The control of the chief financial officer (CFO) has expanded while changing in focus during the past three to five years. Although many CIOs report to CFOs (often as an attempt to address "runaway" IT costs and ineffective governance), the IT group/CIO must re-examine its competency in supporting finance and understand the major triggers for concern.
META Trend: In 2004, public firms will accelerate business and IT projects to ensure they are in compliance with Sarbanes-Oxley (SOX) and other regulatory edicts (IAS, Basel II). During 2005/06, firms will consolidate global compliance initiatives within a corporate governance office. Firms will seek to optimize compliance processes through IT infrastructure (e.g., business applications, security), and many will also improve business efficiency by using the compliance justification. By 2007, global compliance will raise control expectations for all multinational firms.
Since we last examined CFO trends in business applications in 2002, much of the focus and effort demanded from IT have changed. From our numerous interactions with Global 2000 CFOs, we have observed several common trends as firms seek to maximize the value of enterprise financial management applications. Although finance costs have decreased during the past 10 years from 4% of revenues and are approaching a goal of less than 1%, there is still ever-present pressure to cut costs while providing more value (e.g., less focus on transaction processing and more on financial analysis).
There is a clear role that information technology can help address this quandary. ROI is important, but so is enabling compliance and improving applications to reduce risk and fraud. Corporate governance is emerging as a major focus, and current economic times particularly require solutions that deliver financial processes and information in better, auditable, cheaper, and faster ways. Concurrently, the once-uneventful enterprise financial management application space and the services to provide CFO and compliance-related consulting are improving. Performance management has experienced a renaissance. Best-of-breed and ERP solutions stretch the scope of traditional functionality and embrace Web-enabled components, including many applications aimed at improving a firm’s approach to corporate governance and compliance. Vendors are touting the benefits of business performance management (BPM) platforms, refocusing traditional financial applications as critical backbones to end-to-end business processes, and integrating financial applications with customer and supplier value chains through financial value chain solutions. In contrast to some CFO visionaries, numerous organizations are uncertain about emerging application functionality because many have not realized business objectives with major enterprise package implementations, and they have typically missed budget targets during implementation. This is mainly due to organizations’ inability to adopt solution best practices and effectively support an implementation. According to recent META Group research of Global 2000 organizations, several areas are of major concern to forward-thinking CFOs. The IT group must develop an appropriate response if it is going to continue to receive improved funding, be leveraged as a business partner, and reduce the likelihood of being outsourced. Areas of concern include:
Bottom Line: Improvements in financial management business application deployment will prove vital through 2008 as firms revamp and eliminate many legacy financial processes. If the CIO and the IT group do not add value to CFO processes, their futures are in jeopardy.
- Managing regulatory compliance and optimizing the response: Whether it is the Sarbanes-Oxley Act (SOX) or international accounting standards, organizations must demonstrate that effective controls and business monitors are in place to ensure financial processes are sound and void of fraud. More than one year after SOX legislation was signed into law, its effect on improving corporate financial accountability/visibility is unclear, especially given the fact that most organizations are still working to enable and evidence compliance. However, given the creative nature of the corrupt or criminal executive mind, organizations determined to bend the financial rules will still be able to do so it may just take a little more work. Organizations must look beyond mere tactical SOX compliance and focus strategically on leveraging SOX investments. The improved visibility and the transparency that gaining SOX compliance will enable, coupled with an opportunity to clean the IT house (e.g., consolidate excessive ERP instances), mean that SOX regardless of its impact on corporate corruption can enable organizations to become more nimble, flexible, and competitive (if they evolve the business and operating models to reflect it). Major inquiries in the compliance area include the benchmarking of compliance initiatives and risk management tools. Compliance has also given rise to a new application space for the monitoring, management, and assessment of internal controls that will become critical through 2008 as firms seek to trim down compliance-related costs.
- Managing performance: BPM is an integrated solution approach consisting of Web-based analytical applications (based on financial analytical applications) providing key performance indicators that are tiered within the enterprise. It includes business plans that are intended to achieve such metrics, reporting, and forecasting of actuals to ensure performance. BPM projects will accelerate in 2004 as firms continue to replace legacy financial/management reporting and planning processes. BPM also plays an important role in regulatory compliance. As compliance places tight reporting deadlines and requirements for increased controls on financial management process, many firms will turn to BPM solutions to consolidate and prepare results, provide financial transparency/visibility, and offer critical alerts for changes in financial conditions. As business decisions are impacted by shorter economic cycles, increased competition, mergers and acquisitions, and new business regulations, many firms find that their BPM capability lags their transaction systems. Many companies have completed ERP projects but find they still have severe reporting and planning issues. The business problem is further complicated when firms have multi-ERP environments with differing data sources. An integral part of many BPM implementations is to “transform” finance and financial management, and this is typically accompanied by the assistance of a systems integrator for the requisite management consultant to develop performance processes and manage process re-engineering.
- Providing focus to cross-organizational/unit processes: A recent IBM study hints at the change in paradigm of the initials “CFO” evolving to mean “chief focus officer.” One of the major focus areas for the CFO is ensuring cross-unit/business processes. The classical finance organization role model is to administer and perform most (if not all) financial transactional processes. However, leading trends call for more value from finance, mainly in responding to the enterprise as a value-added business partner, providing clear focus on business decisions, and improving and measuring cross-area processes to reduce costs and increase efficiency. A “top of mind” for most CFOs is the opportunity to cut costs out of the business to ultimately improve shareholder value. However, this should not be done with total disregard for the employee (particularly if the main product or service is primarily employee-dependent). Solutions addressing such requirements include BPM, SCM planning, demand planning, sales forecasting, and human resource planning. The new twist is that solutions must be integrated and leverage a cross-discipline focus, requiring consistency at the data, metadata, user interface, and process levels.
- Reducing process costs/improving asset utilization: This includes improving controls in inefficient business processes across all business areas. Business processes and applications should be re-examined to determine if they are efficient or are a hindrance. There are still many legacy solutions, including custom-built general ledger and accounts payable solutions that are rapidly aging, some in excess of 20 years. Improvements in asset utilization, including how organizations can get more out of their spending processes, require firms to put processes in place to make certain there are effective/optimal contracts with key suppliers and compliance processes to ensure execution. Applications in the financial value chain (e.g., expense management, e-procurements, credit and collections) should be leveraged.
Business Impact: The CFO has emerged as a critical cross-discipline control and process enabler, and is responsible for ensuring consistency in planning and performance management while reducing costs across the enterprise.
META Group originally published this article on 25 May 2004.