Achieving Cost Savings Via A Control Environment

Posted: 07/09/2012

Back in 1998, the CFO of Applied Materials understood that, in order to support the operation long-term, a Shared Services Organization (SSO) needed to be formed. I was brought in by the CFO and Corporate Controller to perform this grimacing task. Enhancing control and scale were the primary objectives set forth by the finance leadership team.

Having performed several Shared Services projects at other multi-national companies, I found it quite peculiar that the sole focus was not simply efficiency. I soon found out that, along with CFO foresight, the culture of Applied Materials and its industry helped to dictate these objectives.

Controlling Cyclical Swings

The innovation-based culture of Applied Materials, coupled with a hugely cyclical semiconductor industry, makes for a very elastic business model. Thus, maintaining control during the ups and downs of the cycle was of the utmost importance to the finance organization.

For example, back in 1999, it was not uncommon to witness a 50 to 70 percent change (whether a jump or decline) in transaction volumes, from one quarter to another. For a seven-to-10-billion-dollar enterprise, these changes in transaction volume were enormous. Trying to ensure that control was maintained during these swings was painful, given the organization's historic processes and systems.

A strong, control-focused finance culture existed pre-Sarbanes-Oxley and is alive and well post-Sarbanes-Oxley. Much like most other publicly traded companies these days, we are currently in the process of mapping our control processes and governing models into these new statutory requirements. We are finding, in fact, that our strong foundation appears to support the incorporation of these new standards. If you are going to remember one thing about Applied Materials' finance culture: control and financial integrity is Job # 1.

In 2000, we completed the development of the North America Shared Services Center (NASSC), located in Austin, Texas, which provides 15 different service offerings.

The success of the North America model acted as catalyst for the Global Shared Services initiative aimed at the European and Asian regions. As a result, the highly controlled and efficient North America systems and processes are currently being deployed throughout Europe and Asia as the global, scalable standard. One thing that we have learned in North America is that when you build scale you inherently build better control, as well.

Leading from the Top

The control environment and supporting processes at Applied Materials are led straight from the top and underpin our finance culture of "no news is bad news, and bad news is good news." This small statement goes a long way in ensuring disclosure at the lowest levels of the company, from where information is elevated through a structured governing process. The Corporate Controller defines our control environment from many different levels, all of which add up to our Internal Business Control (IBC) structure.

Starting with Governance and moving down to Reporting, these tiers are somewhat consistent with those of other multinationals so I will review them only briefly. The main differentiation lies at the Application Level, which has as its cornerstone the Quarterly Balance Sheet Review (QBR) process.

Internal Business Control

The model is based on a structured Governance approach which includes areas such as the Board of Directors, Financial Risk Management Committee, Audit Committee, Capital Committee, and 401k Committee, to name a few.

IBCs are supported by policies such as the Standards of Business Conduct, Human Resources, Environmental Health & Safety, Finance, Signature Authority Matrix, Income Statement Accounting, Balance Sheet Accounting, etc.

The next tier addresses the quarterly ‘close process,’ consisting of Day +4 meetings to confirm all necessary entries are recorded; and a Day +1 close meeting to address open QBR action items, bookings, revenue, etc. In support of the close process, Internal Audit observes the cut-off on a quarterly basis.

IBC-related reporting involves both internal issue communication and the standard external reporting requirements of publicly traded companies. Issues and processes are regularly communicated through standard quarterly forums such as Balance Sheet Reviews, Quality Reviews, Close Meetings, Integrated Reviews, Forecast Reviews, Technical Reviews and Operations Reviews.

Within the NASSC, an organizational model has been designed to support the Application Level within the IBC pyramid. The NASSC has segregated responsibility in order to ensure proper independence and oversight. There are Operational Managers, a Controller and an independent IBC Manager. All of these positions report to the Director of the operation.

The role of the Operations Manager is to ensure desk procedures are followed and all exceptions are approved in their area; the NASSC Controller is responsible for ensuring all supporting documents for the QBR are complete and accurate, all reconciliations are performed and account balances are reasonable.

Finally, the IBC manager is, in essence, a full-time daily auditor measuring and monitoring end-toend processes and data hand-offs ensuring that the NASSC is measuring all the right things in the Operation; thus, creating an NASSC IBC governance model that monitors for adequate controls on several levels.

Several times, as a result of system changes or new process changes ‘up-stream,’ the IBC manager has alerted the NASSC Operation to change desk procedures and system configuration to ensure adequate controls are maintained.

Balance Sheet Review

What really differentiates Applied Materials is the discipline we maintain in our regimented QBR process. This forms the basis of the governing process. Each balance sheet account in the company is assigned a finance and operational owner. Every quarter, the Corporate Controller, Operational Owner and Operational Controller meet, review and sign-off on their respective balance sheets. This process is taken very seriously and is a key foundational element of our finance data integrity. In addition to the normal account review process, the QBR requires a significant amount of issue disclosure and self-assessment to ensure the IBC environment is constantly monitored.

Within the North America Shared Services Balance Sheet Review process, we have approximately eight levels of disclosure and self-assessment measurements supporting our final signed statement of adequacy:

1) A Daily Control Log is completed for every major process in the NASSC and identifies all nonstandard transactions processed. Each Control Log is supported by system-generated exception reports and is signed off by the Operational Owner as well as the Controller. The IBC Manager is in charge of ensuring the completeness of each Control Log and of making sure that each operational area is monitoring the correct elements. Spot-checks are performed to ensure daily compliance.

2) As is the case in any accounting function, we perform detailed account reconciliations and trending, on a quarterly basis. This portion of the QBR is the most time-consuming, involving detailed reconciliations and trending of each account with eventual sign-off that each account has been reconciled. This section of the NASSC QBR is approximately 20 pages long.

3) Within the NASSC, we have a bi-weekly Self-Identified Forum, where processors, supervisors, control analysts and managers discuss control or efficiency issues. They also identify and escalate known process and policy deviations made by the business units (BUs). The issues compiled in this forum result in several different actions. Efficiency-related issues are assigned process owners, and tracked for closure. Internal NASSC control issues are assigned an owner and reported and tracked on our selfidentified worksheet, which is part of the QBR.

External, BU specific, process and policy deviations identified within this forum are reviewed by management, who determine if a "red card" will be issued by the NASSC to the responsible BU. If a "red card" citing the policy/process control infraction is issued to a BU, it is the responsibility of the supporting BU Controller to report that control weakness in their QBR. The "red card" issuance process is very formal, with significant communication with the receiving BU Controller prior to issuance.

4) Operational owners are responsible for producing and reviewing their Operational Metric Scorecards every quarter in the NASSC Operational Review. The suite of metrics covers efficiency, control and customer service.

5) As mentioned previously, the NASSC produces a Self-Assessment and Control Log worksheet, which monitors open items from the Self-Identified Forum, Internal Audit findings and IBC findings.

6) A Balance Sheet Single Page status represents a summary of high importance items compiled from the Self-Assessment and Control Log. Each item is assigned an IBC Red, Yellow or Green status indicator.

7) The Control Environment Calculation Worksheet compiles all the highlighted issues and assigns Red, Yellow and Green status. These items are assigned IBC values and compiled to arrive at an overall IBC metric for the area.

8) The Control Environment Dashboard takes the calculations from the issues-driven Control Environment Calculation Worksheet and requires finance and operations management to make an overall Self-Assessment (Red, Green, Yellow) of additional overarching areas, such as systems, etc. At the top of the QBR is a signed adequacy statement, along with specific areas that require initialing, from the responsible BU Controller and BU head. This document must be signed before the conclusion of each QBR.

As is the case with any process involving people, control is relative, but we believe that our IBC model coupled with segregation of duties and oversight, positions the organization to achieve an adequate control environment.

Achieving Efficiency Without Charge-Outs

We measure the NASSC against third-party benchmarks on an annual basis and have achieved 1st-quartile performance in many of our high-transaction areas such as disbursements and payroll. We achieved this efficiency without charging out for our services. With other SSOs, the charge-out model is used as a key motivator to drive customer behavior. Charge them more and they will no longer utilize a process within the SSO that is both costly and manual. As is the case in many SSOs, the charge-out calculation, communication and justification process is time-consuming and – one could say – less than productive. Within the NASSC, we set the process and system standards that meet customer requirements and IBC standards. If a BU elects not to utilize the standard, or not to follow policy, they are issued a "red card" as cited above. This, in turn, changes their behavior.

To counter balance the control focus, each Operational Manager within the NASSC is assigned a BU head with whom they must meet, on a quarterly basis, to review the NASSC metrics scorecard and allow for customer service concerns to be understood.

Summary

As you can see, ensuring IBC is intact is a complex process, driven by finance at Applied Materials. For that reason, the NASSC's role within Applied Materials stands apart from that of other large SSOs. Our value proposition centers on control and scale. Within the NASSC, the cost to implement automated tools to ensure process scale is many times justified by the systemic controls they bring to a process. We, in essence, achieve efficiency through scale, justifying many of the initiatives on their control merits. Of course, as is the case with any expenditure, cost/benefit analysis is performed. However, IBC strengthening is also significantly valued in the analysis.

Conclusion

Five years ago, I questioned how a SSO would succeed in this environment. I know our control-focused/non-charge-out model differs from that of many other SSOs, but given the efficiencies we have achieved coupled with mounting statutory compliance requirements, I am confident that our SSO model is well positioned to continue on its journey.

Posted: 07/09/2012

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