Robert Kugel's Analyst Perspectives

Office of Finance Research Agenda for 2012

Posted by Robert Kugel on Feb 23, 2012 9:43:00 AM

As this year begins, “finance transformation” is a trend gaining favor with strategic consultants. The term is associated with the objective of shifting the focus of CFOs and finance departments from transaction processing toward more strategic and higher-value functions. This objective is hardly new – it has been the purpose of my practice for the past nine years. Our research confirms that most people want their finance department to take a more strategic role in the management of the company. But although some progress has been made, Finance still spends too much time and effort on the mechanics of day-to-day operations.

In my experience, one important reason for this persistent focus on mechanics is that relatively few companies use available technology to support more effective approaches to managing the finance function. To get beyond this situation, CFOs and controllers must look at their existing IT systems with an eye to making better use of 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. As I mentioned above, technology is only one of the four major factors that organizations must address. The others are people (improving skills and training, for example), process (better definition and documentation as well as instilling a culture of continuous improvement) and information (such as collecting scattered data or simplifying an overly complex chart of accounts).

Corporations use financial performance management (FPM) to address often-overlapping issues that shape a finance organization’s ability to manage its own operations and support the activities and strategic objectives of the company. FPM deals with the full cycle of the department’s functions, including corporate and strategic finance, planning, forecasting, analysis, closing and reporting. It involves a combination of people, processes, information and technology. Information technology is a key component used in supporting FPM.

Ventana Research’s Office of Finance practice selects a research focus topic based on two key criteria: 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 2012 emphasizes three broad technology-related themes serving the goal of finance transformation: promoting awareness of the application of advanced finance, more effective execution of the finance function and implementing change. Within each of these three themes we will be exploring a range of important topics.

Promoting Awareness of Advanced Finance

One of the more significant ways companies can transform Finance is by adopting agile business planning and driver-based modeling to augment and ultimately replace their annual budgeting and periodic reforecasting methods. Our business planning research shows that each part of a business manages multiple plans. Yet the only integrated plan in almost all companies is the corporate budget. While budgets are necessary they mainly serve the needs of Finance because they focus on fiscal control and cash flow, not planning operations and managing the integration of plans across the organization.

A second topic under this theme is applying mobility and cloud computing to finance and accounting. Mobility is increasingly important as executives and managers adopt tablet computers, smartphones and other devices that expand their ability to interact with their company’s information systems anywhere at any time. Smaller companies and those with dispersed locations will increasingly find cloud-based ERP solutions an attractive option. Even those that do not move ERP there can find areas (such as spend management or incentive compensation) where stand-alone cloud-based software can be the best alternative. Changing employment patterns and the evolution of the human resources (HR) function have spurred adoption of workforce management software that facilitates managing headcount and retaining talent in the cloud as well. Because Finance often is involved in HR processes, our research practice will look into it.

Another issue is the heavy reliance on monthly or quarterly accounting data leads to “managing by using a rear-view mirror.” Another advanced finance topic that supports finance transformation is the use of predictive analytics with large-scale data and in-memory computing. The expanding capabilities of technology are making it possible to spot issues and opportunities sooner and get a deeper understanding of the factors behind them. Doing so enables organizations to look ahead instead of behind.

More Effective Execution

Corporations are focused on the bottom line, and individual parts of the business have some combination of revenue and cost objectives. Yet most companies are missing opportunities to use technology to manage these more effectively. Often, efforts in one part of the business do not support or even touch the efforts of another, such as when incentives offered to achieve sales targets wind up lowering profits. Software available for pricing and profitability management substitutes analytics and a numbers-driven approach for gut-feeling and tradition. However, few companies are taking advantage of it. Use of spend management software to cut costs and increase cash flow visibility is in the mainstream, but it’s not always fully utilized, and there are still many companies that could benefit from its use. More cost-effective governance, risk and compliance management is available through software that manages these aspects of running a company, but here again few companies are applying them to increase automation, reduce busy work and avoid risk. Fourth on this list is the accounting close, a core function of the Office of Finance. Our research shows that closing the books sooner is important to finance executives, yet too little progress has been made in shortening the interval, especially for those companies that take more than a week to complete the process. And for corporations that must provide financial information to third parties, the process of creating these external reports now must be considered an extension of the close. For that reason, a fifth topic I will continue to explore in my research is the use of automation of external and internal financial reporting. All public and larger private companies can benefit from automating the production of regulatory and internal financial reports that combine text and numbers, especially when there is a requirement for tagging these reports using eXtensible Business Reporting Language (XBRL).

Implementing Change

I suspect that a big issue preventing Finance from transforming itself is just getting started with the effort. No matter how much people in a company may complain about their annual budgeting process, they need a practical way to implement an alternative. In this vein I will be exploring ways of implementing integrated business planning to achieve finance excellence. Similarly, companies can manage risk more effectively but must have a blueprint for incorporating risk analytics across business processes. Third, taxes of course are major expenses for companies. New technologies are available that will help them implement strategic tax management to lower costs and optimize their compliance risk.

Desktop spreadsheets are a fourth major issue for Finance that must be addressed. Spreadsheets have been an important productivity tool, but users routinely push them beyond their original role as personal productivity software to the point where they become colossal time-wasters. In recurring enterprise processes, their versatility is offset by the inevitable plethora of errors in data entries and formulas. Their inherent technology defects translate into barriers of inefficiency as people waste time struggling to find data entry errors, inaccurate formulas and mistakenly hard-coded values, all of which increase risk of financial misstatements avoidable through more automated methods. Until several years ago, companies have lacked workable alternatives, and newly available technology is not yet widely deployed. Since the spreadsheets used in enterprise processes or recurring analyses are not going away very quickly, corporations must find ways to control them and limit their negative impacts.

Finance organizations need to focus more on providing more valuable services to their companies, spending less time on “bean counting” and putting more effort into analytics that support the company’s strategic aims and enable their organization to make better, more intelligent operating decisions more consistently. Technology is a key component to making this possible because it can make it feasible to deliver these services. Whether it’s called “finance transformation” or something else, it points to the unmet potential of finance departments to play a more important role in supporting their company’s operations. To meet this potential, Finance must have a better understanding of what’s possible, identify the gaps between what it is doing and put a program in place to close those gaps. In most cases, technology can help them get to the desired state.


Robert Kugel CFA – SVP of Research

Topics: Social Media, Business Analytics, Business Collaboration, Business Mobility, Cloud Computing, Business Performance Management (BPM), Financial Performance Management (FPM), Workforce Performance Management (WPM)

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.