We’ve been doing some work recently looking at Finance and Supply Chain performance metrics across many of the world’s largest organizations. The first wave of this has been a fairly high level analysis – we’ve taken publically available Key Performance Indicators and compared these against industry averages and our own measures of best practice. Nevertheless it has given us an interesting snapshot of how well the biggest businesses are doing.
Partial analysis of Global 500 sector based results:
|Sectors||Days Sales Outstanding (DSO)||Days Inventory Outstanding (DIO)||Days Payables Outstanding (DPO)||Cash Conversion Cycle (in Days)|
|Media & Entertainment||62||45||37||70|
The first impression is that, at the Global 500 level, there’s plenty of room for improvement. Underperformance in these KPIs is affecting the ability of these organizations to turn their available resources and cash into profit, and ultimately, shareholder value. If we take a look at the topmost measure of performance in this area, we can see a Cash Conversion Cycle (CCC) that is often really lagging behind where it should be.
If you delve a bit deeper into the KPIs that contribute to this CCC performance, it’s not surprising that there seems to be a sizeable flock of underachievers. Some of the common threads that are appearing include:
- Days Sales Outstanding (DSO) is too high – it’s taking businesses too long to get paid, and possibly, too long to process the money that’s coming in from their sales.
- Days Inventory Outstanding (DIO) is also too high – businesses aren’t turning the inventory they’re buying or building into sales as quickly as perhaps they could.
- There are big variations in Days Payable Outstanding (DPO) – pointing to inconsistencies in effectiveness and control over the payment of suppliers. How fast or slow you decide to pay your suppliers is a particularly fine balancing act – too fast and you will negatively impact your cash flow – but too slow and you can be accused of being a poor corporate citizen, or even leave yourself open to late payment fines, missed discounts and whispers on the market that you’re unable to control your finances.
Of course, there are some perfectly good reasons for some of the outliers in the performance data, given variations across the different industry sub-sectors, geographies. But I think that overall, when you take a more in-depth look, there’s often a strong case for transformational change. Many of these Global 500 companies will have invested in BPO in some form or another, but they’re still not hitting the mark when it counts. So the question becomes are they looking at their business processes as critically as they could be?
It’s worth adding that these numbers aren’t just of interest to accountants. They’re also seen as important indicators of corporate health and shareholder value by all sorts of analysts and market commentators. If you search these terms online, you’re just as likely to find them discussed on popular investor websites as you are on accountancy forums.
So what does best in class look like?
Based on Capgemini’s experience in working with some of the world’s largest enterprises across a range of sectors, there is room for improvement. In the Consumer Products sector for example, a global beverage client needed to release additional cash flow. Through concentrating on its top late-paying customers and the root causes of these late payments, Capgemini’s working capital analytics solution helped reduce DSO by 12 days. This also included the credit term normalization we carried out for 43 client end customers and reduced DSO by four days. In the manufacturing sector, Capgemini helped a leading agribusiness company by identifying that DPO was not on par with competitors. Through remedying inconsistent terms data in vendor records, we were able to improve DPO by four days, and also helped the client set up a specific process dealing with prepayments..
The bottom line is that the differentiating results come from companies who have embraced a transformational approach with an innovation track. Global organizations seeking greater automation, data insights, and enabling platforms continues to drive greater value and outcomes. From my continued perspective we can all gain and expect more from BPO.