Forecasting can be extremely difficult in turbulent markets, and recent uncertainties in the global economy have made more challenging the task of predicting and developing costing models with any degree of accuracy. Most finance professionals simply resort to talking about ranges and assumptions.
But there is a growing desire amongst companies to obtain a clearer view of their costing and their cash position, in order to aid effective long-term planning. We look at how two finance professionals did this successfully: Maryvonne Palanduz, head of finance at Metropolitan Retail, and Steve Swientozielskyj, head of finance shared services at Network Rail in the UK.
We also examine how Andrew Higginson, Chief Executive of Retailing Services and Group Strategy Director, and his team transformed Tesco Personal Finance into Tesco Bank.
Metropolitan Retail, South Africa
How did Maryvonne Palanduz achieve a cost base reduction of 6% in just three years, implementing a costing model that informs strategic and tactical decision-making to support aggressive long-term cost targets?
South Africa’s Metropolitan Retail has set itself the goal of reducing its cost base by 20% over the next ten years. Palanduz, a chartered management accountant, is at the heart of measuring the effectiveness of this effort, and guiding management to opportunities in both the pricing and operational realm.
The company holds the largest life insurance customer base in South Africa, with revenues exceeding 7 billion rand (US$1.8 billion) and more than 4,500 staff. Last year, Metropolitan merged with Momentum Group to form one of the largest life insurance-based financial services groups in South Africa. The combined group is now listed as MMI Holdings.
Before the costing model was developed, line management across various cost centres in the business contributed their input regarding what they thought it was costing them to do business. As Palanduz explains, “In the absence of a solid costing model, our best guess was the accumulated best guesses of our line managers.”
“Our new model means it isn’t a guess any more – it’s an accurate science. We are well positioned to evaluate the financial impact of merger-related business plans and inform decision making.”
The working group responsible for implementation was made up of Palanduz, accountants in business, a consulting company (Cortell Intelligent Business Solutions), and a systems analyst and developer to deal with the IT role. The executive sponsor’s commitment and dedication to the working group was invaluable.
Palanduz explains: “Our consultants were selected because they are very strong in management accounting. They used CIMA students on the project team and the senior partner is an FCMA. Because we are both qualified management accountants, he was a great sounding board and we worked together as partners. The team was really good at quickly grasping our conceptual thinking to practical implementation of a solution, whilst staying focused on project scope.”
“The result is a solid costing methodology that is applied consistently across the business that reflects the 6% cost reduction and highlights areas of opportunity. We are well placed to inform tactical and strategic business decisions for the merged entity as well as support the longer-term cost targets.”
In two years, the model was designed, tested and implemented in the business. “Operational managers are responding really well because they now see where they are doing well or where they need to improve operational performance. Executive management have comfort in evaluating the longer-term expense impact of an uncertain future.”
Network Rail, UK
Since 2004, Steve Swientozielskyj, head of finance shared services at Network Rail, has been applying his CIMA skill set alongside his inspirational leadership style to drive huge cost savings and enhance performance for Network Rail. After establishing Network Rail’s Finance Shared Services Centre (FSSC) in Manchester, Swientozielskyj has led a quite remarkable turnaround in performance.
In 2004, Network Rail’s finances were being managed across 25 different offices using 35 different systems and processes. This not only caused problems with compliance but also created huge costs. Using his CIMA training, Swientozielskyj transformed the management of Network Rail’s finances into a truly world-class operation.
Invoices now take an average of three hours to process, compared with six weeks in 2004. The requisition-to-pay headcount has now decreased by 50%, while volumes have increased by 100%, a savings of £1 million annually. First-time invoice accuracy is 87%, compared with 13% in 2004. Customer-to-cash have realised £25 million in debtor reductions.
The performance of the FSSC is regularly benchmarked across a number of frameworks, and the whole team, built around CIMA members and students at Network Rail, have contributed to some outstanding results.
Swientozielskyj then went further and set an ambitious target of a one-day reporting cycle. The motive, rapid completion and distribution of reports that would allow for quicker decisions, enhanced performance monitoring and optimised management.
Swientozielskyj explains: “We’re proud of our world-class status, but it’s no time to sit back; it’s better to go on seeking better ways to serve the business.” The result of these efforts? “We realised the equivalent of 13-15 full-time employees per year by achieving one-day reporting. This has allowed us to redeploy people into higher value-added work in analysis and decision-making, resulting in a savings of £25 million.”
When viewed in the context of sheer volume of transactions and the large values handled by Steve’s team, it is indeed a particularly impressive achievement.
Tesco Bank, UK
A key part of the transformation of Tesco Personal Finance from a successful but straightforward joint-venture into Tesco Bank is a CIMA-based approach to planning and benchmarking.
Tesco Personal Finance was set up by UK supermarket chain Tesco and Royal Bank of Scotland (RBS) in 1997. Known as Tesco Bank today, the former joint venture is poised to become a significant player in retail banking. Since it bought out RBS in 2008, the supermarket has invested £350m, recruited 1,100 people and set targets of doubling profits.
While the joint venture had performed well and contributed £70 million in post-tax profit in 2007, its growth had plateaued. Both RBS and Tesco had evolved since 1997: RBS had become a global operator, while Tesco’s profits had grown from £700 million to £3 billion.
“The feeling was it needed to be more strategically important to one or the other of us,” says Andrew Higginson, Chief Executive of Retailing Services and Group Strategy Director at Tesco. “We concluded that we needed to buy it out, push it harder and put in a management team who could meet more of our aspirations.”
Higginson and his team carried out a business case to value the bank and establish the investment required to go it alone. That exercise drew, he says, on his background as a CIMA qualified accountant and on the CIMA training of key members of his staff, as they modelled the cost and risk to Tesco of covering regulatory and infrastructure requirements such as call centres, treasury, IT, audit and legal support.
The move represented significant risk at a time of straightened credit availability, and the supermarket needed scale in order to compete. Reaching profit target would, says Higginson, represent a decent return on capital, but the supermarket aspires to exceed that and establish a business that shareholders and customers will view as stable.
Tesco evaluates its business units according to a ‘steering wheel’, which parallels CIMA’s strategic scorecard. The steering wheel has five components: customers, people, operations, community and finance and the supermarket seek to achieve balanced performance across each of those segments.
As the joint venture banking and insurance interests migrate to Tesco’s new stand-alone bank, Higginson’s team will be carefully evaluating progress across those measures.
About the Author
Irene Teng is Regional Director based in CIMA’s Kuala Lumpur office. She leads CIMA's strategy across ASEAN and Australasia, including student growth and related alliances and partnerships.