OTC in a cold climate
Christopher J. Brown and Eric Mboura, Supply Chain, Capgemini Consulting UK, explain why Order-to-Cash is finally getting a 21st Century makeover.
12 November 2008
Publication
This article appears in the Nov/Dec 08 edition of Supply Chain Europe magazine. You can read the article in full here.
We constantly hear of ‘transformation’ in business life, and of its apparently
magical powers in areas such as procurement, marketing or logistics. Yet rarely
do we hear of the wand being waved over the basic commercial routines of taking
customer orders, satisfying them, and getting paid for the privilege — the daily
bread-and-butter activities of just about every business on the planet. The whole
so-called Order-to-Cash (OTC) process remains, for most organizations, much as
it was twenty years ago.
Why so? It is surely partly because OTC, so easy to describe in outline, is in
practice far from simple. It can, and for most companies must, encompass a rather
complex sequence of processes, from capturing an enquiry and taking an order through
production planning, pricing, customer credit checks, order processing and physical
distribution right through to invoicing and accounts receivable. All of which
means that OTC must necessarily involve several different departments — for example
sales, manufacturing, logistics and finance — and this is another factor making
change difficult to achieve. A third factor is, until very recently, the lack
of solid experience or successful examples of companies transforming their whole
approach to the OTC process.
Massive Benefits
Today, however, things are changing, and for three main reasons. First, because
within the last 3–4 years some of the world’s bluest of blue-chip companies have
realized massive benefits by effecting radical change to their end-to-end OTC
processes.
A second key factor is the firm establishment of the shared services concept.
The idea of setting up a centre of expertise (perhaps in a low-cost offshore location)
to handle a specific business function — anything from telesales to insurance
claims processing to HR administration to IT — has truly come of age and is steadily
gaining acceptance in multinational boardrooms everywhere. And, as a few leaders
and innovators have discovered, the same idea can be applied to OTC, in whole
or in part, with great results.
Last but not least, the cold economic climate of Autumn 2008 has forced many
companies to revisit their most fundamental business processes in their quest
to trim costs, save headcount, cut out waste and improve customer loyalty by improving
customer service.
OTC as a Shared Service
Let’s look in more depth at what benefits the shared service model has to offer
in improving the whole OTC process. First, it offers the only realistic chance
of streamlining processes that historically involve many separate departments.
And while the old way of handling OTC often works, it often fails to work. Mistakes
get made in transmitting data from department to department. Problems are compounded
when (as is often the case) different departments are using different IT systems.
As a result, customer orders get lost, or the wrong goods are delivered, or delivered
to the wrong place at the wrong time, or invoices are incorrect — all resulting
in the loss of money and customer dissatisfaction.
Avoiding Glitches
By contrast, a shared service approach produces a centre of expertise in OTC
with a total focus on best-in-class excellence and continuous improvement. Inter-departmental
glitches are avoided because everything is handled by one department in one location,
with one single team and one single IT system. And if all divisions of the company
use the same shared service centre, they are all moved forward to the same best-in-class
standard.
Tip 1: Get Started
Streamlined OTC could be key to survival — so get started before your competitors
do.
So we see that the shared service model offers the opportunity for a major step
forward in the quality of OTC processes. And that, in turn, means an advance in
customer service and, therefore, in customer loyalty and repeat business.
Dramatic Net Cost Savings
But cost as well as quality is an equally important benefit of the shared service
approach. By streamlining the A–Z OTC process you will find many areas where duplicated
effort can be eliminated. IT costs will also fall as disparate departmental systems
are replaced by a single, integrated solution. And this in turn eliminates the
multiple keying-in or transfer of data that is such a problematic and expensive
feature of so many OTC processes in use today. And, of course, setting up your
shared service centre in a low-cost area such as Eastern Europe or India provides
further savings. All these factors can add up to dramatic net cost savings.
Tip 2: Avoid Risks
Use the step-by-step approach to reduce risks and learn as you go.
Step by Step
So what is stopping people from going down the ‘OTC as a shared service’ route?
Historically the answer is cost and risk. It is undoubtedly a major transformation,
involving changes in organizational structure, business processes and supporting
technology. And, in the past it had to be undertaken on an all-or-nothing basis.
During the last few years, however, a new approach has proved to be highly effective,
not just in theory but in real-life practice, with organizations from the largest
multinationals to UK local authorities. The new approach applies a step-by-step
methodology that starts by transferring just one component of OTC — invoicing/accounts
receivable, for example — into a shared service centre. This ‘ice-breaker’ model
has three big advantages:
- It can be done quickly and at relatively low cost.
- It is less complex than a ‘grand slam’ transformation and, therefore, has lower risk.
- It builds confidence from all stakeholders by proving the ‘OTC as a shared service’ concept and by providing quick wins.
Tip 3: Go for Quick Wins
Step-by-step should also give rapid results, help to prove the concept and combat
the scepticism that major change often provokes.
Once this first step has been taken and the benefits demonstrated, it can provide
a solid foundation on which to roll out all the other components of OTC incrementally,
one component at a time. The organization moves progressively towards a fully
functioning OTC shared services facility while steadily building its in-house
knowledge and understanding of best practice.
Does it Work in Practice?
Best of all, it is an approach that has worked with great success in real life.
Three recent examples from our own casebook show how it works in practice a major
soft drinks multinational operating in more than 200 countries — and one of the
world’s most famous brands — established a shared service centre in Belgium for
its pan-European operations. Starting with the accounts receivable component of
OTC, the application of best practice reduced overdue debts by a monitored and
proven percentage, equating to a significant increase in European bottom-line
financial results. The company is now proceeding to migrate other OTC components
to its Belgian centre.
Tip 4: Drive from the Top
OTC involves lots of business units — sales, logistics, finance — so change needs
a top-level champion.
The European foods division of one of the world’s largest multinationals identified
shared services as a key part of its future business strategy. A pilot shared
services design and migration plan was created and approved in just 6 weeks, and
the new centre in Holland was up and running in 6 months. It is now seen by the
company as a showcase for service and technology, and the plan to migrate the
remaining OTC components is speeding ahead.
A London borough council decided to centralize all payments made to it by credit
card or direct debit in a new shared services centre. The resulting automation,
simplification and standardization (key components of best practice) have enabled
it to reduce its transaction costs by some 2.7%, making a significant contribution
to its financial situation.
Visibility and Control
A benign by-product of centralized and integrated OTC is the enhanced visibility
it gives senior management of what is really going on in their business. Which
product lines and which customer groups are most and least profitable? Which are
giving revenue collection problems? Where are the delays that are costing money
and customers? What are the trends? It is often found that management get a comprehensive,
up-to-date picture — often for the first time — from the numbers generated within
the shared services centre.
There is no doubt that the great majority of business organizations can realize
major gains by taking a fresh look at the entire end-to-end order-to-cash process.
And many companies are finding that the shared services solution is the only logical
answer in their quest for leaner costs, better customer service and tighter management
control.
Tip 5: Get Help
There are pitfalls in redesigning OTC and in creating a shared services centre,
so get help from a business partner who knows the dos and don’ts — one with a
proven track record.
But for any organization to realize those gains — gains that in today’s cold
business climate could be essential to survival — it has to make a start. And
smart organizations will do so ahead of their competitors.
