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May 01

Snakes And Ladders – The Benefits and Pitfalls of Pan European Finance Systems

Henry Ford is the father of modern mass production. His production lines established Ford as the first global car manufacturer. Yet it was not until 34 years after his death that Ford produced their first global car – the Ford Escort. Ford set out to use common components worldwide, but by the time the Escort came off the production lines in Detroit, Halewood, Saarlouis and Nazareth, the cars only had three small components in common.

Perhaps it is not a coincidence that many global finance system initiatives have started from US-based companies. They are well accustomed to the benefits of having a single system and common processes for their operations from Florida to Alaska, with the enormous economies of scale from a single service centre covering continental operations.

However many attempts to replicate these benefits across European operations have not delivered the same benefits. The financial services division of one manufacturer is said to have scrapped their global systems projects, writing off many tens of millions of dollars of development, and many other major projects are running years behind schedule and over budget.

So what are the benefits from a single pan-European system?

Attack of the clones

Many of the earliest international asset finance systems were not based on a single system, but multiple installations. An AS/400 or an installation of InfoLease (which seemed to be the system of choice for international lessors in the 1990s) would be cloned around Europe and each copy modified for the needs of each country. While this approach delivered some payback from standardisation it couldn’t achieve the main benefits.

For IT management there are significant benefits from a single system. Development changes, fixes and upgrades only have to be made to one version, so new features can be introduced much more quickly, and testing of changes is greatly reduced. Data Centre and IT operations costs are greatly reduced and the reliability increases with only having one system to run, albeit larger and more complex.

Shared Services

The bigger business benefits from a single international system come through the provision of shared services. While US-based operations can easily centralise customer services, there are obvious challenges in Europe, particularly from languages and wider business cultural differences. Several international technology captive finance providers have set up European customer service centres in Dublin, including Cisco Systems Finance, HP and Dell, with others using “near shore” locations which have a plentiful supply of graduates with language and business skills.

Even with distributed customer services, a single system allows centralisation or regionalisation of parts of the business, particularly the management and oversight of sales, credit, pricing, treasury, operations, asset management and risk. Shared service centres can also be set up for some back-office functions with less direct customer interaction like remarketing and finance – indeed some technology funders get a strong advantage from remarketing equipment at an international level, by shipping used equipment to developing markets with more demand for lower specification equipment.

Centralised management functions are greatly assisted by a single database for consolidated reporting, which can be run “at the touch of a button”, rather than having to run reports for each country then collecting them before consolidation. This can reduce reporting cycles from weeks – even months –  to days, with some flash reports available in real-time. Tim Hricko of Oracle cites a captive finance company that rolled out a single instance to 14 countries in Europe. “It used to take them six months to get a report of their install base of assets throughout Europe – and when they did get it, they couldn’t trust the accuracy. With the single instance in place, they now get a report in 30 minutes and it’s 100% accurate.” However even with a single database this reporting is not without its challenges – such as multiple currencies and exchange rates (see article “Go Forth And Multi-ply”).

Two nations divided by a common language

Introducing standardised systems – and common business processes – is an enormous undertaking. Although a global business may be using the same general business model around the world as the project gets down to the detail needed for effective systems delivery, a myriad of differences and complexity can emerge. From the “thirty thousand foot view” it all looks the same. Some differences may be immediately obvious. But down in the detail– to use the tangled quote of US Defence Secretary Donald Rumsfeld – “there are also unknown unknowns. These are things we do not know we don’t know.”

A US accountant can find that the methods for calculating VAT on an invoice are the same as US Sales tax and stop there, remaining unaware of the need for credit notes, that there are different regulations for implementation in each European country or the legal penalties incurred if errors are made. (A few years ago in a presentation to a ELFA conference in Boston, I exercised my theory that Americans are inherently unable to understand European imposed taxes on goods – overlooking the site of the Boston Tea Party!).

Apparently standard business practices, like direct debit automated collections, vary enormously in practice. In Norway and Denmark a direct debit has become an electronic invoice, with customer confirmation required before payment is made. If you were expecting that the Single European Payments Area would simplify things, the European Central Banks “Blue Book” of Payment and Settlement Systems for the Euro Area runs to 460 pages.

One of the themes coming out of my discussions for these articles and my own experiences is that however capable global systems are, they are never going to be able to support all the requirements, and the business may get many of benefits just from simplifying the business processes. It then comes down to analysing the process differences as:

  • “Have  to have” features – such as for regulatory, tax or statutory requirements  in each country).
  • Features  needed to offer competitive advantage in the market – in which case the costs of the implementing the feature can be balanced against the financial benefits.
  • “Just  because that’s the way we’ve always done it.” – in which case the  differences can be eliminated, remaining sensitive to the risk of changing  processes without a clear benefit for those impacted.

An example of such a feature is the formula for calculating rentals variable for interest. While the feature is not common in UK German or French markets, but is essential in CEE and Scandinavian countries, and even Euro zone countries which had weaker currencies before adopting the Euro. Aside from the Base rate used in the calculation, the formula will vary – and is often set by local funding banks. Should a pan-European system cope with every single formula, or could you standardise?

Could you achieve benefits just by simplify the business without a single system? “One alternative that we are seeing more interest in recently is Business Process Management solutions.” says Steve Byrne of Cap Gemini. “This alternative enables companies to leave the existing infrastructure in place and still deliver enhanced, standardized, processing capabilities.”

International Diplomacy

Managing this change – particularly on an international basis – is critical and complex. No-one is going to accept change “for the greater good”. Stakeholders need to be engaged, sometimes with individually tailored communication approaches, to build up two way trust and shared goals. “Managing Successful Programmes” – the big brother of the Prince2 project management methodology – even suggests a “stakeholder map” – a matrix of key project players and areas of interest, charting if each player is a supporter or opponent for each area. While avoiding national stereotyping, communication styles need to differ by country. The Rough Guide to Scandinavian travel advises “The best way to get a Norwegian to accept your idea is to make him think it was his idea.” And you wouldn’t get a Brit to give up their Pint just for European standardisation!

A breakdown of this mutual trust can be catastrophic, resulting in imposed solutions, on an unwilling and unco-operative business.

Faced with escalating complexity and costs, an international project can end up with a compromise solution – and compromised benefits. One international project manager draws a comparison with European Politics. “When safety or quality are compromised, people get hurt. Yet in Europe, compromise is often a political ideal. The appointment of Lady Ashton as the EU’s foreign-policy chief wasn’t because she was the best person for the job. It was a compromise, as she is British and a woman – and because she isn’t Tony Blair.”

(c) Nic Evans 2010. This Article may not be reproduced, in full or in part, without the prior permission of the author.

Nic Evans is Director of Evans Global Associates, delivering consultancy and interim management for commercial
finance technology and business agility. If you want to discuss any points raised by this article or broader issues he can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans

Permanent link to this article: http://transformingfinance.eu/snakes-and-ladders-the-benefits-and-pitfalls-of-pan-european-finance-systems/