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Because my research practice is centered on important business issues where technology is a key part of a solution, my written perspectives tend to focus on technology. However, it’s almost never the case that a company can just implement some application and fully resolve a business issue. Some progress may be achieved by using more effective tools, but in most cases results will fall short of what’s possible unless people, process and information issues are addressed as well. This is especially true for the accounting close.

It is generally agreed that companies should close their books vr_Office_of_Finance_09_fast_closers_have_more_timely_informationwithin one business week. On important reason to do that is that prompt closing enables them to make essential performance metrics available sooner to executives and managers. Our benchmark research on the Office of Finance confirms this correlation. Three-fourths (76%) of companies that close their books in one or two business days said they have timely information available to run the company, compared to just 10 percent of those that take more than two business weeks to complete the process. The timeliness of performance-related information is an important factor in how nimbly a company is able to respond to challenges or opportunities. However, despite nearly universal agreement that it’s important or very important to accelerate their company’s close (for 83% of companies in our research on developing a fast close), we also found that companies on average are taking a day longer to close their quarterly books than they did a decade ago. Using ineffective technology certainly plays a role, as I’ve discussed, but a poorly executed process is just as important a barrier to closing quickly.

Closing the books is a highly definable, repetitive procedure, similar in that way to a manufacturing process. In both cases, attention must be paid to the design of the process. It must be examined step by step to determine, for example, whether there unnecessary or redundant steps and they are in the most efficient sequence. The execution of the process must be evaluated to confirm that handoffs between individuals are always crisp and that exceptions are handled quickly. As in manufacturing, it’s important to take a total quality management approach – one in which design of the process and related methods eliminates as many sources of defects as possible. In the case of the close, the process should be supported by systems designed to prevent errors from occurring. Building quality into the process minimizes the need to spend time discovering the source of a mistake and then fixing it. On average research participants estimated that they could save one to two days in closing if all errors were eliminated.

The financial close is a complex process so it’s not easy to spot the sources of bottlenecks and root causes of defects without analyzing it in detail. Most people involved can describe their process at a high level, but those taking more than a business week to complete the close need to compile a complete definition of their process. This is more difficult than it might seem. Collectively, the accounting organization performs hundreds of steps (larger or more complex companies may have to do thousands) as well as hundreds of exception routines. Finance executives and accountants in these organizations usually don’t realize how many steps and processes there are. They often are surprised by the number of spreadsheets that they use in the process. Software that can compile a full list of steps, their precedents, exceptions and handling and the applications or spreadsheets used for that step can help automate the process, and our research shows that automation saves time. While defining all the steps is a painstaking process, it’s necessary to achieve even bigger time savings.

A carefully detailed examination of close processes may find that changing the sequence of close-related tasks is another way to accelerate the completion of the process. For example, rather than performing an entire month’s work after the end of the period, it may be possible to reduce the crush of work by spreading it out over the month into a weekly or biweekly task. Another approach many companies use is closing subledgers before the end of the period. If there is no material change in the amounts between that point and the end of the period (applied consistently) it will not distort the company’s financial results. Even if starting these tasks earlier has no impact on the total hours of work that must be performed, the object of closing sooner is to get important information to the rest of the organization as soon as possible.

UntitledStill, technology has an important role in making process improvement feasible. A CFO and controller may be reluctant to embark on a major overhaul of their close because they think that the department is too busy to spare the time for process improvements. One interim step that can reduce workloads is automating steps in the closing process. Our research finds that a large majority (71%) of companies that use automation substantially in the close are able to complete the process within six business days, compared to 43 percent that use some automation and just 23 percent that use little or none. Many finance professionals don’t realize that the operation of their ERP systems can be automated to eliminate or substantially reduce the time accountants now spend in performing the close. Automation can eliminate the need for human intervention to move the process forward – for example, by automatically closing a subledger, generating the necessary journal entries consistently and accurately, and then validating that all necessary steps have been completed properly. Automation software is designed to perform all these tasks in the background while alerting process owners of exceptions that must be resolved or approvals that must be given. Companies can program the process of extracting data from applications or tables and entering it into others. In our research half of midsize and larger companies said they must pull together information from two or three vendors’ systems to complete their close; 38 percent have to collect it from four or more. Today, such data management may require having an individual run a report, perform additional calculations, organize results from this data and enter information into the ERP system. Automation software can handle this full range of tasks faster and more reliably.

In some cases a slow close may be the result of nonfinance functions taking longer than they might to complete necessary tasks such as taking inventory. The finance department may face resistance to speeding things up from those functional groups. This is a management issue more than anything else. “A fast close is everyone’s business” should be the attitude that senior executives apply in these situations.

Even when a corporation begins to shave time off its close, it cannot let up. Continuous improvement is necessary to keep those gains from slipping away. Our research shows that companies that have regular monthly or quarterly reviews of their close process to uncover issues also close sooner than those that do this annually.

While software, people and data issues all contribute to a slow close, it’s essential to examine the existing process to identify opportunities for improvement. This should be done before assessing software options because it enables those involved to spot issues caused by, for example, inappropriate use of desktop spreadsheets or issues in data availability or quality. When all the steps are compiled for analysis, it becomes much easier to eliminate redundant or unnecessary ones and achieve greater consistency in how all are performed. Having a detailed view of all the steps makes it easier to determine whether restaging processes or changing their frequency will lead to a faster process.

We believe that how quickly a company closes its books is a useful measure of the overall effectiveness of its finance organization. Our research shows that nearly identical companies (that is, they share the same size, industry, ownership structure, centralization of accounting and number of ERP systems, among other factors) can differ considerably in the length of their closing processes. The reasons most frequently centers on process management and software; adopting a continuous improvement approach to closing sooner and using software to support a faster, accurate process can make the difference. Methodically addressing process issues is essential to shortening the close, and it takes management focus to begin and sustain the effort. CFOs and controllers who are serious about making the finance function play a more strategic role in their corporation must make it a priority to complete the close within a business week.

Regards,

Robert Kugel – SVP Research

Managing prices has always been an activity of keen interest to businesses, but it has become even more critical to do it well. Over the past decade many companies have found their ability to raise prices has been constrained by intense competition resulting from Internet commerce, global competition and other factors. One tool for dealing with this pressure is price and revenue optimization (PRO), an analytic methodology that calculates how demand varies at different price levels and then uses that algorithm to recommend prices that should optimally balance revenue and profit objectives. Computer-supported PRO began in earnest in the 1980s as the airline and hospitality industries adopted revenue management practices in efforts to maximize returns from less flexible travelers (such as people on business trips) while minimizing the unsold inventory by selling incremental seats on flights or nights in hotel rooms at discounted prices to more discretionary buyers (typically vacationers). Price and revenue optimization algorithms are designed to enable a company to achieve fatter profit margins than are possible with a monolithic pricing strategy. Using PRO, airlines and hotels catering mainly to less price-sensitive business travelers found they could match discounters’ fares and rates to fill available seats and rooms without having to forgo profits from their high-margin customers.

PRO has expanded into other industries as computing power and data storage become ever less expensive, as software vendors have improved their techniques and algorithms to deliver better results and as the software has grown increasingly user-friendly. While the concepts underlying all PRO software are the same, there are different categories in which it is customized to meet the needs of specific industries. Retailers in particular have requirements that are best met by using applications that manage markdowns.

At the heart of price and revenue optimization is the concept of demand-based pricing. As its name suggests, demand-based pricing is a method that sets a price that is controlled by the seller’s assessment of what the buyer is willing to pay, which in turn is based on an estimate of a good’s or a service’s perceived value to the buyer. Companies use demand-based pricing to optimize – rather than simply maximize – their pricing to achieve revenue and profitability objectives. It uses data to estimate where the prospective buyer sits on a demand curve and therefore how much the individual is likely to pay. In some respects this is similar to what happens daily in souks, bazaars and other markets in cultures that do not insist on set prices. However, software makes demand-based pricing practical in large businesses and facilitates its introduction in societies used to set pricing.

Advanced analytic applications – especially for price and revenue optimization – have been gaining ground in corporate management because they have demonstrated to work. Significantly, they have the ability to deliver results that are unobtainable otherwise. Such software can crunch through very large data sets rapidly, apply purpose-built algorithms and automate the repetitive mechanical steps needed to put decisions into action.vr_Office_of_Finance_13_finance_lacks_advanced_analytics It also ensures consistency and supports objectivity in how executives and managers make decisions. Price and revenue optimization applications have benefited as the cost and complexity of the computing resources needed to use them have declined.

The adoption of PRO software is part of a broader trend of using applications to support fact-based decisions that once depended on experience and hunches. However, our benchmark research on the Office of Finance finds that just 20 percent of companies use price optimization analytics extensively. Only one-third look at product profitability. We think that more of them should do both. Analytic applications can digest a considerable amount of data to segment markets into useful groupings, pinpoint correlations and divine trends, to name a few tasks necessary for pricing management. However, companies investigating PRO software should narrow their search to applications that are appropriate for their specific business. While some offerings have broader applicability than others, no software product now available performs well in every industry.

Retail businesses that have multiple outlets, especially those that deal in trend- or fashion-driven products, face unique price and revenue optimization challenges and this affects the design of pricing management applications aimed at retailers. Many of these businesses are self-service, exclusively so if they are Internet-based, so there is no face-to-face contact during the product selection process. Negotiating prices isn’t feasible in most multiple-outlet retail settings in developed economies because of cultural norms and the hazard of delegating these decisions to front-line staff in even a midsize company. Unlike business-to-business transactions that involve ongoing relationships with established products, most stores today know little about most of their customers, so there is no direct way of judging an individual’s price sensitivity for the specific purchase at hand. In other words, most of the elements that support PRO strategies in analytics used for other types of businesses aren’t available to multiple-outlet retailers.

Since they usually cannot gauge the price sensitivity of their customers, retailers take a different approach: Let the merchandise do the talking. Products that aren’t selling well are by definition overpriced in that market. Retailers have used markdowns as a crude tool of price optimization for a long time. Offering a 30 percent discount near the end of the season is usually better than having to take a 60 percent haircut from a close-out specialist. Yet deciding when and by how much to reduce prices and then implementing the reductions at the store level in an optimal fashion is complicated because of the number of variables that must be considered. There are different types of merchandise, including long-life categories of goods that can be offered for sale for years, short-life fashion and fad items that are offered only once and those somewhere in between. There are differences in demand patterns and price sensitivity between regions and even at the store level. Seasonality, weather and movable holidays such as Easter and Thanksgiving must be considered.

Using analytic applications is superior to relying on experience and intuition because applications often demonstrate that the best decisions go against the grain of established practices. For example, retailers have found that smaller markdowns applied earlier and more frequently produce better results (that is, greater volumes sold at a lower aggregate markdown) than the common practice of making one or two big moves. Until the data became available, minimizing the number of markdowns was reasonable because of the cost in staff time to change prices at the store level. However, retailers using smaller and more frequent markdowns more than pay for these costs and then establish processes to facilitate price changes. Some retailers have found to their surprise that early small markdowns reduce the overall cost of markdowns. Analytic applications also are able to deal with a range of variables that retailers can use in markdown management. For example, they can vary percentages and frequency by size and color as well as by location. The software can monitor sales and inventory levels by the SKU at each store and automatically make detailed recommendations on how to adjust pricing. The software also enables retailers with multichannel operations (usually an online presence) to manage pricing decisions optimally across different types of outlets.

PRO software designed for markdown management also enhances the ability of a multiple-outlet retailers to run their business in a way that maximizes the productivity of their stores measured in sales or gross margin per square foot (or meter) or per linear foot (or meter) of shelf space. Items taking up space in a store or on a shelf have an opportunity cost in that they could be replaced by faster-moving or more profitable goods. Modeling the cost of the uplift required to free up space can result in a more attractive mix of merchandise that will improve returns.

While usability and capability of markdown management software have been improving, retailers face internal challenges in being able to utilize it. Analytic applications are only as good as the data available to feed the systems. Our research consistently finds that data accuracy and availability are significant challenges that almost all midsize and large companies face. Using markdown management software successfully also involves a change management effort requiring heavy involvement by senior management to endorse changes in how the organization handles day-to-day business as well as changes to processes and training and considerable amounts of follow-up to ensure compliance with the new ways of doing business.

Information technology is playing an increasingly important role in how companies conduct their businesses. Analytic applications can transform how entire industries operate. Today, airline and hospitality businesses operate very differently from how they ran in the 1980s because of the Internet and analytics. All sorts of businesses are finding that price and revenue optimization software enables them to improve their results measurably. Retailers should look into markdown management software as a way to fatten their bottom line. Other types of businesses also should consider PRO tools as applied to their particular needs.

Regards,

Robert Kugel – SVP Research

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