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A pioneer of reengineering, Electronic Data Systems has instituted best practices in every facet of finance. The result: lower costs, greater effectiveness, and three REACH Awards, including Overall Excellence.
Russ Banham, CFO Magazine
December 1, 1997
To undertake an extensive overhaul of finance at a company with more than $8 billion in annual revenues takes a lot of stamina in any year. But to do so in 1990, when words like reengineering, benchmarking, and best practices hadn't yet entered the business lexicon, required an extra dose of intestinal fortitude. Yet Jody Grant, an accomplished marathoner and triathlete, took it in stride.
Going the extra mile when an advantage can be seized is something Grant, the 59-year-old CFO of Electronic Data Systems Corp., is used to. Before earning his Ph.D. in finance and economics from the University of Texas, Grant won three consecutive Southwest Conference 1,500-meter freestyle swimming championships. He'll swim with the tide when the course is prudent, but he isn't cowed by the other direction, either.
Indeed, Grant's aerobic capacity has been critical to EDS's finance reengineering. The diversified information technology services company has experienced astonishing growth since Grant hired on in 1990. Annual revenues have increased more than $6 billion, to $14.4 billion last year; 43,000 new employees have joined its ranks, augmenting the work force to more than 100,000.
His charge then and now was to complement the impressive growth at Plano, Texas-based EDS with a more efficient finance group. "Prior to the process reengineering effort, EDS's growth put a huge strain on the internal support groups and processes," states Grant.
"Operating personnel saw that the finance staff was spending a great deal of time doing the basics-- like closing the books, paying the bills, and producing management reports." Finance saw the same thing and undertook an internal review to determine how it could do the basics more efficiently, thus freeing up more time to devote to other activities, such as new business development.
"We focused on our expenses first because we realized the importance of the company's overall cost-reduction objectives," adds Paulett Eberhart, a 20-year EDS veteran who is now the company's controller and corporate vice president. "But the actual reengineering was fueled by a desire to become more efficient and effective, which we believed would reduce costs as a consequence."
Events have justified that belief. Even while revenues and employee ranks were skyrocketing, EDS has dramatically reduced its cost of finance while halving the size of the finance group. Along the way, the company has been a REACH finalist in numerous categories since the awards began in 1995. That year, it won for accounts payable; in 1996, it won for accounts receivable and billing.
This year, EDS was a finalist in five of the seven REACH categories, placing first in two core processes: customer processing and employee processing. The company's strong showing in all areas of finance earned it CFO's 1997 REACH Award for Overall Excellence.
SERVING SHARED INTERESTS
When EDS set out to reengineer finance, managers were well aware they were entering uncharted territory.
"We entered this process feeling very much like pioneers," says Eberhart. "We reviewed whatever external research was available, but frankly, there wasn't much at the time. So we turned our focus inward."
Eberhart's staff reviewed the finance group's expenses as a percentage of EDS's revenues in the late 1980s and early '90s, a period in which the company experienced 20 percent annual growth in revenues. "We then took that data and compared it as best we could at the time with similar metrics at other service and manufacturing companies--what we now call benchmarking," she says. Once it had suitable metrics to chart its objectives and measure the effectiveness of its reengineering program, the finance group turned its attention to processes. "We engaged in an internal debate over whether to centralize or decentralize various finance functions," says Eberhart.
From an operational standpoint, EDS is highly decentralized, and Eberhart wanted finance to reflect this. The group ultimately decided on a shared services structure, with eight centers covering eight processes: accounts payable, billing/accounts receivable, asset management, corporate records, process review, general accounting, financial assistance, and project development. "All processes, systems, and policies are centrally owned, controlled, and maintained in the service centers, but are disbursed in a decentralized manner," explains Geney Gibson, manager of corporate shared financial services. So, for example, a travel- and-entertainment expense report "is systematized here, but is executed wherever an employee is traveling around the country."
Common today but unusual then, the shared services strategy enabled the finance group to downsize its ranks from 525 in 1990 to 265 today. In the meantime, finance costs have plunged from $42.2 million to $16.7 million over the period. "We've substantially flattened management layers while leveraging the skills of our people," Gibson says. "We're seeing a 50 percent improvement in our cost structure at the same time we're building a better service base."
Although many companies have reengineered the components of customer processing, few have integrated them into a seamless stream of events as well as EDS has.
"We looked at our reengineering from the onset as purely customer processing, not accounts receivable," explains Mark Andrews, manager of accounts receivable and customer billing. That meant everything from receivables and collections on the back end to billing on the front end--one clean, continuous process. "The metrics indicate just how successful this approach has been," says Andrews.
Prior to reengineering, EDS's U.S. operations counted 24 billing systems and 13 accounts receivable locations. More than 1,400 account managers were responsible for the collection of outstanding receivables. The department processed more than 18,000 invoices per month, including 2,000 that were manually keyed into the A/R system. It also manually addressed the billing data captured by more than 80 percent of EDS's billing sites. All adjustments for invoice corrections, voids, and write-offs were prepared on paper, approved by division A/R managers, and then mailed to the corporate A/R group, where they were manually keyed into the system.
Andrews determined to consolidate, centralize, and automate the entire customer processing system. He and his team pared the number of billing systems from 25 to 6; centralized accounts receivable and collections in one location; and created a centralized billing, receivables, and collections help desk.
All customer data--including name, address, pricing, tax information, terms, A/R balances, and collections status--is now retained in one central database accessible via the company's intranet.
"The customer is automatically established in the A/R system through an automated interface," Andrews says. "Meanwhile, all adjustments for invoice corrections, voids, and write-offs are processed online along with electronic submission of edits, routing for approval, and posting to A/R and general ledger systems."
Andrews made sure that the effort did not migrate far from EDS's established reengineering drivers--service, efficiency, and control. "When we tackled a particular customer process, we always kept an eye on the drivers," he says.
"Sometimes, one driver would play a more important role, such as service with respect to customer information," he continues. "When it came to accounts receivable, however, the driver there was control over the monies and accounting for them. Yet, we didn't neglect the other drivers in either circumstance."
In the end, the customer has been served well by EDS's reengineering, from details like the redesign of customer invoices--with invoice information reorganized to meet customer payment authorization needs--to larger issues like the expansion of customer payment options, which now include check, electronic data interchange, electronic funds transfer, automated clearinghouse transactions, and credit cards.
Employee processing at EDS has been overhauled no less than customer processing, with the shared services technology infrastructure again key. Once that infrastructure was in place, says Gibson, new tools and functions could be "hung on it"--whether a shared employee database, automated time-collection tools, or direct deposit of paychecks.
Also hung from the infrastructure was a revamped travel-and-entertainment expense reimbursement process. Before reengineering, 18 accounts payable departments were responsible for processing employee reimbursements. Employees were reimbursed through two methods--petty cash or the paper trail.
The latter process was extremely time- consuming. After incurring a business expense, employees filled out a three-page paper reimbursement form. Receipts (for all items exceeding $25) had to be taped to white paper and attached to the form. These were routed by mail to obtain approval by the appropriate cost center manager, and then were sent for processing to one of EDS's A/P processing departments.
That's not all. Once received by the A/P department, the clerk there had to verify the information presented--including authorizing signatures, outstanding advance balance, arithmetic, receipts, and employee information- - before entering the reimbursement accounting data into the payment system to issue a check. The checks then had to be manually sorted, stuffed into envelopes, and mailed to employees. The average cycle time from disbursement creation to check distribution was 28 days--far too long, says Linda Diaz, manager of accounts payable and asset management.
"We looked at our core accounting areas, where there was a high volume of transaction activity in need of significant improvement," Diaz adds. "Obviously, employee reimbursement was a key candidate. Literally everyone in the company was impacted by this process."
The problem was essentially one of technology infra-structure. "We couldn't blame the processing slowness on one piece of the puzzle or another. We had to step back and focus on the big picture," Diaz explains. "Once we did, we decided to establish one means of employee expense reimbursement--an electronic expense report."
Under the new system, employees submit the electronic report from any location worldwide to be reimbursed for a business expense. The report defaults much of the information required, such as name, home cost center, auto rental, and hotel, thereby relieving employees of typing in all the data. The default not only streamlines the data entry, it also reduces disbursementcreation time.
Once created, the electronic reimbursement is automatically routed for approval based on dollar amount rather than cost center manager. Receipts are forwarded to a centralized scanning department for imaging. Payment of the reimbursement, however, is not delayed until the receipts are received, but is issued upon electronic approval. Employees can specify on the report how they want the expenses credited-- to their corporate credit card or their bank account. Electronic funds transfer completes the process.
"We strived for simplicity and were able to achieve it," Diaz says. "I can submit my expense report today, get it approved, and then get it routed to my credit card for payment tonight." And it now costs finance just 33 cents to process that report, compared with $3.50 previously.
EDS, meanwhile, can keep growing without having to hire more people to process the 280,000 reimbursements it expects to process this year alone. "We've freed up people in accounts payable from processing invoices and expense reports to focus more clearly on managing the integrity of the system," Diaz says.
Diaz's strategy fits perfectly with Grant's marathoner ideals of conserving energy before the big kick. "What we have strived to do is reduce the effort required to produce a transaction at the same time we reduce processing time," says the CFO. "By combining these factors, the finance group can generate more- accurate and -timely information from which to make business decisions."
ROOMS WITH A VIEW
How do you combat the inevitable resistance to reengineering? The first rule is to keep the lines of communication open. At Electronic Data Systems Corp., controller Paulett Eberhart and manager of corporate shared financial services Geney Gibson accomplished that in a novel way.
Gibson commandeered two rooms at EDS headquarters and attacked their walls with staples and tape, redesigning their look and intent. One became the Vision Room, the other became the Reflections of Change Room. "Each room told the story of where we had gone and where we were going," Gibson says. "They broadcast very clearly that we were hiding nothing."
Mark Andrews, manager of accounts receivable and customer billing, says his department benefited from the approach. "Each wall in the Vision Room represented a different part of what we were trying to do," he says. "One wall featured our starting point, or baseline--how we look today, the organizational structure, costs, the way processes work, and so on. Another wall featured our best practices for each process, such as customer processing. The third wall mapped our trail, and the fourth-- the people wall--recognized that when processes change, people's skills must change, too."
The Reflections of Change Room is considered command central for each of EDS's shared service centers. "The room reflects how we viewed processing engineering in a shared services environment," Andrews explains.
"Its setup was similar to the Vision Room, except that each wall focused on a particular function, such as customer processing and vendor processing, and whose charge it was to migrate EDS to the best practices in that area."
The rooms invited employees to understand and then participate in the changes affecting the company and, by extension, their jobs. Nevertheless, there were still pockets of resistance. "There will always be some individuals who toss roadblocks at you as you attempt change," Andrews says.
"However, you don't want this occurring during the reengineering process, because that will just slow things down," he adds. "So we encouraged everyone to get their frustrations out early on and all at once. By doing that, we were able to address most people's anxieties. Moreover, it helped some people make the decision whether to proceed with the program or head for the exit."
For a snapshot on the best practices and key metrics data for customer processing and employee processing click here.
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