on the business portfolio, controlling the existing portfolio, representing Philips to its

stakeholders, and developing leadership and organization. One of the seventeen

Corporate Staffs is Corporate Treasury.

Chapter 1 Organizational description

Philips Corporate Treasury is organized as a matrix with geographical units along one dimension and product lines along the other dimension. Figure 1.1 shows the organizational chart.

Figure 1.1: Philips Corporate Treasury

Source: Philips Intranet, 2002

Within the Philips Group, Philips Corporate Treasury (PCT) has established product lines that are headed by managers with worldwide responsibility. It is organized regionally into four Regional Finance Centres: Headquarters/EMEA (Europe, Middle East, and Africa), North America, Latin America and Asia Pacific.

During the last three years PCT has made significant progress in re-engineering its processes and standardizing its ways of working. A standardized Treasury Management System with integrated General Ledger has been rolled out and the architecture as well as the infrastructure has been developed for supplier independent e-enabled deal execution and payment traffic of the Philips Group.

During the next three years PCT intends to close the already narrowing but still existing gap with world class. It will further shift its resources from transaction execution and processing to consulting in order to increase its value added to the Philips Group.

One of the objectives of PCT is to provide the most cost efficient and secure ways of

handling the Group Companies’ internal and external payments. In order to achieve this

and to be able to control these payments in the most efficient way possible PCT has the

objective to move the Philips Group from manual or paper-based methods in favour of

electronic transfers. To achieve this goal PCT has created the Operational Hub, which is

situated in Eindhoven as a department of the Headquarters in Amsterdam.

Chapter 1 Organizational description

In Figure 1.2 one can see that the Operational Hub is one of seven product lines governed by the PCT Headquarters. Besides these product lines the staff division Treasury Control exists, which controls the infrastructure for all treasury processes.

Figure 1.2: Philips Corporate Treasury HQ

Source: Philips Intranet, 2002

According to statements on the Philips Intranet the mission of the Operational Hub is to be a world-class processing centre for treasury transactions. There are two main objectives:

• To provide a seamless, automated and secure payment process for the Philips organizations

• To centralize and automate the accounting and reporting and improve the efficiency of information processing

In order to achieve these two objectives the Operational Hub wanted to work with a standard payment service that is able to work on a global scale. A system that obeys these demands was found in the Philips Payment Factory (PPF) and In-House Bank (IHB) system. This tool simplifies Accounts Payable processes by providing a single gateway for both internal and third party domestic and cross-border flows.

An important issue is to create an optimum routing of information flows and money

flows. The information flow that is collected from the banks has to be transmitted via an

electronic link directly to the Enterprise Resource Planning (ERP) systems of the payers

and receivers. The money flow has to be routed in the most efficient way to the bank

account preferred by the Philips Group. A significant advantage of the PPF is that it can

distribute a much higher volume of transactions in a process that can be handled easily

and by fewer banks, thus reducing the overall costs.

Chapter 1 Organizational description

1.3 Way of working of the PPF and IHB

In this section an answer will be given to the question why Philips wanted to introduce the PPF and IHB. Also the system of the PPF and IHB will be explained. The important difference in accounting between intercompany payments (ITC’s) and third party payments (3rds) will be presented with help of an example. Finally an overview will be given of the situation at the time of research of the PPF and IHB. The content of this section is based on the leaflet ‘Philips Payment Factory and In-House Bank, global solutions for improved cash management’, Philips Intranet, and interviews with employees of PCT in Eindhoven.

1.3.1 It all started with….

The rethinking of the Philips system for payments and settlements began in 1997 and was driven by two factors:

• The new corporate governance model and

• The opportunities arising from the rapid introduction of ERP systems across the Philips Group

The old corporate governance model described that most of the needed services at Philips entities were provided by the country organizations. These organizations had a lot of influence. They conducted a lot of payment services.

In contrast with the old model, the new governance model wanted to let the PD’s or entities take care of their own businesses, so the balance of power shifted from the country organizations to the PD’s. That is why the PD’s were able to look for optimization at global PD level. One of the opportunities that were created by this shifting governance model combined with the upcoming ERP system is the use of common standards.

In the old situation there were a lot of interfaces caused by the different payment models.

The ERP system and the new governance model make common standards possible.

These standard transaction formats are valid for all types of payments. The ERP system automatically submits these payments into the standard form. The reduction of interfaces causes more efficiency.

Another benefit that is caused by standard transaction formats combined with the

flexibility of electronic payments is the reduction of costs. This is caused by the standard

transformation from more expensive cross-border payments into cheaper domestic

transactions. This is part of the routing system. The routing system makes sure that the

transactions will be executed in the most efficient and cheapest way. This will be further

explained later in this chapter, but first the difference between the PPF and the IHB will

be explained.

Chapter 1 Organizational description

1.3.2 The payment process

This paragraph will describe the payment process, as the PPF will handle it. The PPF covers ITC’s and 3rds, both domestic and cross-border. As a consequence of the governance model, each entity is responsible for its own Accounts Payable and Receivable processes with regard to both ITC’s and 3rds. This maintains full visibility of the outstanding payables and receivables per entity.

By making use of the PPF, the entity out sources the execution of the payment process, but remains in full control of: Who to pay, What to pay, and When to pay.

An entity creates its own payment files without making any distinction between ITC’s and 3rds. These files are delivered in a so-called PAYEXT format to the PPF. At the PPF the files will be validated and ‘opened’, i.e. every Payment Order (PO) will be acted upon individually.

In Figure 1.3 one can see the core processes of the PPF and IHB.

Figure 1.3: Payment Factory core processes

22

PAYMENT PAYMENT FACTORY FACTORY

BU Bank BU

In-house Bank

All payment All payment

orders orders (PAYEXT)

(PAYEXT) External PaymentExternal Payment orders orders

Balance and Balance and transaction transaction reports, reports, rejects etc.

rejects etc.

Supplier

Confirmation Confirmation messages messages (BANSTA)

(BANSTA)

Cheques

Rem. Advice (RA01)

View balances and transactions

via browser

Rem. Advice (paper/electronic)

Source: Philips Intranet, 2002

The ITC’s are taken care of via the IHB. The two external banks of the PPF, Citibank

and the Bank of America pay the 3rds. The ability of the PPF to collect, process and

forward large numbers of easy-to-handle transactions makes Philips an attractive client

for these banks. The large volumes enable Philips to negotiate with banks to obtain

better price structures. This will make a significant difference in costs. Another

significant benefit of the PPF and IHB is the transformation from foreign transactions

into domestic transactions. This part is called the routing system. In order to explain the

routing system and the differences between ITC’s and 3rds, two examples are given

below:

Chapter 1 Organizational description

Intercompany payments (ITC’s)

ITC’s will be settled over accounts with the IHB. If one Philips entity pays another one (both have an account with the IHB), this will result in a debit to the Payer’s IHB account and a credit to the Payee’s IHB account. Depending on the status of the IHB account the balance on the IHB account may be settled with the country organization or direct participant at month-end. The IFIS model (Invoicing and Forwarding Information Structure) stipulates that a Philips entity that is making a payment to another Philips entity should send the latter a RA01 message (remittance advice). As the original payment format delivered to the PPF contains all information necessary to create an RA01 (at invoice level) sent by the PPF, the PPF will take this responsibility over from the paying entity. Consequentially, this activity is also ‘outsourced’ to the PPF.

Third party payments (3rds)

3rds on the other hand will be processed differently. The PPF will optimize such payments by trying to make all payments ‘domestic’. To get this done the payments will be made from disbursement accounts in the country of the currency of the payment. The PPF only works with two disbursement banks, Citibank and the Bank of America (BoA). Generally, the PPF will operate two accounts per country, one in the name of the Holding Company in that specific country (e.g. Philips Germany GmbH in Germany) and a Royal Philips Electronics NV (RPENV) account held in that same country. Traditional local payments (e.g. a German Philips entity paying a German vendor in Euros) will be paid from the Holding Company account. As the Holding Company now pays on behalf of the German organization, the IHB account of the latter will be debited and the IHB account of Philips Germany GmbH will be credited. Traditional cross-border flows will be turned domestic by paying such from an account in the name of RPENV in the country of the currency. For example, if a French Philips entity would pay a vendor in the USA in USD, this will now be done from the account of RPENV in the USA. Next, the IHB account of the French organization will be debited (in its functional currency) and the IHB account of RPENV credited.

By using the account of RPENV (a non-resident) as described above, Philips will avoid potential (additional) Central Bank Reporting issues for their vendors. These vendors will continue to receive funds from a non-resident that will trigger the reporting at the vendor’s bank.

A 3rd party service provider (Burns) will deliver remittance advices (electronically or

through paper/fax) to these vendors, if the details of the payment exceed the maximum

number of details in the local bank clearing system. By doing so, Philips will avoid the

vendor calling the relevant Accounts Payable department asking for a clarification of the

payment.

Chapter 1 Organizational description

After the ‘payment optimization’ has taken place and the best routing has been determined, a file will be created and sent in a secure way to each bank. The bank will confirm receipt of the payments file and at a later stage will send the postings to the accounts. These postings will be translated by the PPF into so-called BANSTA messages and sent back to the organization. ITC’s will also result in BANSTA messages sent back to the paying entity. Consequently, the BANSTA messages will be used by the entities for reconciliation, thereby closing the loop.

1.3.3 Situation at the time of research

In May 2002 Philips was trying to realize a fully automated PPF and IHB. This is called the ‘lights-out Philips Payment Factory’. In total there are about 1000 Philips entities worldwide. They were all linked with the IHB. In May 2002 only 150 entities were actively using the PPF that started in 1999 as a pilot project. There is a big difference between ‘active entities’ and ‘passive entities’. Active entities use the PPF to make and receive ITC’s and make payments to third parties. Passive entities only receive ITC’s.

Currently there are circa 600 passive entities.

The structure for payments to third parties is as follows; the payment is executed from the most logical external Philips bank account, which is not necessarily an account for which the paying entity is responsible. In that case the IHB account of the paying entity is debited against a credit on the IHB account of the external bank account holder.

The final objective of the PPF is that all 1000 entities will handle their transactions (internal and external) via the PPF and IHB, but this will probably take another year (by end 2003). After this will be realized the PPF and IHB will be designed to not only handle accounts payable, but also accounts receivable. In order to achieve these objectives there are three important aspects whereto must be met:

1 The entities must be willing to accept and work with this new system.

Without the full cooperation of the worldwide entities the PPF will never work. Only positive attitudes towards the new payment system will lead to a successful PPF.

2 The PPF software application (Auros) has to be capable.

With the fast growing number of active entities the PPF must be able to rely on the stability and capacity of Auros. Without Auros the payment system can not function.

3 The entities also known as the end-users of the system must be well informed about how to cope with the PPF and what to do when things go wrong.

If entities are well informed less will go wrong with payments and fewer questions will be asked. The Production Team (PT) of the PPF will be responsible for this.

The first aspect has already been researched; although it was in June 2001 it is still

representative for the overall opinion of the different entities. It seemed that almost

everybody had a positive attitude with regard to the PPF and IHB. And from my own

point of view I can say that the will to work with the system is present but most of the

time it is not clear how the system exactly works.

Chapter 1 Organizational description

With concern to the second aspect it is quite obvious that this is an important issue which has to be sufficient in order to realize a fully automated payment system. The Canadian Software Company Alterna has developed the web-based operating system

‘Auros’ to process the payments via the PPF. In the following paragraph the definitions Alterna and Auros will be explained. The Auros system meets most of the demands on the functional area but still has some problems with capacity, stability and reliability. This is the full responsibility of Alterna and the IT-people at the PPF and IHB who work with this software. They have to solve problems with Auros together. For this research software application problems will not be taken in to account.

The last aspect is quite broad when you look at it. A lot of human errors can be made during the whole payment process. This can occur due to ignorance, bad communication, or other reasons. To solve these issues the PPF tries to communicate with the entities by informing them what went wrong, how to solve the problem and how they should act the next time they make use of the PPF. Also errors at the end of the process, such as with the disbursement banks, take place. It is important for the existence of an efficient PPF that this function is well organized and prepared for growth.

1.4 Software supplier Alterna and Auros

This section will describe the software supplier of the PPF and the reason why Philips has chosen Alterna to supply the software application called Auros for the PPF and IHB.

The second part of this section will describe the payment process in Auros. The content of this section is based on the leaflet ‘Philips Payment Factory and In-House Bank, global solutions for improved cash management’, Internet, and the experience of the researcher with the software application Auros.

1.4.1 Alterna

In order to select a vendor for the software application that was needed for the execution of the PPF and IHB, PCT has requested proposals from respective vendors and evaluated those. After various discussions with the respective vendors, it was decided early February 1999 to proceed with three parties, Ediport, Burns Open Systems, and Alterna and engage into a defined test period (eight weeks) which was seen as best practice in critical IT projects.

During the test period, the three vendors were requested to proceed ‘as if’ they had won the Philips Group’s mandate (in order not to loose time) and at the end of the eight weeks they should be able to demonstrate their ability to deliver the final solution. In order to achieve the latter, PCT had defined a test scenario. Operating companies would deliver payments (ITC’s and 3rds) to the PPF, optimization had to take place and payment files would have to be delivered to the assigned bank.

By doing so, they were able to test two critical aspects, the core functionality of the PPF

(re-routing payments), and establishing connectivity to the assigned banks.

Chapter 1 Organizational description

In the meantime, Corporate Internal Audit met with the three vendors, analyzed the various solutions (looking at aspects like end-to-end integrity of the PPF process (including databases, security, etc.)) and assessed the financial and organizational ‘health’

of Ediport, Burns Open Systems, and Alterna. On April 16 and 19, 1999 an extensive evaluation took place where all individuals involved from the Philips Group’s side participated. Both Ediport and Alterna proved that they could deliver according to the Philips requirements. On PPF functionality Alterna scored better than Ediport (and much better than Burns).

The only two aspects where Alterna did not score the highest were performance and people. At Alterna there was a huge dependency at the knowledge of a limited group of employees. On the performance side (the ability to handle the volume that the Philips Group expected), Alterna could meet the Philips Group’s needs. The people issue could be effectively mitigated by buying an existing product and by ‘boxing’ the deliverables in the contract. More importantly, during the test period the Philips Group was impressed by the company’s responsiveness.

All of this made the Philips Group decide for Alterna. The fact that Alterna was also the cheapest and the Philips Group could have the additional benefit of running the IHB on the same platform, were ‘nice to have’. Fortunately, the Philips Group could decide on functionality though.

1.4.2 Software application Auros

Auros is an existing application, designed by Alterna, which enables corporate groups to implement web-based Payment Factory and In-House Banking solutions by deploying the rich transaction processing and reporting capabilities across the enterprise. Alterna and the Philips Group are working together to continue improving the application. One has to keep in mind that Auros is not an accounting system, but only a payment system.

For accounting purposes all the transactions in Auros will be transformed at the end of the month to Quantum, which is the accounting system of the PPF.

Because Auros has been designed for use over Internet, users around the globe as well as (traveling) treasury professionals have access to the same data for different processes 24 hours a day. The users of the system can monitor the postings on their IHB-accounts and bank balances via Philips Intranet.

1.4.3 The payment process in Auros

The paying entities send their Payment Orders (PO’s) to the PPF. The PO’s are sent

through so-called PAYEXT files. These files contain all the information needed to make

a payment (SWIFT-code, beneficiary account, value date, etc.). The PAYEXT files can

be send in different formats, but eventually one can distinguish two kinds; unsecured and

secured PAYEXT files. Unsecured files must be matched with a cover-mail that the

paying entity has to send to the PPF in order to be sure that it was this entity that sent a

payment file. Secured files do not have to be matched with a cover-mail.

Chapter 1 Organizational description

Import

The first step in the process is the import of the PAYEXT files into the system. Each hour the files that are sent by the entities are imported in Auros. When an ITC is imported an RA01 (remittance advice) is sent to the receiving entity. The system checks the files for errors and when no errors have been found they are set up to be authorized.

Initial Authorization

Initial authorization is only done with unsecured payments that are sent by the entities.

When an entity uses unsecured paying it is obligated to send a so-called cover-mail to the PPF. After importing the PAYEXT file the PO’s in this file are matched with the cover- mail the entity sent to the PPF. It is checked on equal amount, currency and value date.

When the cover-mail matches with the sent PAYEXT file, the PO’s are initially authorized. The 3rds are set up to be released and the ITC’s are set up for final authorization.

For secured payments counts that they are not initially authorized by the PPF, but that they are manually authorized by the sending entity. After they have authorized these payments the 3rds are set up to be released and the ITC’s are set up for final authorization.

Final Authorization

As one can derive from the above, the only payments which will be finally authorized are the ITC’s. At the end of a working day all the ITC’s with a value date of yesterday or older are selected and finally authorized by the production team. This is necessary because the system has to wait until the correct exchange rates have been put in the system. After the final authorization so-called BANSTA messages are sent to the paying entities to inform them that their payment has been made. This is the end of the ITC process.

Release and Transmit

In case of an external payment the PO has to be released. At the end of the day the production team selects per disbursement bank the PO’s which can be released. The PO’s are set up to be sent to the external banks. With the transmit function one can send these PO’s to the external banks. The external banks will respond by sending a confirmation file (bank transaction file) that the payments will be made.

Reconciliation

The bank transaction files are imported in Auros. The transactions that are in these files

are matched with the transactions that were already in the system. This process is called

reconciliation.

Chapter 1 Organizational description

Finalize

After all payments have been matched the final step is to finalize the file. If the file is finalized, all the payments that were in that file will get the status reconciled in Auros.

This means that the PO’s have been completely executed. The finalization will also generate so-called BANSTA messages. Bank status messages will be sent to the paying entity to confirm that their PO’s have been executed.

During the whole process a customer can see in the system what the status of his PO’s is.

A PO can be authorized, released, reconciled or rejected. If a payment order is rejected, it will not be processed anymore and the paying entity is asked to send a new PO. If everything works according to schedule the entities can see their PO with status reconciled within three working days after they have sent their PO.

1.5 Summary

The multinational enterprise Royal Philips Electronics N.V. was trying to provide the most cost efficient and secure ways of handling the Philips Group companies’ internal and external payments. To achieve this goal Philips Corporate Treasury started the Philips Payment Factory and In-House Bank.

The Philips Payment Factory distinguished intercompany and third party payments.

Intercompany payments were settled on a monthly base with the In-House Bank accounts of the entities and the third part payments were turned in to domestic payments and were paid as soon as possible, depending on their value date, by the two external banks, the Citibank and the Bank of America.

Philips expected a growth from 150 active entities in May 2002 up till 1000 active entities

by the end of 2003. In order to cope with this growth the Philips Payment Factory

should meet to three important aspects of which the Production Team is subject of

research in this thesis. The Canadian software supplier Alterna delivered the web-based

software application Auros, which enabled Philips to implement the Philips Payment

Factory and In-House Bank.

Chapter 2 Research Method

Chapter 2: Research method

This chapter will describe the research method that will be used. The organizational problem will be defined in a research objective and a research question. The latter will be divided in subquestions in order to reach a satisfying answer to the research question.

Furthermore the boundaries, the conceptual model, the sources of data, the measure and observation methods, and the methods of analysis of the research will be explained. This chapter is based on the research method by De Leeuw (1996).

2.1 Research method by De Leeuw

In this paper I will use the research method by De Leeuw (1996) to outline the way the research will be done. In his research method the main activities of the research process are summarized and they are linked with each other. These main activities of the research process are shown in figure 2.1.

Figure 2.1: Research method

Source: De Leeuw, 1996

1 Definition of the Problem (2.2) 2 Theoretical Concepts (2.3) 3 Sources of Data (2.4)

4 Measure and Observation methods (2.5) 5 Methods of Analysis (2.6)

2.2 Definition of the problem

De Leeuw (1996) states the definition of the problem together with the theoretical concepts as the centre of his research method. All the other decisions should be made from that point of view. They are the driving forces of the method. In short the definition of the problem expresses ‘What you Want to knoW for Whom and Why’. This is sometimes referred to as the five W’s. The definition of the problem has to point out the relevance of the research also known as the research objective. The definition of the problem furthermore includes the research question and the boundaries of the research.

5

3 4

2

1

Chapter 2 Research Method

2.2.1 What do I want to know for whom and why?

Since 1999 Philips Corporate Treasury has been developing a new world-wide payment system as described in the previous chapter. During the years more and more entities got involved with this Philips Payment Factory (PPF). The PPF that started as a pilot with only a couple of French entities had in May 2002 150 active entities connected and had arrived at the point that it was no pilot version anymore but a full-time professionally running operation. From that point in time a lot of new active entities would ‘go live’ in a relative short time. After an entity has been tested on their Auros performance, at a special software platform designed for testing entities, and the entity passes these tests successfully it is authorized to actively use the PPF. This is called, ‘going live’.

Nonetheless all these entities will have some problems in the beginning. Payment Orders (PO’s) are sent incomplete, e.g. there is no SWIFT-code mentioned in the PO, or the wrong data have been put in the PO. During maturity these problems normally decrease but some problems will stay present. Examples of these problems are the human errors which are made by the entities or an external bank that has sent a message about a refused PO. Furthermore the entities need a sort of helpdesk which they can call or e- mail so they can ask their questions and get satisfying solutions and answers. In order to make sure that things run smoothly when welcoming these new entities aboard of the PPF research had to be done.

2.2.2 Research Objective

In this paper research has been done into the optimization of the Production Team (PT) within the PPF and IHB. Very important for a good working PPF are entities that are able to work with the system. Therefore they have to know how it works and what they have to do when things go wrong. When entities do not use the system as they should or when they have questions which have to be answered before they can carry on, not all the payments can be made and then the PPF-system will not work well. The objective of the research is as follows:

‘Finding a way to optimize the Production Team of the Payment Factory and In-House Bank of Philips Corporate Treasury, taking account of the requirements and the available tools, in order to be able to expand from 150 up to 1000 active entities in the period of July 2002 till end 2003‘

2.2.3 Research Question

The research objective is about the objective of the research. Van der Zwaan (1995) calls this the importance of knowledge. The research question is about the objective in the research. Van der Zwaan calls this the objective of knowledge. The research question is necessary to formulate a central question of which the answer may lead to achieving the research objective. The central question of this research will be:

‘In which way can the PT be organized best in order to be able to grow from 150 active entities to

1000 active entities, taking account of the requirements and the available tools?’

Chapter 2 Research Method

In order to find the answer to the central question I have defined several subquestions that will contribute to the formulation of its answer. The subquestions are treated per chapter. Chapter 7 provides the conclusion and the recommendations of this research.

• Subquestion 1

What was the situation at the time of research, with 150 active entities, of the PT within the PPF and IHB?

To create a good picture of the PT its tasks will be described and quantified per task in four tables. Research will be done on the time spent on PO-Processing, Error Handling, Issues, and Other. Also a schematic overview of the payment process will be lined out to indicate clearly where actions can go wrong. (Chapter 3)

• Subquestion 2

What are the consequences of an increase of 150 to 1000 active entities for the PT within the PPF?

The consequences of increase are estimated by means of a worst case scenario. These estimations are made with help of the information gained in chapter 3. The answer to this question will give an overview of the future situation if no organizational action will be taken. (Chapter 4)

• Subquestion 3

What is the best organizational structure for the future PT?

For designing the future PT there will be looked at the organizational structure of the PT. Choices are made which structure is best for the future PT and which changes should be made for a better organized PT. (Chapter 4)

• Subquestion 4

What are the requirements for an optimized PT of the PPF?

Together with the organizational structure of chapter 4 the requirements are the base for the design of the future PT. Research will be done from three different points of view;

Literature, Stakeholders, and the researcher’s experience. (Chapter5)

• Subquestion 5

Which tools are available for optimizing the PT?

The pros and cons of the tools, which are currently used for the PT, are extensively described. Also some new ideas for tools are suggested and eventually the tools that fit best with the PT will be chosen. (Chapter 5)

• Subquestion 6

What does the final design for the future PT looks like?

Chapter 2 Research Method

2.2.4 Boundaries of the research

Not one research, even the (pure) scientific research, performs in a vacuum. The execution of this research will be limited by the circumstances in which the research takes place. Examples of these circumstances are the fact that there is a limited amount of literature about Treasury Service Centre organizations, the limitation of my contract of 6 months and the fact that I only can analyse the entities which were actively connected to the PPF in order to estimate the future situation.

Furthermore this research does not take into account any restrictions of expansion of the PPF and IHB with relation to the IT-side of the project, the software application Auros.

The results of the research will be presented in a written report.

2.3 Theoretical concepts

In chapter 4 the MO-MS game by the Leeuw (1997) will be used in order to find the best way to organize the structure of the future PT. With help of the MO-MS-game one can determine which actor is most suitable for leading any change in the organizational structure. Four more resources for analysing the company will be treated; comparison with normative models, searching similarities among AWAP’s (actors with a problem), functional analysis, and comparing the views of the organization of the different AWAP’s. With help of the stakeholders’ theory by Friedlander and Pickle (1968) the different requirements for the future PT will be determined.

2.4 Sources of data

De Leeuw (1996) distinguishes six different kinds of sources of data: Documents, Media, the Field, the Imitated reality, Databanks and the Experience of the researcher. In this research Media and Imitated reality will not be used as sources of data. In Table 2.1 the sources of data which will be used are described per chapter.

Table 2.1: Sources of Data Chapter Sources of data

Chapter 1 • Philips intranet

• The leaflet ‘Philips Payment Factory and In- House Bank, global solutions for improved cash management’, 2001

• Software application Auros

• Informal conversations with PPF employees

• Field work

Chapter 2 • Literature about research methods

• Interviews with the management Chapter 3 • Interviews with the Production Team

• Researcher’s own experience in the PPF

Chapter 2 Research Method

• E-mail communication between the production team and the entities in the first quarter of 2002 Chapter 4 • Data from chapter 3

• Conversations with the Production Team

• Five resource by the Leeuw (1997)for analysing the company

Chapter 5 • Literature, especially treasury management magazines about Treasury Service Centres

• Interviews with PPF management

• Researcher’s own experience in the PPF Chapter 6 • Four structure parameters by the Leeuw (1997)

2.5 Measure and observation methods

To measure is adding numbers and symbols to symptoms according to a fixed procedure.

Measurements produce empirical assertions. The demands for a good quality of the measurements are relevance, validity and efficiency. There are different kinds of measure methods. One can register or one can measure by incentive.

A combination of these two methods will be used. Registering will occur in the form of observation by the writer of this research and the reading of documents. The incentives interview and inquiry will be used for the more personal opinion of the directly involved persons. The objective of this thesis is to research the current situation of the PT so a description of the different issues, which occur at the PPF, can be made. Hereafter research will be done to which requirements the future PT should meet according to the literature, the stakeholders and the researcher’s opinion.

2.6 Methods of analysis and presentation

The methods of analysis provide the possibility to turn the rough material in to relevant material. To make sure that this rough material is turned in to relevant material the information gathered should be interpreted correctly. This means that the information must be valid. Analysis of the gathered information will happen thoroughly and precisely.

All this information (first rough and later relevant) is written down in a thesis and will be presented orally at the end of the project. The thesis will be handed over to the faculty of M&O at the University of Groningen (RuG), and to the Philips Corporate Treasury department in Eindhoven.

This thesis ends with recommendations and conclusions as the researcher derived from

the gathered information.

Chapter 2 Research Method

2.7 Summary

In this chapter the method of research has been described. The method is based on a model by De Leeuw (1996). This method distinguishes five steps which should be taken.

Successively the definition of the problem, the theoretical concepts, the sources of data,

the measure and observation methods, and the methods of analysis and presentation are

described.

Chapter 3 Situation of the Production Team at the time of research

Chapter 3: Situation of the Production Team at the time of research

In this chapter research will be done in order to quantify the tasks of the Production Team in the situation that 150 active entities were connected to the Philips Payment Factory. First a schedule of all the tasks within the Production Team will be presented.

These tasks are quantified in a Production Team overview. In chapter 3.3 the information flows from and to the Production Team will be shown.

3.1 Tasks of the Production Team

In May 2002 the Operational Hub (described in chapter 1.2) was organized as follows.

The project leader managed the Back Office (BO), the Middle Office (MO) and the Production Team. In order to support problems and issues with the software application Auros there was also an IT consulting department. An organizational chart of the Operational Hub has been drawn in figure 3.1. The MO had contact with the dealingroom in Amsterdam (FO) and controlled the deals that were made by it. The BO was the administrative organization of Corporate Treasury. The BO was responsible for the accounting. The key department of the Operational Hub was called the Production Team (PT). The PT was responsible for processing the Payment Orders (PO’s). However not all the PO’s were delivered with the correct data and the entities sometimes had questions about the Philips Payment Factory (PPF).

Figure 3.1: Organizational chart of the Operational Hub

Source: Philips intranet, 2002

The focus in this research and therefore in this chapter will be on the PT. At the time of research the PT operated quite ad-hoc. Most of the time the knowledge of the employees of the PT was not written down in any document or file, but the person responsible for questions and problems of the internal customers did his job in his own manner and he did this more reactively instead of proactively.

Project Leader

MO BO Production

Team IT

Consulting

Chapter 3 Situation of the Production Team at the time of research

This means that the same questions and problems were solved over and over, but there was e.g. no database to check how often the same error occurred so you could focus on this problem to solve it permanently. Knowing that in the period until the end of 2003 the internal customer group would expand from 150 up till 1000 a good organized PT was needed.

In May 2002 the PPF had around 150 active entities connected. Before an entity went

‘live’ and became an active entity, the implementation department tested the entity on its capability in sending the PAYEXT files with the correct information. These tests were done on a special software platform created for testing the process. After an entity had been tested and it proved that it was able to cope with the payment process it entered the production system and from that moment on all the payments of the entity were processed via the PPF.

The entities received a manual of the Auros software application and an internal document called ‘the way of working of the PPF’. Furthermore information of some subjects was available on the Philips Intranet. Though there was a lot of information available the new active entities often came up with questions towards the PPF. Contact was made by telephone but mostly via the PPF Mailbox. These questions were most of the time about PO’s which the entities had sent to the PPF. Furthermore there was contact between the PPF and the users of the system due to errors which occurred with these PO’s.

At the time of research only one person was responsible for answering these questions and solving the payment errors. There was no standard procedure available. Besides answering and solving problems of the internal customers, his job was to process the PO’s from import to release. A part-time worker who helped with the initial authorization and archiving of the hardcopies supported this person. These functions were closely related, because the problems that occurred almost always had to do with a PO that had been processed by the PPF and thus by this person.

3.2 Quantitative overview of the tasks of the Production Team

In order to outline the situation at the time of research a quantitative overview of the tasks of the PT will be given below. The data have been measured at the moment 150 active entities were connected to the PPF. This was in May 2002. The PT is responsible for four main tasks, PO-Processing, Error Handling, Issues, and Other. An overview of the minutes reserved for each task is given in four subsections. The data have been collected by means of observations of and conversations with the employees responsible for the tasks of the PT. The specific data, which were needed to quantify the section about payment error handling in chapter 3.2.2, were collected with the help of the PPF mailbox.

The tasks are shortly explained and followed by an arrow (→) which points out the short notation of the task. One can find the short notation of each task accompanied with the number of minutes spent on it in the tables. Each subsection contains one table which indicates the time spent on the subtasks and the total time spent on the four main tasks;

PO-Processing, Error Handling, Issues, and Other.

Chapter 3 Situation of the Production Team at the time of research

3.2.1 PO-Processing

The processing task consisted for an important part of the process mentioned in chapter 1.4.3 and is briefly shown in table 3.1. Two times a day the employees of the PT checked in Explorer if there were any import errors → Errorfolders check. To double-check the import files the employees checked in Auros if any files were imported and if some errors had occurred → AP import check. During the day these files were screened by the employees to check if any new payments were imported during the day → AP import screening. Before payments could be initially authorized all the cover-mails sent, which were archived in the processing mailbox, were printed and put archived in a map → Processing mailbox control. With help of these cover-mails the employees initially authorized the payments → Initial. The final authorization was done by selecting all ITC payments with a value date of yesterday or before and pressing the button ‘authorize selected payments’ → Final.

At the end of the day all payments were released and dispatched to the external banks → Release all and Dispatch PM. The next day contact was made with the external banks to retrieve the messages they sent as a reply on the dispatched payments → Retrieve. Within two hours after the payments were dispatched the Citibank replied with a fax in which they stated which payments were accepted and which they would not process. This fax was checked and archived. The Bank of America (BoA) sent e-mail if they would not process a payment → Citibank fax control and archiving. Also sometimes a payment was not reconciled for unclear reasons → Unreconciled payments.

Table 3.1: Minutes spent per day on PO-processing

In minutes

Import

Errorfolders check 10

AP Import check 10

AP Import screening 20

Total 40

Authorize

Processing mailbox control 15

Initial 60

Final 15

Total 90

Release and dispatch

Release all 15

Retrieve 5

Dispatch PM 5

Total 25

Reconciliation

Unreconciled payments 5

Citibank fax control and archiving 5

Total 10

Chapter 3 Situation of the Production Team at the time of research

3.2.2 Error Handling

Error handling is about the actions to take when a payment error occurs. In order to explain this good I will first give the definitions and the abbreviations for the different kinds of errors which can occur:

1. →API: Accounts Payable Import-error

The Accounts Payable Import-error occurs at the beginning of the Auros Process. Auros observes while importing an error in a PAYEXT file and refuses to import a part of the file. The customer will be notified by e-mail and by a so-called NEG BANSTA, which is an electronically sent message. These messages inform the entity what happened and what the entity should do.

2. →WrVD: Wrong Value Date

This is not an ordinary error. The PPF is supposed to receive a PO at least three working days before the requested value date in order to process the PO on time. If this does not happen the PF will send a notification of what happened and a request to send the next PO with a correct value date. The sent PO will be processed as usual and the value date will be adjusted automatically by Auros before transmitting to the bank.

3. →REL: Release-error

The Release-error occurs in the Auros process. Auros validates a number of bank masterdata (=received details from participant versus the ‘country validation rules’).

When an REL-error occurs the PO is flagged as rejected in Auros and the customer is notified by e-mail about what happened and what he should do. In the future this notification will be sent by NEG BANSTA.

4. →EXT: External Bank-error

The External Bank-error occurs after a PO has been released and transmitted to the External Bank. The External Bank checks the PO’s on correct masterdata and when they are incorrect they will not proceed on processing the PO. EXT-errors from Citibank are communicated to the IHB by fax or e-mail. The rejected PO’s from Bank of America (BoA) are communicated via the control messages which are covered by e-mail. After receiving an EXT-error the helpdesk will notify the customer by e-mail and so-called NEG BANSTA and tell him what he should do best.

5. →RET: Returned payment

A returned payment occurs after a PO has been reconciled in Auros. It is a result of a

PO but it is not per definition the same amount. The PO, or a part of the PO, is rejected

(and returned) by the beneficiary or the beneficiary bank. The beneficiaries may also

transfer a part of the original payment. When a returned payment is done, the customer

is notified by e-mail why this happened, what the amount is of the returned payment and

what he should do best.

Chapter 3 Situation of the Production Team at the time of research

6. →REQ: Request-error

Sometimes an entity has sent a PO but finds out that this PO should not be processed. If it discovers this in time it can send e-mail to the PPF in which they ask to cancel this PO. The PPF will undo this PO and send a notification to the concerning entity.

After an error is communicated to the entity the document must be archived. This takes about two minutes per document because a hardcopy must be printed of all communication and archived in maps. Take a look at table 3.2 for the amount of minutes spent per day on each error.

Table 3.2: Minutes spent per day on Error Handling

In minutes

API

Communicate API-errors 9,42

API-errors archiving 1,88

Total 11,3

WrVD

Communicate WrVD 43,23

Total 43,23

REL

Communicate REL-errors 18,37

Retrieve 2,45

Total 20,82

EXT

Communicate EXT-errors 14,13

EXT-errors archiving 1,88

Total 16,01

RET

Authorize RET-error

Control&Communicate RET-errors 46,15

RET-errors archiving 4,62

Total 50,77

REQ

Communicate REQ-errors 1,77

REQ-errors archiving 0,24

Total 2,01

Total Error Handling 144,14

Source: PPF e-mail archives, Q1 2002

Chapter 3 Situation of the Production Team at the time of research

3.2.3 Issues

Issues are mainly about PO’s that due to unknown reason have not been paid as they should have been. The issues can be divided in Bank issues and entity issues. It is a bank issue when the PT wants to know information about a PO from one of the external banks. This can e.g. be about the reason why a PO was returned or why the bank did not reconcile a PO. Some of these issues can take a very long time, because the information must come via a lot of intermediates. The PPF can have issues with the Citibank → Citibank Issues. Or there can be issues with the BoA → BoA Issues.

All the other issues are called entity issues. When an entity has an ordinary question about the PPF or when a payment went wrong within the PPF and the PT has to find out where it went wrong, it is called an entity issue. All these issues are investigated by the PT and as soon as they have the information about what happened with a PO they communicate this with the involving entity → Entity Issues.

In Table 3.3 one can see the number of minutes spent per day on Issues by the employees of the PT.

Table 3.3: Minutes spent per day on Issues

In minutes

Bank Issues

Citi bank issues 40

BoA issues 20

Total 60

Entity Issues

Entity issues 60

Total 60

Total Issues 120

3.2.4 Other

The rest of the tasks of the PT fell under the topic ‘Other’. The employees of the PT got information out of Auros in order to determine which currency and how much of it the dealing room had to buy on the money market. This information was put in an Excel sheet and was sent to Cash Management → Forecast Auros.

The consulting with the manager was of crucial importance to keep each other noticed of

what they were doing → Management Consulting. Furthermore there was the possibility

for customers to call to the PPF and explain their problem or ask a question →

Telephone. This was advised to do as little as possible, but out of client friendliness and

sometimes because it works faster, this tool was still used. There was some time reserved

to look at statistics of the PO’s → Statistics. These statistics were quite basic, such as

how many payments were processed and how many errors occurred during the process

for all entities together. And of course some time was spent on drinking coffee and

relaxing → Coffee.

Chapter 3 Situation of the Production Team at the time of research In Table 3.4 the number of minutes spent per day on Other is shown.

Table 3.4: Minutes spent per day on ‘Other’

Other In minutes

Forecast Auros 10

Management Consulting 60

Telephone 20

Statistics 10

Coffee 30

Total Other 130

3.2.5 Production Team in Total

In table 3.5 the results are shown of the total time spent on the four main tasks of the PT: PO-Processing, Error Handling, Issues, and Other.

Table 3.5: Minutes spent per day on PT

In minutes

Total PO-Processing 165

Total Error Handling 144

Total Issues 120

Total Other 130

Total PT 559

in hours 9h19

3.3 Flowchart of the paying process

In Figure 3.2 the flowchart of the paying process has been presented. With help of this figure one can easily see how the PO of an entity can walk through the payment process.

Also the errors named in section 3.2.2 have been used. However, when everything goes

well, the PO ends at Final PO process.