Robert Kugel's Analyst Perspectives

Three Essentials for a Digital Office of Finance

Posted by Robert Kugel on Mar 3, 2020 6:00:00 AM

One of the objectives of our recent Change in the Office of Finance benchmark research was to assess the technological capabilities of finance and accounting departments. The research confirms that today we are on the verge of a major technology-led shift. Technology that’s already available can have a greater impact on how the finance department operates over the next 10 years than it has over the past 50. Advances in columnar databases, in-memory processing and artificial intelligence and machine learning, as well as a relentless reduction in the cost of computing resources, will make it possible to substantially redefine how work gets done in the department.

Ventana_Research_Benchmark_Research_Office_of_Finance_10_PI_technology_Pie_190924Technology will automate an increasing amount of rote, repetitive work, enabling a new generation of finance and accounting executives to provide their workforce with tools that help them to avoid tedious, soul-deadening toil. Robots aren’t about to take over finance and accounting, but automation will transform jobs, shifting time and attention away from repetitive tasks to work that requires insight, judgement and experience.

Of course, this optimistic view of a technology-led bright future for the finance and accounting department should be tempered by experience. When it comes to technology in the Office of Finance, there’s an ongoing tension between what’s possible and what’s feasible. We use our benchmark research methodology to assess how organizations perform core business processes and functions. To do this we evaluate performance on the dimensions of people, process, information (data) and technology (chiefly software), distilling our evaluation into four levels of performance: from top to bottom, Innovative, Strategic, Advanced and Tactical. Our recent research reveals that half (49%) of companies place at the lowest level of performance in using technology while just 12 percent place at the highest. An inability to master technology is likely to be a major impediment in achieving a fundamental transformation of the mission of the Office of Finance. 

“Digital finance” is term increasingly used to refer to how today’s information technology enables finance and accounting departments to assume a more strategic, agile and forward-looking role in a company. The role of technology is ever more important a result of the cumulative impact of a decade’s worth of technology evolution along with the demographic shift from executives and managers of the baby boomer generation to those who grew up with computer technology.

It’s of course fun to consider technology’s potential, especially if it promises to provide deeper insights or make the most tedious and time-consuming jobs go away. Yet decades of experience repeatedly show that technology alone is no magic wand. Beyond the challenge of using digital technology effectively, actually realizing the promise of new technology always involves dealing with other basics: the data, processes and organizational factors that must be wrangled to enable companies to achieve their full potential. 

In that regard, our research and empirical observations have found that the majority of finance and accounting departments are still grappling with more mundane issues that they must resolve before successfully employing more advanced technologies. For example, it’s hard to mount a big data initiative when simply dealing with regular data is a chore. One-third (33%) of participants in our Office of Finance research said that the data they need is either inaccessible or too difficult to integrate. Our research also finds that 70 percent of people in finance departments spend the biggest part of their time dealing with data preparation; only 22 percent can devote more time to analytics-related tasks. In order to use big data analytics successfully, organizations must have the processes, tools and priorities in place to address their data issues. 

A second, related issue is that technology alone will not by itself address the often-interrelated people, process and data issues that limit a department’s effectiveness.  Having and using the right software is essential, but insufficient. Just buying software, for example, doesn’t automatically fix poorly designed processes. Also, failing to design processes that take advantage of the capabilities of a new technology undercuts the value of the investment. And without leadership, a prevailing attitude of “we’ve always done it this way” can stymie any attempt at productive change, especially in the Office of Finance. 

To accelerate the ability of the finance organization to adopt and apply new technology to core finance processes, Ventana Research has developed an approach to managing the Office of Finance that includes three essential components: Continuous Accounting, Continuous Planning and Continuous Improvement. The first two are holistic frameworks for managing accounting and financial planning and analysis (FP&A) organizations, respectively. The last is a means of altering the mindset of the department to make it more adaptable and willing to accept change. 

Ventana_Research_Benchmark_Research_Office_of_Finance_19_19_Automation_Speeds_the_Close_190906Continuous accounting is a term Ventana Research uses to describe an approach to the accounting function that streamlines processes and improves efficiency by addressing the causes of inefficiency at the source. To enhance effectiveness, finance departments must use software to automate all mechanical, repetitive accounting processes in a continuous, end-to-end fashion. As a rule, using software to automate manual tasks improves efficiency and speeds the completion of processes. By eliminating human intervention (and therefore the potential for mistakes and misdeeds), automation can enhance financial control. Organizations achieve end-to-end (continuous) process automation when they enter numbers only once, all calculations and analyses are performed programmatically by the system and the system manages all workflows. These workflows handle the execution of every step in the same order, enforce approvals and sign-offs and control the roles, rules and responsibilities of those involved in performing the work. 

Our research confirms the value of automation in finance departments. For example, we find that the vast majority (88%) of companies that automate substantially all of their financial close complete it within six business days of the end of the quarter, compared to 59 percent that automate just some of the process and just 40 percent that have automated little or none of it. Using software enables the department to manage the flow of data through its processes in an end-to-end fashion. This ensures data integrity, which in turn eliminates the need for checks and reconciliations that can consume time that could be spent more productively. Organizations undermine data integrity every time someone re-enters data manually or when someone uses a spreadsheet in a process, for example, when data from one system is manually transferred to another, when the same information is entered twice in two different systems or when a spreadsheet is used to perform an allocation or a set of calculations. 

Another aspect of continuous accounting involves optimizing the scheduling of tasks. Continuous accounting incorporates a process management approach that wherever possible distributes workloads to flatten spikes of activities, whether in the month, quarter, half-year or year. This approach eliminates bottlenecks and optimizes when tasks are executed. It reduces stress on the department and also can eliminate the need for temporary help and its associated expense. Much of the traditional accounting cycle and related departmental practices are artifacts of paper-based bookkeeping systems. These methods required finance organizations to wait until the end the month, quarter or year to take accountants offline to perform aggregations, allocations, checks and reconciliations; the rhythm of such antiquated approaches represented the best trade-off of efficiency and control. Today’s systems offer far more flexibility, which enables departments to spread workloads more evenly over time and complete them more expeditiously. 

The second essential element of a digital finance department is a continuous planning approach. Continuous planning is a term Ventana Research uses for a type of high-participation, collaborative, action-oriented planning that is built on frequent short planning sprints. This enables organizations to enhance the accuracy of their plans because refinements are made at shorter intervals. Short planning cycles enable organizations to achieve greater agility in responding to market or competitive changes.  

“Continuous” also means continuous across the entire organization planning as an ongoing collaborative dialogue that brings together finance, line-of-business managers and executives. And because it’s non-siloed, high-participation planning, companies can plan with greater accountability and coordination in their operations. This ongoing dialog tracks current conditions as well as changes in objectives and priorities that are driven by markets and the business climate. Continuous planning promotes a forward-looking mindset in planning and reviewing that’s focused on performance improvement. 

Continuous improvement is the third essential element for a digital Office of Finance, one that focuses heavily on the people dimension. Decades ago, continuous improvement revolutionized manufacturing worldwide as well as the culture of manufacturing departments. Adopting a continuous improvement attitude (in Japanesekai-zen or change is good) made Japan a manufacturing powerhouse and forced companies around the world to copy their approach. The Office of Finance is a numbers factory. Data comes in and financial statements, budgets and reports go out the other end. Continuous improvement demonstrates its value by lowering costs and improving quality; it works because most often organizations must address a set of small issues rather than a single big one to achieve better results.  

And a continuous improvement approach recognizes that business is not static. As conditions change it’s necessary to adapt and modify processes, policies and procedures. I believe this approach is especially important for making finance and accounting departments more strategic, agile and forward-looking. Embracing continuous improvement as a part of the culture of the department can enable finance executives to overcome roadblocks that are common in finance and accounting departments transformation efforts.  

Having a culture of continuous improvement makes it easier for a finance and accounting department to use disruptive technology. Accounting is a discipline that requires doing things exactly the same way over and over. In that context, it’s always going to be difficult for accountants to buy into disruptive technology. But doing things the same way forever isn’t necessarily the best way. Making continuous improvement a central part of the finance department’s mission statement goes a long way to eliminating mental barriers to change. 

Mastery of technology is essential for the Office of Finance. Over the coming decade technology will transform how an Office of Finance can operate, enabling it to achieve the longstanding objective of becoming a more active participant in the management of a company. Technology is necessary but by itself is insufficient. Finance executives must redesign how their organizations operate in a way that best uses the capabilities that technology affords. And they must act as leaders to overcome organizational inertia.

Regards,
Robert Kugel

Topics: Office of Finance, Financial Performance Management, Price and Revenue Management, ERP and Continuous Accounting, robotic finance, Predictive Planning, revenue and lease accounting, subscription management

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.