Sunday, December 12, 2010

Speed up your close


It’s been 10 years since companies like Cisco pushed the financial close envelope to its limits and set out-of-this-world standards for closing their books within 1 hour.  Cisco was one of the leaders in the “virtual close” space moving from a 14 day window to being able to close their books and produce consolidated financial statements within hours.  As a result, they cut their finance costs in half and were able to provide Cisco executives with the data they needed to achieve sales targets, manage expenses, and make daily decisions that resulted in increased shareholder value.  

In the last 10 years, much has changed in the world of finance.  In addition to the global financial crisis, finance outsourcing and off-shoring has become a large topic.  As a result of this, many finance operations have been significantly downsized; complicating the picture still are a set of accounting rules and regulations that are becoming more complex.   Data from BPM International suggests that while some improvements have been made to average close cycle times, significant improvements have not occurred.  Further, the data suggests that for leading companies, many have actually increased the number of days it takes to close.  

This article highlights several aspects of a financial close improvement program. If you have not reviewed your close cycling with an eye toward efficiency, now is this time. 

How fast should I close?

Research by the Hackett Group indicates that the top 10% of global companies close their books internally within five days.  Further research by BPM International indicates that there is a direct linkage between the number of days to close and the health of the finance group, finance processes and systems that support the financial close.  If your close is taking longer than 30 days, there are significant issues, in plain sight or hidden, within the financial close process. 

Benefits of a faster close

In addition to the cost benefits due to the reduction of manual input and reconciliation, a faster close supports better decision making due to timely access to information.  This allows managers to work from the same set of facts.  Since the data is timely and consistent, proper behaviour can be measured throughout the organization.  Shareholder value is increased as more time is allowed for analysis of market opportunities since time spent performing the close is reduced.  

Financial System Changes

One of the key aspects of Cisco’s success is that they adopted a fully automated financial system through their organization.  The solution was fully integrated and included an automated financial consolidation system.  

Cisco also implemented an automated intercompany accounting system which allowed transactions to occur between entities without the need for accounting and finance intervention. 
The final aspect to Cisco’s strategy was leveraging an online analytical processing database that allowed users to run their own ad hoc queries and analysis.  This OLAP engine had a web portal front end that also allowed for a central distribution of reports.  

Cisco’s strategy serves as a model for companies improving their systems with reduced financial close as the goal.  In summary, the financial systems strategy goals are:
  • Fully automated financial system including automated financial consolidation system
  • Automated intercompany accounting system
  • Online analytical processing database
  • Web portal

Close Calendar

As a finance leader, ask yourself the following questions:
  • Do you have visibility into the close cycle?
  • Do you have a standard close checklist? Can you evidence that your staff uses it?
  • Has the checklist been reviewed in the last year?
  • How are issues captured and resolved?
  • Do you feel like there is accountability and ownership for all close activities?
If you don’t have a flight plan, how will you arrive at the right airport on time?  Developing a close calendar can provide finance with the ability to identify dependent sources of information for key activities and track progress against milestones. Additionally, assigning ownership to individual tasks can help improve status reporting and accountability.

The close calendar displays the key events that occur every month during the company’s monthly financial close process. Each month’s closing schedule follows a recurring pattern that involves the first few working days of the month. Everything else follows from that.  Each task should have an owner so accountability can be achieved. 

Exam your policies

  • Are the policies and procedures accessible to all relevant employees?  Is there a single version of the truth?
  • Are manual processes documented?  Are they sustainable?
  • Are policies linked to procedures and procedures linked to activities?
Finance governance is difficult to achieve if everyone is not fully up to date on what the processes and procedures are.  As a finance leader, it is difficult to hold people accountable when process bottlenecks and procedure breakdowns occur if you don’t know who to hold accountable.   Utilize a web portal to communicate current policies and procedures and make sure the web portal contains the most up to date versions. 

Internal Control Holdup

  • Have you examined your control environment recently in light of potential changing materiality (due to financial crisis)?
  • Does clear accountability exist for control performance?
  • How is control performance and review tracked and managed?
A high percentage of key and entity-level controls relating to the financial close are usually tested as part of Section 404 compliance. If your external auditor is not comfortable with the governance of the financial close and consolidation process, the company can quickly be exposed to a risk of a material weakness. Strong entity-level controls enable a company to manage the process with a smaller set of controls, permitting greater internal process efficiency and significantly reduced time to close. 

Summary

Financial close excellence is achieved when people, process, and technology are combined to optimize and streamline financial close processes.  The results are lower operating costs, increased business performance, avoidance of risks, and increased visibility into market opportunities. 

Thursday, December 2, 2010

99 Day Plan for New Finance Execs

Several surveys conducted over the last few years indicate that there is pent-up-demand in the workforce with people dissatisfied with their current roles.  As the global economy continues to rebound from a deep recession, opportunities to take on new challenges will appear.  Whether you are moving to another division in your current firm or you are taking on a new role at a new company, you will need a strategy to hit the ground running.  Here are some of the tasks that should fill your first 99 days.

Understand, Formulate, Implement

Whether you outline a 99 day plan, a 90 day plan or a 100 day plan, the basic outline is the same: spend the first 3rd seeking to understand, listen, confirm and ask probing questions in order for you to determine what strategically and tactically needs to happen; spend the second 3rd formulating your strategy and confirming it with your sponsors, your peers and your team; and spend the last 3rd beginning to implement your strategy.

Understand: Confirm How Value Is Created

Joining at any level and any leadership position requires that you understand how value is created at your firm.  In short, how does the company make money?  Assuming you joined from an outside firm, it is likely that you have a general sense of what the company does.  After all, as part of the interview process, a review of the company’s website, 10k, press releases, and a few analyst reports would have been in order.  But there is nothing like being able to see how the company really works from the inside out.
The key question to ask is “how does the company create shareholder value and what is the best way for my group to support that mission”.

Understand: Get to know your stakeholders

Surveys indicate that when CFO’s reflect on their time in roles, the one thing they wished is that they had spent more time with their peer group in the first 99 days.  During your first day, set meetings with the following groups of people (in descending order of priority):
  • Business Unit Heads
  • CEO
  • Finance Staff
  • Executive Committee
  • Board of Directors
  • Investors/Analysts


You need the support of your peers in order to implement the strategic changes you are likely to make.  Spend some time proactively understanding what their pain points are, who you can rely on, and what the various personality types are.
Getting to know the CEO and how your vision integrates with his vision and working style is next on the list.  As equally important as understanding your boss is understanding your own team.  People (more so than process and technology) largely dictate the success or failure of an organization.  Take inventory of who are your stars are and where you have weaknesses on your staff.  Gauge whether the weaknesses are correctable or not and begin to counsel those individuals out that aren’t a fit for your new team.

Understand: Expectations

Surveys indicate that the CEO expects the CFO to (order of importance):
  • Being active member of senior management team
  • Contributing to company’s performance
  • Ensuring efficiency of finance organization
  • Strengthen Core Team


When polled using the same questions, finance staff responded with the opposite priority list.  This is an important distinction of expectations that should be an input into your strategy.

Formulate: Clear and Simple Communication

As you formulate your strategy and seek to confirm your plan in the 2nd month, remember to communicate simply and clearly.  Backing up insights with hard facts is great but PowerPoints filled with tables of numbers rarely impress.  Place a high level of importance on making your leadership messages clear and simple to understand.

Implement: Ruthless Execution of Quick Wins

As you transition into your 3rd month, you are likely to have formulated your strategy and have begun to implement key provisions.  If you’ve identified any quick wins, use this time to ruthlessly execute those and celebrate your victories.

Monday, November 22, 2010

The People-Process-Technology Mix

I’ve been thinking a lot lately about People, Process and Technology related to how a CFO should build his team.  I’m beginning to think that People are 80% of the puzzle, Process 15% and Technology 5%.  This is especially true for a finance support technology group.  Most technologists would have you believe the opposite; that technology can work miracles.  A long time ago, I might have believed that myself, but not anymore. 

When I first started thinking about this topic, I thought maybe the pie was split evenly between the three.  Then I started to think through common issues and scenarios that finance executives face in the business world:
  • When there is an issue, where does the CFO turn to: a computer system, a review of the process, or her key people?
  • When you need an answer that is only supported by numbers and analysis, where does that number really come from: a person, a process or a data warehouse?
While it is true that having the right technology can make processing A/P easier and can lower the activity level (and therefore cost) of monthly reconciliations, however, you need the right people to run the implementation project, the right people to design the process to make the technology fit into the organization, and the right people to measure the benefit of the initiative after go-live.  

This thinking moved the People dial from 33% to 50%.  However, it still didn’t feel right.  What about leadership?  Leadership only comes from people.  I don’t think you can train integrity, nor can you train motivation.  I like the phrase “hire for culture, train for skills”.  Leadership is such an important aspect yet it often isn’t given its full recognition.  And leadership doesn’t mean the top of the food chain.  You need leadership at all levels of the business.  

I was now close to believing that people where 80% of the pie.  But what about the remainder?  Again, I considered what makes or breaks an organization.  Considering different types of risk (enterprise, operational, financial, etc.), a well thought-out, organized and communicated process trumps technology 9 times out of 10.  You can make up for inefficient technology with the right people and the right process.  This left me with thinking that Process made up the lion’s share of the remaining 20%.  

If you are new to your leadership role, you need to focus the majority of your time on getting your organization right. 




Monday, November 1, 2010

Understanding Your Cost of Finance



Depending on the part of the world you live in, what keeps the finance executive up at night can be vastly different.  For those in the US, making sure you maintain market share is paramount.  For those in APAC, finding and retaining top talent without overpaying might be at the top of your list.  But a common theme for all finance execs is making sure your organization is operating as efficiently as possible.  Undertaking a cost of finance study can help to provide objective measures in determining if you are getting the most out of your finance team.
The objective of a cost of finance assessment is to benchmark a company’s finance function relative to its industry standards and organizational size and to quantify the cost of the finance function, based on FTE activities.  The assessment should identify strengths and weaknesses that exist within the finance function and produce an actionable plan for improving areas where the company is operating below the agreed upon standard. 

Agree on the scope of the review

The first step in the review is to agree on the scope.  The term finance function should be treated broadly and all functions (whether they report to the CFO or not) should be included if time and budget allow.  Finance areas typically considered include:
  • General Accounting
  • Risk Management and Compliance
  • Treasury and Cash Management
  • Corporate Planning (annual budget, long range planning)
  • Corporate Strategy
  • Corporate Development (M&A)
  • Business units
  • Payroll
  • Tax
  • SOX - Internal Controls Process
  • Accounts Payable
  • Fixed Assets
  • Project Accounting and Reporting
  • Billing and Accounts Receivable
  • Finance IT

Process Documentation

Each process for the in-scope areas needs to be documented.  If you are a public company subject to SOX or other controls-based regulation, then it is likely that you can utilize your controls documentation as a baseline and supplement where needed.  Regardless of where you start, you will need a list of each task performed within each major activity of the finance function, based on FTE time allocation. 

Metric/Measure Development

Once you are clear on the tasks that each function performs, you should develop a list of metrics/measures that you will include in the study.  They need to be relevant and you need to be able to capture the data.  Many databases and studies exist to serve as your benchmark and these should be referenced for industry standard metrics and measures. 

Examples of metrics include:
  • Finance Costs as a % of Revenue
  • Revenue per Finance FTE
  • AP Cost as a % of Revenue
  • % of AP Invoices Automated
  • Total AP Invoices processed per FTE
  • Total AP Invoices Lines processed per FTE
  • Average Salary in AP Department

While a robust database is critical to this type of analysis, it is not without certain limitations.  Differences such as organization structure, process design, technology, and industry may drive disparity in both entity performance and the interpretation of relative performance.  Despite efforts of practitioners to structure data collection efforts in a consistent manner, the unique circumstances of each participant will influence this process, in turn influencing the outcomes.  Make sure that the differences have been normalized before making decisions on the results. 

Data Capture

Once you are clear on your metrics, you can begin data collection.  The data will need to produce the metrics you have chosen above.  While this may include some uncommon data points, most of what you will be collecting includes:
  • Complete financials for the entity
  • Full Time Equivalents (FTE) working on the process
  • Key transaction volumes (e.g. number of invoices) – split between manual and automated
  • Costs applicable to the process – broken down by salary-related, direct on-cost, IT cost, outsourcing cost, corporate overhead, etc.
  • % estimates for non-value add, errors & defects & SLA performance
  • A few key process metrics - e.g. % credit notes, days for month-end close

Analysis, Results and Recommendations

After you have collected all the data, you can begin the analysis of the results and craft the recommendations.  Understand that creating a world class finance organization does not come without cost.  When reviewing metrics, look for areas in the process or organization where you are significantly below the agreed upon standard.  Determine the best approach or a prioritized listing of approaches to resolve the gap.
  • Is a lack of automation to blame?  Maybe a system should be implemented.
  • Are salaries too high?  Maybe a shared service in a cheaper location is in order.
  • Are there too many errors?  Maybe a training program is needed. 

When identifying solutions and creating the business case for any major changes, remember to calculate the cost savings generated by the improvement.  In many cases, the easiest improvements are the ones that end up being self-funded.  Once you understand where improvement is needed, the possibilities of how to improve are limited only by your imagination and budget. 


Sunday, October 10, 2010

Are Bad Policies Driving Bad Behaviour?

The behavioural difference in two of my clients is amazing.  In one client, client A, employees are responsible for scheduling their own vacation.  Sure, there is a reconciliation report to make sure that employees don’t book more vacation time than they have allotted to them, but so long as they communicate to their stakeholders that they will be out of office and they are performing at or above expectation, they are free to take time off as they please.  As a result, the amount of time booked against the sick leave account is virtually non-existent. At another client, client B, employees are required to schedule and seek approval for every vacation hour.  I have yet to meet an employee that likes this policy; it is universally agreed that this policy is a hassle and is a major distraction from serving their customers.  Why does client B have this policy?  To control the amount of time booked against vacation.  But as a result, the time booked against the sick leave account is twice industry average; employees use sick leave as a work-around to getting approval for a single vacation day (more effort than it’s worth). 
I can imagine at some point, client B felt that this was the right policy.  And it doesn’t help that few people feel empowered to challenge the process.  To guard against this, CFOs can take the following action for their organizations:

Conduct annual policy reviews

Not every policy will need to be reviewed annually, but you should have a policy review plan in place that rotates the coverage of all policies so that all are reviewed within a 3-5 year window.  Business models and markets change.  Companies divest business units and acquire others.  You want to make sure your policies reflect the reality of your business today; not your business as it used to be. 

Benchmark Causal KPIs

If you utilize KPI-based management reports (and you should), occasionally, include a deeper dive into the data and include causal KPIs.  In the case of my clients, looking at vacation accrued versus vacation taken is one metric but sick leave taken as a trend is a causal KPI that revealed important trends.  Vacations are taken during the summer and around holidays.  An analysis of the sick leave data showed that people tend to get “sick” on Fridays or the day before a long weekend. 

Include Anonymous Feedback Questions Targeting Non-Financial Factors

Ask your employees for their feedback on policies.  While you may have solid accounting logic to back up a policy, if a change in policy would drive additional revenue, then maybe it is time to look beyond the accounting logic.  Make the feedback anonymous so people feel free to express themselves.  Don’t predispose the questions that assume an as-is state (meaning: don't create questions that assume that the policies are correct in the first place).  Include open ended questions. 

Conclusion

Policies are not a “forever” mandate.  Organizations change over time and therefore, policies must change also.  Just because “we’ve always done it that way”, doesn’t mean we need to continue to “do it that way”.

Sunday, October 3, 2010

6 questions CFO’s should ask about cloud computing

1. What is the right strategy for our company? 
Cloud computing is such a broad term; just because you hear the CIO say cloud computing does not mean that her definition matches yours.  There are multiple types of cloud offerings: infrastructure as a service (e.g., disk drive storage in the cloud), platform as a service (allows the ability to build applications using someone else's infrastructure) and applications as a service (salesforce.com).  With cloud computing services just now reaching 1st grade, it will be a while before the industry sorts out the winning business models.  Utilize cloud computing if there is a clear ROI or it enables your business strategy in a way that nothing else will. 

Open up any trade magazine and you are bound to see an article on cloud computing.  Do not buy into the hype that cloud computing always equals the best ROI.  The best approach is to engage the organization in a dialogue that is centered on the business problem to be solved: lower cost of IT for Finance; improve speed to market for shared service for accounting functions, etc.  Require that the CIO come up with a list of options and review the hard and soft benefits and costs associated with each.  If cloud computing comes out on top, so be it. 

Alternatively, if your accounting staff is touting cloud computing as a faster path to market, take caution.  The last thing you want to do is to create a shadow IT function within your organization: Accounting and Finance owning IT functions outside of the span of IT control.  Cloud computing is making this easier to do than ever before.  As a leader of the business, you want to be seen as an enabler of the business, not someone who creates silos.

2. What solutions are available for Finance and Accounting functions?
Consider the applications that support the finance and accounting function; to name a few:
·   ERP
·   General Leger
·   Planning software
·   Reconciliation software

Depending the size of your organization, there may or may not be a cloud strategy suitable for your organization.  While there are cloud based ERP solutions, do they have the history that the major ERP players have?  If your ERP solution is in need of an upgrade, can you create a strategy that gets you from your current state to a future cloud state with minimal business disruption.  Consider the migration of your historical product data that would need to be migrated.  The sweet spot for cloud computing for F&A might be companies that don't have an existing software solution and are meeting their processing needs with Excel and manpower. 

3. Can the solution scale to meet my business needs?
The key benefit of cloud computing is being able to purchase as much as you need, only when you need it.  Depending on the solution you need, a formal RFP may or may not be in order.  In either case, you do want to feel comfortable that the vendor can provide for your firm. The essential question: Can the solution scale up or down to match your business needs?  And, what is the pricing structure?  If you are in acquisition mode, can the vendor support 2x the user base from your company overnight?  If you are in divestiture mode, does the pricing and contract structure allow you to de-provision users quickly? 

4. How does cloud computing support my shared service finance function?
Are you considering consolidating any of your Finance and Accounting functions into a shared service center?  This type of project might be a good catalyst to pursue a cloud solution in parallel.  However, as CFO, you should also ask about plans to make sure the data is integrated between the shared service center and the home office.  If you are planning on using a cloud solution for a HR shared service center, how will this data interface with the general ledger software?  What other systems rely on HR data and how will they be integrated? 

5. How do I audit a cloud computing solution?
Existing regulatory requirements were created at a time (not that long ago by the way) when almost all data existed on your network.  While some facilities exist, such as SAS70, that may be used to understand how the vendor has approached security, none are specifically directed at cloud computing.  As one who signs off on the financial control environment, the CFO needs assurance that customer and company data are being handled appropriately.  Beyond financial reporting, cloud computing introduces additional issues, such as jurisdiction (is your data being stored in a location that is allowed by regulatores and a location that would be approved by shareholders?).  These types of issues need to be feed into your enterprise risk management assessment as well.

6. What makes this different?
Vendors have been providing some type of outsourced IT for a long time.  Outsourced mainframe environments are nothing new.  In a way, cloud computing is the new virtualization, which was the new client server, which was the new mainframe.  With all the hype, a sage CFO will ask "why is this different".  Challenging your peers to come up with a value statement on “why” will keep everyone grounded in what is important: growing the business.



Sunday, September 26, 2010

Is your IT team multi-lingual?

I had a recent experience that left me more convinced than ever that IT executives still need to do a much better job at articulating business value.  As anyone who has crossed over from pure technology to interacting with business executives can tell you, speaking in pure technical terms won't get you very far.  Yet I continue to be amazed by technology experts who rely too much on technical aspects of their products and services without putting them in a business value context.

A vendor indicated that their product could process transactions in a low latency environment.  They even quoted specific speeds down to the milliseconds.  Sounds great..... to the technical experts in the room.  But they completely lost the non-technical folks in the room.  Never assume that everyone in the room is as technical as you are.  It would have been better if they described their product on both technical and non-technical terms; as in "our product processes a transaction every 8 milliseconds; for your reference, 33 milliseconds is about how long 1 frame flashes on the screen for a video".   This leaves the non-technician with a mental picture of how fast your product works.   It would have been even better if they monetized the feature; as in "Our product processes a transaction every 8 milliseconds.  Our nearest competitor can only process a transaction every 15 milliseconds. We have found this 7 millisecond difference to be worth $5 million per year in additional revenue to our clients."  Now the business executives in the room can start engaging in how your product or service will really help him solve their problem.


If you are the CFO, it would be worth your time to teach the technical folks the language of business: Accounting.  I would start with cost accounting concepts since I believe those bring the most bang-for-buck vocabulary and behaviors.  I would focus extensively on activity-based-costing and then reap the rewards come capital budget development and project execution time.   Learning how the business makes money and the tie between cash coming in the door and the financial statement would do wonders for helping the technologist understand how to better use technology to support the business strategy.  Teaching them some portfolio management and project accounting concepts would help them deliver better results back the business. 
 
You can probably skip lessons on taxation; while you probably won't make CPAs out of programmers, a little education can go a long way towards IT executives being able to communicate business value.