Implementing a Payments Factory at Philips

Royal Philips Electronics has already realized net savings of almost €7m over 5 years since implementing its payment factory and in-house bank. By moving to Trema’s Cash Management Module, the firm has reduced banking relationships, increased control of local subsidiaries, and improved operational efficiency.

Background

Royal Philips Electronics is among the world’s largest electronics firms. It has operations in 60 countries and initiates 2 million payments each year in support of its operations.

In 1998, Philips began examining the concept of a payment factory as a way to meet some important corporate goals. Philips had decentralized and pushed financial responsibility out to its business units. As a consequence, treasury functions proliferated across regions. Not only was this redundancy expensive in terms of duplicative efforts, it also introduced multiple methods of making payments, with more than 100 banking relationships across the organization.

Business Challenge

In 1990, the company restructured and pushed financial visibility and accountability out to each business unit, including treasury and finance functions within each group. With this restructuring, ERP systems were also implemented for each business unit. Each of the business units was free to implement its own ERP system, thus creating a heterogeneous back-office environment throughout the enterprise (23 unique implementations of SAP alone). Processes were duplicated within each business unit and were not adding value to the company; in fact, they were adding costs, increasing risk, and reducing control. One of these areas was payment processing.

Without centralized operations, each business unit developed its own processes for third-party and intercompany payments, managed its own bank relationships, and used its own cash management and forecasting techniques.

Much of this complexity had to do with the unique requirements of the countries in which Philips was operating, as well as the number of banks with which it had relationships (over 50 just for disbursement). Each country had unique currencies and payment systems, and each bank had its own protocols and formats for payment initiation, reconciliation, and reporting.

Starting in 1998, Philips looked to a payment factory as a way to increase efficiency and control while still allowing business units to manage their own accounts payable policies and processes from within their ERP systems (see box for the time line).

An organizational imperative to improve efficiency added urgency to the project. In 2001, the company em-barked on an enterprise-wide effort to increase return on capital employed (ROCE). Part of that effort has been streamlining redundant operations and replacing them with centrally managed shared service centers (SSC).

Meeting the long-term goal of SSCs and improving efficiency within the treasury function has been a multistep process. One underlying requirement with an SSC is the ability to centralize the control of disbursements. At Philips, the existing payment initiation system had been developed internally many years earlier and could not support centralized processing. This had to be done, however, while leaving control of accounts payable with the business units and establishing an automated interface with each of their ERP systems.

Before the Implementation

Before implementing the payment factory, Philips had different payment practices and payment platforms in each country. This met the company goal of pushing financial responsibility out to the business units, but it was expensive to operate. This became increasingly apparent as sourcing was done globally and international payment volumes increased dramatically.

Without centralized payments, each region worked independently and developed its own practices and standards. Payments made to third parties were handled differently from intercompany payments, and there was very little concentration of banking relationships?each country had two or more cash management banking relationships, which they managed locally. Cross-border payment volumes were also too high, resulting in excessive bank fees and internal inefficiencies. To provide transparency into this distributed environment, Philips employed a netting service. Even with netting, however, cash forecasting was difficult and bank borrowing was higher than necessary.

After the Implementatiom

Trema’s Cash Management Module (CMM) provides both payment factory and in-house banking capabilities to Philips. In the new environment, only two disbursement banks serve all the regions, down from 50 before the implementation. Standard interfaces and payment formats are used for both internal and external payments. Local payment platforms have been eliminated, as have all the direct interfaces that were developed to communicate with each of the local banks. Business rules within the platform reduce the volume of cross-border transactions by matching payments with local accounts in the regions.

Locally, payments are still approved and initiated within each business unit’s ERP systems, so accounts payable still controls how and when payments are made to its trading partners. The unit can also view transaction activity, distribute remittance advices, and receive more timely information than it could in the past.

In addition to better information, the local offices also have fewer responsibilities. Bank account reconciliation is now done centrally, as is exception management and foreign exchange.

As of summer 2004, 630 sites in 40 countries were live on the system and 70,000 payments a month moved through the payment factory. By end of 2004, that number will increase to 90,000 as more regions migrate to the new system. Payments are now made in 25 currencies and currency risk is managed centrally within corporate treasury.

In-house banking has likewise evolved dramatically with this implementation. Philips had a fully depreciated inhouse banking system that dated back to 1993 and was primarily used to administer zero-balance accounting for the business units. With the CMM application, visibility into liquidity has increased and liquidity management has been centralized for 20 currencies. Cash forecasting is also greatly improved. To manage internal accounting, 1100 in-house bank ac

counts have been established, with the in-house bank supporting interest and non-interest bearing, as well as transactional accounts. Implementation Approach The idea that culminated in the Philips payment factory and in-house bank started in 1998. The firm knew that it could dramatically improve efficiency, but its current systems were not up to the task. In April 1999, Philips formally chose Alterna (now Trema)1 as its solution provider. Philips was able to pilot the payments processing within two months in France. The firm quickly expanded the pilot to include five sites (four in France and one in Germany), and then officially launched the payment factory in 2000. With time, production staff was added, but without adding expense. Staff increases in treasury were offset by productivity savings and staff redeployments in the local regions as their responsibilities decreased. Conservatively, Philips estimates that each site achieved staffing savings with an average of .25 full-time equivalents (FTEs).

Global Rollout

Philips was very pleased with initial results and pursued an aggressive global rollout schedule. By the end of 2000, 40 sites had implemented CMM, and this number rose to over 100 in 2001. In-house banking functionality was added in March 2000 for inter-company payments.

During the project, the implementation team took care to remain focused on the project goals and prevent scope creep. There was pressure to add new sites more quickly or to add new features. Rather than bow to this pressure, the team stood by its delivery commitments and used its customer reference board to help guide priorities and future deliverables. The team was conservative in its implementations and rolled out cautiously to minimize disruption at the local business units. Even with this approach, Philips was able to reap savings quickly from the project, and these will continue to accrue with time.

Qualitative Impacts

Not only has Philips achieved positive ROI and fast payback with this investment (Figure B), it has also improved the work environment at the local business units. The accounts payable group can now concentrate on relationships with its trading partners and internal customers. The previous environment consisted primarily of manual work: transmitting payments to the banks, reconciling account activity, and handling exceptions. Now, users have real-time, always- on access to CMM to view transaction activity for their business units.

Users also appreciate their ability to stay in control of the payment process and continue to use their own ERP systems to input invoices and generate payments as they are accustomed to doing. For them, it is a win-win situation: they reduce their costs and improve their business processes with no loss of control. Not only has Philips delivered bottom-line results to the organization in terms of financial savings, users of CMM are also positive about the impact on their daily processes.

Parting Thoughts

Philips continues implementing new sites and countries. Next, the firm plans to focus on improving its collections processes and expects to start other working capital optimization initiatives in line with its goal to increase ROCE.

¹Alterna was acquired by Trema in 2003, and Auros has been re-branded Cash Management Module (CMM).

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