Enterprise Content Management (ECM) is the ideal companion technology to financial reporting, since it focuses management attention on the workflow, tasks, issues and documents that are intrinsic to the process, allowing management to purge wasteful activities, eliminate paper handling and encourage collaborative working. Gary Simon, FSN’s managing editor shows that when coupled with an appropriate methodology (such as ‘Lean Six Sigma’), benchmarking and best practices then ECM can form the foundation not only of optimised processes but continuous process improvement as well.
CONTENTS
INTRODUCTION
THE BENEFITS OF AN EFFECTIVE CLOSE ARE WELL ESTABISHED
THE IMPEDIMENTS TO CLOSE PROCESS IMPROVEMENT
Time Pressure
Process Issues
People Challenges
Technology
HOW ECM MEETS THE CHALLENGE
Document management
Workflow
Task and Issue management
Dashboards
Compliance
THE BENEFITS OF ECM
Completeness of solution
Super-imposed on existing infrastructure
Visibility, control and auditability
Productivity
SUMMARY
INTRODUCTION
It is not surprising that the financial close has been a major preoccupation of the finance function for the last two decades. Broadening disclosure requirements, more pressing regulatory deadlines and mounting accounting complexity have exerted relentless pressure on overstretched corporate reporting functions seeking to maintain their composure in the face of unprecedented change and a testing economic environment.
Despite heavy investment in ERP systems, performance management suites and business intelligence capability, public and private sector organisations of all sizes and hues have struggled to maintain efficiency let alone make productivity gains. In the main, the focus of financial reporting initiatives has been almost exclusively on speed, encouraged by capital markets around the world that place a premium (often literally) on companies that are able to deliver their earnings announcements ahead of their contemporaries. But to focus exclusively on the velocity of reporting appears misguided. Accuracy, dependability and user productivity have all too frequently been sacrificed in the race to deliver results more rapidly to internal and external stakeholders. So is there a better way?
For a start, taking a different perspective of financial reporting can be surprisingly illuminating. A more holistic approach, i.e. viewing financial reporting as a Reporting Supply Chain (RSC), which stretches from ‘period close’ in subsidiaries through to e-filings to regulators underlines the importance of examining the process in its entirety, rather than seeking to improve discrete elements. Viewed this way, reporting is not unlike the manufacture and delivery of finished goods. In other words the quality of the final product and the speed with which it is manufactured depends on the effectiveness of all of the preceding steps and tasks in the chain.
As we shall see in this white paper, Enterprise Content Management (ECM) is the ideal companion technology for the RSC, since it focuses management attention on the workflow, tasks, issues and documents that are intrinsic to the process, allowing management to purge wasteful activities, eliminate paper handling and encourage collaborative working. When coupled with an appropriate methodology (such as ‘Lean Six Sigma’), benchmarking and best practices then ECM can form the foundation not only of optimised processes but continuous process improvement as well.
THE BENEFITS OF AN EFFECTIVE CLOSE ARE WELL ESTABISHED
It is sometimes easy to lose sight of the fact that the close process is not an ‘end’ in itself, but a ‘means to an end’. Rapidly closing the books and calculating the consolidated results gives management its first view of performance for the period. Yet the Pareto Effect, sometimes called the 80:20 rule, can mean that up to eighty percent of the available time is spent capturing and manipulating data and only 20 percent is spent analyzing the results. By contrast, enlightened companies with an optimized RSC are able to direct the majority of their expensive and highly qualified resources (business analysts and financial controllers) to understanding performance and gaining valuable business insight.
Early visibility of performance across the organization is highly desirable but the process also needs to be robust, accurate and dependable, that is, capable of delivering reliable results consistently to a published timetable so that key stakeholders and decision makers can use their time effectively.
Accuracy is of supreme importance, whether in the context of internal or external reporting. Accurate results derive from the control environment. A reporting supply chain that validates data, employs automated controls wherever feasible, manages interfaces and provides security from unauthorized changes is likely to deliver accurate results.
Data quality is a slightly different concept from accuracy since it captures the notion of financial measurement and the proper exercise of professional judgment. It relates to the clarity of financial dictionaries, accounting policies and journal adjustments. Ultimately it depends on adequate oversight and approval of material adjustments and compliance with accounting standards. An effective close process has rugged data quality built into every facet of the process. Together, reliable data quality and accuracy reduce the need for re-statements of financial statements or to revisit earlier steps in the process. This in turn boosts market confidence in the process and the organization.
Well run organizations that have honed their RSC can turn compliance to their advantage since well managed and governed processes are less costly and error prone. With appropriate tools and documentation built into the process an organization can not only establish compliance but readily demonstrate compliance to regulators and external auditors.
Overall, an optimized RSC delivers timely, accurate and dependable results at much lower cost than the relatively uncontrolled processes that many organizations suffer. Furthermore, it allows organizations to fully leverage their investment in existing ERP systems by complementing and extending existing processes into the RSC. So what are the impediments to an effective close process?
THE IMPEDIMENTS TO CLOSE PROCESS IMPROVEMENT
Time Pressure
One of the challenges of launching an effective process improvement project is the relentlessness of the close process itself. One monthly cycle of management accounts production rapidly blends with another with little time for finance teams to take a step back and assess what went wrong or how to repair the process. Quarterly and half-year reporting cycles add to the burden with publicly quoted companies having to satisfy simultaneously the needs of external and internal stakeholders. The result is that many finance teams simply burn the ‘midnight oil’ to maintain their timetable.Ironically this makes it even more difficult to make the case for change, since key stakeholders continue to receive their financial statements on time, blissfully unaware of the strains in the process.
Process Issues
Large enterprises with heterogeneous trading operations and distributed finance functions scattered throughout the world encounter the most difficulty in developing a smooth close process. The main challenge is twofold, firstly; to connect the finance function to the process within its charge and secondly, to connect the members of the finance function to each other. It is this lack of process visibility across the entire enterprise and collaboration between the key players in the process that are the major impediments to process improvement.
In addition there are a number of more prosaic factors that can snag the process. Although by no means a comprehensive list, poorly defined accounting dictionaries, inconsistent accounting policies and inaccurately maintained entity hierarchies (percentage shareholdings) can materially affect the effectiveness of the close. Unwieldy charts of accounts, separate management and statutory processes and inter-company wrangling act as a further drag on the process.
People issues
Organizational issues play a major role in the smooth conduct of the RSC, but can also be a major impediment to progress. Furthermore, the increasing breadth of statutory reporting, has added considerably to the number of reviewers and stakeholders in the final stages of the reporting process, the so called, ‘Last Mile’ of finance.
Diverse organizations with, say, regional accounting centres have to contend with personnel operating in different time zones, with different qualifications, native languages and culture. This provides fertile territory for misunderstandings, especially in the absence of enabling technologies for collaboration and support.
In broad terms problems arising in the RSC are most effectively dealt with as close as possible to their source. Failure to resolve an issue locally often means that it is propagated all the way to the corporate centre where it is much more difficult to identify and resolve. Enabling technologies which allow the corporate finance function and local finance function to simultaneously have visibility of the same issue and combine forces to find a solution can make a significant difference to user productivity and effectiveness.
Technology
Technology remains a major impediment to progress. A variety of ERP and operational systems present noteworthy challenges when trying to streamline close processes or to integrate local applications to group consolidation systems. Furthermore, the major CPM suites can be very complex, costly and difficult to implement. On the other hand niche vendors provide only part of the answer and spreadsheets are inefficient for controlling and managing processes.
The CPM approach:
The biggest drawback of the large CPM suites is that they are an amalgam of different solutions acquired piecemeal from a range of different suppliers over time. The focus of these comprehensive suites has been on the principle applications, such as budgeting, planning, forecasting, financial consolidation and reporting rather than enabling technologies that support say, process visibility, collaboration and document management. Yet the potential for process improvement is bound up with these core technologies for they allow users to extend their reach across the RSC, to more efficiently manage issues, task and documents that transcend functional or geographic boundaries. However, without these technologies ‘baked’ into their solutions the CPM vendors’ potential for process improvement is effectively capped.
Niche vendors:
As the name suggests, niche vendors provide only a specialised part of the solution and so by definition can have only limited impact on the RSC. Although these vendors provide helpful functionality which is often beyond the scope of traditional CPM vendors, for example, reconciliation software and Sarbannes Oxley controls, their inability to support the RSC in its entirety renders them ineffective in a close setting.
The spreadsheet approach to process management:
Designed as a personal productivity tool, spreadsheets are ill-equipped for the heavy processing demands of the corporate reporting environment. They quickly become overburdened with data and are unwieldy to manage, maintain and share. But spreadsheets are even more inappropriate in the context of managing processes, tasks and activities in a multi-stakeholder environment. Although they are routinely used to record checklists or schedules of close tasks and activities their principle drawback is the inability to share worksheets across the enterprise. So they work in a limited way as an aide memoire for individuals involved in the close process but can play no part in wider process improvement.
HOW ECM MEETS THE CHALLENGE
There is no fixed definition of Enterprise Content Management but in broad terms it is an application designed for guiding and marshalling documents and other content through an organization. Historically, it has been applied to all sorts of business processes (including accounting processes) and industries but it is only in recent times that document laden organizations have turned to ECM to service core financial reporting processes.
In the modern environment ECM can do much more than manage document flows. In recent years the technology has expanded to manage the tasks and issues that are intrinsic to any process, providing the organizational ‘glue’ between business functions and the foundation for continuous process improvement as well as a robust environment for electronic document storage, search and retrieval.
Document management
The corporate reporting process is almost completely enveloped in documentation. Audit evidence, management commentaries, externally generated documents such as balance confirmations, compliance sign-offs, checklist of close tasks and instructions are just some of the types of documentation that accompany the RSC.
In many finance functions this documentation is stored in a variety of physical files, emails and spreadsheets. Scattered throughout the organisation, these documents are difficult to retrieve and also take up valuable shelf space. The effect of this is that manually maintained information is detached from the underlying process, leaving users to contend with one process for transactions and a parallel manual process for the documentation which underpins it. Navigating between these two process streams is inefficient and time consuming with research suggesting that users can spend up to a quarter of their day simply looking for the information they need.
ECM overcomes this by enabling manual documents to be scanned (or partially scanned) and electronic documents or files to be attached to tasks –yet stored reliably in a central, ‘discoverable’ repository. The net effect is that information is appended directly to the tasks to which it relates and amenable to search at a later time.
Workflow
Workflow is a transformational technology that has had a major impact on finance processes. It allows tasks to be routed according to pre-defined business rules between the different users in a process chain. This may be to obtain a compliance approval, to escalate an issue to a supervisory level or simply to invoke the next stage of the process. Linked to email and alerting systems including mobile devices, workflow provides the means to expedite a process whilst maintaining appropriate levels of control.
Task and Issue management
Period close is usually a well honed routine yet the instructions and tasks they relate to are often consigned to Microsoft Word documents and Excel files. But in this format the information is ‘inert’, i.e. incapable of being shared or measured. By contrast, once tasks are exposed in an ECM then they become visible to authorized users anywhere in the process, their status can be captured courtesy of integrated workflow and they are amenable to measurement. The ability to automatically record task start and finish times provides the foundations of performance measurement and process improvement. A rich repository of performance built up over time and embedded in the application helps to identify the delinquent tasks that hold up the overall RSC yet if tackled could bring about profound improvements in overall performance.
Dashboards
User configurable dashboards incorporated in ECM solutions allow performance metrics to be surfaced in an imaginative way using a variety of graphs, gauges and dials. As such, responsibility for improving performance can be devolved to the process owners, empowering them to find suitable ways forward.
Compliance
ECM is particularly valuable in the context of a constantly changing compliance landscape in which new requirements can be introduced very hastily by regulators. The ability to add new tasks, measure performance and add relevant documentation at key points in the process enables organizations to respond to new requirements as they arise, implement the required process steps and be able to demonstrate compliance in one maneuver.
THE BENEFITS OF ECM
Completeness of solution
ECM brings unique benefits to the Reporting Supply Chain. A unified platform coupled with the ability to match every step of the process with complete support for document management, workflow and task tracking provides capability that is not readily matched by any of the traditional approaches to the close process. It enables users to marshal all of the documents related to the close in a single computing environment that can be deployed and shared throughout the organization.
“In addition to the increased speed of close, the possibilities with AFRM to ensure completeness and accuracy of close procedures, reduce errors and re-work, and enhance visibility of the close activities put the hard dollar signs on the project.” Brian English, RTI Metals International
Super-imposed on existing infrastructure
But ECM is not a disruptive technology. Despite the positive impact that ECM can have on the efficiency of the close process and user productivity it can be super-imposed on existing technology platforms without the need for complex integration and IT involvement. The non-invasiveness of the solution means that it can be implemented in a very short timeframe (usually a matter of days) and that the finance function can take ownership for configuration, implementation and maintenance. And once the solution is in place it can be readily extended to other application areas.
Visibility, control and auditability
Capturing all of the close tasks from inception in reporting entities to final e-filings exposes the whole process to the organization. It provides management with complete visibility of the status of tasks, issues, documents and commentaries anywhere along the process, allowing the organization to assess its progress during the close cycle and to work collaboratively on areas of difficulty. By mounting ECM in the ‘cloud’ finance users can access the applications using nothing more than a web browser on a low specification computer, laptop, mobile device or smart phone and the applications are available on-tap 24/7 from anywhere in the world. This freedom to access applications on demand is not only hugely convenient but also has advantages for organisations with distributed finance functions working in different time zones.
“The beauty of the tool is in the visibility. The tool will not fix your close process, but it will put the problems with your close process right in front of your face and force you to fix them.” Brian English, RTI Metals International
Auditors too can benefit from ECM. They can gain assurance that the process is well controlled by reviewing the close tasks and workflow that have been followed. Furthermore, the ready availability of supporting documentation, audit evidence and compliance sign-offs should provide a higher level of audit comfort and reduce the time taken to reach an audit opinion.
Productivity
ECM presents the opportunity for a step-change in finance function productivity. In the first instance a preliminary review of close tasks as a precursor to an ECM implementation frequently enables organisations to identify and eliminate wasteful activities as well as establishing what level of control and documentation to maintain in the system. The remaining productive tasks can then be fully configured with responsibilities, deadlines and workflow. It is this level of process automation, together with capabilities for sharing information, instant searching and retrieval that underpins potential productivity gains. In addition the ability to review a central repository of task metrics and explore under and over-performing tasks allows the organization to benchmark its performance from one close cycle to the next and provides the basis for continuous process improvement.
Enhanced ‘User experience’
A valuable bi-product of ECM is that it reconnects users to the processes in their charge and through collaboration, continuous improvement and productivity gains reduces the burden of the period close. The time liberated from handling the ‘mechanics’ of the process can be redirected towards analysis and other value-added tasks which fully leverage the skills of the finance personnel engaged in financial reporting and in this way provide a more fulfilling ‘user-experience’ as well.
SUMMARY
The pressures on the financial close continue to mount in the face of relentless regulatory change but CPM suites, niche solutions and spreadsheet workarounds have had done little to improve finance function productivity. The growing burden of regulation and compliance together with rising accounting complexity has increased the number and variety of documents and close tasks which need to be managed yet these traditional approaches have focussed on transactions rather than managing the underlying process. As a result the Reporting Supply Chain (RSC) is poorly supported leaving finance professionals mired in a patchwork quilt of spreadsheets, Microsoft Word documents and emails – burning the midnight oil and ill-equipped to make process improvements.
Enterprise Content Management (ECM) takes a very different approach. It combines, document management, task management and workflow in a single computing environment which can be aligned with the RSC alongside its entire length. This means that for every process step the organization can define the activities that are required, append relevant documentation (e.g. audit trail, certificates and instructions) and, via workflow, invoke the next step in the process. By capturing all tasks, documents and activities in a single unified environment it is possible to give authorised users complete visibility of the process and its status at any point in time. It also acts as a robust repository for all associated documents, metrics and audit trails improving the control environment and auditability at a stroke.
Despite its over-arching capability an Enterprise Content Management system is surprisingly easy to implement and can be super-imposed on existing technical architectures with relative ease. This means that organisations can benefit quickly from ECM and through process benchmarking start to make real inroads into user productivity, at the same time improving data quality, increasing the time available for business analysis and providing an enhanced user experience.
About SVACPA
Silicon Valley Accountants is an organization that is dedicated to optimizing the financial close. Developed by accountants for accountants in industry, commerce and the public sector it has created a unique approach to optimizing the financial close by harnessing leading edge ECM software from Hyland software and fusing it with industry best practice and Lean Six Sigma methodology. The result is a groundbreaking product called AFRM (Accelerated Financial Reporting Management) which allows organizations to very rapidly improve their end-to-end close procedures without the technical and organizational disruption associated with traditional approaches.
Contact SVACPA at
530 Lytton Avenue
2nd Floor
Palo Alto California 94301
(650) 241-3587
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About FSN |
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FSN Publishing Limited is an independent research, news and publishing organization catering for the needs of the finance function. This white paper is written by Gary Simon, Group Publisher of FSN and Managing Editor of FSN Newswire. He is a graduate of London University, a Fellow of the Institute of Chartered Accountants in England and Wales and a Fellow of the British Computer Society with more than 27 years experience of implementing management and financial reporting systems. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector. Whilst every attempt has been made to ensure that the information in this document is accurate and complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and not intended to be specific to a particular set of circumstances. FSN Publishing Limited and the author do not accept responsibility for any kind of loss resulting from the use of information contained in this document. |
