Senior finance executives and finance organizations that want to improve their performance must recognize that technology is a key tool for doing high-quality work. To test this premise, imagine how smoothly your company would operate if all of its finance and administrative software and hardware were 25 years old. In almost all cases the company wouldn’t be able to compete at all or would be at a substantial disadvantage. Having the latest technology isn’t always necessary, but even though software doesn’t wear out in a physical sense, it has a useful life span, at the end of which it needs replacement. As an example, late in 2013 a major U.K. bank experienced two system-wide failures in rapid succession caused by its decades-old mainframe systems; these breakdowns followed a similarly costly failure in 2012. For years the cost and risk of replacing these legacy systems kept management from taking the plunge. What they didn’t consider were the cost and risk associated with keeping the existing systems going. Our new research agenda for the Office of Finance attempts to find a balance between the leading edge and the mainstream that will help businesses find practical solutions.
The example above suggests why it’s important for executives to understand how technology affects a finance organization’s ability to improve its overall effectiveness and strategic contribution to the rest of the company. Finance must use technology to support improvements to processes and enable its people to focus on work that provides the most value to the operating results of the company. For example, analytics can enhance understanding and visibility, giving executives the ability to make better decisions more consistently. The role of technology will become even more important for finance organizations over the next several years as the pace of change in business computing accelerates. This change will be driven by the cumulative impact of a decade’s worth of technology evolution and the increasing demographic shift from executives and managers of the baby boom generation to those who grew up with computer technology. These demographic shifts will drive demand for a new generation of software, one that emphasizes mobility and agility.
In this context it’s important that CFOs and financial executives monitor the evolution of technology and understand what’s possible. We recommend a rigorous annual technology audit for this purpose.
With this in mind, our research focus for the Office of Finance in 2014 will cover three main areas.
First, to address its basic requirements, we’ll look at the application of financial performance management (FPM) to help achieve consistently better 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. We see information technology as a particular focus of FPM because we find that most finance organizations are not using IT assets as fully as they could. In particular, they often focus only on efficiency and neglect opportunities to use IT to enhance their effectiveness, which can make a difference in their overall results.
Similarly, ERP systems are a core technology that supports finance operations. Finance executives must take into consideration more than just the difficulty and cost of implementing and modifying these systems. As for the British bank that has experienced multiple major failures, reluctance to make timely changes to ERP systems poses cost and risk issues of its own. Organizations that are reluctant to use cloud-based ERP also should re-examine their assumptions for not doing so. In particular, midsize companies that are transitioning from entry-level accounting software to something more sophisticated often will discover that a cloud-based deployment is a more sensible alternative to persisting with their existing software or buying an on-premises system. As well, larger companies and those that have geographically dispersed operations may find that cloud alternatives for their second-tier ERP systems offer better value than staying with on-premises systems.
To strengthen the core capabilities of the Office of Finance, there are several technologies that will be particularly important. One is in-memory computing. Because of its ability to rapidly process computation of even complex models with large data sets, in-memory computing can change the nature of planning, budgeting, forecasting and reviews. 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-do-we-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 computing. Our recent planning benchmark 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 true visibility into root causes of opportunities or issues.
Predictive analytics is another 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.
The second area where technology will play an expanding role in business computing is enabling the finance organization to play a more active role in improving performance in the company’s operations. Finance has the necessary analytical talent as well as the ability to be a neutral party in cases where issues cross business unit 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 results that are 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-pay discounts.
Another operational area, taxation, is one 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. There is a growing list of software 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 even 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 2013 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 the right 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 them to do 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 recent governance, risk and compliance benchmark research 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.
In the new year we will explore these issues through several approaches. Our benchmark research rigorously investigates how business and technology issues intersect. In 2014 our Office of Finance benchmark research will examine how well finance organizations utilize technology to address a growing need for greater efficiency and to play a more strategic role in the company’s management and operations. Also, as noted, developments in information technology are making it feasible to transform business planning to become more interconnected, collaborative, mobile and interactive. Our next-generation business planning benchmark research will investigate these factors as we assess the current state of business planning, the issues that prevent organizations from planning, forecasting and budgeting effectively, and the ways in which information technology affects their ability to plan.
From another perspective, Ventana Research Value Indexes are 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. In 2014 we will once again assess financial performance management suites and introduce a new Value Index for Business Planning software to complement our benchmark research.
Overall, finance departments and lines of business still focus on improving the efficiency of the mechanics of day-to-day operations, and they often fail to use available technology to support more effective approaches. Executives in finance and business 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.
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 is not necessary. Business executives need not 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 2014 continues to focus on the major issues that confront businesses where technology plays a key role in addressing those issues.
Robert Kugel – SVP Research