The Office of Finance in 2016

The imperative to transform the finance department to function in a more strategic, forward-looking and action-oriented fashion has been a consistent theme of practitioners, consultants and business journalists for two decades. In all that time, however, most finance and accounting departments have not changed much. In our benchmark research on the Office of Finance, nine out of 10 participants said that it’s important or very important for finance departments totake a strategic role in running their company. The research also shows a significant gap between this objective and how well most departments perform. A large majority (83%) said they perform the core finance functions of accounting, fiscal control, transaction management, financial reporting and internal auditing, but only 41 percent said they play an active role in their company’s management. Even fewer (25%) have implemented a high degree of automation in their core finance functions and actively promote process and analytical excellence.

Despite these findings, we believe that today finance transformation is both necessary and achievable. Practical, affordable technology is available to enhance productivity in order to de-emphasize the department’s “bean counting” role and promote its ability to enhance the performance of the entire corporation. Technology enables Finance to be more proactive and more strategic in providing analyses and methods that enhance its capabilities and improve the performance of the entire corporation. Of course, technology by itself will not transform a finance organization, but most of the longstanding issues that it must address to improve performance can be fixed using information technology to address interrelated people, process and data issues in a comprehensive fashion.

Our Office of Finance research agenda for 2016 emphasizes three broad technology-related themes serving the goal of finance transformation:

• Applying a continuous accounting approach to promote greater departmental efficiency and effectiveness
• Adopting technology that promotes action-oriented continuous planning, using rapid, short planning cycles to promote agility, coordination and accountability
• Using software and other information technologies to achieve continuous optimization to promote ongoing organizational alignment across departments and business units.

Continuous Accounting

We introduced the term “continuous accounting” last year to identify the three areas where our research consistently finds tactical roadblocks to achieving a more strategic finance organization. By focusing on these three areas, finance executives can achieve steady gains in effectiveness.

The first area concerns how the organization uses technology and manages information. To enhance effectiveness, finance departments must use software to automate all mechanical, repetitive accounting processes in a continuous, end-to-end fashion. Automation improves efficiency by eliminating the need to have people perform repetitive tasks. For example, we find that most (71%) companies that automate substantially all of their financial close complete it within six business days of the end of the quarter, compared to 43 percent that automate some of the process and just 23 percent that have automated little or none of it. Using software enables the department to manage the flow of data through its processes in a continuous, end-to-end fashion. This ensures data integrity, which in turn eliminates the need for checks and reconciliations that can consume time that could be spent more productively. Data integrity is undermined every time data is re-entered manually or when a spreadsheet is used in a process: for example, when data from one system is manually transferred to another; when the same information is entered twice in two different systems; or when a spreadsheet is used to perform an allocation or a set of calculations.

The second aspect of continuous accounting involves optimizing scheduling of tasks. Continuous accounting incorporates a process management approach that, wherever possible, distributes workloads continuously to flatten spikes of activities, whether in the month, quarter, half-year or year. This approach eliminates bottlenecks and optimizes when tasks are executed. It reduces stress on the department and can eliminate the need for temporary help and its associated expense. Much of the traditional accounting cycle and related departmental practices are artifacts of paper-based bookkeeping systems. These methods dictated the need to wait until the end the month, quarter or year to take accountants off line to perform aggregations, allocations, checks and reconciliations; that rhythm represented the best trade-off of efficiency and control in such antiquated approaches. Today’s systems offer far more flexibility that enables departments to spread workloads more evenly over time and complete them more expeditiously.

The third aspect of continuous accounting is the need to instill continuous improvement in the departmental culture. This steps counters tendency of any organization – but especially finance – to embrace a “we’ve always done it this way” mindset that resists needed change.  Continuous improvement acts as a mission statement that sets increasingly rigorous objectives. To achieve those objectives it’s necessary to have regular reviews of performance toward those objectives and make addressing shortcomings a priority. For departmental executives, communicating the need for continuous improvement is an essential element to achieving finance transformation.

Used as an organizing principle for the department, continuous accounting frees up time and therefore the resources needed to implement changes that result in performance improvements in a sustained and steady fashion. Adopting a continuous accounting approach enables CFOs and finance executives to reduce the amount of time spent “fighting fires,” many of which are the result of not using capable technology.

The Transformation of ERP

In most companies, ERP systems are the backbone of the accounting function, and this software category will continue to be an important focus of our research in 2016. The ERP software market is set to undergo a significant transformation over the next five years. At the heart of this transformation is the decade-long evolution of a set of technologies that enable a major shift in the design of these systems – and it amounts to the most significant change since the introduction of client/server technology in the 1990s. Vendors are seizing on technologies such as in-memory computing, improving the user interface and user experience, adding more in-context collaboration and extending the use of mobility to differentiate their applications from rivals. Those with software-as-a-service (SaaS) subscription offerings are investing to make their software suitable for a broader variety of users in multitenant clouds. These and other topics will be addressed in the results of our next-generation ERP benchmark research, which we will release in 2016.

We’ll also continue to look at the application of financial performance management (FPM) to improve results. Ventana Research defines FPM as the process of addressing the often overlapping issues that affect how well finance organizations support the activities and strategic objectives of their companies and manage their own operations. FPM deals with the full cycle of the finance department’s functions, including corporate and strategic finance, planning, budgeting, forecasting, analysis, closing reporting and statutory filing. In each of these areas, using inappropriate technology has a negative impact on how well a company performs. We will continue to highlight the importance of improving the creation and use of analytics. For example, our Office of Finance research finds that on average, companies that are heavy users of spreadsheets in their closing process take longer to close their books than those that limit them or don’t use them at all. Elsewhere, our next-generation finance analytics research finds a high degree of dissatisfaction with finance analytics in the company: 58 percent said that significant or major changes are necessary while just 7 percent stated no improvements are necessary. The research also shows that heavy use of spreadsheets for all forms of analysis is at the heart of this dissatisfaction. In 2016 also we’ll publish the next installment of our Financial Performance Management Value Index, which assesses vendors and products in this software market.

Financial Performance Management

As noted above, we recommend that finance organizations that want to play a more strategic role in the management of their corporation should adopt a continuous planning methodology for their financial planning and analysis function. A continuous planning approach uses frequent, short planning cycles to promote agility, coordination and accountability in operations. It includes establishing an ongoing dialogue among finance and line-of-business managers and executives to track current conditions as well as changes in objectives and priorities driven by markets and the business climate. To manage planning in such a comprehensive way requires dedicated software that enables members of the FP&A organization to focus more of their time on analysis and modeling. Technology also enhances the quality of plans, forecasts and budgets. In particular, in-memory computing makes it feasible to rapidly process computation of even complex models with large data sets. Consequently, it can expand the range of planning, budgeting, forecasting and reviewing performed in rapid cycles. It enables organizations to run more simulations to understand trade-offs and the consequences of specific events, as well as change the focus of reviews from what just happened to what to do next. For these reasons, in-memory computing also may encourage more companies to replace spreadsheets (which have practical limits to the size, complexity and adaptability of the models that are created in them) with dedicated planning applications that can harness the power of in-memory processing.

Sales and Operations Planning for Finance

Companies that deal in physical goods that are manufactured or sourced and then sold direct or into distribution channels often benefit from using sales and operations planning (S&OP). The process of orchestrating the flow of parts and materials through the production process to meet expected customer demand involves many functional units, each of which make plans, as well as the finance organization, which assesses the financial impact. Sales and operations planning is a discipline aimed at aligning and optimizing the plans of several business units. There are sales plans, product plans, demand plans and supply chain plans. Within a corporation, the performance of each of the functional units that produce these plans is assessed using different, often conflicting metrics. Information technology enables corporations to manage their inventories more skillfully and  minimize their working capital investment while maximizing their ability to fulfill demand. S&OP is designed to align a company strategically so that it can execute tactically in more effective fashion. The ultimate goal is to determine how best to manage company resources, especially inventory and cash, to be able to profitably satisfy customer demand with the lowest incidence of stock-outs. The output of an S&OP group is a SKU-level demand forecast that is used to create a detailed inventory plan. This quantitative plan is a major driver of a process that guides the purchasing an optimal amount of inventory (the one that best balances desired fulfillment rates while minimizing the investment in inventory) from the best set of suppliers (balancing a range of considerations including goods availability, pricing, discounts, economic order quantities and supply chain constraints). To enhance their strategic value, the financial planning and analysis group should play an integral role in the sales and operations planning process.

Advanced Analytics

We also will monitor the ongoing development of advanced analytics for business users. Using technology to make better use of data through advanced analytics can provide companies with breakthrough results. Often that’s because using capable information technology can provide insights and visibility that are unavailable by eyeballing data or using spreadsheets. Advanced techniques such as predictive analytics provide companies with more nuanced forecasts as well as the ability to spot deviations from expected results and thus address problems or seize opportunities sooner. For example, price and revenue optimization is rapidly developing applied analytic techniques that enable businesses to achieve higher profitability, increased sales or some combination. Software that helps manage pricing and profitability is spreading from hospitality, transportation, retailing to consumer financial services and other areas, especially business-to-business verticals. Used properly, this type of software enables a company to tailor its control of individual decisions regarding pricing, discounts and other terms to achieve the results best suited to its strategy. It can continuously make adjustments consistent with longer-term objectives in response to market conditions. Price and revenue optimization is impossible to achieve without using software and analytics that can deal with the huge volumes of today’s data.

Tools for Promoting Productivity and Effectiveness

There are a range of specialized software tools also can promote a more effective finance function, and executives must focus on acquiring and using those that enable the department to take a more active role in improving performance in the company’s operations. Finance has the necessary analytical talent and is positioned to be a neutral party in balancing the requirements of different functional groups or where issues cross business units or geographic boundaries.

The Office of Finance practice will continue to focus on software categories that can improve corporate efficiency, increase visibility and enhance agility. Our main objective is to enable finance organizations to be more effective by eliminating the root causes of time-wasting, low-value activities. For example, more companies are adopting a subscription or recurring revenue business model. This model isn’t always handled well by ERP systems, especially if a company is selling something more complex than simple subscriptions. These companies need to automate their quote-to-cash process from end to end, with the objective of controlling the flow of data, from configuring, quoting and pricing all the way to billing. Using this type of automation to ensure data quality enables companies to achieve two usually conflicting goals: substantially reducing finance and accounting department workloads while still allowing sales and marketing to offer customers flexibility in how they buy their services or products. Expense management is another classic time-waster poorly executed in most companies. Automation not only can save the finance department time, it also can reduce the “administrivia” workload for employees who have to submit expense reports. The cost of these expense management systems is typically less than one full-time equivalent employee, but it can save a multiple of that amount of time.

Managing Taxes More Intelligently

Taxes are one of the biggest expenses corporations face. There are two basic types of taxes: direct or income taxes and indirect taxes, which include sales and use tax and value taxes. Managing direct tax provision and analysis is still in the dark ages in most companies. We recommend to corporations that operate in multiple countries and that have even a moderately complex legal entity structure that they consider tax provision software that is supported by what we call a tax data warehouse of record. Taxes operate in a parallel universe from business management. Our research confirms that most companies use spreadsheets to manage their tax provision and analysis: Half (52%) rely solely on spreadsheets, and another 38 percent mainly use them. Several issues arise in using spreadsheets in the tax function: They are time-consuming, provide limited visibility to senior executives and pose unnecessary risks through errors. International companies are facing increasing scrutiny of their tax positions and can benefit from using dedicated software to manage their direct taxes more intelligently. Among the indirect taxes, in the United States, sales taxes are notoriously complex to administer. We recommend that any company with 100 or more employees doing business in more than a handful of states adopt a sales tax service for the same reason that they use a payroll service: It’s not worth the time, hassle and potential liability to do it in house.

The Impact of Changes to Accounting Rules

The Office of Finance practice at Ventana invests a great deal of time in researching software applications and related information technology. Uniquely, though, we also read accounting bulletins. The world of accounting is undergoing a substantial change now and over the next three years as a result of the adoption of accounting rule changes for revenue recognition and, to a lesser extent, lease accounting. The impact of revenue recognition changes will be profound because it is built on a fundamentally different conceptual framework than classical accounting. The upshot of this framework is that systems must account for revenues and expenses in a parallel fashion rather than in a balancing one. This type of approach would have been extremely problematic in paper-based systems. It’s feasible only because of the nearly universal use of computer-based accounting systems. Almost all ERP vendors are gearing up to support the new accounting rules, but it’s important for companies to plan ahead to make the transition as smooth as possible. And it’s important to be sure that sales contracts and documentation are designed to make accounting for them as efficient as possible.

Technology’s Role in the Office of Finance

One major reason for investing in technology is to help senior executives achieve better results by supporting more effective business management techniques. For example, our benchmark research on long-range planning demonstrates that better management of technology and information can improve alignment between strategy and execution. And when it comes to cloud computing, far from simply being a technology concern, cloud computing enables corporations to cut costs and gain access to more sophisticated technology than they could feasibly support in an on-premises deployment. Using technology can boost performance. The improper use of spreadsheets as seen in our research continues be an unseen killer of corporate productivity because these tools have inherent defects that significantly reduce users’ efficiency. Relying on spreadsheets makes it impossible to find the time to improve performance. Increasingly companies have inexpensive options that are easier to use and enable more advanced, reliable modeling, analysis and reporting.

Information technology is an essential element of business management and promotes a discipline of continuous optimization, a term we use to emphasize the importance of achieving better alignment of organizations to a company’s strategy. Yet many senior executives and managers have too narrow and too limited an understanding of IT’s full potential, much as those managing corporate information technology usually don’t appreciate business issues and how IT can address them. The business/IT divide is a barrier that prevents many companies from achieving their performance potential. The divide need not exist. Business executives don’t have to be able to write Java code or master the intricacies of an ERP or sales compensation application. However, they should master the basics of IT just as they must understand the fundamentals of corporate finance, the production process and – at least at a high level – the technologies that support that process. Our research practice addresses the significant business issues where technology plays an important role in addressing those issues. Because business is dynamic, optimization must be continuous to adapt to changes in markets, the competitive landscape and customer demands. Continuous optimization requires companies to operate in faster cycles and have real-time visibility to improve responsiveness and agility. Information technology can remove the barriers that prevent them from achieving more optimal results.

Regards,

Robert Kugel – SVP Research

Research Agenda: The Office of Finance in 2015

Last year Ventana Research released our Office of Finance benchmark research. One of the objectives of the project was to assess organizations’ progress in achieving “finance transformation.” This term denotes shifting the focus of CFOs and finance departments from transaction processing toward more strategic, higher-value functions. In the research nine out of 10 participants said that it’s important or very important for the department to take a more strategic role. This objective is both longstanding and elusive. It has been part of the conversation in financial management circles since the 1990s and has been a primary focus of my research practice since its inception 12 years ago. Yet our recent research shows that most finance organizations struggle with the basics and few companies are even close to achieving this desired transformation.

Today, finance transformation is not only even more necessary but also increasingly achievable. Advanced technology now can equip management teams with more powerful competitive capabilities. Its availability has raised the bar for everyone in business. Technology changes the terms of engagement, expands available marketing channels, alters consumer preferences and revolutionizes business models. The overabundance of hype when it comes to the popular treatment of information technology can obscure its usefulness in business. One of the most serious challenges for executives – especially in the Office of Finance – is to understand the practical application of information technology, neither embracing fads nor ignoring opportunities with real economic and competitive benefits.

Business computing tools continues to evolve in ways that make it more user-friendly and more affordable than ever, and thus it can assist in achieving finance transformation. The “consumerization” of business applications is now well established, as software vendors adapt technology to enable their software to adapt to the needs and preferences of users. Moreover, as technologies such as in-memory processing and big data analytics find increasing use in business, savvy executives will adjust their management practices to use them to their advantage. In-memory computing, for instance, makes it practical to easily engage in a numbers-based dialog for planning, tactical analysis and performance insights.

In my experience, this persistent focus on mechanics is necessary because relatively few finance and accounting organizations make effective use of available and affordable technology. Instead, a majority spend too much time “fighting fires,” many of which are the result of not using capable technology. To get beyond this situation, CFOs and controllers must evaluate their existing IT systems with an eye to using them to automate repetitive tasks and speed execution of cross-departmental functions. Doing that can free up time and money better spent on activities that return value, such as more insightful and actionable analyses or more accurate forecasting and planning. Our new research agenda for the Office of Finance attempts to balance the leading edge and mainstream use to help businesses find practical solutions.

Ventana Research’s Office of Finance practice uses two key criteria to select a research topic: It must have pressing relevance to finance executives as a means to improve their company’s performance, and information technology can play a role in addressing the issue. Our research agenda for 2015 emphasizes three broad technology-related themes serving the goal of finance transformation:

• The use of software and other information technologies to expand and extend the department’s capabilities
• More effective execution of the finance function
• Using IT to make it easier to implement change.

Within each of these three themes we will be exploring a range of important topics.

First, to address basic requirements, we’ll look at the application of financial performance management (FPM) to help improve results. Ventana Research defines FPM as the process of addressing the often overlapping issues that affect how well finance organizations support the activities and strategic objectives of their companies and manage their own operations. FPM deals with the full cycle of the finance department’s functions, including corporate and strategic finance, planning, forecasting, analysis, closing and reporting. It involves a combination of people, processes, information and technology.  In each of these, not using the appropriate technology has a significant impact on how well a company performs. For example, spreadsheets are an essential technology for finance departments but often are used inappropriately. Our research shows that on average companies that use them substantially in managing their financial consolidation and close take more than two days longer to complete the process than those that use them rarely. Spreadsheets are often used to address the symptoms – not the causes – of technology issues. But automation through software dedicated to such tasks can eliminate the need for repetitive steps such as allocations and reconciliations or address the root causes of data that is hard to access, inconsistent or inaccurate.

Similarly, ERP systems are a core technology that supports finance operations. Forward-looking finance executives must take into consideration more than just the difficulty and cost of implementing and modifying these systems. A reluctance to make timely changes to ERP systems poses cost and risk issues of its own. Organizations that are have shied away from cloud-based ERP also should re-examine their assumptions for doing so.

ERP is a mature category, yet there are some business models and methods that most ERP systems do not handle well. The Office of Finance practice will be paying greater attention to areas such as configure, price and quote (CPQ) applications as well as recurring revenue software. Companies that offer subscription-type services (as their core business or one that contributes a significant share of revenues) will find it valuable to automate the quote-to-cash process as an end-to-end process, including control of the data created by and used in the process.

To strengthen its core capabilities, several technologies are particularly important to the Office of Finance. One, mentioned above, is in-memory computing. Because of its ability to rapidly process computation of even complex models with large data sets, in-memory computing can expand the range of planning, budgeting, forecasting and reviewing. It enables organizations to run more simulations to understand trade-offs and the consequences of specific events, as well as change the focus of reviews from what just happened to what to do next. For these reasons, in-memory computing also may encourage more companies to replace desktop spreadsheets (which have practical limits to the size, complexity and adaptability of the models that are created in them) with dedicated planning applications that can harness the power of in-memory processing.

More effective use of technology also means replacing spreadsheets used in repetitive collaborative enterprise processes with dedicated applications. Our recent business planning research reveals that a majority of midsize and larger companies continue to use spreadsheets for planning, forecasting and budgeting – and these companies continue to suffer the consequences, such as an inability to do effective contingency planning or drill down into underlying data to have visibility into root causes of opportunities or issues. People recognize that spreadsheets have shortcomings, but they rationalize their use because of their familiarity and convenience. Our research shows that many aren’t aware of the various categories of affordable and relatively easy to use software that provide a range of capabilities unavailable in spreadsheets. Those capabilities can go a long way toward making Finance more strategic.

For instance, predictive analytics is a technique that companies can utilize to achieve better results. It can be used to create more accurate or nuanced projections of future outcomes and is especially useful in quickly finding divergences from expectations to create more timely alerts. For instance, rather than having to wait until the end of a month to look at actual results and then initiate a course of action, early in the month a corporation could use predictive analytics to spot and address a probable revenue shortfall in a specific product line or to change production rates or shipments to avoid a likely regional stock-out caused by demand that is stronger than expected. Predictive analytics increasingly is embedded in planning applications.

Other, more specialized software tools also can promote a more effective finance function, and executives must focus on acquiring and using those that enable the department to take a more active role in improving performance in the company’s operations. Finance has the necessary analytical talent and is positioned to be a neutral party in balancing the requirements of different functional groups or where issues cross business units or geographic boundaries. For example, software that helps manage pricing and profitability is spreading from hospitality, transportation, retailing and consumer financial services to other areas, especially business-to-business industries. Used properly, this type of software enables a company to tailor its control of individual decisions regarding pricing, discounts and other terms to achieve the results best suited to its strategy. It can continuously make adjustments consistent with longer-term objectives in response to market conditions. Similarly, companies increasingly use expense management systems to gain greater control over aggregate spending and vendor selection. These sorts of systems can provide controllers and treasurers with greater forward visibility into future outlays, ensure volume discounts are utilized and honored, and help streamline the accounts payable process to earn early-payment discounts.

Another operational area, taxation, incurs some of a company’s biggest expenses, yet direct (income) tax management is still in its infancy. Here also, most organizations use desktop spreadsheets to manage their direct tax analytics and provisioning, a time-consuming process that fails to deliver transparency or the ability to manage tax risk exposure effectively. They would do better with technology more conducive to a strategic approach to managing income taxes. Half the companies in our research said that having deeper insight into their tax positions could save them money. A growing list of software is available to make the tax provisioning process faster and more visible, enabling companies to make better decisions about the timing and aggressiveness of their tax positions. In addition, all larger and some midsize corporations can benefit from a dedicated tax data warehouse to support the automation of tax planning and provisioning.

The third area where technology can help senior executives achieve better results is in implementing fundamental changes in business management. For example, our benchmark research on long-range planning demonstrates that better management of technology and information can improve alignment between strategy and execution. As well, far from simply being a technology concern, cloud computing enables corporations to cut costs and gain access to more sophisticated technology than they could feasibly support in an on-premises deployment. Using effective technology can boost performance. The improper use of spreadsheets as seen in our research continues be an unseen killer of corporate productivity because they have inherent defects that significantly reduce users’ efficiency in these tasks. Increasingly companies have inexpensive options that are easier to use and enable more advanced, reliable modeling, analysis and reporting. Finance organizations are usually involved in developing scorecards to assess performance. In developing and applying balanced scorecards, companies must incorporate operational risks to the mix of measures. Managing operational risk outside of financial services is still hit-and-miss, as our benchmark research on governance, risk and compliance shows. Nonfinancial businesses rarely manage risk well, usually because they do not measure risk explicitly and therefore do not formally consider it as a trade-off in making decisions.

Another component of our 2015 research agenda is the Ventana Research Value Indexes – detailed evaluations of vendor software offerings in specific categories. We carefully assess an exhaustive list of product functionality and its suitability to task, product architecture and the effectiveness of vendor support for the buying process and customer assurance. Each Value Index represents the value a vendor offers and relevant aspects of its products and services for users. This year again we will assess financial performance management suites and introduce a new Value Index for business planning software to complement our benchmark research.

Information technology is an essential element of business management. Yet many senior executives and managers have too narrow and too limited an understanding of IT’s full potential, much as those managing corporate information technology usually don’t appreciate business issues and how IT can address them. The business/IT divide is a barrier that prevents many companies from achieving their performance potential. The divide need not exist. Business executives don’t have to be able to write Java code or master the intricacies of an ERP or sales compensation application. However, CEOs and executives should master the basics of IT just as they must understand the fundamentals of corporate finance, the production process and – at least at a high level – the technologies that support that process. My research agenda for 2015 that you can download continues to focus on the major issues in which technology plays a key role in addressing key issues that confront businesses. Please follow my analyst perspectives this year as I continue to focus on the practical use of information technology to improve the effectiveness of finance and accounting professionals.

Regards,

Robert Kugel

SVP Research