Taking financial consolidation to the next level.

2nd June 2014

In recent years, continuing advances in hardware capability together with the onset of unified EPM systems have caused a blurring of the boundaries between performance management and operational reporting, allowing organizations to delve deeply into very granular data to reveal new insights about business performance aided by business intelligence capability ‘baked’ into the same EPM environment.  In this new FSN Executive Briefing, sponsored by BOARD, Gary Simon, FSN’s managing editor says that organizations at the leading edge are now able to manage all of their reporting and performance management needs in one environment leading to improved productivity and better decision making.

 

 

 

Introduction

Financial or statutory consolidation is a specialist activity steeped in complex accounting standards and regulatory reporting requirements that can vary quite significantly across the world.  As such, since the introduction of consolidation applications in the mid-eighties, financial reporting has been the preserve of highly skilled teams of specialists frequently working as a separate strand of the finance organisation, creating  a ‘silo’ mentality reinforced by ever more pressing statutory deadlines and complex information needs.

Yet to view statutory consolidation in a ‘vacuum’ – whose purpose is limited to providing historic reporting for the benefit of governments, regulators and investors is to miss the point.  ‘Actuals’ reporting is the lynchpin of performance management and the gateway to superior business performance.  So why are so many organizations seemingly hidebound by outmoded ways of working?

Exploiting the common ground

Theoretically, management and statutory reporting have been converging for years.  Successive rounds of legislation have sought to put external investors and boards of management on the same footing by improving transparency and enabling shareholders to view business critical information in exactly the same way as boards of management. This was the rationale behind, for example, segmental reporting which attempts to align statutory accounts with the way that the business is viewed internally.  So it follows that if there is to be a common view of business performance that statutory and management reporting should share much of the same source data and indeed similar structural information (metadata or ‘data about data’) for example, time periods, chart of accounts, cost centres, reporting entities, divisional structure, product and other dimensions.

Indeed, over the past two decades organizations have increasingly striven to unify statutory and management reporting in the same computing environment underpinned by a consolidation application and business model that can simultaneously serve both reporting needs. In some cases it has been possible to satisfy more specialised regulatory reporting as well, but success has been limited by;

  • finance organizations that continue to separate the financial and management accounting functions
  • outdated consolidation solutions that are unable to cope simultaneously with the complexity of maintaining distinct management, statutory and regulatory structures in one application environment
  • limited computing power, unable to support large data models and complex reporting

More disconcertingly, these issues have also acted as a brake on Enterprise Performance Management (EPM).  But what exactly is EPM?

Performance management offers new vistas

A commonly held definition of EPM is that it is an amalgam of management methodologies, business processes, software tools, technologies and applications that provide for the development and communication of business strategy, the alignment of corporate resources in accordance with it and the monitoring of outcomes so that management can take action to ensure its success. It is sometimes described as a closed loop process because the business insights gained from constant monitoring and analysis of performance are subsequently used to refine the long term strategy – closing the loop (see diagram below).

The process starts with the development of strategy and long term plans from which performance measures are derived and embedded in operational budgets and scorecards which are monitored, analysed and reported on against actual results. The results of these analyses are used to inform and refine the business plans which are adjusted before the whole EPM cycle starts again. 

The closed-loop performance management cycle

closed loop perfprmance management.jpg

So consolidation systems are pivotal to the effective working of the closed loop performance management cycle – even more so in an uncertain and volatile economy in which businesses need to iterate around the performance management cycle more frequently in order to keep their finger on the pulse and to hasten decision making.  In these circumstances the efficacy of the consolidation and financial reporting process becomes even more critical yet for many businesses comprehensive EPM has remained elusive.

Historically, software developers (most notably the mega-vendors) sought to retrospectively bring best of breed consolidation, budgeting, planning, forecasting and BI capability together by acquiring companies and attempting to merge the products.  But the different origins of these products often proved insurmountable.   Users could see the joins, data conflicts remained, applications were overly complex and spreadsheets were widely employed to pave over the cracks.

The scale of the problem is highlighted by a 2011 study1, which found that 87% of businesses managers criticise data sharing and communication between departments, with 71% describing the links between strategic goals, operational plans and budgets as “fragmented”.

Taking consolidations to the next level

Implicit in the EPM paradigm is that all of the core management processes and the applications that support them are developed in the same environment, i.e. integration is a ‘given’. More particularly, all of the applications share the same metadata (for example, accounts and business entities) so that information used by any EPM application can be shared with another and has the same meaning.  For example, a “sales revenue” account should have the same meaning whether it is surfaced in a finance portal, a dashboard, a scorecard, a budget or on a report of year-to-date actuals. This gives rise to the much Hackneyed phrase, “One version of the truth” - but the self-evident truth is that it is not possible to establish a dependable performance management system without a unified environment in the first instance.

In fact the case for a more unified approach could not be stronger.  37% of managers think the Board of Directors in their company does not capitalise as much as it could on the insight and knowledge of its managers.  37% of non-finance managers would like to be better informed about the strategic and financial targets of the company, while 20% feel their personal knowledge and experience is rarely reflected in the decisions made by the Board1

Unlocking the key to operational reporting

A unified environment is clearly a prerequisite for effective performance management but could it also hold the key to integrated operational (distribution, logistics and manufacturing) and financial reporting?  Here one has to look beyond application architectures to the profound developments which have taken place in hardware as well. 

The last few years have been accompanied by a substantial increase in hardware capabilities, for example, more powerful parallel processors, ‘in-memory’ computing technology, together with massive memory and storage capabilities which have transformed the processing capability that can placed at an organization’s disposal.

So in practice hardware is no longer a major constraint, allowing organizations to build consolidation, budgeting reporting models and text (commentary) in a unified environment, on a previously unattainable scale.  Operational data is easily and automatically integrated with information from finance, marketing, and the sales forecasting process- making it possible to optimize inventory investment, evaluate suppliers' performance, and gain better visibility into production efficiency and product profitability.

And when combined with Business Intelligence capability built in the same environment, these developments have blurred the lines between “information systems” and “transaction systems” allowing business users to delve beyond variances to understand the true drivers of business performance. For example, not simply recording a fall in, say, revenue but to ‘drill around’ at a granular level to uncover the real reasons for falling customer retention and the ability to discover the true reasons behind a high level of customer credits, for example, damaged stock returns.

But the advantages of a unified environment imbued with advanced workflow extend well beyond better insights and decision making.  Workflow permeated throughout an EPM environment enhances the controllability and efficiency of core processes, adding to their reliability in terms of results, and significantly less onerous in terms of time and resources.

Only modern EPM suites such as Board, built from the ground-up as a single environment, with a single user interface, and Business Intelligence ‘on tap’ are able to genuinely support a closed-loop performance management environment which bridges the gap with operational reporting as well.

Summary

Financial consolidation has often been a solitary application maintained off the beaten track and buoyed by specialisation and complexity.  But over time statutory reporting has been merging with management reporting, driven by legislation seeking to make it more relevant and understandable as well as the realisation that it is not always cost-effective to maintain an organizational separation between financial and management reporting specialists.

Furthermore, with the onset of unified EPM systems developed from the bottom up in one environment the metamorphosis has continued and consolidation systems now form the cornerstone of performance management as well. 

In recent years, continuing advances in hardware capability have caused a blurring of the boundaries between performance management and operational reporting, allowing organizations to delve deeply into very granular data to reveal new insights about business performance aided by business intelligence capability ‘baked’ into the same EPM environment.  Organizations at the leading edge are now able to manage all of their reporting and performance management needs in one environment leading to improved productivity and better decision making.

 

 

 

 

 

 

 

 

 

Bibliography

Note1Management Performance: An Incomplete Picture,” Dynamic Markets, April 2011

 

 

 

 

 

 

 

Disclaimer of Warranty/Limit of Liability

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. The publisher and author make no representations or warranties with respect to the accuracy or completeness of the contents of this white paper and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose.  No warranty may be created or extended by sales representatives, or written sales materials.  The advice and strategies contained herein may not be suitable for your situation.  You should consult with a professional where appropriate. FSN Publishing Limited and the author shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

 

 

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