Published: January 01, 2000
Leading global precision manufacturer and identification expert Brady Corporation has grown substantially since 2001, largely through acquisition. Over the years, it became increasingly apparent that finance costs were increasing as a percentage of revenue compared with competitors. Consequently, treasury recognised the need to enhance processes and reduce costs to remain competitive and efficient.
Brady had an enterprise-wide performance initiative in place based on LEAN principles called Brady Business Performance System. We wanted to apply this model to our finance function to drive out cost and inefficiencies, but realised that in order to do so we first needed to standardise our processes. We had grown very decentralised and fragmented due to rapid growth and numerous acquisitions. To do this, we brought in the Hackett Group to support us in mapping out the current state and defining the future state grounded in best-in-class processes based on their experience and expertise. We made the decision to establish SSCs in Bangalore, India for financial processing, Manila, Philippines for our collections call centre and Shanghai, China to serve our Chinese locations. The SSC in India was tasked with a wide reach of responsibilities, including procure to pay, order to cash, financial planning and analysis, and treasury back-office processing. In some cases, it made sense to manage credit and collections locally, due to commercial and cultural sensitivities.
We dedicated a specific team to the project, including a transformation leader, treasury, owners of each process and region and process specialists. In redesigning our processes, it was important to us to take a global view, including integrating our business in countries such as China and India where standardisation with other countries can be more difficult. We identified Bangalore as our primary SSC location, for a variety of reasons. For example, the level of proficiency in English was very high, it is a low-cost location and there is significant local expertise in finance and accounting skills, as well as new technologies. We also benefited from government incentives, a skilled workforce with a focus on process quality, and existing business process outsourcing. There were disadvantages that we needed to address, not least the infrastructure weaknesses, the geographic distance from our headquarters in the United States, potential political and social instability, rising labour costs, competition for resources and turnover.
We established a structured approach to optimisation, standardisation and centralisation of activities.
As a first step, we sought to remove cost from our financial processes through centralisation, effectively by understanding what each local finance function was doing, and replicating and stabilising these processes centrally. We sent employees from the SSC to each country to understand first-hand what the needs and challenges were, which enabled us to manage the needs of each business unit successfully. Our intention with this first phase was to achieve centralisation into our SSCs and therefore cost arbitrage quickly, while also building credibility within the business and developing a knowledge base. We did not have the mass in all of the individual locations to standardise the processes first before making the shift to the SSCs.
The second step was to add value to existing processes through innovation; leveraging a central technology infrastructure and standardising processes to improve productivity, efficiency and control. For finance, I would estimate we are about 70% through this phase of our centralisation project, but other functions have also begun similar migrations and are in varying stages of utilising the SSCs, including IT and HR.[[[PAGE]]]
Finally, the third step is to leverage the SSCs as centres of excellence and knowledge hubs to find optimal ways of solving business challenges, introduce new business methodologies and expand into other areas to enhance the SSC value proposition. When we get to this point, we will feel we have achieved success.
This journey is a long and challenging one in practice. Over the past two to three years, we have completed more than 90 transitions to the SSC, which represents around 90% of the initial centralisation project, including planning, shadowing and documentation of existing processes, and undertaking business processes at the SSC. We have also completed around 90% of our stabilisation and measurement process. As a service provider to group companies, it is important that the SSC works towards agreed service level agreements and performance metrics that are agreed by each business unit and measured proactively. As we have moved into the second phase of the project, we have completed over 50% of our technology acquisition and implementation, including selecting systems, obtaining budget approval, scoping and project planning and implementation. In this respect, we have worked closely with our ERP provider and global banks to enable us to gain our objectives without substantial investment in new technology. We do hope to introduce a treasury management system when the time is right to further automate key processes, particularly in areas such as FX, which is still quite manual.
To date, we have also made substantial progress standardising business processes and documenting new procedures. We have also started implementing LEAN concepts, including training, introducing daily management tools and problem-solving methodologies. Finally, as a result of each of these initiatives, we will be in a position to meet the globalisation and efficiency goals we set out to achieve.
We recognised that it was not enough to transform our transaction processes: we also needed to optimise the way that we managed our cash. We appointed Bank of America Merrill Lynch for its payments, collections and liquidity business across 25 countries in Europe and Asia. These include cash concentration by currency wherever possible to enable greater visibility, control and mobility of cash, including cash pools in Europe, Singapore and China. We have also implemented Bank of America Merrill Lynch’s global commercial card programme across Europe and Asia. In addition, an intercompany netting arrangement was set up with Bank Mendes Gans, which resulted in a significant reduction in our foreign exchange volatility that was caused by growing intercompany payables and receivables.
There are undoubtedly lessons we have learned through implementing this major, diverse project so far, and project elements that have been critical to its success. Change management is complex and has major implications for individuals. It is understandable that not everyone will appreciate the value of centralisation and standardisation, requiring a tactful and non-combative approach to education. When transferring responsibility from one team of people to another, it is important, although very difficult, to avoid a ‘them v. us’ culture emerging, and everyone needs to feel part of the same team.
Strong management support is essential to clearing project ‘roadblocks’ that occur when working on a complex project with geographically and culturally diverse business units, different business processes and technology, and a large number of individuals affected. Once the project has started, it is essential to maintain project momentum to keep project tasks and objectives front of mind. One of the ways of doing this, apart from disciplined project management, is to have the right people on the project team with a passion for improvement and a certain amount of resilience. It is not an easy role to take on, taking control from one group of people and moving it elsewhere within the group. Consequently, individuals need to be effective and experienced in change management.
We had the advantage at Brady that despite rapid growth and frequent acquisitions, we have over 70% of our business on one instance of SAP globally, which made it easier to centralise and then standardise processes. That said, the SSC in India does handle multiple systems today where system migrations to SAP are still in the pipeline. Establishing the right global bank relationships is also critical to ensure that automation and account structures are optimised, cash management is efficient and transparent and transactions are processed accurately and securely across all countries. We have been very fortunate in our partnership with Bank of America Merrill Lynch in Europe and Asia which has proved pivotal in achieving our project objectives and the speed at which we were able to implement.[[[PAGE]]]
We found that there were challenges associated with migrating only a portion of a process and trying to drive efficiencies, for example moving the pay process in advance of the procure process. Process issues were far more complex, deep and cross-functional than we had first anticipated. This meant that we weren’t always able to address the root cause of problems initially, which prevented us from achieving the degree of cost efficiency we had hoped for in the early stages. One way of addressing this would be to introduce LEAN expertise earlier on in the process. Secondly, working with Hackett as an external, impartial organisation with significant experience of industry best practices was very useful in defining our process and objectives; similarly, it is essential to have sufficient IT resources dedicated to the project, which can otherwise become a major project constraint.
We are on track to achieve the reduction in finance costs as a percentage of revenues that we intended, although we are striving to increase the contribution that the SSC makes to the business even further. From a treasury perspective, we had 14 FTEs engaged in treasury activities on a decentralised basis before our transformation project. In a centralised environment, we now have eight, including two in the India SSC. We had 50 bank relationships and around 400 accounts in the past, and we are on target to reduce these by almost 50%. We have full visibility and control over our cash, with EUR, GBP and USD cash pools in Europe, and USD and RMB pools in Asia Pacific. Consequently, we are able to optimise our use of cash and maximise the amount available for investment, to further fund growth initiatives or pay down debt balances. Our intercompany netting and automated clearing solution has proved extremely successful, with twice-monthly netting processes, reducing FX volatility by 75%.
We are extending our centralisation model to Latin America
While payments processing at our international units was manual in the past through a variety of banks, this is now largely automated through a host-to-host connection with Bank of America Merrill Lynch. Consequently, transaction processing is cheaper and more reliable, as master data has been cleansed, resulting in fewer errors and repairs, and payments are automatically routed using the most efficient and cost-effective clearing mechanism. Our straight-through processing rate is now 99% for SAP-based entities in Europe and Asia Pacific. In addition, more than 20,000 bank statement transactions each month are now processed and reconciled automatically with a straight-through reconciliation rate above 70%.
Having achieved considerable success in centralisation and standardisation, we are now looking to finalise migration to the SSC and complete local account closures. We also see the best-in-class model we have built as an asset we can continue to leverage and drive synergies for future acquisitions. We are always seeking to extend the benefits further. Our initial focus was primarily on our international business, but we are also now looking at how to migrate from cheques to card and ACH payments in the US, leveraging our global infrastructure and identifying what changes need to made locally to reduce days sales outstanding (DSO) and reduce operating costs. Furthermore, we are implementing purchasing cards to reduce manual administration and cheque processing, building on our existing success in implementing Bank of America Merrill Lynch’s commercial card programme for T&E expenses. We are looking to enhance our cash flow forecasting capabilities, and consider supply chain finance to optimise working capital. We are also extending our centralisation model to Latin America, where we are consolidating our cash management activities with HSBC.
A key priority is to drive strategy on capital allocation, as we recognise that this is a key area in which treasury can drive shareholder value. We are also working to improve our risk management policies to increase clarity on risk tolerance and how we should manage our risks within this. To support this, we are enhancing our FX analysis processes and strengthening business relationships to manage supply chain risk.
Finally, we continue to develop our talent in treasury, providing training and education to drive continuous improvement in skills and competencies, and create an environment that fosters excellence and innovation.
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