The drive to comply with the Sarbanes-Oxley Act has been a double-edged sword in the battle to improve corporate finance processes. Many companies have increased the reliability of their forecasting. But new research by Atlanta-based The Hackett Group indicates that closing cycles have extended slightly and that most businesses have been unable to reduce their overall finance costs.
Hackett's "2004 Finance Book of Numbers" reports that more than two-thirds of all companies are confident in their financial forecasting and reporting outputs. Only 9 percent of companies classified as average -- and just 33 percent of companies that Hackett considered "world-class" -- made the same claim just a year ago.
That's the good news. The bad news is that the cost of finance is not falling. Organizations that are middle-of-the-road in terms of process efficiencies now spend 1.08 percent of corporate revenue on finance. Although that number has fallen by 44 percent since Hackett began its research in 1992, these companies have seen little net reduction in costs since 2002. World-class companies currently spend 0.74 percent of revenue on finance. That's 31 percent less than their average peers pay, but it's slightly higher than the 0.72 percent best-practice companies spent on the function two years ago.
According to Hackett, businesses are still finding ways to cut costs, but their increased spending on compliance activities is largely offsetting the savings. At average companies, spending on compliance has risen 29 percent since 2003, from 0.07 percent of overall revenue to 0.09 percent.
The research also shows that the long-term trend toward shorter closing cycles reversed in 2004. Both average and world-class companies now need more than a week to close their books each month. For average companies, the typical monthly close time rose from 5.2 days in 2003 to 5.5 days in 2004. Top-tier companies saw an even greater percentage increase, from 4.3 days last year to 5.1 days now.
Labor costs continue to represent the bulk of finance expenditures, and this is an area in which the performance of world-class and average companies clearly diverges. The most efficient organizations spend only 0.46 percent of corporate revenue on labor costs. They support a staff of 63 full-time finance employees per $1 billion of revenue. The typical company spends 65 percent more -- 0.76 percent of its revenue -- on finance staffing and employs 122 full-time workers per billion dollars of revenue.
World-class companies have reduced their finance workforce partly through the use of technology. Hackett reports that they spend 30 percent more on technology per full-time finance employee than does the average company. They also make much better use of their enterprise resource planning (ERP) systems. While middle-of-the-road companies still rely on an average of two ERP systems (down from a count of 2.7 in 2003), top companies average just one ERP system (down from 1.7 in 2003).
To achieve world-class status in terms of their finance function, companies must apply a wide array of best practices in finance and other areas. For example, the best finance organizations are 46 percent more likely than other companies to use a central data repository to generate business performance reports, and they focus on 58 percent fewer budget line items in their analyses. They are also more likely to have fully integrated budgeting and planning applications and much more likely to use online tools to enable self-service for ad hoc inquiries and financial reporting. Finally, they are twice as likely to use mature balanced scorecards with a mix of financial and nonfinancial metrics to analyze performance.