Getting control of a company’s financial reporting can be an uphill battle, with new challenges seemingly being created with every problem solved. Standardization begins and then a new tool is rolled out that allows customized reports, and new reports “appear” from other organizations.
In fact, you can feel like Hercules while he was defeating the mythical Lernean Hydra. However, just as Hercules used his special skills and innovations, you have a significant tool at your disposal: shared services.
Current State: Financial Reporting is Expensive and Fragmented
We’ve all experienced the proliferation of financial reports in a company. Between corporate, regional, country and business unit reports, they often feel like the Hydra in which cutting off one “head” results in the exponential growth of reports.
Shared services is a tool that can be used to break this cycle. How much is shared in terms of scope, function, partners, governance and accountability will differentiate basic initiatives from leading-practice transformative solutions. World-class organizations engage the client in designing and building their future state, and sharing decision-making and responsibilities. This enables the transformation to be sustainable over time.
Root Causes
Major companies typically have numerous performance and operational management reports that are created, maintained and analyzed in multiple locations by a broad number of individuals and groups. This is due to the different usages of financial reporting.
Producing and maintaining this large number of reports is complex and costly. It also becomes harder to maintain the integrity of financial data and information reported, especially when there are multiple sources of data and various inputs into producing the reports -- often on multiple platforms used by different teams.
Reports also tend to proliferate, and different “motivations” for the production of financial information, especially from an internal management reporting perspective, can undermine the validity and value of the information produced.
As a result, many companies are looking for a more standardized, consistent and automated reporting framework. This framework is often a mix between utilizing different shared services functions, often called the “Center of Excellence” (for transactions) and the “Center of Expertise” (for specialized work). However, some of the financial reporting work will still be retained by the business units and corporate finance.
Transition to Shared Services
Shared services for finance provides a natural route to improving financial reporting. At its core, a shared services center (or centers) will provide transactional and administrative services for finance and accounting. These “services” typically include general accounting, accounts payable, reconciliations, accounts receivable, fixed assets and the like. Importantly, these functions should be fully deployed and have been operating in a stabilized form for a period of time. This alone is a critical step as it leads to senior leadership, both in and out of finance, being confident in the consistency and accuracy of the core data. Performing in a standardized way means deadlines are more likely to be met and compliance needs to be achieved. An outgrowth of this is that a great number of legal, statutory and tax reports can now be performed in a controlled, consistent and efficient manner at reduced cost.
Once the core transactions are transformed, there is further opportunity to create Centers of Expertise for additional financial reporting functions. These centers can further reduce the complexity of reporting and provide better service, both to corporate finance and to the company’s business units.
Enablers
Improving financial reporting, or cutting the heads off the Hydra, requires several leading practices in shared services. It is not sufficient to simply designate certain resources and processes to be shifted within the new operating model utilizing shared services. For a world-class operating model to be successful, the company needs to transform its financial reporting function. This will mean certain functions are appropriate for shared services, while others are not. Regardless, all of the touchpoints between different groups must be addressed.
Some of the critical success factors:
Process Improvement: Based on the planned implementation at the process and sub-process levels, time savings can be created through touching core processes one time only, rather than having multiple teams and functions performing similar work throughout the organization.
People: Ensure the financial reporting staff has the right competencies for the job. Many organizations have senior, highly compensated people creating reports. This is a huge opportunity for unlocking value in the organization. Correct training and placement of people in the right roles, according to their skill sets and desires, ensures the operation works more efficiently and more value-added service capacity is added.
Technology: Automation is an important component of success that affects the sizing model and estimated savings new technologies may afford the operation. Technology enhancements are there to augment your process enhancements. For example, if you were able to move closer to fully leveraging your ERP platform, this should improve overall performance and productivity, and should be taken into account in sizing the new organization. It is not necessarily required to build a new IT application for reporting.
Instead, a project component is a new technology assessment and roadmap that provides the implementation pathway and timelines for optimizing the company’s current technology. For example, a plan should be developed to link existing databases and business warehouses to eliminate the ad hoc requirement for data to be aggregated, averaged and disaggregated to produce consolidated reports. If there is no single reporting tool with access to information for all business units, this could also be documented. This transformation will produce a single solution that will report from a single source of truth for financial data. In addition, other technology enablement will be considered to support the broader financial reporting transformation.
Client: The client, or customer, of the financial reporting should be engaged early in the process. In this way, the critical determination of “needs” versus “wants” can be made in a collective manner. This is key to avoiding the future development of “shadow organizations” in which individuals create their own reports to achieve their needs.
The Future
Using this shared services model to tame the reporting “beast” results in many benefits, including the following:
Economies of scale – Aspects include performing core reporting tasks for multiple groups or business units. This will save time and resources. Also, automation through effective technology utilization and process standardization will increase these economies of scale.
Reduced cost through labor arbitrage – There are often opportunities to locate aspects of financial reporting in locations that allow the same or better quality to be achieved at a dramatically lower cost. Additionally, it should be carefully considered whether additional FTEs are needed to ensure the appropriate quality. However, due to the decrease in costs, the savings should still be significant. If savings are not significant, re-examine the staffing numbers and levels in the new location.
Standardization of inputs and outputs – Many companies have an issue with ensuring a true “apples to apples” comparability with data. By moving elements of financial reporting into the shared services Center of Expertise and having core transactions in a shared services Center of Excellence, the inputs and outputs are documented in a way to ensure the comparability of data, and standard processes are followed so month-to-month and year-to-year consistency is maintained.
Data consistency and trust – One of the biggest issues with decentralized financial reporting is that there can be multiple sources of the “truth” in the numbers. Often reconciling and understanding the source of the data becomes a focus and exercise, as opposed to evaluating information and taking action based on the reporting.
Value-adding analytics – The four components above contribute to the ability to spend time on forward-looking, value-adding analytics. This type of activity is often sacrificed in the interest of time, but can provide the greatest support to the business going forward. “What-if” analysis becomes easier to perform, as well as responsiveness to ad hoc requests.
Tying it Together
A natural step to add value through shared services is to transform the operating model for financial reporting. The implementation of effective shared services can deliver the “triple benefit” of enhanced quality, reduced cost and a tighter control environment. Shared services can improve the accuracy, consistency and value of financial reporting. Additionally, increased control can be derived from assurance of meeting reporting standards across the enterprise. Cost is also positively impacted through having a standardized, centralized set of operating models for general accounting and financial reporting, eliminating errors, duplication and re-work in the production of financial information.
Additionally, shared services provides an opportunity for the finance organization as a whole to partner with business units and help drive the company forward with value-added analysis.
Structured correctly, a world-class financial reporting operating model, utilizing shared services, can add substantial value to an organization.