The Efficiency Gaps in Corporate Finance

Average companies have little faith in financial forecasting, rely on nearly three different ERP systems, according to The Hackett Group

Atlanta, GA  February 19, 2003  While Congress and the SEC continue their intensive efforts to improve corporate accountability, most companies have significant weaknesses in their financial operations, according to a research report recently released by The Hackett Group, an Answerthink company. Hackett's research showed that average companies today have little confidence in their ability to predict future financial performance, are using outdated and inefficient budgeting tools and still have extended closing periods.

At the same time, the world's best corporate finance operations have made significant progress implementing best practices and are reaping real benefits, particularly in the area of reducing the cost of low-value transaction processing activities. World-class finance organizations have improved the quality of information they capture as well, enabling them to forecast more effectively and provide more strategic analysis to their companies. However, challenges remain even for the very best finance organizations.

The statistics in Hackett's "2003 Profile of World-Class Finance" research report were compiled by identifying Hackett clients that showed the greatest overall efficiency and effectiveness in their financial organization across a wide range of metrics. According to the analyst firm, these "world-class" performers were compared with average companies in Hackett's best practices database. Nearly 2,000 companies have participated in Hackett research, including 100 percent of the Dow Jones Industrials.

Despite pressures from government and regulatory agencies to improve accountability, only a small fraction of average companies have confidence in their financial forecasts. According to Hackett, just 9 percent of average companies surveyed felt they had confidence in their forecasting and reporting outputs. Average companies are also using inefficient spreadsheets as their primary budgeting tool nearly half the time (47 percent), rather than relying on more sophisticated software that automatically draws financial information from a centralized repository in a manner that ensures integrity and improves efficiency, the firm said.

While most companies have adopted balanced scorecards, Hackett reported that only 6 percent of average companies rely on balanced scorecard metrics with a mix of financial and non-financial metrics as a basis for decision making. This is a technique that enables all levels of the company to set targets for productivity, quality and cycle times to support overall business-level strategy. Finally, Hackett's research showed that these average companies still take a full five days to close their books each month.

Hackett's research found that companies with world-class financial organizations do significantly better in all these areas, but still show some clear deficiencies. Only a third of all world-class performers said they feel that forecasts and reports are reliable and accurate. A full 20 percent of these companies still use spreadsheets as the primary budgeting application, and only 33 percent are fully leveraging a balanced scorecard. But these world-class performers have made significant improvement speeding up the monthly closing cycle, cutting closing time to just one day.

Even companies with world-class finance operations have a significant way to go to reach full best practices compliance, according to the Hackett. The best finance operations are only half to two-thirds of the way through their best practices deployments, leaving room for improvement. Hackett research also showed that world-class finance operations still rely on an average of 1.7 enterprise resource planning (ERP) systems for their information. While this is significantly less than average companies, which use 2.7 ERP systems, the lack of a single company-wide ERP system represents a roadblock that can handicap critical business processes and decision-making, according to the firm.

"Our 2003 research report shows that for the average public company there is still a tremendous accountability gap in the financial area, despite the fact that most of these CEOs and chief financial officers now have to personally vouch for the accuracy of their quarterly results," said Hackett Group President Bruce Barlag. "The combination of factors is exceptionally disconcerting: little to no confidence in forecasting tools; budgets created using outdated, incomplete and often inaccurate data; and up to a week spent simply closing the books. With these kinds of problems, companies are literally operating in the dark without a clear picture of where they are, where they're going, or how to get there.

A critical component of the problem is that many companies simply aren't using proven best practices to drive how they run their finance operations, explained Barlag. "They're doing things certain ways 'because they always have,' or relying on anecdotal best practices and advice from consultants, industry analysts and other sources. Companies need to manage by fact, utilizing data-driven best practices that have proven to be the most effective and efficient, not at just one company but at dozens or hundreds of others. By using real-world analytical experience to drive process change, companies can see dramatic improvements, and achieve real competitive advantage," he said.

Hackett's research also showed that world-class finance operations have used a combination of best practices and technology integration to drive down costs and error rates within the transaction processing portions of their operations. This has provided them with a base of accurate information from which to provide their companies with more accurate guidance. By reducing the time and effort that is expended simply capturing and verifying financial data, world-class companies have also been able to free up staff resources to dedicate to strategic analysis and other higher value-add activities. In today's difficult economic climate, this level of efficiency and improved accountability can provide world-class companies with significant competitive advantages.

World-class companies show significantly lower transaction processing costs and error rates, according to Hackett. The company's research showed that world-class companies now spend only .19 percent of revenue on transaction processing, while average companies spend almost twice as much (.34 percent of revenue). World-class companies also spend dramatically less on discrepancy resolution  only 8 cents per line item, compared with a number almost three times greater at average companies (23 cents).

In general, world-class finance organizations have been able to develop the skills and resources to be more than just "number crunchers" and serve as trusted advisors to their company's CEO and board, according to Hackett. They foster collaboration between finance and front-line managers, interconnecting what at most companies are discrete and disparate processes into a tight network of information that helps leaders identify and act on opportunities and minimize risks. Top finance organizations use advanced business simulation techniques and are comfortable doing things like getting involved at the front end of mergers and acquisitions with advice on funding strategies, or synthesizing information about political environments to minimize the risks associated with global expansion.