Companies have invested heavily in purchasing and implementing new financial reporting systems over the past few years. Most of those investments, however, have been on an ad hoc basis, leaving many of those companies unable to measure the performance of these systems. As a result, they've found themselves unable to fully trust their own financial data.
A study from enterprise software provider Oracle and consulting firm Accenture highlights the challenges companies are facing in their financial reporting process, not the least of which are increased costs and decreased effectiveness. In this Business Finance Q&A, we sat down with Scott Brennan, partner in Accenture's finance practice and global lead in their Charlotte-based enterprise performance management practice, to get a better idea of what companies can be and should be doing to gain the most value from their corporate financial reporting processes.
Business Finance: What are the key findings or takeaways from the financial reporting study that Accenture and Oracle put together?
Scott Brennan: This report was about the challenges that companies have in the financial consolidations, close and external reporting process. The key takeaways from this were pretty interesting. First, despite 82% of companies saying that they made substantial changes in this process over the last five years, 84% say they still struggle with data quality issues, and 71% say they still struggle with getting good visibility into the data or doing data analysis. That was the most important finding.
The second key takeaway is that these findings were reasonably consistent across the world, in developing countries and in very mature markets like the U.S. and the U.K. Our takeaway from this is that companies are investing but they're not likely to be investing in a way that holistically solves the problem.
BF: Describe the demographic makeup of the survey respondents.
Brennan: This was a global study responded by over 1,100 finance managers in 12 countries. 52% were greater than 1,000 employees, and only 2% of the respondents were in small companies of less than 250 employees.
BF: Based on the takeaways you just described, it sounds like it's not an isolate problem. What is the fallout for finance teams who need to deliver management reports when data quality is poor?
Brennan: On the most severe end of this, the study shows that 15% of companies actually missed statutory filing, which really puts the company at risk of penalties or even worse consequences. The study also shows that almost 20% missed internal dates for management reporting, which puts the company at risk of not getting to the root cause or the underlying issue of what's impacting their financial numbers. And you can go on from there.
The transparency and visibility into their results, if they can't get at their data by geographic region, by customer segment, by product segment -- in other words, if they don't have that visibility, and this survey shows that 71% of companies say that lack of visibility into the root cause is one of their issues -- not having that puts them at risk of not being able to fix those issues in time for the next revenue reporting cycle. And then there's also the cost impact. If they don't have data visibility coming out of their normal processes, they're going to be spending more money, more human capital, doing the analytics necessary to understand root causes or opportunities and take action on those.
BF: So what are leading companies doing to overcome these reporting challenges?
Brennan: The survey shows that 47% of companies made what they call a "substantial investment" to improve these processes, but yet the data shows that 84% still say they've got data quality issues. What the leaders are doing, those that are investing and getting value out of this, is they're looking at the close, consolidations, statutory reporting and management reporting in a holistic way. In other words, they're starting from the ground up, saying, the first thing we have to do is improve data quality. The second thing we have to do is improve data visibility. We've got to get our systems integrated. And we've got to understand what are the key measures and metrics that drive our company, and what dimensions are we looking at those key measures and metrics, and do my financial analysts have visibility to the drivers in the right dimensions to manage my company? So taking that holistic view is what separates high-performing companies from the laggards. The laggards are doing piecemeal investments in the close and consolidations process without really addressing the whole of the process.
BF: What are some of the solutions that finance teams are using? Are there solutions that can help companies get better at data analysis or any other part of the process?
Brennan: Yes. We coach our clients to look at the enterprise performance management layer of a reporting architecture as an integrated suite in and of itself. While a lot of companies are focused on getting a common ERP layer in their transaction processing, what we often see is that customers take a very piecemeal approach to performance management. This is the layer that sits on top of the ERP. So for example they might have one solution for the close and consolidations process, another solution for management reporting, and another solution for analytics.
What we see high-performing companies doing is looking at that layer of performance management as an integrated suite, so as they draw the data out of their ERP systems, they're bringing it into a common format, thus improving data quality. They're looking at it in a common set of defined dimensions, so they define customer, geography, product and channel in a common way, and they're able to then aggregate those numbers – by legal entity, geography, management entity, whatever it is – and report and analyze it in a common way. And the best way to do this is to have a common solution suite.
I think the punchline is really looking at it as an integrated capability, not a piecemeal capability.
BF: What's the typical ROI for this type of solution? And what does a company need to do internally before investing in one of these solutions?
Brennan: The software is not sophisticated enough to provide an ROI without a company making changes in the underlying processes, the underlying metrics and reports that a company looks at, or the underlying data quality. And data quality is not a software issue – it's a garbage in, garbage out issue. I'll give you some examples.
We worked with one company that put in some of these tools to improve the performance management of their forecasting process. The first thing they did was look at the process end to end, and the organization that supported those processes. Then they implemented a tool and they cut the size of their FP&A group in half – so there was a 50% savings in financial planning and analysis.
We worked with another company that, before they attacked the financial reporting process, they rationalized the reports, and they rationalized the metrics they looked at, and they were able to save over 15% of the cost of their financial reporting process, which for a global company can be significant. But most of the savings from our customers are driven by using the software as an enabler to an improved process with a realigned organizational structure, and realignment of the measures and metrics that drive their company.
BF: How do these proactive initiatives impact investor confidence in companies?
Brennan: On the extreme end, if a company misses their filing date and their earnings release, the immediate impact can be significant. We've seen companies whose market cap has been impacted 10% to 15% just because the investors are starting to lose confidence in the management's ability to tell the truth.
BF: Over what time frame did that 10-15% drop occur?
Brennan: That can be almost immediate. If a company misses an earnings release, they have to reschedule. That's usually a sign that there's something wrong. Now, it's usually not the first time that that can happen where investors start to lose confidence, but there have been studies that show that companies that are first to release their earnings in their industry enjoy a P/E multiplier that's higher than their industry competitors. That may be just due to increased confidence in the management team's ability to understand their business, consolidate their numbers and report.
But on the other end, even if a company is able to report in a timely fashion, they need to also have insight into what is driving either improvement in revenues and margins, or what's driving variances in revenues or cost of goods sold; for example, if a company's executives are able to report they exceeded revenue by 10% and that was driven by this product line or this customer segment in this geography. In other words, if they have good dimensional analysis to the changes – either good or bad, if they missed revenue estimates or costs are higher – if they're able to isolate those things, have data visibility and have the information through the analytics, they can improve investor confidence just by confidently talking and being able to answer all the analysts' questions.
It all links back to this holistic view of data quality, data consistency and good processes to consolidate the information, and then the right holistic software so that as you consolidate financial information, you're consolidating the management views of that information, it all ties out, and you understand what's impacting your company where. And again, this is critical for large global companies that are doing business across multiple geographic segments, customer segments and product segments.
For more information, don't miss this video interview of Scott Brennan conducted by Business Finance's Dave Blanchard.