Technology Can Enhance Performance in Finance Departments

Finance transformation” refers to a longstanding objective: shifting the focus of CFOs and finance departments from transaction processing to more strategic, higher-value functions. Our upcoming Office of Finance benchmark research confirms that most of organizations want their finance department to take a more strategic role in management of the company: nine in 10 participants said that it’s important or very important. (We are using “finance” in its broadest sense, including, for example, accounting, corporate finance, financial planning and analysis, treasury and tax functions.) Finance departments have the ability and at least an implicit mandate to improve business performance and enable a corporation to execute strategy more effectively. Yet the research shows that becoming strategic is a work in progress. Most departments handle the basics well, but half fall short in areas that can contribute significantly to the performance of their company. More than three-fourths of participants said they perform accounting, external financial reporting, financial analysis, budgeting and management accounting well or very well. But only half said that about their ability to do product and customer profitability management, strategic and long-range planning and business development.

We asked research participants to identify the three most important issues finance departments confront in a dozen functional areas: accounting, budgeting, cost accounting, customer profitability management, external financial reporting, financial analysis, financial governance and internal audit, management accounting, product profitability management, strategic and long-range planning, tax management and treasury and cash management. We gave as choices for issues analytics, data availability and quality, management effectiveness, process design, software and training. As a whole, participants did not point to a single overarching issue. On average, none of the six issues was selected by more than half of participants, and the difference in frequency between the top three issues – process, analytics and data – were statistically insignificant. The identification of these top three as important issues confronting Finance is consistent with other research we have done. On the other hand, software was the issue least frequently named, chosen by just 24 percent. Yet failure to use highly capable software and reliance on spreadsheets often are root causes of process, analytics and data issues. The inability to recognize the importance of technology in supporting finance processes is an ongoing barrier to improving the performance of finance departments. The research provides several examples.

We find that the best-performing finance organizations adopt a total quality management approach to finance and accounting. As with manufacturing operations, the objective in any finance department process should be to design quality into the process (for example, addressing root causes that drive errors in calculations and accounting classifications) and ensuring consistent execution of that process. A poorly designed process is often the heart of a problem that results in unnecessary work in the finance organization or in its impact on customer-facing roles or other aspects of company operations. Yet inconsistent execution can offset the benefits of a well-designed process, which is why software with built-in workflow addresses the root causes of issues that arise when processes are managed with spreadsheets and email.

The research also points to a good deal of skepticism (or ignorance) on the part of executives generally and finance professionals in particular about the role that technology can play in making the finance organization a more effective, strategic organization. While two-thirds said that business analytics will significantly influence their future performance, only half that many asserted that mobile technology and big data will be influential. Only half said that cloud computing can affect their performance, and just 15 percent said that about technology that promotes collaboration. (I have written that collaboration is an essential aspect of how work is performed in finance departments.)

One possible reason why technology fails to impress finance departments is that software companies have done a poor job of marketing to them. There is a lasting memory of the Y2K fizzle and the stoking of misplaced fears of the impact of the Sarbanes-Oxley Act. For the most part, new technology is promoted as new and better with little regard to the tangible, practical benefits that address finance departments’ needs. This omission fails to engage a departmental culture that is resistant to change and averse to being “sold” anything.

One of the most important roles that a finance department has is providing the rest of the company with analysis and perspective on business results to enable them to understand “the why behind the what.” Here, too, using the right software can be a critical factor. Desktop spreadsheets are indispensable, but they are not always the right choice for analysis. Because they are two-dimensional grids, spreadsheets have a limited ability to manipulate data in multiple dimensions such as by business unit, product family, currency, geography and time (to name several of the most common). Pivot tables can be helpful, but they offer a limited ability to manage dimensions and are time-consuming. Replacing desktop spreadsheets with the right software usually is necessary to address analytics issues.

Data quality and availability are common issues in all of our benchmark research and usually stem from a variety of sources. Here, too, the inappropriate use of desktop spreadsheets is a factor that often goes unrecognized. When data is extracted from enterprise systems and then subjected to further analysis and reporting using spreadsheets, errors and inconsistencies inevitably follow.

Creating a high-performing finance organization requires attention to the full range of people issues (such as leadership and communications) as well as process design and management (especially in designing in consistency in execution and designing out opportunities for mistakes and other process defects). Along with these, technology competence is essential to an effective finance organization. Companies with 500 or more employees benefit from having a dedicated group that understands the requirements of the finance function and how information technology can best address those needs. (Those with fewer than 500 employees would also benefit, but it’s usually not a practical option.) The good news is that almost half of companies (44%) have such as group, but, of course, a majority do not. The research also shows that having such a finance IT group reduces the likelihood that the department will experience issues with the software the department uses or the analytics they employ in a range of processes and functions. Twice as many of those in the research that lack a finance IT function reported issues with the software they use for managing a range of finance and analytical functions, and two-thirds (68%) more often they reported issues with the analytics they use than those that have a finance IT group.

Over the past several decades finance executives have done an excellent job of making the Office of Finance far more efficient through the use of technology. ERP and financial performance management systems have enabled companies to grow without having to add finance department head count. However, the Office of Finance now must focus on using technology to improve its effectiveness and the value it provides the rest of the company. Faster closing, increasing financial data timeliness, using advanced analytics and automating repetitive departmental tasks are all ways that information technology can enhance the performance of the finance department. Changes in the technology underpinnings of finance-focused applications will support efforts by CFOs and senior finance executives to forge more a strategic partnership role with the rest of the organization and reshape the mission of their department. They will put the CFO and the Office of Finance in position to enhance the potential and performance of business.

Regards,

Robert Kugel – SVP Research

Data-Driven Business Processes Essential for Optimization

When applying information technology to drive better business performance, companies and the systems integrators that assist them often underestimate the importance of organizing data management around processes. For example, companies that do not execute their quote-to-cash cycle as an end-to-end process often experience a related set of issues in their sales, marketing, operations, accounting and finance functions that stem from entering the same data into multiple systems. The inability to automate passing of data from one functional group to the next forces people to spend time re-entering data and leads to fragmented and disconnected data stores. The absence of a single authoritative data source also creates conflicts about whose numbers are “right.” Even when the actual figures recorded are identical, discrepancies can crop up because of issues in synchronization and data definition. Lacking an authoritative source, organizations may need to check for and resolve errors and inconsistencies between systems to ensure, for example, that what customers purchased was what they received and were billed for. The negative impact of this lack of automation is multiplied when transactions are complex or involve contracts for recurring services.

Our benchmark research shows that data fragmentation, consistency, availability, usability and timeliness are key issues for companies.  The information management issues in process design and execution are similar to those at work for analytics.   However, addressing them effectively requires a different approach than just creating a separate data store to be the “single version of the truth.” Careful consideration is required to determine the best method to manage data throughout a core business process, particularly when multiple applications are required to automate and support the execution of the process. Software application platforms offered by some vendors make it far easier to integrate niche software applications into processes in a way that may eliminate the need for an operational data store.

The information dimension is usually overlooked in designing business systems because data is viewed as a given, is not explicitly considered (“we’ll work out the details later”) or is considered only an afterthought. This may occur because the information dimension of systems engineering is treated as being of secondary importance to defining the best process and determining the required applications capabilities. But we think making data an afterthought is a mistake. Ventana Research uses a framework that explicitly calls out information (all forms of data) and technology (software, hardware and networks) as separate elements in addressing business issues, rather than lumping the two together as “technology.” Explicitly taking the data perspective into account provides a broad perspective that frames process and technology requirements. We assert that treating data as a core consideration can result in better process design and clarify the issues companies must consider to select the appropriate systems to support the people and process aspects of business operations.

Quote-to-cash is a useful example of where an end-to-end process requires more than just workflow to manage the handoffs as tasks are executed. In some simple cases, an ERP system can handle all of the details. In others, automating the process and data flows may require multiple systems (such as a CRM system for customer and account information, as well as systems for product configuration, contract management, billing and collection in addition to ERP. Some of the data assembled in a quote-to-cash transaction may have to be transferred to other operational systems to fulfill the transaction. To achieve best results, data must be staged and controlled from start to finish and there must be a single system of record. Deciding on what application (or applications) to use to manage the process and where to locate the system of record physically and logically depends on a company’s specific circumstances.

Engineering quote-to-cash end to end from both process and data flow perspectives can speed its completion (thereby improving customer responsiveness), remove unnecessary manual steps (generating efficiencies) and reduce or eliminate errors at every step (resulting in better customer service and lower costs).

Another example that benefits from a data-driven end-to-end process is requisition-to-pay. It may seem counterintuitive, but accelerating the payment of invoices can improve a company’s bottom line. With interest rates in much of the developed world at historic lows, the greatest return on available cash is taking advantage of early payment discounts. Yet few companies take advantage of these. One important reason why they don’t is deficiencies in the data and technology needed to make early payment practical. Starting the automated process at the point of initial requisition gives the treasury function better visibility into the amounts and timing of future outlays, making cash forecasting more certain. Greater certainty about the corporation’s cash position lowers the amount of cash it needs to hold to meet payment obligations while maintaining an adequate operating liquidity buffer to allow for forecasting errors and unanticipated needs. Companies that have limited visibility will be cautious about making payments and must maintain a larger, more conservative buffer stock of cash. Using automated systems to speed the processing of invoices by eliminating delays in handoffs is only one element needed to make early payment discount feasible. Timely access to accurate data to support processing invoices is necessary, as is data needed by an analytical application that supports the treasury function to handle the complexities of managing cash effectively.

The importance of timely access to reliable data is often overlooked, but it can be the key ingredient to improving the execution of core business and finance department functions. Engineering data and data management into the design of technology-driven processes must not be an afterthought; it must be integral to the decisions about what software is used and how processes are to be performed. Our research shows that data issues plague companies, and the larger the company, the bigger the problem may be. Effective data management is essential to improve corporate performance. We advise companies to review their current processes and take steps to modernize and automate any that are a drag on performance.

Regards,

Robert Kugel – SVP Research