executive briefing understanding performance and drivers...

Deloitte Consulting LLPFebruary 2012

Executive Briefing Understanding performance and drivers of the finance function in Latin America

2 Understanding performance and drivers of the finance function in Latin America Executive Briefing 1

As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.


Table of contents

2 Introduction

3 Background

5 The “Seven Key Findings” of the Latin America Finance Function

15 Closing thoughts

16 Appendix: Benchmarking study overview and participant demographics

19 Deloitte contacts


Introduction

Unprecedented insights reveal the seven key themes of the Latin American Finance Function With the continued economic growth and rise of multinational companies across Latin America (LATAM), it is time to take a closer look and get a deeper understanding of the performance and drivers of the finance function of LATAM companies. As their growth continues, finance functions must become increasingly more effective while maintaining efficiency to remain agile in today’s challenging international business and economic environment. LATAM finance executives should have a clear, empirical understanding of their finance function’s performance in order to implement lasting operational improvements and become a trusted business partner.

This briefing is the culmination of over twelve months of in-depth research and draws from our experience of working with LATAM companies, client interviews, quantitative data collection, and deep understanding of the finance issues. It brings to light seven key themes that resonate across the finance functions of companies throughout Latin America including the total cost of finance, staffing allocation, technology usage, “self-induced complexity,” country variation, economies of scale, and multinationals vs. locals. We uncovered opportunities for finance functions to increase efficiency and add value.

In conjunction with the Deloitte’s Global Benchmarking Center, we conducted an inaugural LATAM Finance Benchmarking Study, which served as an important source of data and insight for this point of view. Our benchmark study was comprised of 51 companies in Latin America and evaluated over 70 finance metrics relating to cost, efficiency, and effectiveness. Through this benchmark, Deloitte now maintains the largest database of the Latin America Finance function.


CFOs play four critical roles within companies — the “Four Faces of the CFO”

Background

Catalyze behaviors across the organization to execute strategic and financial objectives while at the same time creating a risk intelligent culture.

Provide financial leadership in determining strategic business direction, M&A, financing, capital market and longer term strategies vital to the future performance of the company.

Protect and preserve the critical assets of the organization and properly report on financial position and operations to internal and external stakeholders.

Balance capabilities, talent, costs and service levels to fulfill the finance organization’s core responsibilities efficiently.

•To function effectively across these four roles, Finance executives should have a clear, empirical understanding of their finance function’s performance and actionable improvement opportunities.

•The ability to measure, compare and contrast efficiency metrics is a key to achieving results.


Deloitte´s insights into the Latin America Finance function are based in part on our extensive Latin America benchmarking study completed in 2012•The study is comprised of 51 companies in Latin

America, and includes a variety of industries, countries and company sizes, thereby allowing a broad assessment of Latin America Finance

•The study evaluates over 70 finance metrics relating to cost, efficiency, and effectiveness

•Through this study, Deloitte maintains among the largest database of the Latin America Finance function, which allows unprecedented insight and the ability to tailor analysis to specific company peer groups

•At the aggregate level, the study compares overall Latin America operations against U.S. companies, thereby highlighting key regional differences

•At individual company level, the study identifies performance gaps against best in class performers, and further quantifies and qualifies improvement opportunities

On average, the benchmark study has identified $3.8 million of cost reduction opportunities per $1 billion in company revenue


The “Seven Key Findings” of the Latin America Finance Function

Seven key findings highlight the Latin America Finance function cost structure and performance

1. Total Cost of Finance — Across Latin America, there is wide variation in the total cost of finance; Latin America finance functions generally have higher staffing levels yet much lower labor costs, leading to lower overall total cost of finance compared to U.S. companies.

2. Staffing Allocation — Latin America allocates more staff to lower value transaction processing activities, and proportionately fewer staff to higher value performance management activities.

3. Technology Usage — Higher technology usage drives lower costs in Latin America due to decreased staffing levels.

4. “Self-induced Complexity” — Greater number of key controls and journal entries in Latin America leads to higher complexity and costs than U.S. companies.

5. Country Variation — Among countries in Latin America, there is notable variation in cost structure, staffing levels and labor rates.

6. Economies of Scale — As Latin American companies increase in size, economies of scale are recognized, as larger companies have lower finance costs as a percentage of revenue.

7. Multinationals vs. Locals — Multinational organizations operating in Latin America have higher finance costs than local companies headquartered within Latin America.

Finding 1: Across Latin America there is wide variation in the total cost of finance•The most significant cost Latin American benchmark

study participant spends over 12 times more on the finance function than the lowest

•The variation in total cost is driven primarily by the range of total staff (full-time equivalents, FTEs) and labor rates

Latin America key finance metrics by quartile

Finance cost as a % revenue

Median MaximumMinimum

Finance FTEs per $1B of revenue

Finance fully-loaded labor rates

$12,000 $170,000$45,000$31,000 $59,000

0.29% 3.7%1.10%0.69% 1.53%

19.0 727.0170.899.7 225.7

1st Quartile 3rd Quartile

Source: Deloitte Global Benchmarking Center and Deloitte Consulting LLP. Latin America Finance Function Benchmark. 2012


Finding 1: Latin America participant companies maintain a lower overall finance cost structure than U.S. companiesThe benchmark demonstrates Latin America median finance cost as a percentage of revenue is 25% lower than the U.S. median

Key findings•The Latin America median company spends $3.8M less

(per $1B revenue) than the U.S. median•The majority of the total cost of finance is labor (66% to

80% across the three comparators)•Labor costs (as a percentage of revenue) are 22% lower

in the Latin America median company and 45% lower in the Latin America low cost performer (LCP) compared to the U.S. median

•The Latin America companies spend 2-3 times less on technology than the U.S. median, which has both upside (from a cost perspective) and downside (lower technology usage can result in lower efficiency and effectiveness)

Notes: Median represents the midpoint value of the Latin America participants. Low-cost performer (LCP) represents the first quartile or 25th percentile value of the participants. The U.S. median is the midpoint of a peer group consisting of 178 companies with less than $3 billion in revenue.

Finance cost as a percentage of revenue

0.98%

0.77%

0.54%

0.24%

0.17%

0.04%

0.17%

0.06%

0.03%

0.09%

0.11%

0.07%

1.48%

1.10%

0.68%

U.S. median LATAM median LATAM LCP

Labor cost Outsourcing costTechnology Other

$3.8M advantage per $1B of revenue

$4.2M advantage per $1B of revenue

The benchmark demonstrates Latin America has higher finance staffing levels yet much lower labor costs, leading to lower overall total cost of finance compared to U.S. companies

Key drivers•Latin America median maintains 89% more (80 FTEs)

FTEs per $1B in revenue than U.S. median•Latin America’s overall finance fully-loaded labor rates

are 59% lower than U.S. median

Finance FTEs per $1B in revenue

Finance fully-loaded labor rate

170.8

90.3

LATAM median U.S. median

$44,969

$108,417






Finding 2: Latin America participants allocates more staff to lower value transaction processing activities, and proportionately fewer to higher value performance management activities

Key findings•Latin America median maintains 81% more FTEs

(32 FTEs) supporting finance transaction processing activities (such as accounts payable, accounts receivable, and billing) compared to U.S. median

•U.S. median allocates 2.4 times more of its finance FTEs to performance management than Latin America median

•Performance management resources typically are higher paid, which may in part explain the labor cost gap between Latin America companies and the U.S. median

Transaction processing FTEs per $1B in revenue

Performance management FTE allocation

72.9

40.3


11%

26%


Key drivers•Latin America median generates 48% more performance

reports than U.S. median•U.S. median has higher usage of automated tools for

business planning, although both U.S. and Latin America median appear to rely heavily on spreadsheet-driven planning processes

•Both Latin America and U.S. median indicate more time could be spent linking the drivers of performance to key performance indicators (KPIs) so that causes and effects are understood by management

Degree KPIs are linked to drivers

Monthly management reports per $1B in revenue

Degree business planning conducted through automated tool


High

Medium

Low

None

182

123



High

Medium

Low

None







Finding 3: Participants higher technology usage drives lower costs in Latin America due to decreased staffing levels

Key findings•Participant companies could be split into High Tech

Leverage or Low Tech Leverage categories based on the amount of technology usage such automation of customer remittances, invoice transaction, journal entries, and key controls, as well as the amount of general ledger system integration and usage of automated planning tools.

•Participant Latin America companies that leverage technology to a high degree have 35% lower finance labor costs and spend 64% less on technology as a percentage of revenue

•Participant high tech leverage companies also have 51% fewer finance FTEs, which drives the overall lower costs

Finance FTEs per $B in revenue

Finance labor cost as a % of revenue

Finance technology cost as a % finance cost

98.6

199.5

High tech leverage Low tech leverage

0.53%

0.81%


5.2%

10.4%






Finding 4: Greater number of key controls and journal entries in Latin America leads to higher complexity and costs than U.S. companies

Key findings•Latin America median processes 1.6 times more manual

journal entries and has 59% more general accounting FTEs than U.S. median

•As the number of key controls per $1B in revenue decreases from 500 to 100, Latin America controls process cost as a percent of revenue decreases from 0.19% to 0.14% ($556K per $1B in revenue)

•Metrics such as manual journal entries and key controls are typically internally driven activities which could be diminished to improve efficiency

Impact of key controls on controls cost

Manual journal entries per $1B in revenue

General accounting FTEs per $1B revenue

0.0%

0.1%

0.2%

0.3%

50 300 550 800

Lati

n A

mer

ica

Co

ntro

ls p

roce

ss

cost

as

a %

of

reve

nue

Latin America Key controls per $1B in revenue

39,629

15,459


30.5

19.2

LATAM median U.S. medianSource: Deloitte Global Benchmarking Center and Deloitte Consulting LLP. Latin America Finance Function Benchmark. 2012




Finding 5: Across the Latin America region, there is notable variation among participant companies in cost structure, staffing levels, and labor rates

Key findings•Brazil finance costs are the highest and two times higher

than Chile, which maintains the lowest total cost of finance in the region

•Brazil has the fewest overall finance FTEs, but its labor rates are nearly two times higher than Mexico and Argentina/other

•Although Argentina/other labor rates are 64% lower than Brazil, the total finance cost is only 14% lower due to the 74% greater number of FTEs

•Chile maintains relatively few FTEs at labor rates that are 26% higher than Argentina, which allows Chile to have the lowest overall total finance costs

Average Latin America Finance FTEs per $1B in revenue by country

Average Latin America finance cost as a % of revenue by country

Average Latin America Finance fully-loaded labor rates by country

160

231

271

156

Chile Mexico Argentina/other Brazil

0.85%1.08%

1.44%

1.68%


$45,802 $40,836

$33,810

$94,631






Key findings•Latin America invoices and remittances varies by country•Argentina/other AP cost per vendor invoice is $3,

significantly lower than Chile ($16) and Brazil ($13.80)•Mexico and Brazil process nearly 9 times more customer

remittances per AR FTE than Chile•In customer billing, Chile’s transaction productivity is the

most efficient and nearly 8 times higher than Brazil

Average Latin America customer invoices per billing FTE by country

Average Latin America AP cost per vendor invoice by country

Average Latin America customer remittances per AR FTE by country

148,885

92,787 108,315

18,874


$16.0

$7.9

$3.0

$13.8


10,520

91,669

5,655

74,306






Impact of revenue on total finance FTEs

Finding 6: As participant Latin American companies increase in size, economies of scale are recognized, as larger companies have lower finance costs as a percentage of revenue

Key findings•As revenue increases, both Latin America and U.S.

median see consistent cost decreases due to economies of scale

•As Latin America increases in revenue size from $1B to $5B in revenue, there is a 0.54% decrease in finance cost as a percent of revenue ($5.4M); U.S. median has a 0.53% decrease ($5.3M)

•Smaller Latin America companies (by revenue) have more finance FTEs per $1B in revenue than U.S. median (68 FTEs more at $1B in revenue)

•As revenue increases, Latin America companies see even greater benefits from economies of scale as finance FTE levels decrease to levels similar to U.S. median

Impact of revenue on total finance cost as a % of revenue

0%

1%

2%

3%

$0.1 $3.0 $5.9 $8.8

Fina

nce

cost

as

a %

of

reve

nue

Revenue (in billions)

0.75% differenceat $1B in revenue

0.73% difference at $10B in revenue

Latin America

U.S.

0

100

200

300

$0.1 $3.0 $5.9 $8.8

Fina

nce

FTEs

per

$1B

in r

even

ue

Revenue (in billions)

Latin America

U.S.

40% differenceat $1B in revenue

24% difference at $5B in revenue




Key findings•Latin America median < $1B’s accounts receivable cost

per remittance is 2 times higher than Latin America median > $1B’s

•Latin America median < $1B’s accounts payable vendor invoices per AP FTE is 49% higher than Latin America median > $1B’s

•Latin America median < $1B’s number of manual j ournal entries is 7 times higher than Latin America median > $1B’s

Manual Journal Entries per $1 Billion of Revenue

Accounts Receivable Cost per Remittance

Accounts Payable Vendor Invoices per Accounts Payable FTE

253,339

36,163

LATAM median < $1B LATAM median > $1B

3.87

1.90


8,458

12,598






Finding 7: Latin America divisions of multinational participant organizations have higher finance costs than regional/local companies headquartered within Latin America

Key findings•Latin America divisions of multinational organizations

have total finance costs that are 16% higher than local companies headquartered within Latin America, but they have different cost structures

•Multinationals have half the FTEs, 75% higher labor rates, 72% higher outsourcing, and three times higher finance technology costs

Finance fully-loaded labor rate

Finance cost as a % of revenue

Finance FTEs per $B in revenue

$44,402

$108,417

LATAM local LATAM multinational

0.73% 0.66%

0.07% 0.12%0.07%

0.21%0.06%

0.08%0.92%

1.07%


Labor cost Outsourcing costTechnology Other

163.7

84.8






Closing thoughts

•Latin America finance executives should have a clear, empirical understanding of their finance function’s performance in order to implement lasting operational improvements

•Numerous differences exist between Latin America and U.S. finance functions, in terms of cost structure, staffing levels and allocation, technology utilization, and complexity

•The value of technology and reduction of “self-induced complexity” are key requirements that can increase efficiency and adding value, as demonstrated in Latin America

•Although Latin America is often viewed as a homogenous region, country by country variation, and differences between locally operating and multinational organizations create interesting performance improvement opportunities and challenges

•Improvement initiatives should be balanced around global and regional differences and focused around finance best practices, and prioritized action plans and should be developed based on overall business strategies


Transaction Processing 1. Accounts payable2. Accounts receivable3. Billing4. Collections5. Cost accounting6. Credit7. Fixed assets accounting8. Freight payable9. Project accounting10. Revenue accounting11. Travel and entertainment

External Reporting and General Accounting

12. External reporting13. General accounting

Controls 14. Internal audit15. External audit16. Statutory requirements

Tax and Treasury 17. Financial risk management18. Tax-income19. Tax-property20. Tax-sales and use21. Treasury

Performance Management

22. Budgeting-capital23. Budgeting-expense and revenue24. Business financial analysis25. Financial management reporting26. Forecasting27. Function management and strategy

Appendix: Benchmarking study overview and participant demographics

The benchmarking study covers five finance process categories and 27 processesProcesses have been strictly defined in detail to ensure common definition of all data.


Process•Accounts payable: The process of paying the money

which a company owes to vendors for products and services purchased on credit

Sub processes•Invoice receipt and validation•Invoice processing•Payment processing•Supplier relationship management•Management reporting•Compliance•Outsourcing, Technology

Activities•Assess approval signature manually•Process supplier debit/credit memos•Process automatic payment•Resolve invoice discrepancies•Prepare and enter related journal entries

The Latin America finance benchmarking study includes 51 participants in Latin America

Net revenue ($U.S.) Total employees

24%

35%

41%< $250M

$250M to $1B

$1B to $12B

39%

33%

28%

< 1,000

1,000 to 5,000

>5,000




The Latin America finance study includes participants from eight countries and 11 industries•Mexico has the single largest representation with 43% of

the total participants•Process and Industrial Products industry sector represents

33% of the Latin America study population•Participants consist of a diverse mix of global

multinational corporations, regional companies, and local companies with operations in single countries

Net revenue ($U.S.)

Total employees

48%

15%

20%

17%

Mexico

Chile

Argentina/Other

Brazil

33%

18%13%

16%

9%

9%4%

Process and industrial products

Consumer products

Financial services

Life sciences

Retail

Telecommunications

Other

This report compares the Latin American median and low-cost performer (LCP) with the U.S. median, as determined by total finance cost as a percentage of revenue•Median represents the midpoint value of the Latin

America participants•Low-cost performer (LCP) represents the first quartile or

25th percentile value of the participants•The U.S. median is the midpoint of a peer group

consisting of 178 companies with less than $3 billion in revenue from separate finance benchmarking studies conducted over the past three years

•U.S. median revenue is $694M; U.S. median operates in fivetrack of j countries; U.S. median has 1,784 employees

Finance cost as a % of revenue

0.98%

0.77%

0.54%

0.24%

0.17%

0.04%

0.17%

0.06%

0.03%

0.09%

0.11%

0.07%

1.48%

1.10%

0.68%

Global/U.S. median LATAM median LATAM LCP

Labor cost: Fully loaded labor cost of employees, contractors, and temporaries

Outsourcing cost: Services provided by third-party providers

Technology: Hardware, software, license fees, and the related support

Other: Facilities, subscriptions, supplies, travel, training

Cost categories

Process cost = labor cost + outsourcing cost





Deloitte contacts

Sam Silvers Global Finance Transformation LeaderDeloitte Consulting [email protected]

Francisco Silva Mexico Finance Transformation Leader [email protected]

Javier Montero Mexico Finance Transformation Leader [email protected]

Omar MataChile Finance Transformation Leader [email protected]

Celso Aziz Kassab Brazil Finance Transformation Leader [email protected]

Claudio Fiorillo LATCO Finance Transformation Leader [email protected]

Tim DerksenCBC Finance Transformation [email protected]

Rich Rorem U.S. Finance Transformation Leader [email protected]

Steve McCaughey Canada Finance Transformation [email protected]

Latin America finance executives should have a clear, empirical understanding of their finance function’s performance in order to implement lasting operational improvements

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2012 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited

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