Close Fast, Close Smart

As long as they're meeting their regulatory reporting deadlines, most enterprises don't think a lot about closing their books more quickly.

Maybe they should start.

Increasingly, the speed with which an organization closes its books and reports its financial results is being looked at by practitioners, analysts and investors as a defining metric for evaluating whether the organization possesses the best possible processes and enabling technologies. And it turns out that many companies don't, even those making huge IT investments and supporting equally large IT departments.

World-class companies can close their books internally in five days, while top performers can do it in three, says Scott Holland, IT practice leader at the Hackett Group, a strategic advisory firm. But only about 10 percent of US enterprises are in that class, Holland says.

Ask a typical CIO how his company could improve its financial reporting and his recommendations most likely will focus on mechanics: normalizing data, collecting it and passing it on to some central repository. Some CIOs will go a little further to suggest that the data generation and gathering systems be reviewed for compliance requirements. And that's fine as far as it goes — except it doesn't go very far. It doesn't address what most CFOs need; it doesn't help the business run more intelligently; it doesn't cement IT-business alignment. No matter how integrated a company's financial streams are, CFOs will still struggle to close the books and issue the appropriate reports. Their staffs will still spend countless hours reconciling data gathered from multiple departments and systems — all under deadlines that are shrinking even as regulators ask for more information.

At the very least, what the business needs from IT is a way to make the financial close and reporting process more efficient and accurate in order to lower costs and minimize the risk of providing incorrect information to stockholders and regulators.

But that's merely a tactical improvement. The real opportunities lie elsewhere. By redesigning the organization's financial processes and then implementing the technology infrastructure to execute them, business managers and executives can gain a near-real-time view of financial performance, enabling them to identify problems and opportunities much earlier. A second opportunity is to understand the relationships of all financial information so managers and executives can do analysis outside the box. Lastly, by providing accurate filings more quickly than your competitors, your company will increase investor confidence, and that will put a smile on the face of every business executive and make the CIO king for (at least) a day. (For how a faster close can lead to better business-IT alignment, see "Speeding Alignment".)

Needed: The Big Picture

Noel Gorvett is well aware of how an organization can miss the opportunities offered by speeding the close.

In 2002, Gorvett, the group business systems manager at book publisher Pearson, began exploring centralizing group reporting. The idea was to replace the more than 400 general ledgers and 80 ERP systems in use throughout the global publisher's operating units in 60 countries to track $US7 billion in annual revenue. The IT group's goal was more efficient maintenance through a common technology base. But the focus on platform integration overlooked a key business need: a way to report the financial information flowing through the systems in a meaningful, consistent way at the departmental and executive levels.

"Each Pearson department was working off its own assumptions," Gorvett recalls, such as the criteria for sales forecasts and profit margins. That made it difficult to create a consolidated financial report, much less to identify variations from plan so managers could act quickly while there was still time to do so usefully. It became clear to Pearson's group CFO in mid-2003 that a different approach was needed, one that focused on fixing inefficiencies in the financial reporting process itself and standardizing processes across Pearson. That way, executives could work from the same financial assumptions, no matter what applications they used to manage their books. This in turn would enable them to quickly identify significant differences across divisions and adjust strategies if needed. And the processes would gather the information that would be needed for compliance, regulatory and stockholder filings — no more scrambling to retrieve this information at each close from buried Excel spreadsheets or by running queries against transaction systems.

So Gorvett — working as a liaison between the CFO and the CIO — led Pearson on a tack that determined standard financial transaction, auditing and reporting processes for the whole company — creating, for the first time, a standard chart of accounts. This provided a unified list of all accounting data tracked to ensure that everyone used the same definitions and categories and that the enterprise captured all the financial information it needed at all locations.

The next step was to set up the technical requirements for what data needed to be captured from what sources, how it would be presented to the central financial reporting tool and what processes had to be followed to generate the results. That way, no matter what technology platform a division happened to use, the data that management was receiving would be consistent, accurate and timely.

The result: Pearson was able to close its quarterly books in six days (down from about 20) and reduce its year-end reporting time from eight weeks to six weeks. And because everyone was working from the same chart of accounts, financial staffers no longer had to burn the midnight oil to translate their financial information into what the executive team needed.

Page Break

The ROI of Speed

The Hackett Group's studies show that "world-class companies spend 45 percent less" on their closing and reporting efforts than other companies, which on average saves $US5.5 million per $US1 billion in revenue. These savings come, in part, from needing fewer people and systems to scrub data.

There's a compliance payoff as well: Consistent, self-auditing processes help companies more easily conform to regulatory mandates such as Sarbanes-Oxley by reducing the risk of errors, says Peter Harries, a partner at accounting consultancy PricewaterhouseCoopers.

A faster close also helps large, public companies — typically those whose stock is worth more than $700 million — meet new and more stringent regulatory reporting deadlines from the Securities and Exchange Commission. As of December 15, 2006, such "large accelerated filers" had to complete their annual 10-K reports within 60 days of the fiscal year end, down from 75. (The schedule for quarterly 10-Q reports was maintained at 40 days.) A 2006 Hyperion survey of SEC filings (covering 2003 to 2005) shows that the average Fortune 500 company takes 67 days to file its annual reports, with 76 percent taking more than 60 days. These statistics show how close to the edge many companies live. Reducing the time it takes to close helps free up time for reporting, says Joe Kuehn, an advisory partner at accountancy KPMG.

Finally, a fast close builds investor confidence. Investors are right to make the inference, Kuehn says, that if the close is slow it means processes are broken. And if the processes are broken, he says, chances are the data is broken.

There's another hard-to-quantify but critical payoff: smarter business management.

"World-class organizations go from transaction mode to analysis mode," says Hackett Group's Holland, using financial data for analysis that highlights problems, identifies opportunities and considers potential shifts in customer behaviour, marketing effectiveness and product requirements.

"A close is a step in time, and it's only meaningful if it's close enough to the present," says Terry Flood, COO and president of Logicalis Group, an IT consultancy.

"As business expands, it becomes imperative to have credible snapshots of performance. The close is the lens," says Logicalis CFO Greg Baker.

So Logicalis has established both common processes and a common technology platform. The result: a four-day close. "All our managers are tied into the metrics of our company. If we waited a month, we'd miss those key measurements," Baker says.

"When IT marries up with the CFO or CEO, we see tremendous success," says Holland.

A Cure for Mandate Madness

For many companies, meeting complex requirements, such as evaluating the effectiveness of newly required accuracy controls, in the same amount of time — or even in less time than before — forces executives to rethink their closing and reporting processes. That was the case at Rock-Tenn, a $US2.1 billion manufacturer of paperboard products such as packaging and retail displays.

"The close had been a perfunctory process — no one really looked at it. Then Sarbox came along," recalls CIO Larry Shutzberg. Sarbanes-Oxley exposed all the touchpoints in the process where errors could creep in.

"We have 90-plus locations, with people doing accounting functions in the field. Getting everybody to do what they need to do is like herding cats," Shutzberg notes. Add to that challenge a string of acquisitions and management's attention was diverted from the increasingly patchwork financial processes that were taking root.

So Shutzberg, working with his CFO, led an effort to identify and standardize Rock-Tenn's financial controls.

"It was a painful process," he says, overcoming people's resistance to let go of systems they had used for years. Shutzberg uses software from Movaris to determine what Sarbanes-Oxley would require of the revamped processes, and then to test the new processes against the requirements.

"The first thing you need to do is understand your current state," advises PricewaterhouseCoopers' Harries.

Shutzberg's first step was to create standard Excel checklists for all Rock-Tenn financial and accounting staff. But truly adhering to Sarbanes-Oxley's requirements "was impossible to do with spreadsheets, e-mail and PowerPoints", he notes, because it's extremely difficult to validate the accuracy and consistency of such disparate, individually maintained data. So Rock-Tenn launched a project to replace its aging ERP system with one that supports Sarbanes-Oxley processes out of the box. When it's deployed later this year, "we'll see if it's good enough", Shutzberg says.

Page Break

The Bottom Line Payoff

The process efforts at Rock-Tenn have reduced its closing time from 15 days to 10. But "the business didn't feel disadvantaged when we were closing in 15", Shutzberg says. The real benefit for Rock-Tenn (in addition to meeting Sarbanes-Oxley requirements), he says, was "in consolidating accounting by reducing headcount".

An efficient financial process typically lowers costs by eliminating the need for reconciliation across systems and processes, thus reducing demands on staff, and by eliminating duplication of effort across organizations. Common processes and systems allow for more automation and shift responsibility to a smaller set of managers.

At Accenture, sales, general and administrative expenses have dropped 1 percent a year as a share of revenue, says Tony Coughlan, controller and chief accounting officer — that's a $US166 million drop for Accenture in 2006, given its $US16.6 billion in revenue. In essence, Accenture's accounting costs have stayed flat as the business has grown, he notes. Coughlan attributes this payoff, in part, to reworked financial processes and a consolidated technology platform: "We've cut finance headcount even as we grew, and a significant driver was our ability to leverage the infrastructure better." IT costs relative to corporate revenue have also dropped by half, says Accenture CIO Frank Modruson. "And we have better technology than we did before," he notes.

Managing Smarter

Accenture wasn't just looking for cost reductions. When it converted from a private partnership to a publicly held company in 2001, "we were publishing our reports 40 days after closing, and the deadline then was 45 days", recalls Coughlan. "That didn't look as good as we wanted."

A big reason reporting took so long was that Accenture's decentralized organization — designed for a partnership — didn't support the visibility that investors and regulators demanded and that senior executives could use to be more nimble. "You end up with different versions of the truth. With different systems, you get timing differences that make it hard to cross-check your financial data," says Modruson. That slowed both the close and reporting processes and risked incomplete, conflicting information that could hobble the company.

Coughlan, Modruson and management reporting chief David Rowland tackled the problem on two fronts over a three-year effort that ended in September 2004. ("We had to join at the hip," recalls Modruson.) The first front was to rework a series of sequential processes into a single one, thereby reducing touchpoints. The second was to consolidate various financial systems into a single instance of SAP's ERP system, converting 450 systems into one ERP implementation. In addition to reducing expenses, these efforts lowered the reporting time from 40 to 22 days, letting Accenture's financial staff go on vacation for Christmas 2006 — a first, Coughlan notes. United Technologies Corporation (UTC), a $US48 billion diversified manufacturer, also gained a quality-of-life ROI from its financial integration efforts, notes CIO John Doucette. "People no longer work until 2am to meet reporting deadlines," Doucette says. "They go home on time."

But the critical business advantage UTC reaped from its faster close is actionable insight. "It's about getting information quickly, to be able to act on it," says Greg Hayes, UTC's VP for accounting and finance. For example, in the northern autumn of 2006, he noted a drop-off in air conditioning orders just as external data showed a decline in new-home construction across the United States. Armed with current sales shifts, UTC adjusted its orders so it wouldn't get stuck with inventory, and it adjusted factory schedules so it wouldn't produce as many air conditioners. "Knowing only the general trend wouldn't have shown us the specific implications for our business," says Hayes.

To achieve that degree of agility, UTC consolidated 250 instances of Hyperion financial reporting tools into one instance of Hyperion Financial Management (HFM) across its six subsidiaries, such as helicopter maker Sikorsky, aircraft engine maker Pratt & Whitney and air conditioning maker Carrier. By having a common reporting and analysis tool into which all subsidiaries feed consistent financial data, the company has achieved a five-day close, down from eight.

"If we had a single ERP system, I think we could close the books in one day," Hayes says. But he doesn't think it makes sense to impose the cost of conversion to a single ERP platform on six distinct subsidiaries given how fast the organization closes already.

As Pearson's and UTC's experiences show, a unified technology base can make an efficient process execute faster, but Hackett Group's Holland advises that CIOs first identify the right business processes for the ERP or other systems to execute.

In fact, that's Pearson's strategy, says Gorvett. With a consistent financial process in place that delivers what's needed, the company is now able to focus on consolidating its ERP platforms. And while UTC doesn't expect to see a single instance of ERP across all six subsidiaries, it is moving to consolidate each unit on just one ERP system.

Page Break

Why Reporting Is Different

Even organizations that have fast closes find it hard to reduce the time it takes to report results to investors and regulators. UTC takes only five days to close its books each quarter, but it takes another 17 days to prepare the 10-Q quarterly filings for the SEC. And the annual 10-K takes a few days more.

The review process relies largely on human effort. Lots of people — executives, legal staff, board members — have to go through the financial data and projections, as well as the legal, labour, personnel and other issues that may need to be disclosed. Even if automated tools are used to gather all the financial data for these filings (rather than just the data needed to close the books), this other information requires human judgment to articulate. And not all organizations have knowledge management systems that can track and make such information easily available, says KPMG's Kuehn.

To speed the process and improve filing accuracy, UTC deployed a legal case tracking system so the status of all legal issues can be found quickly. The company is also using a two-year-old technology standard called the Extensible Business Reporting Language (XBRL) to tag its filings, and that's a horse of still another colour (for more on XBRL, see Lingua Banca).

A New Business Language

XBRL has been touted by the SEC as a way to make information more easily accessible to investors and regulators, but there's a direct benefit to the enterprise itself. XBRL makes all information in a filing accessible through standard, tag-based formatting, as XML does for transaction data. But XBRL also provides structure for validation rules, queries and analysis rules, notes Mike Willis, a Pricewaterhouse­Coopers partner. If XBRL were introduced throughout the enterprise's financial closing and reporting process, rather than simply used as a report format after the fact, users would gain new controls and insights into their data, Willis says. "They can automate analytic rules rather than auditing manually, which would reduce costs and speed the process," he adds. Plus, the use of XBRL would ensure that a company's reports reach their stockholders (and analysts) unfiltered by third-party aggregators. "It lets companies tell their own stories," says Willis.

That scenario is probably a year or two away, predicts John Stantial, UTC's director of financial reporting, since the SEC currently does not accept XBRL reports as the official filing (they can be filed in addition as part of a testing program). In the meantime, companies can use XBRL and convert the data to the SEC's official format.

Stantial believes an XBRL-based reporting workflow would reduce the time to produce quarterly reports by 20 percent, because the tagged data would let the reporting systems automatically update the financials. Stantial says that companies like UTC typically spend one to three weeks per report on all sorts of government-required information, such as labour statistics, unemployment statistics and tax reporting. "With XBRL, I could push a button and get that in five minutes," he says.

The SEC is spending $US54 million to make its electronic Edgar reporting system XBRL-capable, and the effort to complete the standard SEC reporting taxonomies should be done by June, so Stantial speculates that XBRL-based reporting will begin by 2008. (Gartner has made similar predictions.) And he expects the Department of Labour and the IRS to follow suit.

Beyond making reporting easier, XBRL will improve internal visibility into company financials, Stantial predicts. Although UTC has a fast, five-day close with standard processes, there's still room for interpretation in what's reported. For example, an executive may want to know the operating expenses as a percentage of sales for all UTC's major locations. But "operating expenses" could be interpreted differently. Plus, it can take several days to respond to requests, and the answers may come back in different forms, such as e-mails and Excel spreadsheets, that must then be consolidated manually. But if the various general ledgers and ERP systems in use throughout UTC's subsidiaries were XBRL-enabled, Stantial wouldn't have to wait for the financial data to be prepared in UTC's standard format; XBRL makes it automatically accessible.

Several commercial tools now come with XBRL capabilities, including Hyperion Financial Management, Oracle Financials and Cartes is. Willis and Stantial expect XBRL capability to be built into most commercial financial applications as they are upgraded.

"XBRL is not expensive, and it's not technical; it's all there for a layperson. And there's a very impressive support network out there," Stantial says, which is why he's frustrated that few companies have adopted it. Most view XBRL simply as a new data format that no one is required to use, so why spend time looking into it?

But there are signs of increasing interest. "Usage picked up substantially in 2006," says Jeff Neumann, an SEC technology specialist. He suspects that Burl's release around the time of Sarbanes-Oxley doomed it to the back burner for the past two years.

Page Break

Go Fast for the Right Reasons

A faster close is a good indicator of successful financial processes, says PricewaterhouseCoopers' Harries. But going faster for its own sake should not become an enterprise goal. "If you improve quality and cost, [speed] usually improves, but if you drive for [speed], the others may not improve," he says.

"When we think about closing, quality comes first," says Dow Chemical CIO David Kepler.

"In no way should speed ever sacrifice quality. If there's one lesson learned over the last several years, it's that the integrity of financial reporting is paramount," concurs Harries.

"Garbage in, garbage out," warns KPMG's Kuehn.

When it comes to a fast close, the bottom line is to empower companies with trustworthy, current information. "Yes, we close faster today, but what we really did is to get information to people faster," says Kepler, drawing an important distinction for all CIOs and enterprises chasing the faster close.

SIDEBAR: Speeding Alignment

When the CIO and CFO work together, you get a better-managed company, not to mention a faster close

As companies accelerate their close, improve the ubiquity of the ­financial process and lower their costs, "you move to a shared service centre," says Peter Harries, a partner at PricewaterhouseCoopers. And that evolution depends on business and IT being closely aligned.

The benefits of alignment go beyond increasing the likelihood of identifying opportunities or dangers earlier, says Terry Flood, COO of IT integration provider Logicalis Group. "Good relations between the CIO organization and the CFO organization just cost less. You'll have infrastructures that save the company money, and you'll get focused on how to make the company money," he says.

In this partnership, though, the CIO is typically the junior partner. "For financial reporting, the buck stops with the CFO and other executive management, so they drive the show," says Steven Kursh, executive professor of finance and insurance at Northeastern University.

That doesn't mean, however, that the CIO is merely an executor.

"Having a CIO who understands the needs of finance for reporting and daily financial needs will help the CIO bring the right technology and packages to meet these needs," says Joe Kuehn, an advisory partner at accountancy KPMG. He's seen simple examples of that with his clients. For example, reports are historically created monthly, and people have grown accustomed to waiting for the next report before formulating their strategies. "No one ever asks for more frequent reports," he says, but a tuned-in CIO will notice that decisions are being held up and use automation to make reports available more frequently.

And sometimes the CIO takes a larger role. For example, at paperboard manufacturer Rock-Tenn, CIO Larry Shutzberg was heavily involved with defining the financial process. "But if I followed the traditional role of the CIO, I'm not sure I would have had the same role in the revised financial process," he says.

— G GRUMAN