Research from Hackett quantifies impact of complexity reduction; organizations also rely on single chart of accounts, half the bank accounts, fewer budget iterations
Atlanta August 15, 2005 By moving to a single enterprise resource planning (ERP) system for finance and at the same time implementing consistent data and technology standards, companies can cut the cost of finance operations by 23 percent, according to Book of Numbers Research from The Hackett Group, a business process advisory firm. But companies that take either of these approaches independently may see little to no savings, or even a slight increase in finance operations costs, Hackett found.
World-class finance organizations rely on both of these approaches, which help them spend 31 percent less than their peers on finance, operate with nearly half the staff, and also complete their financial reporting cycle more quickly each month.
In addition, they turn to a wide range of other complexity reduction techniques that help them generate even more cost savings. World-class finance organizations, for example, rely on a single chart of accounts, use half the bank accounts of typical companies, and do fewer budget iterations.
Value of Complexity Reduction in Finance
Hackett began its analysis by looking at a range of areas to identify those with the greatest ability to reduce business complexity. The research identified two areas as among the most significant the number of finance or ERP systems and adherence to data and technology standards, including the use of standard hardware and peripheral software tools for finance and usage of common data definitions.
The research showed that individually, reducing complexity in these two areas had little impact on cost. In fact, companies that had not moved to a single common ERP system saw cost of finance rise slightly as they implemented standards. But when companies focused on both together, they saw significant cost reductions. The median cost of finance for companies with common applications and high standards was .99 percent of revenue, 23 percent less than that of companies that did not meet either or both of these criteria, where total cost of finance operations was 1.28 percent of revenue. This amounts to $2.9 million in annual savings for a $1 billion company. Savings were equally distributed between finance labor and technology.
Hackett's research found that world-class companies clearly focus on these two complexity elements. They are 61 percent more likely than their peers to have a single ERP system, and rely on common data definitions 20 percent more often. In addition, they cut costs by another 21 percent, or $2.1 million/billion of annual revenue, over companies that focus on just these two elements, in part through their implementation of complexity reduction in many other areas.
World-class finance organizations rely on a centrally maintained, uniform single chart of accounts 98 percent of the time, while only 82 percent of all typical companies make the same claim, according to Hackett. They use only 14.4 bank accounts per billion dollars of revenue, less than half the number used by typical companies. In this area, Hackett's research showed a clear correlation across the board between a decrease in the number of bank accounts per billion dollars of revenue and decreased treasury management process costs. World-class finance organizations also do an average of only three budget iterations, 25 percent fewer than typical companies.
Reducing complexity and creating a centralized system for finance can be exceptionally challenging. But the potential rewards are significant. This is why world-class finance organizations make it a priority, said Mark Krueger, The Hackett Group's Finance Practice leader.
To make it happen, companies need to begin by assessing the systems they're using, Krueger continued. How many are there? How standardized are they? Are differences being driven by real business need, or by some combination of happenstance and perhaps practices established before parts of the company were joined in a merger? Careful planning and the consideration of options such as outsourcing and shared services are also critical, as is strong support from senior management.
Krueger added that change management is a critical element. To keep people from backsliding, companies may need to go as far as shutting off old systems and processes as soon as the new ones are working, he said.
