Michael Alfonsi, CRM, CTP, WPT VP and Practice Manager Finance Transformation

Michael Alfonsi, CRM, CTP, WPT VP and Practice Manager Finance Transformation Paul Diegelman, CPA VP and Practice Manager Finance and Accounting Optimization 1

Just a few housekeeping items & reminders Today s Discussion Outline The Setting and the Importance of this effort Its all about Liquidity.so let s understand that Working Capital - the root of Liquidity, and it has its costs Evaluating our approach and our processes.have we had all this upside down, until now? What others have done Impact, Summary & Next Steps 2

A polling question. 3

The Roles are Changing AP & AR Treasury Professionals The roles of these functions is re-evolving from a control and transaction focus, to a value creation role by adding insight to operations. This effects the setting of EVERY activity. From Through To Best Practice Finance s Role Financial Reporting Risk Management Business Decision Support Focus Transaction Dollar Economic Value Customer Service & Shareholder Value Policy Loosely Defined Rigid Adherence, Well Defined Triggers & Controls Process Reactive, Lacking Prioritization Focused & Efficient Proactive Automated Control Points & Escalation Organization Autonomous Cross-functional Customer Oriented Tools Multiple Non-Integrated Systems Multiple Integrated Systems Common Systems Metrics Results Oriented Process Oriented Forecast Oriented/Risk Oriented 4

Transaction Processing Knowledge/ Skill Leadership Business Partners Process Leadership Process Leadership Process Leadership Role Transaction/ Administrative Processing and Information Infrastructure Decision-Making and Knowledge Integration Line/Corporate Operational and Strategic Support Information Management Rules Management Exception Management Continuous Improvement/ Elimination of Processing Tasks Functional Skill Management Best Practice Research, Innovation Enterprise-wide Policy Management Policy Consultants to Business Units Enterprise-wide Decision Making Knowledge Integration Audit / Process Reviews Policy Creation/Management Strategy Development and Execution Issue/Opportunity Management Management Processes Team/Business Education Focus Centers of Scale/Manufacturing Centers of Expertise/Professors Decision Support/Consultants Activities Accounts Payable Accounts Receivable Liquidity & Systems Operators Supplier Management Payments Czar E-commerce Design Business Planning Capacity Management Succession Planning Application Development 5

Lowers Perceived Financial Rating and Triggers Covenants Deteriorates Key Financial Ratios Increase in Working Capital The effects of Stranded Working Capital - - undesirable in the current economic crisis Uses Cash Drains Investments/I ncreases Borrowing Lowers Income Results in Higher All-in Costs of Credit 6

Future State Current State Transaction Processing Focused Inefficient Processes, Technology The transition is in multiple steps Cost focused Allocation focused Analysis focused Effectiveness focused Lowest feasible cost of capital Highest Returns, per policy Decision Support Focused Trusted Business Partner Change Agent Transaction focused Efficient & Effective 7

A Narrow Accounting Definition Leads to Risks Definition Working Capital is Current Assets minus Current Liabilities Implication Working Capital is a Balance Sheet Issue Risk Ignores operational drivers and opportunities (i.e. Customer Service, Revenue Growth, Profit Enhancement) Business Process Definition of Working Capital Identifies and Avoids Risk Definition Controlled Working Capital covers all processes: Quote to Cash/Meter to Cash Purchase to Pay Inventory Treasury Management s Core Duties Implication Working Capital Management is: Controlled by processes outside Finance Driver of Revenue and Expense Driver of Cash Flow Driver of Customer Service Driver of Shareholder Value 8

Well, everybody likes to get money fast Inventory TIME Sales Mail Process Avail. Customer order received Customer order entered Invoice mailed / presented Customer sends payment Check Deposited in Bank Customer credit review Order shipped Customer receives Invoice Customer payment received Funds Available DSO Order & Inventory Float Invoice Float Collection Float Trade Credit Risk 9

Even though people & Companies like to pay slowly, it s really about an effective payments process Trade Credit Risk Sales Order placed with Vendor Order received from vendor Goods or Services Delivered Purchasing / Procurement Cycle Management Invoice Float Invoice received TIME DPO Company Payment Disbursed Mail Disbursement Float Vendor receives payment Vendor Funds Deposits Gone Check Process Avail. 10

It s the Cash Flow Timeline that is the Real Focus but, it s being called Working Capital Prime Components Sales Order placed with Vendor Order received from vendor Goods or Services Delivered Purchasing / Procurement Cycle Management Sales Inventory Trade Credit Risk Invoice Float Invoice received TIME DPO Company Payment Disbursed Mail Mail Disbursement Float Vendor receives payment Vendor Funds Deposits Gone Check Process Avail. Process Avail. Customer order received Customer order entered Invoice mailed / presented Customer sends payment Check Deposited in Bank Customer credit review Order shipped Customer receives Invoice DSO Customer payment received Funds Available Order & Inventory Float Invoice Float Collection Float Page 11 11 Trade Credit Risk

Cash Mgmt Customer Strategy Sales Mgmt Receipt & Allocation of Cash Risk Mgmt Cash Collection Revenue Mgmt Contract Mgmt Customer Service Sales Order Processing From Order to Cash Billing Order Fulfillment Credit Check Since working capital is often not managed holistically, optimization is even more challenging 12

Distribution Product Development Product Range Mgmt Warehousing Production Supply Chain Mgmt Forecasting Sales Order Processing From Order to Distribution Production Planning Raw Material Planning Production Scheduling Since working capital is often not managed holistically, optimization is even more challenging 13

Cash Mgmt Purchasing Strategy Budgeting Forecasting Payment Issuance Invoice Processing Expenditure Mgmt Originating Requirements Selecting & Negotiating From Purchase to Pay Discrepancy Mgmt Receiving & Evaluating Ordering & Contracting Since working capital is often not managed holistically, optimization is even more challenging 14

Receipt & Allocation of Cash Cash Collection Cash Management Customer Service Billing Customer Strategy REVENUE MANAGEMENT Order Fulfillment Credit Check From Order to Cash Sales Management Sales Order Processing Risk Management Contract Management Cash Management Payment Issuance Invoice Processing Accounts Payable Purchasing Strategy EXPENDITURE MANAGEMENT Budgeting & Forecasting Production Originating Requirements Selecting & Negotiating Distribution Warehousing Production Planning Product Development SUPPLY CHAIN MANAGEMENT Raw Material Planning From Order to Distribution Product Range Management Forecasting Sales Order Processing Production Scheduling Discrepancy Management Receiving & Evaluating Ordering & Contracting From Purchase to Pay But since working capital is often not managed holistically, optimization is even more challenging 15

Liquidity is the organization s ability to meet its financial obligations in a timely manner It is MORE than current assets/current liabilities (the current ratio) It is the ability to convert assets TO Cash.Business Cycles.and manage the cash.and remember, Liquidity includes readily available debt If you are not converting operating cycles to cash in the right timeframes, then cash is stranded.and if there is no debt vehicle then you are ill-liquid. Ill-liquidity means markets, creditors and more will make decisions FOR you if you survive! 16

Performance metrics are used to identify the true world-class performers The structural factors are where you see the success of the world-class performers that is -- their best practices 17

Transaction Processing Accounts Payable Freight Payments Travel and Expense Fixed Assets Accounts Receivable Credit Collections Order Entry Customer Billing General Accounting External Reporting Project Accounting Cost Accounting Cash Management Tax Accounting Tax Filing And Reporting Core Finance Processes (30) Risk Management Risk Management Budgeting Outlook/Interim Forecast Business Performance Reporting Fleet Management Treasury Management Industrial Tax Planning 50% Internal Audit External Audit Decision Support Cost Analysis Business Performance Analysis New Services/Costing Strategic Planning Support Finance Function Management Additional Management Decision Support Functions (5) Industrial Companies Automotive Chemicals Consumer Goods High Technology Industrial Products Lumber & Paper Products Metals Other segments Service Companies Financial Services Information Services Insurance Publishing Restaurants/Retail Telecommunications Utilities Transportation Other segments 18

Attribute Average Top Performer Sample Co. DSO 36.7 1.8 32.45 DPO 41 49 37 DSI 26 1.6 37 CCE 3.4% 19% 5% DWC 53 7 47 *Note: All metrics, and particularly DSO, are industry-segment specific 19

Attribute Average Top Performer Sample Co. FTEs per $100M of revenue 3.3 1.8 2.45 Bank accounts managed per FTE 51 229 10 Average collected balance $1,278,000 $11,000 $2,400,000 Accounts per $200million of revenue 27.9 4 10 Banks per $100M 6.7 7 2.0 Total Risk Score 66 93 71 20

Attribute Average Top Performer Sample Co. FTEs vs. Invoices (staffing) 12,000 16,000 4,000 Cost per invoice 3.80 1.75 11.00 Discounts reviewed/percentage $1,278,000 $11,000 $2,400,000 Discounts missed 24.9% 1.0% 37.5% Frequency of Check Runs 2x.7x 3x Total Cards* 312 561 4 21

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How are we structured? Answer: Special Set Staff Percentages Executive 4% Average Top Quartile Performers Executive 5% PM/TS, 19% Fraud 8% Ops 52% Fraud 9% PM/TS, 19% Ops 41% Imp 9% Mktg 8% Imp 12% Mktg 9% 23

Working/Using Systems and IT Question: Payments technology business requirements are met by: Sample Company Metrics Aggregated in Database: Top Quartile 24

Spending Time on Transaction Processing? Management staff time allocation Professional staff time allocation 1st Quartile 1st Quartile Average Average Utility Co Utility Co. 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Transaction Processing Decision Support Risk Management Function Management Transaction Processing Decision Support Risk Management Function Management 25

Improving Efficiency and Effectiveness Current systems environment is generally complex and consists of multiple applications and mapping requirements to support an overall view of the data The Median has: 46 secondary AP applications 27 secondary T&E applications 30 secondary billing applications 21 secondary cash receipts applications Secondary Applications are used to augment the functionality of the primary application or support additional activities in the process. Examples of secondary applications might be PC Spreadsheets, other ERP applications, bolt-ons or specialty applications. Thus the number of systems drive a more manual process that requires a large number of FTEs to support This complexity also drives long cycle times and a larger percentage of errors rates across the processes ultimately resulting in a higher cost per transaction Disbursements and Revenue Cycle Represent the Greatest Opportunities 26

Reducing Cycle Times & Error Rates Transaction Processing Cycle Times Transaction Processing Error Rates Accounts Payable Accounts Receivable Accounts Payable Billing Segment Median B-Mark Median 27

Inefficiency and Ineffectiveness is Found in Five Transaction Processes Common characteristics Manually intensive processes High staffing and cost levels Extended cycle times Best practices usage is the exception Multiple, applications with low levels of integration Processes only partially automated Low use of on-line technology for data submission, transfer and processing Minimal use of web-based technology Averaged Cost savings at 1st quartile ($M) Source: DecisionGauge Benchmarking Accounts Receivable $3.30 Accounts Payable $2.87 Collections $1.35 Cash Management $1.80 General Accounting $0.78 TOTAL FOR FIVE PROCESSES $10.10 28

Efficiency Effectiveness Effectiveness Companies need be poised to leverage their scale and relative lower complexity to achieve World Class performance High Finance Value Grid 1Q Key Finance Drivers Role of Finance Sample Co World Class Information Access & Distribution 1Q Value of Analysis and Quality of Output Working Capital & Risk Mgmt. Cost and FTEs Productivity, Cycle Times & Self-service Cost per transaction Automated Transactions Specific Segment Integrated Technology & Common Architecture Low Overall Efficiency Peer Group Sample Co High Most KPIs for the Key Driver are at or near World Class Some KPIs for the Key Driver are at or near World Class Most KPIs for the Key Driver are far from World Class 29

A polling question. 30

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Understanding Purchase to Pay Improvement Areas Typical high level Purchase to Pay problems Lack of Key Performance Indicators with clearly established targets Lack of process measures No supplier performance balanced scorecard OPERATIONAL Low interest in Purchasing at company level Lack of Purchasing and Payment Policies/Guidelines Metrics Policy/Procedure Process Org/People System/Tools Purchase to Pay seen as a transaction factory with little perceived value added to the business Paper intensive process with multiple inadequate controls No differentiated channel for standard and non-standard expenditure Decentralised activities with little co-ordination Inadequate skills (too administrative) Different systems not integrated Few automation tools for low value, high volume No simple automated analysis 32

Experience with clients shows.. Metrics/Performance- performance measurement is normally based on financial rather than operational issues, and is reported at monthly intervals resulting in a reactive approach Policies- often non existent or not understood and not measurable, therefore ineffective as a driver of operational performance Processes- often developed to optimise the performance of one function without regard for the impact on the rest of the organization. Processes are normally configured for P&L impact rather than total business performance Org/People- operational staff have rarely received even the most basic training required to undertake their work effectively. Cross-functional roles and responsibilities are often ambiguous resulting in key issues such as working capital being subordinated Systems- especially ERP systems are regarded by Executives as the answer to all problems. organizations believe that they can configure their processes to suit the system, that performance will automatically improve and that people will immediately be able to operate the systems 33

Case Study Example ACTIONS Define cross functional processes Establish clear roles & responsibilities Supplier rationalization process Purchasing effectiveness program Develop & implement performance measures & targets Understanding AND Linking the issues is often missed.. Managing Director Key Issue: Poor control over non-core spend Reasons: Ineffective purchasing function Decentralized operations Financial Manager Key Issue: Inefficient Accounts Payable process Reasons: High level of exceptions Large number of low value transactions and suppliers IT Manager Key Issue: Late payment of suppliers Reasons: Loss of prompt payment discount Unclear purchasing process Payables Clerk Key Issue: Frustration due to low automatic match rate Reasons: Purchase Orders not raised Difficulty identifying purchase originator Executive Agenda - Purchase to Pay Linking Issues BENEFITS 3% to 5% reduction in unit cost of purchase 10% to 25% increase in credit from suppliers 10% to 20% reduction in administration cost 34

Cash Management Purchasing Strategy Budgeting & Forecasting Payment Issuance Originating Requirements Invoice Processing Selecting & Negotiating Discrepancy Management Receiving & Evaluating Ordering & Contracting 35

Understanding Purchase to Pay - Impact For most companies, the largest single cost category is for goods and services, which is primarily operating expense Non-core purchases such as: Small $ items Prof. Services Support (IT, HR, Marketing, ) Packaging/Freight... Source: NAPM - 1997 36

Potential Profit Understanding Purchase to Pay - Impact Poor Management of the Purchase to Pay process will impact Profitability INADEQUATE NEGOTIATION IMPACT High Medium PAPER INTENSIVE Low PURCHASING EFFECTIVENESS Number of suppliers Number of invoices Order quantity VENDOR QUALITY INVENTORY COST PAYMENTS DISPUTES PAPER PROCESS REQUESTORS/ PURCHASING ORDER TO DISTRIBUTION FINANCE NET PROFIT 37

Understanding Purchase to Pay Improvement Areas Improving the Purchase to Pay process requires an integrated Program rather than a point solution. The following are the top 10 high level best practices against which companies can be evaluated 1- Executive driven adherence to strong purchasing principles 2- Strategic alliances and preferred vendor programs 3- Integrated systems, including on-line requisition and procurement 4- Requester-focused ordering; Purchasing-focused sourcing 5- Purchasing involvement in budgeting and planning of total spend 6- Performance tracking, spend analysis and process measurement 7- Automation/Outsourcing of small value, high volume transactions 8- AP and Purchasing as information providers to decision makers 9- Co-ordinated Purchasing, Receiving and Payable processes 10- Authorization managed at budget-holder level 38

Understanding Purchase to Pay Improvement Areas Best Practices are designed to allow Purchasing and Accounts Payable to add value to the organization BEST PRACTICES 1- Purchasing principles 2- Strategic alliances 3- Integrated systems 4- Sourcing 5- Planning of total spend 6- Performance tracking 7- Automation/Outsourcing 8- Information providers 9- Co-ordinated 10- Authorization WHY (IMPACT) To establish internal credibility and power For suppliers to add value in the Supply Chain To streamline and consolidate information To proactively search the market To anticipate, in order to add value To measure and evaluate performance To allow time for value added activities To understand inefficiencies & better negotiate To look at the global vendor relationship To enforce accountability 39

Understanding Purchase to Pay Improvement Areas Typical issues by process Cash Management Uncontrolled release of funds Inaccurate cash forecasting process Large swings in cash requirements/shortages Purchasing Strategy No procurement strategy No form of central function No working capital strategy Budgeting & Forecasting Insufficient involvement in budget /forecast detail Purchasing not involved in supply chain mgt Payment Issuance Many payment channels Large number of low value checks High level of emergency manual payments Invoice Processing Low matching of invoice, P.O. and receipt note High volume of low value transactions Inefficient process leads to late payment Client Impacts: Competitive Disadvantage Lower Profitability Reduced Cash Flow Poor Supplier Relationships Originating Requirements Paper intensive requisition process High level of exceptions Every body can buy Selecting & Negotiating Purchasing involved after vendor selected No co-ordination of spend Lack of preferred vendor/strategic alliances Discrepancy Management No resolution process Discrepant deliveries lead to raw material shortages Discrepancies lead to loss of discount Receiving & Evaluating No record of supplier performance High delivery discrepancies Ordering & Contracting Retrospective Purchase Orders Poor contract management Open Orders 40

Typical detailed level Purchase to Pay problems Understanding Purchase to Pay Improvement Areas Budgeting & Forecasting (Strategy) Originating Requirements Supplier Selection & Negotiation Ordering & Contracting Receiving & Evaluating Payment Processing Continuous Improvement No Proactive involvement in budget management Budget Holders create their own relationships No Central function Purchasing not part of the strategic supply chain Manual requisition process High level of purchasing exceptions No active management of suppliers No Coordination of purchasing No team approach to supplier evaluation No vendor classification No strategic alliances Intensive Paper process No channel by type of spend Little contract Weak supplier evaluation Little process integration with suppliers Inadequate approvals and authorization mechanism Huge Invoice flow and volume No alternative methods of payment Low productivity Poor matching process No Discrepancy Management Late and wrong payment Poor customer service 41

How is it fixed by process? Understanding Purchase to Pay Improvement Areas Cash Management Scheduled outflows of cash Accurate cash forecasting process Predictable change in cash requirements Purchasing Strategy Well defined procurement strategy Strategic Sourcing Approach supplier as one company Budgeting & Forecasting Purchasing support budgeting and forecasting Highly detailed budget Purchasing support supply chain Payment Issuance Highly automated payment process (outsourcing) High utilization of electronic payment channels Low dollar assumed receipt Invoice Processing High automatic match rate between invoice, P.O and receipt note Consolidation of transactions Self billing Outsourcing Client Impacts: Competitive Advantage Increased Profitability Improved Cash Flow Better Supplier Relationships Originating Requirements Desktop requisition through e-procurement Purchasing monitor/ challenge spend How much and when Selecting & Negotiating Proactive involvement of Purchasing Consolidate terms and maximize credit Consolidation of spend Discrepancy Management Formal discrepancy management process Root cause elimination Supplier self assurance Receiving & Evaluating On-line receiving Supplier performance tracking Clear rejection standards Ordering & Contracting E-Procure Purchasing card Preferred supplier contracts 42

Understanding Purchase to Pay Improvement Areas How is it fixed? Budgeting & Forecasting (Strategy) Originating Requirements Supplier Selection & Negotiation Ordering & Contracting Receiving & Evaluating Payment Processing Continuous Improvement Company wide procurement strategy linked with corporate strategy Approach suppliers as one company Strategic sourcing organization to develop company wide strategy Clear Policies and Procedures Central repository Contract data Supplier Master Item Master and supplier catalogs People focused on supplier Mgmt. Flexible supply agreements based on supplier performance Strategic sourcing organization to coordinate company wide team sourcing decisions Team based decision making Preferred suppliers with on line catalogs Centralized contract management Local purchasing for tactical execution and unique one off buys Desktop purchasing through on-line catalog and requisitions On-line requisitions and approvals On-line PO system integrated with AP & Receiving Electronic workflow Procurement cards Bar codes usage Well defined receiving tolerances and responsibility Reduced receiving activity due to assumed receipt for low dollar items Negative receipt for services Quantity assessment Negative receipt Focus on program to Payment on continually improve: receipt (Evaluated Processes Receipt Supplier Settlement - ERS) relationships Outsource Quality checks/eft/wire/ Employee skills payments Customer service Process through Shared Services Center 43

Understanding Purchase to Pay Improvement Areas Where are the benefits? Budgeting & Forecasting (Strategy) Originating Requirements Supplier Selection & Negotiation Ordering & Contracting Receiving & Evaluating Payment Processing Continuous Improvement PURCHASING COST - 3% to 5% by consolidating expenditure on preferred suppliers and changing buying habits Volume rebate Price discount CASH FLOW + 10% to 25% Better negotiated terms (including term discounts) Increased early payment discount effectiveness Reduce premature payment PRODUCTIVITY + 25% to 50% Transactions processed, automated match rate within payables Rework reduction, by preventing root cause of discrepancies CUSTOMER SERVICE Improved Quality and Customer Service Approval cycle time reduction, improve visibility of requisition Reduce void checks and duplicate payment 44

Understanding Purchase to Pay Example Case Study: A prioritization approach - From P-Card as the solution to a comprehensive program 45

Understanding Purchase to Pay Example Illustrative Example: Maverick, Inc spends $800M annually. What could be the potential benefits of improving their Purchase to Pay cycle? Area Best Practice Current state Opportunity Benefits Total Spend outside Purchasing Influence < 10% 30% 3% to 5% price reduction on total spend outside Purchasing influence $7.2M to $12M Average DPO 30 days & 10% with discount DPO of 20 days & No discount Align with Best Practices $2.8M Invoice per FTE 2000/months 833/FTE/month 100,000 invoices 10 FTEs @ $70K Align with Best Practices $420,000 Total bottom line benefits $10M to $15M 46

Understanding Purchase to Pay Example Strategic Overview: The proposed program will move Real Case s expenditure practices to the GOOD rating, while avoiding overlap with on-going initiatives TOP 10 PURCHASE TO PAY BEST PRACTICES BEST PRACTICES INSUFFICIENT FAIR GOOD ACTION IN PROGRESS 1. Executive driven adherence to strong purchasing principles 2. Strategic alliances and preferred vendor programs 3. Integrated Systems, including on-line requisitions 4. User focused ordering; Purchasing focused sourcing 5. Proactive, expanded Purchasing involvement in budgeting and planning of total spend 6. Performance tracking and process measurements 7. Automated small value, high volume transactions 8. Finance role as information provider 9. Coordinated Purchasing and Payables 10. User and budget holder managed authorization 47

Understanding Purchase to Pay Example RECOMMENDATIONS METRICS AND REPORTING Create focus and commitment to expenditure management by developing performance metrics to expedite business decisions VENDOR AND CONTRACT MANAGEMENT Implement standard contract management / vendor agreement practices that will leverage purchasing best practices Cost Savings Productivity Vendor Rationalization Quick Card Program On-line Requisitions Discounts BENEFITS $3.5M to $5.75 M 5% -10% 5%-15% 10%-15% $270K E-COMMERCE DEVELOPMENT Improve purchase controls via on-line requisitions to channel company spend, sustain vendor rationalization and achieve productivity improvements INVOICE MANAGEMENT Improve invoice processing to prevent discrepancies and capture negotiated early payment discounts Additional benefits include: Improved Customer Service Improved Cycle Times Improved Vendor Satisfaction 48

Sample Victory: AP process costs reduced >&1.5MM USD with 4 month payback BancTec s precision in costing the organizational requirement for retained resources is significant 49

Quick Case Study: Accounts Payable 50

Benchmark Observations Best Practices Usage for PHI s Accounts Payable Year 2008 Best Practices AP leads the discount validation and payments timing forecast/triggers Extent the Internet or intranet is utilized to allow suppliers to inquire on their payment status (e.g., supplier self-service) Percent of purchase-order transactions that are submitted electronically to the supplier Centralized AP al payment functionality Percent of management approvals obtained online Online systems used for registering receipt of goods Percent of purchases made through a procurement card Utilization of Card, when in possession Percent of total invoices processed in an automated fashion (e.g., EDI, ERS, procurement card, recurring vouchers) Company Low Low Low Low/Med High High Low High High Strong Performance High Medium Medium High High High High High High 51

PHI s Working Capital Project Team Observations /Analysis Accounts Payable The Metrics for Accounts Payable (DPO) and Discount Opportunity Results Indicate: There is wide variation in DPO across the Utility companies and across document type. Discount Opportunities need to be researched further to determine if the utility companies are negotiating for discounts. Workflow/s must become automated/improved 52

ACE Totals - Invoice Item Count & $$$ Payment Terms No Pay Terms Ncash N2 N10 N15 N20 N25 N30 1% 10 1% 15 1% 20 1% Im 1% P 1.5% 1/2% 2% Im 2% 10 2% 15 2% 30 2% P4 5% 10 Items 2,728 15 1,850 0 21 0 9 5 798 5 0 14 0 0 0 2 0 9 0 0 0 0 $$$$$ (Thousands) $ 10,074 $ 126 $ 2,563 $ - $ 7 $ - $ 5 $ 6 $ 7,323 $ 15 $ - $ 2 $ - $ - $ - $ 10 $ - $ 17 $ - $ - $ - $ - % of Total Payments - No Discount = Items 98.90% Dollars 99.57% % Within No Discount Total No Pay Terms Ncash N2 N10 N15 N20 N25 N30 Items 100.00% 0.56% 68.57% 0.00% 0.78% 0.00% 0.33% 0.19% 29.58% Dollars 100.00% 1.26% 25.55% 0.00% 0.07% 0.00% 0.05% 0.06% 73.00% % of Total Payments with Discount DPL Items 1.10% % Within Doscount Total 1% 10 1% 15 1% 20 1% Im 1% P 0.015 1/2% 2% Im 2% 10 2% 15 2% 30 2% P4 5% 10 Dollars 0.43% Items 100.00% 16.67% 0.00% 46.67% 0.00% 0.00% 0.00% 6.67% 0.00% 30.00% 0.00% 0.00% 0.00% 0.00% Dollars 100.00% 34.10% 0.00% 4.81% 0.00% 0.00% 0.00% 23.11% 0.00% 37.99% 0.00% 0.00% 0.00% 0.00% Totals - Invoice Item Count & $$$ Payment Terms No Pay Terms Ncash N2 N10 N15 N20 N25 N30 1% 10 1% 15 1% 20 1% Im 1% P 1.5% 1/2% 2% Im 2% 10 2% 15 2% 30 2% P4 5% 10 Items 3,763 1 2,452 0 12 34 1 0 1,168 40 0 20 5 0 0 8 0 20 2 0 0 0 $$$$$ (Thousands) $ 9,258 $ 0 $ 3,202 $ - $ 39 $ 41 $ 1 $ - $ 5,862 $ 64 $ - $ 4 $ 12 $ - $ - $ 4 $ - $ 28 $ 0 $ - $ - $ - % of Total Payments - No Discount = Items 97.48% Dollars 98.78% % Within No Discount Total No Pay Terms Ncash N2 N10 N15 N20 N25 N30 Items 100.00% 0.03% 66.85% 0.00% 0.33% 0.93% 0.03% 0.00% 31.84% Dollars 100.00% 0.00% 35.02% 0.00% 0.42% 0.45% 0.01% 0.00% 64.10% % of Total Payments with Discount PEPCO Items 2.52% % Within Doscount Total 1% 10 1% 15 1% 20 1% Im 1% P 0.015 1/2% 2% Im 2% 10 2% 15 2% 30 2% P4 5% 10 Dollars 1.22% Items 100.00% 42.11% 0.00% 21.05% 5.26% 0.00% 0.00% 8.42% 0.00% 21.05% 2.11% 0.00% 0.00% 0.00% Dollars 100.00% 56.34% 0.00% 3.19% 11.00% 0.00% 0.00% 3.90% 0.00% 25.20% 0.35% 0.00% 0.00% 0.00% Totals - Invoice Item Count & $$$ Payment Terms No Pay Terms Ncash N2 N10 N15 N20 N25 N30 1% 10 1% 15 1% 20 1% Im 1% P 1.5% 1/2% 2% Im 2% 10 2% 15 2% 30 2% P4 5% 10 Items 2,377 18 830 2 41 0 1 0 1,367 16 0 58 2 0 0 12 0 27 0 1 2 0 $$$$$ (Thousands) $ 26,932 $ 186 $ 14,829 $ 6 $ 55 $ - $ 1 $ - $ 10,838 $ 2 $ - $ 53 $ 3 $ - $ - $ 817 $ - $ 125 $ - $ 3 $ 15 $ - % of Total Payments - No Discount = Items 95.04% Dollars 96.22% % Within No Discount Total No Pay Terms Ncash N2 N10 N15 N20 N25 N30 Items 100.00% 0.80% 36.74% 0.09% 1.81% 0.00% 0.04% 0.00% 60.51% Dollars 100.00% 0.72% 57.22% 0.02% 0.21% 0.00% 0.00% 0.00% 41.82% % of Total Payments with Discount PHI s Working Capital Project Team Observations /Analysis Accounts Payable Items 4.96% % Within Doscount Total 1% 10 1% 15 1% 20 1% Im 1% P 0.015 1/2% 2% Im 2% 10 2% 15 2% 30 2% P4 5% 10 Dollars 3.78% Items 100.00% 13.56% 0.00% 49.15% 1.69% 0.00% 0.00% 10.17% 0.00% 22.88% 0.00% 0.85% 1.69% 0.00% Dollars 100.00% 0.15% 0.00% 5.24% 0.28% 0.00% 0.00% 80.32% 0.00% 12.24% 0.00% 0.27% 1.50% 0.00% Invoice Discount Summary ACE % No Discount: Items: 98.9% Dollars: 99.57% % with Discount Items: 1.10% Dollars: 0.43% DPL % No Discount: Items: 97.48% Dollars: 98.78% % with Discount Items: 2.52% Dollars: 1.22% PEPCO % No Discount: Items: 95.04% Dollars: 96.22% % with Discount Items: 4.96% Dollars: 3.78% 53

Year 2008 1. Re-educate the payers of Invoices on DPO and Working Capital 2. Using SAP report FBL1N, monitor invoice payers for DPO on an invoice basis 3. Research and assess feasibility of implementing SAP functionality for monitoring Working Capital DPO 4. Establish a Scorecard target for DPO by the end of 2 nd Qtr. 2008. 5. Complete a feasibility study for automated Order to Pay PHI s Accounts Payable Working Capital Goals Project Evolution Year 2009 1. Monitor Early Payers and Discounts using SAP Report FBL1N (Report of Paid Items) Ongoing 2. Establish a method to measure DPO Working Capital Improvements Discounts, Pay Terms, and Invoice Type by end of 3 rd Qtr. 2007 3. Partner with Strategic Sourcing to (a) Improve Payment Terms and (b) Eliminate Payment Terms Not Contributing to an Improvement in DPO, both WIRE and checks 4. Assess feasibility of using SAP functionality or another third party vendor to improve DPO and implement Order to Pay process, increase electronic payments to vendors, and assess the feasibility of centralizing AP 54

A polling question. 55

When these attributes surface, there is benefit most from a proven approach Decision-making is stalled A business-case for a specific initiative lacks precision Working Capital Management is misunderstood Efforts to improve Working Capital Management are fragmented and/or slow to yield anticipated results Tools to create solid analytics are few, or do not translate across the company to cause quick action Demonstrable results need be realized in the current financial reporting period Metrics & indicators are not easily translatable is assessing performance Finance has the leadership role, but momentum is lagging due to the lack of analysis tools or process discipline Benchmarks & Best Practice inventories need be reviewed in a fair & objective manner, mindful of the unique business characteristics of the organization Do-It-Yourself efforts need support with a coaching dynamic, rather than a dictatorial stand-off Technology is not enabling the process Competing constituencies and concerns have stalled already agreedupon initiatives 56

A deliberate, coordinated approach to business process improvement yields results Coordinated Efforts Result In Attainment of the Optimal Benefit Realization Fragmented Efforts - Approximately 30% Of Benefits Are Lost! Source: Forrester Research 57

A proven business transformation approach has seen exceptional success Targeting Architecture Construction Deployment Scope Decision Identify specific outcomes of value Benchmark Establish Cost Targets Mobilize resources Define Business Needs Design End-to-End Processes (Internal & External) Identify relevant technology Develop solid business case/s Develop & implement change management plans Specifications, Build, Test Develop Procedures Establish New Organizations Pilot new Environment Review Pilot Roll-out Changes Track benefits 58

The Critical Success Factors for Successful WCM Projects Tactical use of targeted metrics Employment of those Benchmarks & Best Practice Reviews that rapidly translate into needed efficiency & effectiveness direction Ability to motivate the organization to a singular message: Cash is an asset Solid analytics & cost/benefit analysis Methods that produce outcomes of value, not credenza ware Inclusive approaches that enable key contributors to share in both the quick wins and the concerted effort 59

Next Steps Further, focused discussion around concepts and potential in your organization Dimension WCM targets.use the BancTec Benchmark as a way to scope / set initial direction Agree on a method a path for improvements Agree on each partner s responsibilities Identify timeline and deliverables Involve the wider team Commence Log on to www.banctec.com/benchmark 60