Despite the fast march of technology, financial transformation is still lagging behind. Mark Nittler, vice-president of enterprise strategy at Workday, explains the need for a total technology rethink, and how CFOs can take charge of transaction processing.
From scheduled television programmes to Netflix, from huge mobile handsets to smartphones, the world has changed a great deal in the past 30 years, and a big driver of that change has been technology.
Businesses have had to deal with a lot of change, too, and many have successfully embraced it to create whole new industries and many billions in value. Yet, other businesses have literally vanished. Nearly 50% of the companies that were part of the Fortune 500 and FTSE 100 in 2000 no longer appear in those rankings today.
So, what happened? Some of these disappearances are the result of the global merger and acquisition spree that has taken place since the 1980s, while others fell victim to the 2000s financial crisis. But many were simply overcome by the forces of digital disruption. In the face of technical evolution, their inaction allowed innovative start-ups and more agile competitors to win with newer, faster and more efficient ways of doing business.
Strategic partnerships take the lead
With that in mind, it seems absurd that technology itself should be a barrier to change – yet, for many businesses, that is precisely what happened and what continues to happen today. Companies struggle because much of the technology they currently have in place to run their businesses was not designed to help them adapt and excel in the current era of digital disruption. It was created in the era when business requirements were simply not the same as they are today.
A good example of this in practice is how financial organisations have approached technology over the past 30 years. Mark Nittler, vice-president of enterprise strategy at Workday and a “self-confessed recovering financial accountant and auditor”, suggests that the technology that was originally designed to automate transactions and financial accounting “is now preventing finance from realising its ultimate goal: to be a better business partner”.
Consider, Nittler says, that today’s financial function has three main areas of responsibility: transaction processing and accounting; compliance and control; and business partnership. Finance leaders are frustrated because their teams spend too much time dealing with the first two, leaving little time to be the strategic partners their companies truly need.
What does this strategic partnership look like? It requires finance to deliver data that goes way beyond the general ledger information that legacy systems were designed to record. With a wider set of stakeholders and a business landscape that is continually evolving, finance is being asked to provide the broader company with contextual information that can actively influence decision-making – and, for the most part, they’re struggling in this mission.
In short, finance needs to undergo a transformation. It needs faster access to relevant data, better reporting and stronger built-in internal controls. And, because older financial systems were not created with this vision in mind, businesses and their legacy vendors have attempted to fill the void by bolting on missing capabilities. As a result, finance technology has become a complex mix of acquisitions, custom integrations and middleware.
The bolt-on approach may address specific functional gaps, but it can’t support the complete transformation that finance requires. Simply put, systems resulting from this complex architecture cannot adapt and change. Scaling or changing these systems to meet the needs of a growing, changing business is slow, costly and, in some cases, virtually impossible.
But, as technology has created new business opportunities, so too has it created opportunities to rethink how financial systems should be built and what they should offer. The emergence of cloud computing, increased processing power and falling storage costs, plus the rise of mobile devices and the advent of the consumer internet, have led us to a new, more economical, powerful and agile foundation for finance. Those willing to take advantage of these changes are fulfilling the long-held but seldom realised vision of transforming finance into a powerful business partner.
The need for insight
Workday saw the opportunity to build a system from the ground up to take advantage of this new technology foundation, enabling transformation and business agility by combining planning, transaction processing, governance, accounting, reporting and analytics into a single, easy-to-manage system. Companies can quickly and efficiently bring together actionable information about their people and money in a system that can evolve with them as their business changes.
Financial transformation by definition is not something you can bolt-on – it requires a willingness to question long-held assumptions and envision where you want to go. Nittler says that finance leaders should ask themselves whether transaction processing is a key element of finance transformation.
“If I think back to the hundreds – if not thousands – of conversations I have had on the subject of finance transformation over the past ten or so years,” he says, “the vast majority have included at least an initial focus on defining a strategic role for finance by creating or improving the capability to deliver better business insights.
“Yet, finance transformation requires not only a new reporting tool and strategy but also a start-over mindset and a total technology rethink. Just arriving at that start-over approach must begin with a rethink at the transaction level.”
Referencing a recent survey of 46,000 FSN Modern Finance Forum members, Gary Simon, Workday chief executive, says, “More than two decades after enterprise resource-planning systems first appeared in the business landscape, more than half of all CFOs say that they spend too much time on transaction processing.”
It’s hardly surprising when you consider that, on average, transaction processing takes up more than 50% of all finance resources. Add to the mix that inaccurate transactions take 80% more time to process than a transaction that’s processed correctly the first time, and one can see how transaction processing is one of the major barriers preventing finance from achieving transformation and the ultimate goal of delivering a better business partnership.
Most of this increased workload is due to the fact that the transaction models of traditional systems were not designed to capture the data necessary to support the reporting and analytics goals of today’s businesses. The transactions of legacy systems were designed to replicate and automate the manual double-entry bookkeeping entries of a much simpler age. These systems aggregate sub-ledger data, with debit on the left and credit on the right; but, while this worked well for its designed purpose of GAAP/IFRS-type reporting, it completely falls down when it comes to giving the business insight into the reasons behind transactions.
One of the main challenges presented by these systems is complexity. The chart of accounts and limited code block dimensions of legacy financial systems do not do a good job of reporting on business context. A desire to report on elements such as customer, product, channel, region, industry, project, marketing campaign and anything not immediately relevant to GAAP/IFRS has traditionally meant either extending the account number, or parsing another code field. All of this leads to added complexity for finance teams.
“I’ve spoken to a customer who, in their legacy system, faced tens of thousands of code combinations that resulted in over 2,000 data errors on transaction entries every time they entered their financial close period,” Nittler recounts. “In old-world systems, more accounts mean more reconciliations and more effort.”
The manual responsibility
Another major challenge is inappropriate responsibilities. For example, a company may want to track costs by project. In a traditional system, this means one of two things: either you ask the operations team to enter account numbers, or you ask accountants or accounts-payable personnel to enter project information. These are tasks for which neither group is well suited, resulting in inefficient transaction handling due to lots of time spent in meetings or on email at the front end, or file work declassing lots of entries posted to ‘other expense’ or ‘other activity’ on the back end.
Manual transaction analysis also proves a problem. New accounting standards require more business context to analyse transactions for proper GAAP/IFRS accounting. For example, proper analysis of revenue events to determine the appropriate accounting for a sale under IFRS 15 requires significantly more business context than a simple debit AR/credit revenue journal entry.
Manual transaction routing and approval – or automated processes that provide limited business context data – can cause significant transaction processing inefficiencies. For example, how do you approve a purchase invoice if all you get is a date, amount and invoice number?
Unless governance is weaved into the fabric of a system at the transaction level, and the system is designed to capture business context at the same stage (which is the purpose of Workday’s Worktag transaction coding architecture), companies begin their transformation journey with at least one hand tied behind their back.