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A masterful reengineering effort wins Case the 1998 overall REACH Award.
Russ Banham, CFO Magazine
January 1, 1999
Award for Overall Excellence and Category Winner:
* Treasury Operations * Tax Operations * Customer Processing * Accounting Processes
Ted French says that at Case Corp., "finance reengineering was born of a different need." Indeed. Unlike most reengineered companies, Case wasn't in crisis--it was in chaos. Spun off by Tenneco Inc. in 1994, Case began independent life as a multibillion-dollar conglomerate producing agricultural and construction equipment. Each of its two dozen or so facilities boasted its own financial management system.
In an effort to bring order to this hodgepodge, Case launched a major restructuring shortly after the initial public offering. Hampered by a multitude of unwieldy transaction-processing systems, the finance department was not able to help much.
In fact, for all its processing systems, Case lacked such basic corporate structures as a treasury function, an investor relations group, or a financial reporting system. Worse, it lacked the people to build these functions. "Frankly, when we left our parent and began to stand on our own feet, we realized we just didn't have the people, processes, or technology to be a world-class finance organization," says French, CFO and president, financial services.
"Needless to say," he adds, "our objective in reengineering wasn't just to pay lower invoice costs than anyone else."
Over the past four years, French has done far more. Case has accomplished a complete make-over of its finance operations, earning the Racine, Wisconsin-based company this year's REACH Award for overall excellence. Case also won awards in four categories: tax operations, customer processing, accounting processes, and treasury operations.
The numbers alone tell a great story. Over four years' time, finance costs for the $6 billion company have dropped by $24 million, a scanty 1.1 percent of sales, down from about 2.3 percent. But the numbers aren't the whole story. "These cost savings have been redeployed to support the company's new-product development and global expansion," French says. "Today, finance is a true business partner with the rest of the organization."
That partnership is helping Case weather the global economic storm. As a major supplier of agricultural and construction equipment to every Asian and South American country, Case has been hard hit by currency devaluations and the cancellation of massive infrastructure proj-ects in those areas.
Consistent with expectations, Case's third-quarter operating earnings were $106 million, down from $123 million in the prior- year period. Net income also fell, from $78 million to $63 million. Since last January, the company's stock has nose-dived, from roughly $70 to the low-$20 range. "We've been preparing for [a market downturn] for quite some time," French says. "We've positioned ourselves over the past several years to effectively manage these conditions, [and] the steps taken to reengineer the finance organization will help us."
Analysts concur. "Other companies will tell you that in preparation for the downturn last summer, they were the first to strip out assets," says John McGinty, a managing director at Credit Suisse First Boston. "But Ted and Case were the leaders here, not [major competitors] Deere or Caterpillar. Case was the first to cut its production schedule to get assets out of its system, which will have a positive impact on its earnings volatility. Frankly, Ted's financial controls pointed to the problem, and the operating side acted on it."
Accounting Processes: Consolidate, Standardize, Automate ,BR> "Our people were supposed to be supporting the operational people, but they were spending 70 percent of their time crunching numbers and flipping pages," says Connie Johnsen, director of accounting, consolidations, and reporting. "We had all these different general ledger systems used at our various locations, each with a different chart containing thousands of accounts. Inconsistencies and inefficiencies abounded when accounting for the multitude of intercompany transactions that routinely occurred."
The department respond-ed by benchmarking other companies, such as Toyota and GM, and taking an objective approach to its flaws. It formed so-called global owners process teams (G-POTs), composed of representatives from each accounting area (payables, receivables, payroll, and ledger), to develop standard processes for each accounting function. "And we told the G-POTs we didn't want a geographic solution; we wanted a global solution," says Blaine Metzger, director of financial planning and analysis.
To that end, the G-POTs combined multiple country-based finance operations into three regional centers--in Racine, Paris, and Sydney. Each center was made responsible for all transaction processing in its region, and all were required to use the same system, standards, and processes. "Our goal has been to eliminate the processing we don't need to do, automate those processes we do need, and, standardize everything throughout the company," Metzger says. Case's multiple general ledgers, for example, have been pared to one standard system, thanks in part to an integrated client/server system.
Consistent with the new approach is the use of a data warehouse to store information previously retained in either the general ledger or other systems. The warehouse simplified the worldwide chart of accounts at Case, resulting in lower error rates and quicker financial closings. The warehouse segregates transactional data in a form that is optimized for analysis.
Taking its effort to the next level, accounting established customer-service groups that meet with the G-POTs to discuss problems. Accounting also is more involved with operations via its cost management competency network, a team of employees from different disciplines that work with plant locations to focus understanding on activity-based cost management and the composition of product costs. "Our people get involved at each level of the development process to focus on the activities that are driving costs," Johnsen says. "We've developed target-costing procedures that have been used in several new-product introductions, giving us improved profitability."
All these activities hold high promise for the future. "So far, the manual intervention required to capitalize a fixed asset has decreased from 2.5 hours to an hour," Metzger says. "We've reduced the number of manual journal entry lines per month by 32 percent, from approximately 25,000 to 17,000. And we've reduced the number of individual charts of accounts from 63 to 23." Most important, accounting has achieved its original goal--flipping the ratio of transactional processing to business analysis from 70-30 to 30-70.
chart omitted Treasury Operations: Starting from Scratch
Taking treasury to the next level meant starting at the first rung. That's because prior to the initial public offering, the treasury function was handled by Tenneco. "Our reengineering objective was to add as few staff members as possible while overhauling and assimilating these functions from our parent," says Peter Hong, Case vice president and treasurer. Today, a staff of 11 performs all of the treasury, corporate finance, and risk management functions in Racine, although small staffs are kept in Australia and France to maintain relations with local banks.
Case has radically improved foreign exchange management. "The way we used to run things didn't always take advantage of natural currency hedges," explains Kathleen Powers, Case assistant treasurer. "We'd have exposures going two ways, say from the U.S. dollar to pounds sterling and vice versa, orchestrated in two different regions with little or no communication between the two. Now we look at the net of those exposures through our internal hedging center, and hedge on behalf of the subsidiary that has the larger exposure." The new procedure better offsets naturally hedged positions, lowering transaction costs. "Two people spend 76 hours a month managing a process that took three people 324 hours to manage," Hong says.
Now they have more time to concentrate on, for instance, managing bank relationships. When it became a public company, Case was 100 percent financed with bank debt. "Because of our ratings at the time, we didn't have access to the capital markets," Powers says. "There were restrictive covenants on our bank credit facilities so that virtually every dollar of cash flow went to the banks."
An early decision was to refinance the credit facilities to loosen up those restrictive covenants. Case then was able to issue two 10-year bonds and establish a $400 million securitization facility. Today, Case's worldwide credit availability exceeds $5.5 billion, up from $2.9 billion. And it has reduced its debt-to-capital ratio by 56 percent. "We really diversified our funding sources," says Powers, "and, because of that, over a 23-month period, we have had four rating agency upgrades [from Standard & Poor's], from BB to A-. And our covenants have been relaxed to reflect our improving financial position."
Overall, treasury has increased the number of relationships in its bank network from 28 to 58. "We have formed partnerships with institutions that have particular strengths in our targeted growth markets," Powers says.
chart omitted Tax Operations: Focus on Integrity
While Hong and Powers built a treasury department at Case from scratch, John Evard needed to gut the company's tax system, a process he began before the spin-off from Tenneco. "When I got here in 1989, things were pretty broken," says Evard, Case vice president and general tax counsel. "There were six pretty nice people here, but they were way out of their league. I remember asking for files, and when I opened them, Post-Its that had lost their glue tumbled out. As a result, tax had no credibility internally or externally with the IRS and state auditors."
Three weeks on the job, Evard reappraised his decision to take it. "I have a very vivid memory," he says, "of putting my head on the desk and thinking, Where do I go from here? The task was just gargantuan."
Evard got help--from two law firms and Andersen Consulting Ltd., Case's outside auditor. "I brought in these quality people on a short-term basis, and told them I needed to file returns that had more integrity. Then I looked for quality people to help me fix things on a long-term basis."
The new tax team attacked the company's dismal audit situation first. "We had nine years open with the IRS and about that many with Canadian tax authorities," Evard says. "We also had 26 states auditing us. All these we fixed. Then came the IPO."
Once Case was on its own, Evard and his team drafted a mission statement for the future: "To maximize shareholder value by minimizing the worldwide tax burden of the Case group of companies." They launched an educational campaign to create business-unit awareness of the services that tax provides. And, like other parts of the overall finance organization, they centralized their department. "We now partner a tax representative here with each local tax consultant responsible for statutory tax in his or her region," Evard says. "We also instituted a monthly tax management team meeting to consider each foreign legal entity's operating results in the context of tax issues."
Results are encouraging: annual tax cost savings as a percentage of revenue are 0.7 percent, up from 0.2 percent prior to the reengineering.
chart omitted Customer Processing: Putting the Right People First
Case also uncovered another competitive advantage in its customer-processing efforts. When Lisa Sweeney came to Case as its manager of dealer settlements three years ago, she was struck by the mathematical inaccuracies in the settlements that its 4,900 dealers--whom Case considers its customers--provided the company. "We had been using a paper settlement process, in which dealers would report a sale and the type of retail incentive involved," says Sweeney, currently Case's financial manager of sourcing.
"Like other equipment manufacturers and the auto industry, we offer many different sales and rental discount programs. When we reviewed the settlements, we noticed that a good 70 percent of the settlements were mathematically incorrect."
To correct these flaws, Case built its own client interface system, ESS (for electronic settlement system). "We wanted a one-stop-shop process for all ourcustomer-processing activities," says John Hardman, Case's current manager of dealer settlements.
Ninety-nine percent of all customer transactions are now processed via the system. In addition, ESS has pared the department's auditing costs by 70 percent, reduced the time spent answering customer inquiries by 50 percent, slashed invoice processing costs by 40 percent, and shortened the sales closing process from six days to one. "Our employees no longer crunch through millions of transactions," Hardman says. "Instead, they focus on the processing of exceptions or proactively address business issues." In addition, the new system provides sales and marketing with timely, accurate data for their individual needs. "We can measure performance, focus on cost management, and identify true business drivers more quickly," Hardman says. "And we can compare our results against our historical data or that of our competition."