Developing a Center of Excellence (COE) for Financial Planning & Analysis

In recent years, the pharmaceutical industry has experienced significant challenges stemming from patent expirations, issues with R&D productivity, uncertainties from evolving legislative and regulatory action, and considerable industry cost pressures. As a result, the industry has experienced a market capitalization erosion of 30% since 2000. [1]

This environment isn’t likely to improve soon. As a result, operating cost reductions will likely continue to be a focus for many life sciences companies. Many of these companies have already trimmed finance budgets through successful shared services programs that focused on traditional transaction-processing activities, such as accounts payable, accounts receivable, and general accounting. Now companies need to find additional savings in other areas.

One area that holds significant cost-reduction opportunities is the financial planning and analysis (FP&A) function. According to Deloitte experience, FP&A functions typically make up approximately 25% of finance spend and represent the next frontier of finance savings opportunities. [2]

Within the pharmaceutical industry, the FP&A function represents an even greater opportunity. These companies typically have global operations with decentralized P&L responsibility within individual countries. These localized business operations result in significant country-based FP&A support. Based on recent analysis by Deloitte, such geographically dispersed operating models result in some large pharmaceutical companies allocating upwards of 30 to 40% of their finance spend to FP&A activities.

However, one effective approach which can reduce the high cost of the FP&A function, and allow skilled FP&A staff to spend more time on business decision support activities, is to move currently decentralized FP&A decision support activities into centers of excellence.

FIG. 1. WHILE THE OPPORTUNITY FOR CENTRALIZATION WITHIN DECISION SUPPORT ARE NOT AS LARGE AS IN GENERAL ACCOUNTING, SIGNIFICANT BENEFITS CAN BE ACHIEVED. credit: Deloitte

Not all FP&A work is equal

The FP&A function serves a critical role by delivering relevant and insightful information to top executives to help them make informed business decisions. FP&A personnel are typically among the most seasoned and well-compensated staff members within an organization.

However, close examination of day-to-day FP&A activities may reveal some inefficiencies. FP&A processes are typically fragmented with significant customization, redundancies, and inefficiencies as each local entity seeks to best serve its specific business customers. This can lead to highly compensated FP&A employees’ time spent on the transactional aspects of FP&A processes. We believe that most of these transactional FP&A processes could be more efficiently performed in a centralized environment.

Despite such cost-saving opportunities, the FP&A function has typically not been a candidate for centralization due to the high visibility and strategic nature of the work performed. FP&A activities have frequently been considered “untouchable” candidates for centralization given the perceived level of business knowledge required to perform these activities. The FP&A function interacts directly with business leaders, helps set strategy, supports decision making, and affects future financial performance.

Pharmaceutical executives should challenge this blanket characterization of the work performed by FP&A staff given the industry pressures these companies face. Transactional, low-value-add FP&A activities can be successfully decoupled from the more strategic knowledge-based activities and centralized in an FP&A center of excellence (COE) to support a more cost-effective operating model (Fig. 1). Doing so can result in quantifiable cost reductions while freeing up local FP&A resources to perform more valuable business partnering activities. The centralized decision-support model should link operational requirements to corporate objectives and provide a basis for functional design.

An FP&A COE offers many potential benefits

Some of the potential benefits organizational leaders can expect to achieve by implementing an FP&A COE include:

Process standardization and automation: Transitioning activities to a centralized environment helps promote process standardization. Standardization improves an organization’s ability to train resources, develop talent, and further streamline through technology deployment. As activities are standardized across an organization, data analysis, data quality, and the way in which data is used to make business decisions also becomes more consistent.

For example, a large international pharmaceutical client’s finance organization in one country identified an automated way to perform volume, price, and exchange analyses. Once this process was centralized, it became the standard blueprint for all regional markets, driving significant time savings across the organization.

Local process elimination: Migrating activities to a centralized environment helps eliminate custom activities that have historically been performed locally. Through centralization, non-value-add local processes become more visible and can be more easily challenged.

As one Deloitte client began an FP&A COE implementation, it discovered that certain balance sheet and cash-flow analyses were regularly performed by a local entity. As activities were evaluated for centralization, it became clear that these analyses were of little value to leadership and were subsequently eliminated.

Labor arbitrage: FP&A activities are typically performed by highly trained and educated employees. These staff members are expensive; transitioning transactional components to a lower-cost resource pool can lead to significant savings and allow skilled finance employees to focus on areas that are commensurate with their level of expertise and pay grade.

A global manufacturer sought to streamline and enhance the effectiveness of its finance function while reducing operational costs. The company moved 80% of its corporate FP&A work to a lower cost COE, including ad-hoc reporting and analysis, balanced scorecard reporting, and management reporting and board presentations. It also moved select business unit FP&A work offshore, including segment profitability reporting, product profitability and profiles, and competitor analysis. Through these transitions, the company reduced its FP&A costs by between 50 and 70%.

Span and level savings: Through centralization, eliminating organizational

layers and improving span of control is possible. The typical structure of an FP&A COE would allow for a broader span of control that can ultimately result in a lower-cost operating model.

A global hospitality company wanted to reduce its SG&A spend due to increasing cost pressures from changing economic conditions. The finance function was an obvious candidate for centralization due to the significant number transactional activities completed by its highly compensated staff. This company identified these transactional activities and transitioned them to a newly-created FP&A shared service center in the UK. As a result, the company was able to realize significant labor savings by better matching job requirements to staff levels.

Economies of scale: Migrating activities to a centralized environment provides additional cost-saving opportunities due to economies of scale. Activities such as data validation and standard report creation can be performed more efficiently through a centralized model and in large volumes by a team dedicated to these specific activities.

A global consumer business company, facing significant margin and price pressures, embarked on a major cost-reduction initiative, as well as transformation of its commercial operating model. To keep up with these changes, the company’s finance function reorganized around a global structure with harmonized policies, processes, data, metrics, and controls. It increased its use of COEs and shared services centers for transactional and common FP&A activities, and it instituted a standard global framework for management reporting that enabled significant economies of scale through centralized delivery. The result was substantial reduction in overall finance operating costs.

Talent alignment: Leading organizations are continually looking to identify and retain top talent. However, a 2007 Deloitte study shows only 50% of survey respondents believe that their finance organization is strong in the competencies needed to align talent with the business. [3] Moving transactional components of FP&A processes to a COE can help position an organization’s talent more strategically and improve this metric.

A large pharmaceutical company implemented a regional decision-support COE. Shortly thereafter, senior finance leaders found that they could spend more time driving complex analytics and future business decisionmaking. This not only allowed for additional time to focus on decisionmaking capabilities, but it also improved morale within the finance function. The organization’s focus became more strategic and better aligned with the organization’s Finance service delivery model.

Overcoming concerns about centralization

Organizations have been hesitant to consider FP&A as a candidate for a COE model for several reasons. The shared services concept is not new, but the concept of applying a centralized model to business-facing activities is. If implemented without great care, the FP&A COE could hinder an organization’s ability to provide a critical partnering function to the business.

Key concerns that organizations need to overcome as they evaluate the risks associated with an FP&A COE include:

Dedicated local support: The idea of moving FP&A activities to a shared services model has typically been off-limits due to the significant visibility and high value of the end product. The output from the FP&A function is often used by business customers and senior finance executives who are very protective of local FP&A resources. Significant efforts need to be made in managing the change associated with centralizing these activities to ensure that expectations are clearly set and service levels are maintained.

Future leader talent development: The FP&A function is often a training ground for future leaders of the finance organization. The finance talent career ladder needs to be modified to reflect the new operating model and allow for movement of junior employees from the FP&A COE to the more value-add local finance units.

End-to-end process efficiency: The FP&A COE typically only performs a portion of a process and not the entire process. As a result, additional handoffs are created as activities are being performed. As activities are being considered for migration, they must be carefully evaluated to ensure that the new end-to-end process has not created a burden for the organization. See Fig. 2 for criteria to be considered when identifying processes for transition to a COE.

Realizing partial FTE efficiencies: When migrating transactional activities from locations with low volume, or where finance support is minimal, it may be difficult to realize savings. If cost savings is the driving factor behind considering an FP&A COE, the volume of activities migrated from local FP&A functions needs to be large enough to ensure that full resource savings can be achieved. If cost savings is not the driver behind centralization, the additional resource capacity created by migrating local FP&A activities to a COE can be used to focus on more analytical, higher value-add activities.

Fear of going it alone: Finance organizations are already stretched to their limits with day-to-day demands. Burdening them with a transformational project such as evaluating and implementing an FP&A COE may be beyond the current staff’s experience and could be tremendously disruptive. Additionally, organizations should always consider the tax transfer price implications of implementing a COE. Teaming with a service provider that has both the experience and resources to carry out long-term finance transformation initiatives can allow companies to continue day-to-day activities with minimal disruption while moving toward the envisioned future state organization and operating model.

Toward a brighter future for life sciences FP&A

Life sciences finance executives should not wait to explore the possibility of creating an FP&A COE. The FP&A COE model has proven successful at a select group of leading companies and many more are now beginning to assess how to implement it within their own organizations. The high potential for reducing costs, improving FP&A effectiveness, and adding to the bottom line make this an opportunity at a time when life sciences companies are under significant performance pressures. Finance executives should challenge their company’s traditional FP&A organizational structure and explore a solution that could make their organization more efficient, flexible, and strategic. PC

BOX: Consider migrating these FP&A functions:

• Market / Segment Profitability Reporting • Product Profitability and Profiles • Management Reporting and Standardized Presentations • Data Validation and Standard Report Creation • Ad Hoc Reporting and Variance Analysis • KPI Performance Monitoring • Baseline Modeling for Budgeting and Forecasting Activity • Standardized Volume Price and Exchange Analysis • Balance Sheet and Cash Flow Analysis • Competitor Analysis

SIDEBAR: Reducing Finance Operating Costs by 25% at a Global Pharmaceutical Company

This major company asked Deloitte to help implement a decision support center of excellence (COE) that targeted management reporting, planning, budgeting, and forecasting activities. Initially, a finance group developed a proof-of-concept operating model, which indicated that 20 to 30% of FP&A employees perform transactional, low-value-added work that could be migrated to a COE. Deloitte then conducted more than 20 global workshops to further define an operating model that aligned with corporate objectives, create a governance structure, and develop a road map for implementation across multiple international markets and business units.

Each market’s implementation began with a series of meetings designed to explain the concept of the COE and gain leadership buy-in. The next step was to gather an inventory of activities in management reporting, forecasting, and operating plan processes from local subject-matter experts. Using an agreed-upon decision framework, Deloitte analyzed each activity to determine if, and to what extent, the processes could be decoupled. The team identified transactional, noncustomer-facing components of these activities for migration to the COE.

Activities like data validation, basic variance analysis, and standard reporting comprised a significant portion of the activities that met the decision criteria. The team documented these migrating activities with detailed step-by-step work instructions for COE staff hired in regional support centers located in low-cost areas. Before migrating these activities, the team conducted a series of parallel runs to ensure that the COE staff could produce the same results as the original FP&A colleagues.

Post go-live, the COE addressed continuous improvement opportunities, including standardizing reporting activities and offshoring highly standardized FP&A processes. In aggregate, these activities led to approximately 25% reduction in overall finance operating costs, as well as increased FP&A efficiency and effectiveness.

REFERENCES

1 NYSE Pharmaceutical Index, December 2000 — November 2010

2. Source: Deloitte’s Global Benchmarking Center, which has more than 800 participants in its various proprietary studies. To learn more about Deloitte’s benchmarking capabilities, please visit our website: www.deloitte.com/us/bench marking.

3. The finance talent challenge: How leading CFOs are taking charge, Deloitte, 2007.

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

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Copyright © 2011 Deloitte Development LLC.

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ABOUT THE AUTHORS

Brad Smith is a senior manager within Deloitte’s Finance practice with over 12 years of deep corporate finance experience with large multinational companies. A significant portion of his career has focused on helping large Life Science Finance organizations design and improve their planning, budgeting and forecasting functions. He has also recently implemented a global decision support Center of Excellence for a large pharmaceutical company.

Sterling Barnett is a senior consultant within Deloitte’s Finance practice. Sterling has deep experience with manufacturing finance across diverse industries and has recently helped implement a global manufacturing finance Center of Excellence for a multinational pharmaceutical corporation.

SIDEBAR:

Reducing Finance Operating Costs by 25% at a Global Pharmaceutical Company

This major company asked Deloitte to help implement a decision support center of excellence (COE) that targeted management reporting, planning, budgeting, and forecasting activities. Initially, a finance group developed a proof-of-concept operating model, which indicated that 20 to 30% of FP&A employees perform transactional, low-value-added work that could be migrated to a COE. Deloitte then conducted more than 20 global workshops to further define an operating model that aligned with corporate objectives, create a governance structure, and develop a road map for implementation across multiple international markets and business units.

Each market’s implementation began with a series of meetings designed to explain the concept of the COE and gain leadership buy-in. The next step was to gather an inventory of activities in management reporting, forecasting, and operating plan processes from local subject-matter experts. Using an agreed-upon decision framework, Deloitte analyzed each activity to determine if, and to what extent, the processes could be decoupled. The team identified transactional, noncustomer-facing components of these activities for migration to the COE.

Activities like data validation, basic variance analysis, and standard reporting comprised a significant portion of the activities that met the decision criteria. The team documented these migrating activities with detailed step-by-step work instructions for COE staff hired in regional support centers located in low-cost areas. Before migrating these activities, the team conducted a series of parallel runs to ensure that the COE staff could produce the same results as the original FP&A colleagues.

Post go-live, the COE addressed continuous improvement opportunities, including standardizing reporting activities and offshoring highly standardized FP&A processes. In aggregate, these activities led to approximately 25% reduction in overall finance operating costs, as well as increased FP&A efficiency and effectiveness.