Genpact Roundtable Part 2: Benchmarking
As part of the SSON online Order to Cash series Genpact recently held a roundtable to assess current developments in the Order to Cash area. Part 2 looks at the value of benchmarking and explains why this is critical to your business.
Section II: Benchmarking
MA: I’m going to turn the conversation toward benchmarking now. A lot of what we have been hearing and what I’m hearing today is getting at a granular level and becoming agile. In order to do that, what you are measuring and how you are comparing yourself becomes critical?
I think everybody here knows DSO, knows Past Due % and probably knows what is the best possible performance in their own environment so I want to introduce the concept of measuring Revenue Dilution. I think Revenue Dilution is not measured in most cases frankly and often out of control. Kicking off with benchmarking, Frank, I’m going to throw this to you.
FR: We perform our services from about 1,000 field locations. It’s highly decentralized with a high dependence upon local people, but what further complicates it is that while we have a standard contractual approach to the services we provide, there are a lot of one-off decisions and amendments that far exceed the capabilities of our contract and billing systems. So you’re left with people having to make decisions on a lot of variable billing activity that takes place in our business.
In terms of how we build our systems more robustly to capture all the one-offs…unfortunately, that’s probably a $20 to $30 million IT investment which is not the highest priority for allocating these resources. So what we’re trying to do is use more process management to get more control around our revenue dilution. One of our biggest initiatives currently is to centralize more aspects of our billing. We are actually in a transition process that will take at least a year to move these processes from the field to a central finance team utilizing Genpact.
To get at all the various things that impact revenue dilution, we are getting down to level five and six granularity, to really get insights about how to close off these leakages areas. Our IT investment right now is more in tweaking our platform to close off the biggest leaks without having to rewrite the whole system. As an example we have rate error codes that tell us the type of error but not necessarily what caused the error. Was it caused by a setup error or a local decision, or an error somewhere in the contract? Or a misconception about the contract in terms of escalated causes? So there’s all this sort of lack of clarity. I’m really hoping in the next phase of adding some work into Genpact we will get better clarity – but no easy fix. I think we all probably understand that with most of this leakage stuff, it isn’t very clear.
MA: That is true, it’s not clear nor is it easy to fix. Hernan, what are you guys looking for in terms of data analysis and what you are your dilution pain points?
HE: The internet industry is a really particular industry compared to the ones represented on the phone here, where our main business is online advertisement. One of the biggest changes in our industry that affected the OTC process was the way by which we produced our billings. We have our own systems that tell us how many people come online, how many ads they see, how many page views we have, and so on. And in the last couple of years some products were developed to make the agency’s (our customers’) lives much easier. These third party systems would be able to tell how many hits and views were happening and the performance of the Ad. The problem was the 3rd party numbers and the publisher’s numbers never matched so there was always dilution in our billings. This evolved over the last couple of years until finally the agencies started to require that we bill them based on third party numbers. This was not just for Yahoo but pretty much every publisher.
This change affected how we recognized revenue in addition to our Revenue Dilution. We had to consider any adjustment that we needed to make taking into account the third party figures, and adjust our agreements. So in a nutshell, in the last three or four years every major online publisher spent time adapting to this new way of doing business.
Luckily enough, Yahoo took the initiative three years ago to plug in this third party service to our own internal systems, and we developed our own system that takes these third party stats and compares them with our stats, then produces a bill and reconciliation statement for our publishers and our customers. This has been received very positively by our customers, but obviously there is pressure to improve our numbers and the match rates.
BO: When I was at Sony Pictures Entertainment one of our major business units was Home Entertainment (DVDs). We had about a 30% dilution rate on a large revenue number. I had to get into the deep weeds on this because it was so costly in many different ways.
For some industries dilution isn’t the big issue, but when it is, I find that often disputes and deductions are not effectively managed. Organisations tend to be silo’d. To make improvements it takes a great deal of cross functional accountability and communication. Unfortunately most companies I encounter just aren’t focused on coordinating departments across the quote to cash process to analyze dilution and make improvements. One major obstacle is a lack of systems needed to support the effort.
We have used the term granular a few times in this conversation. You have to be extremely granular when you are managing dilution. You have to know root causes and have workflow tools to resolve open items quickly and accurately. To do this, mechanisms must be in place first to find root causes and process breakdowns. Additionally, stakeholders, led by the Credit Manager must have the resolve to fix the issues. With fixes in place the company no longer has to deal with outcomes that are currently taking an inordinate amount of time and effort and by the way, negatively impacting customer perceptions and service.
Unfortunately, many companies still operate manually. This creates a lack of transparency that becomes very costly and disruptive. I advise people to understand not only what the root causes are but the volume of disputes by type, resolution times, the dollar impact on your receivables balance and the DSO.
By bringing visibility to the area driving dilution issues it points the finger to who is accountable. In most companies I encounter, that level of systematic visibility just does not exist. There is a perception that the credit people own DSO and it is their issue. However, when you break DSO down and you show that there are continuous pricing problems, or you have logistics issues, concealed shortages, etc., it provides a more accurate picture of what is driving the accounts receivable balance. This can create the catalyst needed to initiate cross-functional process improvements.
The resource impact – I think you have to take a look at all of these costs and say to the typical organization, where things are clearly disjointed and not coordinated very well, here are the compelling reasons in dollars why we have to pay attention to this. Benchmarking performance is a critical component. Compare not only your performance with industry peers but benchmark your customers one against the other. Look at a particular customer and compare their internal performance, for example, between distribution centres, different store fronts, regions and so on.
DA: For one of my clients we accounted for dilution by measuring individual customer profitability for some large customers. We took into consideration all of the things Bob mentioned plus additional granularity and we presented that to the CFO, the salespeople, and their managers. That visibility into the whole customer relationship, and the importance of dilution started changing salesperson’s behaviours toward the customers they served. The ability to look at the customer profitability, I think, is a really key metric that mirrors dilution.
SA: Let me just add that I see one more dimension to this. I think there are three key insights to managing dilution. The first is obviously awareness, and as simple and naïve as it sounds, most corporations we work with won’t be able to put their dilution statistics on the table.
I think the second one is just a very systemic sort of pareto chart analysis and a sustained effort to understand what the root cause drivers are, and as was pointed out earlier, work across departments to start addressing their root causes.
The third, and this is the next step forward, is kind of the Holy Grail… how do we prevent the dilution before it is created… a dynamic identification and resolution process. For example we’re in conversations with CFOs who are turning to us and saying, listen, we’ve got a thousand invoices going out today, we know now that 5% of those invoices are going to be disputed but we won’t find out which ones for 45 days and then if the dispute resolves in our favour it will take another 45 days to collect. So what can we do now to reduce our days to pay significantly?
BO: I’m sorry to jump in again, but to Dave’s point, customer profitability is so critical. I asked this question of 100+ folks at the NACM session and there was only one person in the room that indicated they calculate this metric. It is an incredibly important "value add" that the credit people can deliver to the sales and marketing folks, and people negotiating with customers. This will drive better business decisions and help focus attention on relationships that help the bottom line and on the drivers that erode profitability.
These efforts take a lot of cross functional cooperation at the senior executive level. What you find is that there are limits to what the CFO can drive. Often, when you want to implement major changes to improve the management of disputes and deductions, you have to deliver such a compelling business case that it empowers the CFO to go against other executives who aren’t like-minded or, who do not see it in their self interest to make these kinds of improvements.
CL: I wasn’t one of the 100 in the audience, but if I had been I could have put my hand up. We recently, implemented a global sales and profitability reporting system. It’s not rocket science but it’s incredibly difficult to get it off the ground, particularly when you have the complexity that we have in terms of the sheer number of products and customers. However, we now have a much better line of sight into sales and profitability by country, by customer by product with profitability data from net sales through standard gross profit and on to selling contribution, which I would define as essentially a profit before G&A costs.