John Stokdyk takes a look at how IT solutions can speed both the production and delivery of financial information.
Company law and tradition require companies to report their accounts annually. But ever since 1947, when Lyons & Co took delivery of Lyons Electronic Office (LEO), technology has promised new ways to collate and deliver the information that managers need to run their businesses.
The industry is still promising. As Brian Hartlen, senior corporate marketing director of Comshare, says, ‘It’s about delivering the right information to the right people at the right time. But as technology has developed, we have had to keep up with new techniques.’
At a minimum, prudent financial managers compile monthly journals to measure whether the actual totals meet the budgeted targets. But, as the technologists interviewed for this article ask, why wait several days to receive a snapshot of what has already happened, when financial systems now allow you to monitor transactions and trends as they occur?
This article focuses on how financial managers can collect, analyse and distribute information to support decision-making within commercial organisations.
But technology is affecting accountants in practice too, by expanding the financial terrain they are expected to survey. In some cases, practitioners themselves are adopting new tools to help fulfil this broader, consultative role.
While many companies are currently upgrading their IT installations to be year-2000 compliant and to cater for the single European currency, research from the Tate Bramald Consultancy shows that improved business reporting is the most important factor driving the installation of new systems.
Trevor Salomon, marketing director for enterprise software vendor JD Edwards, comments on the research findings: ‘The primary driver of business solutions is reporting. Businesses are constrained by the software they are running – they can’t report what their businesses are doing today.’
Realising the general desire to improve business reporting is a multifaceted challenge. First, you need to know the information you want before you can start to specify the systems that can deliver it. And the choice of available tools is bewildering: multinational corporations are putting a lot of effort into building massive, multidimensional data-warehouses around software from the likes of Arbor and Oracle, while players such as Cognos offer ‘desktop data cubes’ that deliver relevant information to individual line managers.
All of these programs are vying to take the place of a huge pool of analytical tools based around standard-issue spreadsheets, many of which will have been created and customised by accountants themselves.
So much for the input and processing elements of business reporting.
On-line analytical processing (OLAP), electronic mail, groupware and intranets have multiplied the options for disseminating the information. In theory, financial and management reporting could operate entirely via the World Wide Web and provide managers, auditors and shareholders of a virtual organisation with real-time access to the same information.
Comshare, which forms the market for ‘performance measurement’ among Fortune 1000 companies, has refined an architecture over 30 years that turns the separate activities of budgeting and planning, variance analysis and management reporting into a continuous cycle.
Each discipline feeds into the other and Comshare-trained consultants go into companies to construct an information infrastructure that ties disparate data sources into a data-warehouse, based on sophisticated multidimensional databases, such as Arbor Essbase and Oracle Express.
Oracle itself, of course, is one of several vendors promoting the ‘enterprise’ software approach. The other main players are SAP, Baan, JD Edwards and PeopleSoft.
Enterprise resource planning (ERP) vendors recognise the difficulties involved in linking different database structures into a seamless whole.
Their solution is to supply, as far as possible, all the necessary business systems themselves. A homogenous data culture simplifies the collection and analysis of business information, but there is a price to pay.
ERP returns users to the older proprietary model of computing: dealing with a single supplier. The one-stop shop has operational advantages but makes the organisation highly dependent on that company. Another downside is that ERP often forces users to tailor their operations to the procedures and business practices dictated by the software. The process is occasionally dressed up as ‘business process re-engineering’, which more cynical consultants and observers dismiss as an elaborate sales campaign for consultancy services and overpriced software.
Research carried out last year by Cambridge-based manufacturing automation consultancy Cambashi indicates that no UK company has yet implemented an end-to-end ERP system. However, many have taken steps in that direction by installing corporate accounts software that links to manufacturing and distribution planning modules.
According to Cambashi’s Mike Evans: ‘ERP systems are marvellous at keeping the score. People can look at the business for the first time and really understand where they make their profits. ERP can help managers pinpoint earlier where they may need to make investments for future growth, or to cut their operating costs,’ he explains.
For example, ERP helped one firm to see the benefit of investing in new plant because of the savings it would make on long-term maintenance costs.
While the number of target UK companies (#100m+) for grown-up ERP and Comshare-style decision support systems is relatively small, smaller organisations can still aspire to apply similar techniques within their businesses.
Where ERP takes a steamroller approach to interoperability, the emergence of Microsoft operating software as a de facto standard has opened the way for piecemeal, ‘best of breed’ accounting and reporting systems.
Different functions within the organisation can select what they see as the optimum packages for their operations and as long as they speak Microsoft, the people at the organisational nerve centre can extract the financial and performance data they need.
On the analysis side, the sophisticated data-warehouses created by companies such as Comshare, Oracle and Essbase pre-calculate all the possible queries that managers might ask. These can run to gigabytes (1,000 megabytes) or even terabytes (1,000 gigabytes) of information.
OLAP is good news for manufacturers of disk drives, but it does give managers more time to look at the information and new ways to look at it. These mountains of data can detail geographical and sales trends, such as profitability and product range, and uncover previously hidden opportunities.
But data-warehouses come with similar health warnings to ERP – building and maintaining the structure can distract the management team from what it really should be doing for a living. Additionally, embarking on ambitious MIS architectures is becoming less popular now that organisations have realised the potential horrors of critical financial systems not being able to tell whether an invoice was raised in 1901 or 2001.
The best-of-breed approach has caught on in the middle market and can be seen in the success of ‘business intelligence’ tools for small and medium-sized firms such as Crystal Reports, Cognos’ PowerPlay and Impromptu products.
In numerical terms, Microsoft’s Excel is probably the most widely used reporting program and, as Great Plains UK managing director Neil Robertson points out, the average user probably only exploits 10-20% of its functionality.
‘Pivot Tables – a standard facility of Excel – can present data in a multidimensional form, enabling very simple analysis of otherwise quite complex data. Once people discover them, Pivot Tables have numerous immediate uses,’ he says.
The beauty of spreadsheets and other computerised analysis tools is that they can present complex data visually.
According to Comshare’s Hartlen, the next step will be into three-dimensional visualisation – the type used by molecular scientists, for example. Comshare’s Decision analysis module includes OverView, which displays accounts as a visual tree with user-defined colour codes to indicate troublespots and high points. Minute variances hidden among the multidimensional megabytes can be assimilated and investigated almost in the blink of an eye.
Changing role of the FD
All of these technological goodies have transformed the role of the financial director. ‘Finance departments are restructuring, re-engineering and fundamentally changing their procedures,’ says Hyperion’s regional European managing director Garry Melville.
The focus of the job is shifting from running the department that prepares the annual and monthly accounts to advising functional managers, answering their queries and helping them to develop business strategies based on accurate financial data.
Reporting in this context is less about collecting and analysing raw data and more about disseminating it to individual managers so they can answer their own queries and compile their own reports. The troubleshooter-FD is packing a new type of weapon that, according to Melville, includes Hyperion’s consolidation and budgeting programs.
Like Cognos PowerPlay, these emerging analytical applications sit on top of existing transaction processing and management information systems. But instead of a proprietary ‘cube’, the data slices are converted into simple spreadsheet files or Web pages.
‘Whatever happens to the finance department, managers will always want a tool that sits on their desks which they’re comfortable using,’ says Melville.
The auditor’s role
Robert Hodgkinson, manager of Arthur Andersen’s national audit practice, explains that technology has transformed the concept of auditing.
‘Instead of looking at financial statistics and asking, ‘What risks are here?’, we look at the business and ask what risks it will face over the next three to four years which might impact on its financial statements this year and next.’
The broader ‘business audit’ Andersens undertakes encompasses a risk assessment, based on factors affecting other companies in the same sector. The analysis includes a detailed assessment of the client’s IT systems and reporting procedures. ‘We try to make sure we’ve got everything on the radar screen before we zero in on the financial audit,’ says Hodgkinson.
‘Auditing standards have said auditors should understand business and finance systems,’ he continues. ‘We have a flow-charting tool that produces a simple schematic that illustrates which economic transactions the client is trying to capture and details the intervening systems in the business.’ In addition to facilitating a broader audit, the software can often benefit clients directly by giving them an insight into their internal information flows.
Experience, in the shape of the two case studies (above) suggests UK businesses have some way to go before they will fulfil the computer industry’s Utopian vision. The impact of technology on accountancy cannot be denied, but it is time the profession fought back.
System specification is a two-way process; technologists and business managers cannot always be trusted to temper their fantastic imaginings with the realities of cost and practicality.
In particular, there is a danger of clever technological solutions building up such a momentum that they eclipse the business rationale for implementing them. The more complex the reporting regime, the more effort needs to be put into feeding and weeding the data sources that underpin it.
Accountants have evolved centuries of tradition to define what kinds of information need to be delivered to what deadlines to ensure the continuing financial health of the organisation. They need to ensure these disciplines are built into the flow of electrons that now provide the lifeblood of so many businesses.
And they should regularly remind colleagues and clients of the computer industry’s oldest adage: garbage in, garbage out (GIGO).
EXHIBITING THE RESULTS
The Earls Court Olympia exhibition complexes in West London house four separate subsidiaries of the P&O shipping group. Both sites are rented out for exhibitions, such as the Motor Show, and are supported by P&O Exhibition services which supplies equipment and services to exhibitors. The fourth entity, P&O Events, runs its own portfolio of trade and consumer shows.
CIMA-trained accounting systems manager John Simpson is responsible for supplying the information needs to the group chief accountant and the line managers in each subsidiary. The accounts for all of the companies are maintained using World software from JD Edwards running on an IBM AS/400 minicomputer.
Simpson is currently in the throes of planning an upgrade which is scheduled to go in over the Easter weekend.
The need for year-2000 compatibility drove the upgrade, but one of the ancillary benefits will be better reporting facilities, he explains.
Each company has its own accounts department which produces its own reports with JD Edwards. Simpson says the software upgrade will provide a faster reporting system that allows each subsidiary to run its own accounts on a monthly basis, but is clever enough to compile them into journals.
He explains that the exhibition companies treat individual shows as works in progress with their own cost and revenue ledgers. The accounts system takes data from a variety of operational systems, including electronic point of sales terminals in hotel catering concessions, the halls’ licensing system which generates the contracts, and an in-house system which manages the equipment inventory and logs sales transactions.
‘All of our accounts payable go through the JD Edwards system and the Dream writer module produces the reports that we use to control debts,’ he says. The financial data produced by the World system is designed to fulfil the company’s statutory requirements. But, in Simpson’s words, the information is too detailed and company managers ‘aren’t that comfortable with numbers’.
To make their life easier, he extracts the basic profit & loss, revenue and turnover information for each cost centre from the JD Edwards system and puts it into a Microsoft Access database, where he can add other information such as visitor numbers, the exhibition space rented for each show and the average spend of visitors on food.
Simpson and his team distribute a manually-bound information pack, complete with written commentary and charts. The summary typically contains the figures for around 10 events, and each subsidiary receives a specially tailored pack produced by the group management accounting team. ‘I’m of the view we produce so much information that they can’t take it all in,’ says Simpson.
While most of the accounts processing at Earls Court Olympia takes place on green-screen terminals, Simpson is confident that JD Edwards’ Windows-based OneWorld software will be able to co-exist with the existing installation.
As the company moves towards Windows NT over the course of the year, he envisages using OneWorld in the management accounts department and giving the separate management teams the option to do more analysis. But, he warns, the pretty pictures they create may not reflect the whole truth, ‘a little learning is a dangerous thing’.
THE SHIPPING FORECAST
The working philosophy of financial director Ron Robson and his seven-strong accounts team at Carisbrooke Shipping is to keep things simple.
The Cowes-based shipping company runs 16 vessels (including Mark-C, above) which for accounting purposes are separated into 16 companies.
Since Robson joined two years ago, he has replaced a Tetra 2000 accounts system with Sage Line 100 (formerly Sovereign) and introduced WinForecast software from Berwick-based Pase to help maintain monthly rolling forecasts for each entity. ‘The main information I need is what we call the time charter income – a daily sheet of what each ship makes,’ explains Robson.
On a weekly basis, Robson looks at the direct running costs of each vessel and also compares forecasts for office and other overhead costs to actual expenditures each month. ‘Shipping is quite a simple business really,’ he says, ‘but Carisbrooke’s organisational structure made it difficult to compare costs or swap ships when building forecasts on an Excel spreadsheet.’
WinForecast allows Robson to update the separate rolling forecasts in a day – rather than the week it used to take him. ‘WinForecast fits the bill,’ he says. ‘You bash in your monthly figures and once you understand the rules you don’t have to bother about the structure. You can’t get the balance sheet out of balance.’ The latest 32-bit version, due to ship at the end of this month, will eliminate the manual data entry by using the Windows Online Linking and Embedding (OLE) function to extract data from the accounts system.
‘It’s set up so each ship and each land-based facility is a separate cost centre,’ he says. ‘I can extract results for existing ships and use them as a forecast for new ships, or to combine them to look at different funding structures we might use. The nice thing about WinForecast is that if you have a month with variances, you can change the year to see what happens if that continues.
‘Sage Line 100 is quite well structured on the statutory reporting side. But I need to be able to report across companies and compare them, for example to compare average crew costs,’ says Robson