Robert Kugel's Analyst Perspectives

The Office of Finance is a Numbers Factory

Written by Robert Kugel | Feb 4, 2020 2:00:00 PM

Yes, it’s an easy metaphor, but a worthwhile one to consider. For the Office of Finance, figures are its raw material. They are transformed and assembled into financial statements, forecasts and reports. Like a factory, there are blueprints (accounting standards, models and forms) that show how the parts are to be pieced together. There’s quality control in the form of internal audit. And there are final inspections — external audits — to ensure the end product has been assembled properly.

I think the factory analogy highlights much of what needs addressing in the Office of Finance at the start of the 2020s. In most companies, the Office of Finance behaves more like an artisanal workshop than a factory, ill-suited for the demands of the 21st century corporation. And in most instances, that should change.

Technology offers the potential over the coming decade to transform how the office of finance operates more than it has over the past 50 years. A set of technologies including artificial intelligence, in-memory computing and more advanced databases are radically redefining how work is done and what work will be done in the department. These technologies will bring us closer to that aspirational condition where computers adapt to the individual in performing work rather than requiring that the individual adapt to the shortcomings of computers.

Manufacturing was transformed in the latter part of the twentieth century as the principles laid down by W. Edwards Deming were widely adopted as creed, first by Japanese manufacturers looking to shed a reputation for shoddy workmanship and then by the rest of the world that competed with them. Total quality management (TQM), adopted as a creed by virtually all manufacturing organizations, is built on the idea that quality must be designed into manufacturing processes from beginning to end because this approach is usually more efficient and results in a better final product than relying solely on inspections at the end of the process. This TQM approach also stresses the need for continuous improvement in any process.

TQM is especially relevant for the office of finance. I started using the term “continuous accounting” several years ago to describe a technology-supported approach to managing finance and accounting organizations that embraces TQM principles.

Today, technology enables finance and accounting departments to build quality into their processes. By automating data movements and process management, technology can maintain data integrity from the beginning to the end of the process. Doing so eliminates the need to check and reconcile accounting numbers, which is required when data is rekeyed manually or moved and transformed using spreadsheets. In addition, organizations increasingly will use artificial intelligence to highlight possible errors, omissions and inconsistencies. This will substantially improve the quality of financial statements and reports. It also will reduce the time spent identifying the source of discrepancies and correcting them.

There’s one serious issue preventing digital transformation, keeping departments more like a workshop than a factory: Today, the office of finance is a technology laggard.

Ventana Research uses its benchmark research methodology to assess how organizations perform core business processes and functions. We evaluate performance on the dimensions of people, process, information (data) and technology (chiefly software). We distill our evaluation into four levels of performance. From top to bottom these are Innovative, Strategic, Advanced and Tactical. Our Office of Finance benchmark research reveals that half (49%) of companies are at the lowest level of performance in using technology. A large majority (88%) of companies at the Innovative level perform accounting very well compared to 44 percent that perform very well at the Tactical level. Similarly, 69 percent of Innovative companies perform budgeting and fiscal control very well versus just 18 percent that are Tactical. Nearly two-thirds (64%) of Innovative companies do cost accounting very well, while 28 percent of Tactical organizations achieve that level of performance.

Analytics work better too: 64 percent of Innovative companies perform analytics very well compared to 28 percent of those that are at the Tactical level. Innovative companies are better at reporting: 63 percent of them provide timely information to the rest of the company, while only 36 percent of Tactical companies do so.

The research shows that competent performance in the use of information technology is essential to achieving better performance in today’s office of finance. Technology is central to the efficiency and smooth functioning of finance and accounting, so it’s essential that the office of finance have a high degree of competence with technology. Unfortunately, those skilled in accounting and financial analysis aren’t necessarily technology experts. And without a fundamental understanding of how the tools in use work, it can be difficult for a department to make good technology purchasing decisions or design technology-driven processes that enhance effectiveness. It may not even be able to use the technology assets it owns.

Our research identifies a practical method for addressing this condition: having a recognized finance IT (FIT) group within the department that has a mandate to direct the use of IT in the department. Because the finance and accounting department should be a well-functioning numbers factory, it needs those well-versed in technology to take full advantage of the systems that are available. The research identifies four examples where having a FIT group within the department has a material impact on the quality of the work performed. For example, 50 percent of the companies with a FIT group report that they perform financial analysis very well compared to 29 percent of those that lack one. We see this pattern across a range of functional areas: 48 percent of companies with a FIT group perform cost accounting very well compared to 20 percent of organizations without one. In budgeting and fiscal control, the comparison is 46 percent to 20 percent. And companies with FIT groups are better communicators: 60 percent of organizations with this capability provide timely information to the rest of the company compared to only one-third (32%) of those without it.

Having a FIT capability will become even more essential as the pace of technology innovation in Finance accelerates in the coming decade. Technologies such as artificial intelligence, blockchain and the internet of things increasingly must be incorporated into core software applications such as ERP. To be effective, finance departments must adopt a “fast-follower” approach to technology adoption. Fast followers don’t operate at the bleeding edge of IT innovation, but they are poised to incorporate technology innovations as soon as they have proven to be practical. To make this a reality, it’s necessary to have a standing group with clout that stays abreast of relevant technologies and anticipates their introduction into departmental processes.

For too long the Office of Finance has operated as if information technology were of secondary importance to its ability to do its work. That attitude has grown increasingly obsolete. Accounting standards now require the use of software to achieve efficient compliance. Planning and budgeting can become more useful business tools than they typically are today. As the baby-boomer CFOs retire they will likely be replaced by those who recognize the vital importance of managing the technologies that support the department’s missions. The new generation of CFOs and controllers must understand that they are running a numbers factory and so must have the tools that produce a quality product in a timely, cost-effective fashion.

Regards,
Robert Kugel