Scale or fail: how decentralised firms can boost performance
Many decentralised firms struggle to achieve world-class working capital performance. Fortunately, there’s a solution.
Many decentralised firms struggle to achieve world-class working capital performance. Fortunately, there’s a solution.
Decentralised firms often have a hard time achieving world-class working capital performance. Far-flung operations, project-driven work, autonomous business units and other structural factors get in the way of efficient cash management. As a result, many such companies lag 80% or more behind world-class levels of working capital as a percentage of sales.
This sets the decentralised company at a permanent disadvantage against many of its more centralised peers. Both might have equally strong businesses, but a centralised company with efficient cash-management practices will be a slightly more profitable and lower-risk business than a project-based business. Uneven cash flows and mismanaged cash can leave the project-based company with low margin deals, disgruntled customers, and unhappy suppliers.
Complete centralisation is not the solution. Many businesses run better when local managers are able to make on-the-spot decisions. This may be especially true for project-driven businesses, such as construction, plant engineering or equipment assembly. Often, centralising is not even an option: many decentralised companies attempt to lay a centralised cash management system over their existing structure, only to watch it fail a few years later.
What can work better is a long, sustained drive to build a culture that values cash. This demands a programme of multiple, staggered steps taken over two or three years. It isn’t easy, but it can work – and has the advantage of going with the grain of the company’s culture instead of against it. Ultimately the company achieves the mature working capital processes it needs to compete in the global marketplace, without destroying the nimbleness that drove its earlier success.
So how is it done?
In a decentralised firm, it’s not possible to tackle every problem at once. You need to begin with a sample. The best plan is usually to start with a short four- to six-week analysis of a particular business unit, coupled with a quantitative scoping of the entire group. The final product of this analysis should be a business case that includes two significant numbers: the end-of-year and end-of-next-year benefit potential to working capital and cash improvement. It should also identify any spots identified in the customer-to-cash and source-to-settle processes where cash is getting stuck.
This analysis then becomes the basis of a pilot project designed to tighten working capital processes within that particular unit. When this experiment begins to pay off, it’s time to replicate this pilot in other units. Yet before beginning, it’s important to conduct an accelerated version of this baseline analysis; firstly to ensure that the conclusions the pilot is based on still address the problems, and secondly to convince local managers of the benefits of the initiative. It goes without saying that throughout this exercise, trying to make a change without executive support means you’ll get nowhere fast.
The next phase is a programme dubbed the dash for cash (Dash-4-Cash), which focuses on chasing overdue or soon-due invoices, high un-billed or potentially billable work in progress, and large upcoming vendor payments.
Apart from the immediate benefit of bringing in more cash (for example, a US$10bn sales group saved US$40m after 10 weeks and US$240m after six months), the experience yields enormous insight that can guide the development of smarter processes and guidelines. Progress is measured by scorecards and reviewed by steering committees. This makes any holes in the system’s plumbing clearer to everyone, and allows performance comparisons between units.
Gaps in the customer-to-cash and source-to-settle processes identified during the first two stages can now be addressed by designing better processes and writing clear best-practice guidelines. Processes should be developed and described in a concise and comprehensible way, with many illustrations and real-life examples to use in the ensuing training sessions.
Any technical changes in invoice processing, vendor payment runs or dispute resolution should be implemented early on. However, the best-practice writers should not concentrate on the use of new hardware; rather their guidelines should focus on process optimisation and behavioural changes with respect to existing customers and vendors. It’s generally more productive to concentrate on clear guidelines for invoice collections, dispute management and payment processes.
Besides best practice guidelines, operational staff and management need to be equipped with tools for making smarter agreements, such as a contract cash scoring model (CCSM), an easy-to-use tool for analysing and rating the working capital friendliness of a customer or vendor contract’s terms and conditions.
Without requiring a full-fledged discounted cash flow analysis or any major financial modelling skills, the tool gives company negotiators all the necessary information about the impact different payment structures can have on working capital. CCSM can create awareness of working capital issues throughout the contract negotiation process, from the tender to contract signing. It also makes it easier to measure sales and procurement performance between business units and over time.
All relevant employees and managers involved in the end-to-end customer-to-cash and source-to-settle processes should be trained in cash management techniques. This training can involve thousands of participants and require translation of many key terms into the local language.
At a major construction firm, for example, more than 3,000 staff were trained in the local builders’ language and examples used to illustrate the concepts were taken from several Dash-4-Cash cases. This is why it is critical that Dash-4-Cash activity leaders serve as trainers as well; their deep understanding of the company makes training activities much more effective and as rich as possible for participants.
At the same time, the company should be working to write more favourable vendor payment terms. A vendor payment terms optimisation (VPTO) programme aims to reduce the working capital pressure created by suppliers and subcontractors.
The first step is to benchmark existing terms to meet best local market practice; these are then benchmarked against global norms. Benchmarking provides an initial idea of the additional working capital benefit opportunity and helps prioritise categories and vendors to be addressed. Vendors are then classified as tactical, strategic or sensitive, and are classified across the various business units and operating companies, so that their payment terms better reflect the value they are bringing the company.
Eventually, procurement officers begin their negotiations supported by tools, training and a help desk for queries from vendors. Set up correctly, the VPTO tends to provoke few questions: Typically, only 1% of vendors ask about where they belong in the classification scheme, and what they need to do.
Sustaining the culture
Next comes the other hard part: sustaining the change. Typically, this is done in three ways: through an upgrade of the transactional working capital, development of a working capital council and creation of a shared services centre (SSC) for finance.
Ultimately, setting up an SSC or finance hub is the best way out of the inefficiency of duplicated efforts and lack of standardisation, because it demands less change in individual units. In highly decentralised businesses using a plethora of heterogeneous legacy enterprise resource planning (ERP) systems, shared services can reduce waste and give the company more control over its processes.
The road to shared services usually starts with routine transactions processing, then moves to higher-value-added tasks. The first step to implementing a shared services finance hub is to develop a rough concept and business case to fully understand the potential for value creation in terms of cash, cost and service. Often, this is a very attractive figure.
Once the value is fully understood, a plan for staggered implementation can be prepared, starting with relatively routine activities first to prove concept and value. More complex activities can be transferred to the SSC entity later.
Conclusion
Being a decentralised company makes working capital harder to manage efficiently but not impossible. With determination and leadership, you don’t have to settle for second-rate working capital performance. Where there is a will in the executive suite, the journey to effective working capital management can be relatively short and quite lucrative. Many successful programmes have generated hundreds of millions of euros of working capital improvement in less than a year. However, making those gains sustainable typically requires at least a second year of focused effort.