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Achieving efficiency in a new dimension

My introduction to pan-European finance technology came on the day Europhile Tony Blair became prime minister. After casting my vote, I drove to my companies newly opened Paris office to struggle with installing a French version of Windows 95 from 24 floppy disks. Since then I have become well versed in the benefits and practice of multi-national finance systems.

So I feel a neat parallel as we enter a new era of domestic coalition politics in the UK, that there is an increasing realisation that in the current climate more untapped and immediate efficiencies might be gained from a coalition of commercial finance businesses.

Let’s first have a look at some trends:

• Through the slump at the start of 2009 just about the only new UK finance business activity was Private Equity investor Anacap’s creation of Aldermore. This combined the banking licence and source of funding from Ruffler Bank, Base Commercial Mortgages, newly formed leasing operations, and then the acquisition of Cattles – now Absolute – Invoice Finance and portfolios from Heritable Asset Finance
• Santander, which already has Abbey and Alliance & Leicester’s leasing operations within its Corporate and Industrial Banking unit also added Liquidity, a specialist factoring and invoice discounting provider, and a joint venture with Zenith Provecta to provide a fleet funding and management solution.
• Lloyds TSB Commercial Finance has continued its merger of commercial finance operations including Bowmaker and Alex Lawrie, while it acquired further operations with its acquisition of HBOS.
• And in continental Europe during the last month Credit Agricole Leasing and Eurofactor have merged.

So how does technology support the synergies that are obviously being sought here? Well, on the whole, from the software vendor side the answer to that question has to be “not immediately”. In the UK the majority of packages remain aligned with one or two of traditional silos of commercial finance. Perhaps this is changing – as recently demonstrated by White Clarkes acquisition of Nexus and Cassiopaes purchase of InfoParc.

Laurent Tabouelle, Product Manager for the iMX Commercial Finance solution at Codix (who supply software to both sides of Credit Agricole Leasing and Factoring) explains: “We have two flavours of iMX: one for commercial finance and one for debt collection. Regarding commercial finance, you hear a lot about products – Invoice discounting in the UK, Inhouse Factoring in Germany, supply chain finance, commercial finance – but to me these are mainly  marketing terms. When you really look at the details of those products, they are broadly the same but with different names in different details, and legal constraints. From a systems standpoint you don’t want different systems to handle different products. If you have thought of those products in a flexible way up front then you can very easily handle them in the same system, even in the same contract for the same customer. Today, I am speaking to prospective clients who have two or three systems. Why? ‘One for my invoice discounting, one for my financing of receivables, one for my leasing and other types of commercial finance.’ And why? ‘Oooh…because they are so different’. But the bottom line is that you have a creditor and collaterals, then all products are variations around those key concepts. By having several systems you spread your risks over systems, which is not what is wanted. It increases the operational risk because you don’t see it. Handling all these products on a single system, in the same way, is our focus.”

Even without software packages that will cover all of the finance products there are still efficiencies that can be gained from business operations. Could you achieve benefits just by simplifying the business without a single system? “One alternative that we are seeing more interest in recently is Business Process Management solutions.” says Steve Byrne of Cap Gemini. “This
alternative enables companies to leave the existing infrastructure in place and still deliver enhanced, standardized, processing capabilities.”

If we extend the basic concepts outlined by Laurent Tabouelle, we have the two fundamental components of any commercial finance:

• Providing finance to a customer in return for collateral or lien of an asset.
• Collecting receivables from a creditor – who is getting economic benefits from the asset.

The efficiencies that can be gained from use of technology and business process management – and where money can be made – in this process come in three areas:

• At the start with risk based pricing for the finance.
• In the middle with management of the assets and collateral that are your security.
• And finally with efficient collection from the creditor.

This should be a cyclical process – particularly under Basle ii – with feedback from the collections history – and the asset management process – being used to improve the accuracy of the pricing.

The most immediate benefits of synergy are to be had at the back end of this process. But don’t fall into the trap of thinking of it as a standard accounts receivable shared service centre. The collections process for each commercial finance product have unique features with long separation in time (for leases and commercial mortgages), separation of your customer and
your creditor (for invoice finance and factoring) and even geographical separation (if we include trade finance).

However the general concepts of a shared service centre can be applied to the collections process, accounting, statutory and regulatory reporting – and by sharing IT services, if not applications – to start to get real efficiency gains, particularly in a market that is still effectively in recession.

And there will be challenges, not least cultural differences between the traditional silos of commercial finance, not unlike those faced by multi-national finance systems delivery.

An edited version of this article appeared in June 2010 Edition of Leasing World

(c) Nic Evans 2010. This Article may not be reproduced, in full or in part, without the prior permission of the author.

Nic Evans is Director of Evans Global Associates, delivering consultancy and interim management for commercial
finance technology and business agility. If you want to discuss any points raised by this article or broader issues he can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans

Travellers tool bag – What to take with you for the journey

As you venture forth on a multinational project delivery, Nic Evans looks at what  tools you need to increase the chances of success.

As soon as you start to cross borders, the geographic and cultural separation mean that the trusted techniques such as “Management by walking around” and “the team that drinks together, thinks together” no longer apply.

Project Management.

A management process is essential for the success of any project. Let’s face it: most Financial Services companies are very good at transactional execution but major projects are not their strong point. Project management is not about what you need to do on the project (see development methodology below) but how you control it:

• Setting the scope and the business case for the project.
• Identifying the tasks to be performed during the project, controlling the resources, managing the deliverables and quality.
• Managing changes to the scope of the projects and risks.
• Having gateway checkpoints and audits of the project.
• Ensuring that the project meets the requirements, stays within budget and delivers the benefits.

Project management methods such as Prince2 and PMP are built around the core of the Executive Sponsor and the Project Manager. The Sponsor leads the project, makes the big decisions and assigns business resources the project needs. The project manager plans the project and is accountable to the business for the project delivery and achieving the benefits.

Software vendors and consultancies will, of course, offer to do the project management but Prince2 is very specific that the PM should not be from the supplier as they will ultimately be accountable to the supplier not the business, and introduce “lock in” with one supplier. Project management should anyhow start before the supplier is selected.

An international rollout may need broader programme management –providing strategic control of subsidiary projects such as the RFP process, software delivery and business change by country.

Development Processes

There are broadly two approaches to the development and implementation process:

The first, Waterfall – or “Big Design Up Front” – concentrates on gathering requirements at the start of the project, before going on to the traditionally more expensive design and programming stages.

The second, iterative or “agile” processes, are widely seen as more suitable for package implementation and where there is business change going on in parallel, with requirements evolving through the project. They use prototyping, rough cut of configurations of a package, and pilots to test assumptions and refine the requirements. Each iteration can be seen as a mini project, which has a better chance of completing successfully and with measurable benefits coming out from each cycle.

The most highly iterative methods, such as scrum and extreme programming, where users and programmers are locked together in intense brainstorming and prototyping sessions, could be seen as less suitable for international projects because of the need for the team to be co-located, defining complex requirements like lease accounting and considering the collegiate requirements of different business units.

The implementation method is distinct from the project management. Where you are working with a supplier it is often best to use their methodology will be geared towards defining the specific deliverables for their system configuration.

Business Process Management

Many large organisations, particularly with manufacturing origins, will have their own Business Process Management or Re-engineering methodology – such as Toyota and Six-Sigma at GE. These are built around scientific calculation of the value each step adds to the end product. Many of these will be difficult to apply to financial processes – let’s be mischievous and ask what value Credit add to a deal? – although Citibank in the eighties embraced the concept of “the bank as a factory”.

In practice for systems enabled business change it will be better to build process redesign around best practice workflows provided by the systems supplier.

With a multinational implementation a single “cookie cutter” standard process can be difficult to impose, because of regional requirements, the different sizes of each business, and even particular individual talent.

But what is more important than the one-off process design is to develop a culture of continuous improvement across the operation with international sharing of best practice.

Collaboration Tools

Initial face to face team meetings are essential to build up trust and understanding at the early project stages. For teams that are dispersed for their day to day work it is important to use collaboration technology to keep them together virtually.

Audio conferencing (with local dial in numbers to cut down on cost) can be enhanced by web conferencing (using tools such as Webex or GoToMeeting to view presentations, whiteboards and even application demonstrations). Videoconferencing using webcams will work with these – up to a full telepresence if project budgets are that big.

Instant messaging is not just for teenagers and helpful to ping a quick question to a distant colleague. Email, although pervasive, is not best for project communications with long and intertwined email exchanges hard to follow. A central project document storage, intranet (shared within the organisation) or extranet (giving access to suppliers as well) provides a common project “knowledge base”. Web based document storage or a Wiki (based on the technology behind Wikipedia) are now common solutions. Microsoft SharePoint 2010 adds the ability to publish and track project plans, create web based databases and even workflows from Visio diagrams.

Technology

For the global system itself what help is there from the technology? Microsoft’s dotNet and rival J2EEE application development provide support for the basic number and date formats. But architectural solutions for the all the “multi” stuff has to come from the system design.

A web based application will certainly greatly assist with the deployment of the system over long distances than an older “thick client” PC application would allow. The amount of data displayed on the screen is improved with modern design and improved features like “type-ahead” make many web applications a richer experience than PC desktop programs.

Highly modularised service oriented applications speed system configuration by having “building blocks” to quickly support particular requirements. You also use web “applets” components to tailor your own screens and dashboards.

Virtualisation frees your application from being tied to particular hardware and servers. Software as a service allows you to get software on a “pay per use” or utility model. If the software supports your needs this can be a quick way to set up and test software. On-going costs may come out higher in the long run but you are insulated from many of the hassles of in-house IT such as upgrades, and if things don’t work out you have not lost the upfront investment! The logical conclusion of this is cloud computing, highly virtualised, highly scalable, internet based software. One note of caution is hidden in the terms of service of Amazon Web Services: “We strive to keep Your Content secure, but cannot guarantee that we will be successful at doing so, given the nature of the Internet. Accordingly… you bear sole responsibility for adequate security, protection and backup of Your Content and Applications.”

Of course, while these tools can assist your international projects, in themselves they will not assure success. When combined with experienced practitioners they can leverage skills, reduce project risks and greatly increase productivity.

© Nic Evans 2010.

Nic Evans is Director of Evans Global Associates, delivering consultancy and interim management for international finance technology and business agility. If you want to discuss anything raised by these articles or broader issues he can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans

Go Forth and “Multi-”ply

Going multinational opens up multiple extra dimensions in system complexity. The biggest strategic efficiency for multinational systems is gained by having front-end, administration and accounting systems that can travel in these extra dimensions

Multi-Format – Culture-specific number formats (thousand and decimal separators) currency symbols (prefixes or
suffixes) and date formats are essential to present users with the basic data in a familiar and unambiguous format. Supporting phone numbers of the right length and postal codes in the appropriate format and position in the address will allow efficient processing. I have seen collections systems where non-US format customer phone numbers had to be stored in a separate field displayed three screens away from the arrears details.

The systems will certainly need to support the extended western European character set in all text fields, with support for eastern European Cyrillic and Asian double byte character sets if you are going that far. Non-English character sets have a knock on effect with alphabetic sort sequences.

Multi-Lingual. – For international finance companies often the internal “lingua-franca” will often be that of the parent company – or English. While it may be simpler for the organisation to use the same terminology for use of the systems (terms such as “evergreen rentals” doget lost in translation) there are statutory requirements to offer users local language – particularly in France. For customer documentation and invoices then local language is a must. Bear in mind that several countries have two languages, so documentation must either have synoptic translations or the customer must be given the choice of language, as is the case in Belgium and Switzerland. And do you want to offer localisation for regional languages,
like Catalan, Welsh and Basque?

Multi-Currency – Systems must be able to work with several currencies in the same business unit and with
multiple exchange rates. This needs to work at both the transaction level, particularly in the CEE countries where deals are increasingly denominated in Euros or Swiss Francs, and for consolidation. Older systems often put separate currency deals into different portfolios or reporting units which greatly adds to the cost of managing a small part of the business.

It has challenges – for instance what exchange rate do you use to record a multi-currency invoice with a future due date? And when that invoice is paid late what exchange rate do you use then? In addition to your delinquency you have an exchange rate risk.

For consolidation, much management reporting will be based around year start rates and plan rates. But spot rates, average monthly rates, accounting period end rates and even a range of future scenario rates will all need to be used for different reporting, accounting consolidation and exchange risk exposure.

The particularly European requirement for multicurrency is to cope with transition to the euro, which may not be a hot topic at the moment. And even disengagement of a country from the euro?

Multi-Organisation – Seamless online access and reporting across multiple companies is needed, rather than having to exit the application and come back in, or run separate reports. A shared service centre could not be implemented effectively without this. Within a country you may need to have further subsidiaries for fiscal reasons, joint ventures and to separate bank regulated business.

At the same time you need to be able to “slice and dice” reporting across the organisations by major product lines, vendor programs, or channels.

Security, access controls, even database backup and recovery may also need to be specific to an organisational unit.

Multi-GAAP – Rather than restating accounts from local GAAP of an operating company to the parents accounting treatment each month, the system produces multiple accounting treatments concurrently.

This is the most complex of the “multis” but increasingly the biggest benefit: and not just for international operations. With many organisations moving to IFRS this allows parallel reporting in both IFRS and the “classic” accounting treatment – so the group parent can move to IFRS while operating units can adopt at a different pace.

Don’t expect IFRS and the global review of lease accounting rules by FASB and IASB to result in simplification or to eliminate the need for Multi-GAAP. Unless a lessor is of a size to influence the lease accounting in each of the countries where it operates, it will still be faced with country by country interpretations of standards. The need for other accounting treatments may remain for tax and regulatory reporting. Standardisation is likely to have the paradoxical effect of increasing the number of accounting methods you will need to manage.

Credit assessment too will need to accommodate the differing format of financial statements and the level of detail available when assessing potential credits.

Multi-Regulatory – In times gone by, one of the advantages of common finance platform systems was to arbitrage  regulation.  As long as you weren’t taking deposits in country you could report Bank regulated business through lighter touch regulatory regimes like Sweden or Luxembourg, rather than face full reporting in countries like France, whose BAFI reporting specification ran to 24 volumes. With the renewed focus on regulatory scrutiny in the last two years such loopholes are closing.

If funders are having to report directly to regulators in each country they are now faced with waves of new reporting requirements and with local interpretations of  BasleII. Companies like FRSGlobal provide software to support multiple regulatory interfaces, but such software comes with a bank- sized price tag and still requires the data to be extracted from business systems. Even if the parent company is presenting the reports to regulators, the asset finance companies will still be faced from analytical reporting from business data and history to feed the regulators appetite.

These are all complex requirements for a system and not features that can be retrofitted as an afterthought. When selecting a package for multinational use companies must identify the diverse requirements of each country up front – as well as considering future markets – and use due diligence to assure themselves that the solution will meet business needs.

Many advisors, even with international offices, will simply not have the experience of these multi-national considerations – after all few accountants would have a qualification in more than one country.

Don’t be fobbed off with the software salesman’s calm assurance that such features can be customised or are “in the next release”. To misquote Rudyard Kipling “If you can keep your head when all about you are losing theirs, then you haven’t understood the question.”

© Nic Evans 2010.

Nic Evans is Director of Evans Global Associates, delivering consultancy and interim management for international finance technology and business agility. If you want to discuss anything raised by these articles or broader issues he can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans

Snakes And Ladders – The Benefits and Pitfalls of Pan European Finance Systems

Henry Ford is the father of modern mass production. His production lines established Ford as the first global car manufacturer. Yet it was not until 34 years after his death that Ford produced their first global car – the Ford Escort. Ford set out to use common components worldwide, but by the time the Escort came off the production lines in Detroit, Halewood, Saarlouis and Nazareth, the cars only had three small components in common.

Perhaps it is not a coincidence that many global finance system initiatives have started from US-based companies. They are well accustomed to the benefits of having a single system and common processes for their operations from Florida to Alaska, with the enormous economies of scale from a single service centre covering continental operations.

However many attempts to replicate these benefits across European operations have not delivered the same benefits. The financial services division of one manufacturer is said to have scrapped their global systems projects, writing off many tens of millions of dollars of development, and many other major projects are running years behind schedule and over budget.

So what are the benefits from a single pan-European system?

Attack of the clones

Many of the earliest international asset finance systems were not based on a single system, but multiple installations. An AS/400 or an installation of InfoLease (which seemed to be the system of choice for international lessors in the 1990s) would be cloned around Europe and each copy modified for the needs of each country. While this approach delivered some payback from standardisation it couldn’t achieve the main benefits.

For IT management there are significant benefits from a single system. Development changes, fixes and upgrades only have to be made to one version, so new features can be introduced much more quickly, and testing of changes is greatly reduced. Data Centre and IT operations costs are greatly reduced and the reliability increases with only having one system to run, albeit larger and more complex.

Shared Services

The bigger business benefits from a single international system come through the provision of shared services. While US-based operations can easily centralise customer services, there are obvious challenges in Europe, particularly from languages and wider business cultural differences. Several international technology captive finance providers have set up European customer service centres in Dublin, including Cisco Systems Finance, HP and Dell, with others using “near shore” locations which have a plentiful supply of graduates with language and business skills.

Even with distributed customer services, a single system allows centralisation or regionalisation of parts of the business, particularly the management and oversight of sales, credit, pricing, treasury, operations, asset management and risk. Shared service centres can also be set up for some back-office functions with less direct customer interaction like remarketing and finance – indeed some technology funders get a strong advantage from remarketing equipment at an international level, by shipping used equipment to developing markets with more demand for lower specification equipment.

Centralised management functions are greatly assisted by a single database for consolidated reporting, which can be run “at the touch of a button”, rather than having to run reports for each country then collecting them before consolidation. This can reduce reporting cycles from weeks – even months –  to days, with some flash reports available in real-time. Tim Hricko of Oracle cites a captive finance company that rolled out a single instance to 14 countries in Europe. “It used to take them six months to get a report of their install base of assets throughout Europe – and when they did get it, they couldn’t trust the accuracy. With the single instance in place, they now get a report in 30 minutes and it’s 100% accurate.” However even with a single database this reporting is not without its challenges – such as multiple currencies and exchange rates (see article “Go Forth And Multi-ply”).

Two nations divided by a common language

Introducing standardised systems – and common business processes – is an enormous undertaking. Although a global business may be using the same general business model around the world as the project gets down to the detail needed for effective systems delivery, a myriad of differences and complexity can emerge. From the “thirty thousand foot view” it all looks the same. Some differences may be immediately obvious. But down in the detail– to use the tangled quote of US Defence Secretary Donald Rumsfeld – “there are also unknown unknowns. These are things we do not know we don’t know.”

A US accountant can find that the methods for calculating VAT on an invoice are the same as US Sales tax and stop there, remaining unaware of the need for credit notes, that there are different regulations for implementation in each European country or the legal penalties incurred if errors are made. (A few years ago in a presentation to a ELFA conference in Boston, I exercised my theory that Americans are inherently unable to understand European imposed taxes on goods – overlooking the site of the Boston Tea Party!).

Apparently standard business practices, like direct debit automated collections, vary enormously in practice. In Norway and Denmark a direct debit has become an electronic invoice, with customer confirmation required before payment is made. If you were expecting that the Single European Payments Area would simplify things, the European Central Banks “Blue Book” of Payment and Settlement Systems for the Euro Area runs to 460 pages.

One of the themes coming out of my discussions for these articles and my own experiences is that however capable global systems are, they are never going to be able to support all the requirements, and the business may get many of benefits just from simplifying the business processes. It then comes down to analysing the process differences as:

• “Have  to have” features – such as for regulatory, tax or statutory requirements  in each country).
• Features  needed to offer competitive advantage in the market – in which case the costs of the implementing the feature can be balanced against the financial benefits.
• “Just  because that’s the way we’ve always done it.” – in which case the  differences can be eliminated, remaining sensitive to the risk of changing  processes without a clear benefit for those impacted.

An example of such a feature is the formula for calculating rentals variable for interest. While the feature is not common in UK German or French markets, but is essential in CEE and Scandinavian countries, and even Euro zone countries which had weaker currencies before adopting the Euro. Aside from the Base rate used in the calculation, the formula will vary – and is often set by local funding banks. Should a pan-European system cope with every single formula, or could you standardise?

Could you achieve benefits just by simplify the business without a single system? “One alternative that we are seeing more interest in recently is Business Process Management solutions.” says Steve Byrne of Cap Gemini. “This alternative enables companies to leave the existing infrastructure in place and still deliver enhanced, standardized, processing capabilities.”

International Diplomacy

Managing this change – particularly on an international basis – is critical and complex. No-one is going to accept change “for the greater good”. Stakeholders need to be engaged, sometimes with individually tailored communication approaches, to build up two way trust and shared goals. “Managing Successful Programmes” – the big brother of the Prince2 project management methodology – even suggests a “stakeholder map” – a matrix of key project players and areas of interest, charting if each player is a supporter or opponent for each area. While avoiding national stereotyping, communication styles need to differ by country. The Rough Guide to Scandinavian travel advises “The best way to get a Norwegian to accept your idea is to make him think it was his idea.” And you wouldn’t get a Brit to give up their Pint just for European standardisation!

A breakdown of this mutual trust can be catastrophic, resulting in imposed solutions, on an unwilling and unco-operative business.

Faced with escalating complexity and costs, an international project can end up with a compromise solution – and compromised benefits. One international project manager draws a comparison with European Politics. “When safety or quality are compromised, people get hurt. Yet in Europe, compromise is often a political ideal. The appointment of Lady Ashton as the EU’s foreign-policy chief wasn’t because she was the best person for the job. It was a compromise, as she is British and a woman – and because she isn’t Tony Blair.”

(c) Nic Evans 2010. This Article may not be reproduced, in full or in part, without the prior permission of the author.

Nic Evans is Director of Evans Global Associates, delivering consultancy and interim management for commercial
finance technology and business agility. If you want to discuss any points raised by this article or broader issues he can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans

European Vision – Pan-European Finance Systems Delivery

For many international finance organisations there is a holy grail of a single system and standardised global processes that can deliver best practices and major efficiencies. But can a single platform meet all the diverse needs of the local businesses? Do the complexities, costs, delivery time and risk of global projects outweigh the benefits?

In this major feature on multinational asset finance technology Nic Evans explores:

• Snakes  and Ladders: The benefits, pitfalls and critical success factors of global  systems
• Go forth and Multiply: The functionality needed to support multinational finance applications.
• Travellers  Toolkit: Management Tools and Techniques for Multinational projects.

Case studies of how vendors have faced the challenges of  pan-European finance and  achieved benefits.

• Baltic Exchange – CHP
• Single Focus – Codix
• One Size Fits None – NetSol

An abridged version of these articles appeared in Asset Finance International

(c) Nic Evans 2010. This Article may not be reproduced, in full or in part, without the prior permission of the author.

Nic Evans is Director of Evans Global Associates, delivering consultancy and interim management for commercial
finance technology and business agility. If you want to discuss any points raised by this article or broader issues he can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans