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| Virtual Finance: Moving Toward the One-Day Close |
| Using Internet strategies to give you insight into your company's financial picture, whenever you want it. |
By G. Patrick Pawling
Illustration by Guy Billout |
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Your company is strong and growing. Great. But have you checked your corporate vision lately? Do you have a clear view into the future? If not, it's time to have another talk about the Internet.
This talk is different. It's about how all the information your company needs—bookings, margins, other key metrics attached to the bottom line—will come faster and arrange itself in more effective ways to reach more people. It's about how finance will move beyond accounting and mass processing to be about analyzing trends and interpreting the meaning behind the numbers. It's about your company being proactive, not reactive. Think agility. Think empowerment. Think speed. Think about what has come to be known as the "virtual close"—the ability to do a financial close literally overnight instead of needing weeks or even months to complete—and its parent, true Internet-based finance.
The virtual close and virtual finance are simple in concept, if not in execution. They both let executive management know what's happening by providing consistent up-to-date measurements of company performance. Rather than waiting for the end of the year, the quarter, or even the week to add up the numbers and look for trends, these systems let you have the key financial information you need whenever you want it. In the process of creating systems to do this, you simultaneously shorten the close cycle. The most influential result is the ability to provide decision makers throughout the company with visibility into information, which will positively and proactively influence their business decisions. The true virtual close is about providing vision: Giving you a clear view of where you've been, where you're heading, and what you can expect along the way.
Only a few companies have completely moved to a virtual close—Cisco Systems being one of them—but leaders across industries are in the process of automating their financial systems. They're prioritizing the process because they smell trouble—their own, if they don't do something soon to improve their agility.
Agility Requires Information
"The future has two dimensions," says Laurie M. Orlov, research director of eBusiness Applications for Forrester Research. "Companies that get a handle on their businesses will survive. The companies that are clueless will have trouble very quickly. Waiting until the end of time periods—like the end of the quarter—to add up the information is highly risky," says Orlov. "There's nothing worse than being caught short when your customers are about to defect."
As Orlov notes, it's easy to spot the companies that aren't seeing clearly. They're the ones blindsided by demand, either low or high. They're the ones that tell investors their suppliers can't keep up or that the channel is saturated. They're the ones that seem surprised when the market changes. Virtual-finance savvy helps prevent these lapses in vision. Think of it as business radar.
"What's really criminal," says Dave Boulanger, SAP product manager for AMR Research, "is to not have the mind-set to be proactive. I can't emphasize enough how important it will be to be able to act quickly."
Why Virtual Finance
One company that understands the importance of being proactive is i2 Technologies, a player in the global supply-chain management space. i2 is moving toward a virtual close at the right speed for all the right reasons. The company's recent growth has forced it to reassess its financial practices, so i2 is taking its time and trying to do it right.
"We have a ways to go," says Bill Beecher, CFO of i2. "We grew at about 100% last year to more than $1.1 billion in total revenue, and that stresses out your systems, including internal reporting. Setting up systems for virtual close is not just something you do overnight. It's not so much about reporting externally, it's an issue of internal management reporting, so unit leaders—the people who manage the corporation—have the best data possible to run the corporation. At Cisco, for example, the leaders have fresh data, so they can see trends in the business and make judgments that give them an edge over their competitors." Virtual close is also about spotting problems and potential problems before they can impact financial results.
One of the primary challenges in implementing a virtual close, notes Beecher, is getting people on board. "For us the pain isn't so much a systems issue; the challenge is more in terms of transforming processes ... getting people to be supportive of what you're trying to accomplish." But Beecher advises companies not to wait too long. "What I'd say to companies looking at automating their financial systems is this: The sooner you get on top of this the better, particularly if you're a fast-growing company. Get on it, because it doesn't get any easier when you wait."
Building Blocks
To understand more about how to incorporate virtual finance strategies into your company's finance organization—and into your core business practices—take a look at Cisco.
Cisco closes its books each quarter in less than one day. The company uses the Internet to provide daily financial information to decision makers throughout the company. It's doubtful anybody does it better, yet Cisco CFO Larry Carter will be the first to admit two things: One, it wasn't easy; and two, Cisco has only begun to harness the power of the Internet in financial applications.
"When we talk to the financial community or executives at other companies about the virtual close and virtual finance, they see the light. Their eyes light up and you can see they really make the connection," says Carter. "And most CEOs today realize that speed and agility are critical for survival. They see this as a real opportunity. The questions usually are about where and how to get started."
These are big questions. Companies can use a set of building blocks to lead them to true virtual-finance savvy and the virtual close. The first block is getting management commitment. This process is one that needs direction from the top. If executive-level management doesn't drive and support the project, the level of success will be limited. The goals of the organization must be set at the top and disseminated at all levels to provide alignment and ownership throughout the organization.
The next building block is the network infrastructure. Companies need reliable ways to move information among desks, departments, divisions, states, and countries. "The infrastructure is the ante to get into the game," says Carter. "If a government wants to improve commerce in a country, it has to be able to support the traffic. It can't do it without the infrastructure of highways, harbors, airports, and trains. The network infrastructure is the same in principle."
The third building block requires taking a hard look at the existing fundamental processes. This examination will probably result in some significant changes. Automating inefficient or flawed processes will only result in flawed automated processes. It's imperative to examine transactions from beginning to end in order to find ways to improve them and increase their efficiency. The key actions related to this process are standardizing financial definitions and systems, streamlining processes, eliminating unnecessary steps, and maintaining strong control.
When Cisco reviewed its own processes, it began with the individual employees in the finance group and asked them how processes could be improved. The quantity of responses was overwhelming, and Cisco was soon on its way toward the virtual close. Within the first two years of trying to shorten its close process, Cisco eliminated 10 days from a 14-day close process, largely because of its streamlined and standardized processes and the initial automation of some key procedures.
The next building block is developing a strong link between the technology organization and the rest of the company. Peter Solvik, Cisco's CIO, credits the company's IT-funding model with a good portion of the company's success. Cisco views the IT function as a strategic partner, not as a force-funded overhead expense. IT develops and maintains the companywide infrastructure, and organizations within the company fund their specific IT development. This system helps ensure that the company prioritizes IT projects. For example, the finance organization funded the IT costs—including staff and software—necessary to develop the virtual-close applications. All company projects are finished in six months or fewer, and no project receives funding unless it demonstrates that it can achieve payback within one year and shows how it will improve customer satisfaction, the metric by which Cisco measures its success.
Another building block in the virtual finance project is skillfully integrating Web-based applications. Providing applications online improves the quality and timeliness of vital information and empowers people by giving them access to the information they need. Cisco divided its Web-based financial applications into two main categories: financial-reporting tools for executives and productivity tools for employee.
An individual's view of the information is based on his or her role. For example, managers around the world can view daily bookings and discounts in their areas and drill down to very specific detail. Employee expenses, handled almost entirely online, are reimbursed within 48 hours, and the system includes an automatic online review for policy exceptions. Employees paid on commission can view online statements based on real-time warehouse information and immediately address any issue.
The power of these applications is that they provide multilevel visibility, allowing many decision makers to steer the company on a daily basis, instead of having to make dramatic decisions only when issues become visible to them. The opportunities for savings from simplifying and automating routine processes are significant. Web-enabling the employee expense-reporting process alone enabled Cisco to avoid spending $8 million in fiscal year 2000 that the legacy process would have required.
The final building block is to focus on continuous process review and improvement. Once you have reengineered and automated a process, the work is far from done. Set up metrics to measure the quality and cycle time of key finance activities to identify opportunities for further improvement. At Cisco, the virtual close process continues to evolve based on a set of metrics by which key participants carefully review every close cycle to identify issues and commit to resolve them prior to the next close.
Standards Are the Difference
When transitioning to virtual finance, companies must effect companywide standards, which rule out the existence of mismatched legacy systems. All parts of the business must be able to communicate with each other, and quickly. Cisco's rapid early growth meant there wasn't time to establish finance standards for terminology or systems. But Cisco has since completely standardized its enterprise applications, using Oracle Applications for financials, and requires all locations, including acquired companies, to migrate to the standard systems. The common platform allows for easy transmission of data worldwide, shortening the amount of time required to see the "big picture." Cisco has rolled out Oracle Financials to more than 40 locations worldwide and supports up to 2,000 simultaneous users. Other enterprise software options include SAP and PeopleSoft.
"The biggest challenge is to develop basic definitions and a common terminology, and to ensure that data coming from a company's multiple business systems conforms to such definitions and terms," says Arun Kumar, a managing director who leads KPMG Consulting's virtual close solutions. "For instance, in most companies, the same customer is represented under different identities in different systems. How then can a company know how much it has sold to its top-ten customers? Similar complications exist with the representation of products and of the organization structure. Addressing these basics helps the company get a better handle on the key drivers of its business even before the goal of real-time information is achieved."
For companies that have made the transition, it's now strategy, not spreadsheets, that keeps finance staffs busy. If something changes in Japan, the right people know instantly and can take immediate action.
"You can have the machines doing the repetitive tasks," says Michelle Roybal, e-finance solutions consultant for the Cisco Internet Business Soultions Group. "People should be thinking while the machines are working."
You can set up systems to continuously monitor and periodically update appropriate managers with information such as bookings, discounts, orders, margins, shipments, and revenue. Thus, the big picture is constantly analyzed.
On the other hand, too much information can be a distraction. Frequently, the initial temptation is to measure anything and everything that can be measured as often as possible. Although Cisco considers market share a critical signpost, the company calculates it only quarterly and measures the drivers of market share at intervals that it has determined are appropriate for each metric. For example, productivity, profitability, and contribution margins are measured monthly; headcount is measured weekly; expenses are measured daily; and orders, discounts, and margins are measured hourly.
The challenges? There are plenty. A switch to true virtual-finance thinking requires change throughout the organization. If your company is entrenched in bureaucracy that resists such major moves, make sure that the CEO is actively on board and that everyone knows.
"The hardest part is the old-school accountants," says AMR's Boulanger. "Many of the companies that need e-finance the most—midsized and growing fast—are the ones stuck with legacy systems and without ERP systems. It takes a culture change, because you have to merge different sorts of departments and different ways of doing accounting."
Companies Making the Change
Because every company is positioned differently, it's impossible to provide a single framework for estimating the cost of implementing virtual finance. As Charles Brown, senior vice president of finance and controller for Office Depot, says, "We understand that we're spending the shareholders' money with every decision ... that keeps the to-do list appropriately focused."
Office Depot began its virtual-finance implementation about 12 months ago. It recently announced the installation of broadband communications for all its stores, and it has enabled several core processes in financial areas such as budgeting, forecasting, and capital expenditure control.
"These tools have allowed us to replace clerical headcount with more robust processes that are scalable with volume and relatively quick and inexpensive to deploy," says Brown. "In the past few months, as our efforts have gained momentum, we're now looking beyond finance. Our customer-facing systems are state-of-the-art, but there is a lot remaining to be done internally. I believe we're early in the adoption cycle."
Why the effort? And why is it so important? "When Cisco's CEO, John Chambers, spoke to us last winter regarding the virtual close, he said that there's no guarantee that the large businesses will beat the small businesses today, but the fast will beat the slow," said Brown. "From that perspective, we feel the Web is an integral part of our toolkit."
General Electric is so serious about virtual finance that it created a new position: eFinance leader. In that role, Brian J. West is charged with ingraining digitization into the finance function's core culture. "The role of finance, I think, is tipping upside down," says West. "We'll get faster and we'll have to embrace technology in ways that we never did before."
"One of our fundamental challenges is that we've let disparate processes creep into our system due to acquisitions—even in bill paying, expenses, those kinds of things—throughout the company and throughout the world," explains West, previously an executive in GE's internal audit staff. The idea then is to move to a standard process, and GE is doing just that. "It requires a little bit of an iron fist from management," says West. "Let's not debate six ways of paying a bill. It's just paying a bill, and there is going to be one good way of doing it."
The problem with the old way is that it created a culture that lulled employees into a rhythm dictated by weekly, monthly, and quarterly reporting, says West. Real-time data interrupts that sleepy rhythm with a daily dose of adrenaline, he says. "For a $130 billion company with so many entities, it doesn't happen overnight."
Ford Motor Company is going through a major overhaul of its finance systems, which is no easy task for a $170 billion company that sells cars in 200 countries and has 350,000 employees. The company's basic finance systems were developed just after World War II, explains Lloyd Hansen, vice president and controller of Ford, and while they've held together amazingly well, it's time for something completely new.
"[Virtual finance] will allow us to close our books and see the data in more real time," Hansen says. "But more important, it will permit us to integrate financial analysis with operating and decision-making systems across the company. We need to have the ability to control costs for programs being developed two and three years in the future."
One of Ford's first steps, says Hansen, was to develop common rules for analysis worldwide. Ford has pulled the team working on implementation of its new virtual finance system from every part of the company that the new system will touch.
"Developing a system this massive in some ways is like developing a new product," says Hansen. "You have to have certain milestones you hit along the way."
Ford has rolled out parts of the system in some of its North American plants for testing. It's already getting incredibly fresh information on profitability, broken down by vehicle line and business unit. Soon it will have the capability to quickly calculate the same things on future products, allowing the company to better manage its revenues and improve the accuracy of its profit forecasts.
The ability to track the cost of materials is vital to Ford. Some 70% of each vehicle's cost is materials, so even small changes quickly add to the bottom line. Of course small changes in efficiency, such as those allowed by virtual finance, also accrue quickly.
Knowing immediately the profit margin of every vehicle it sells allows Ford to make better decisions. For example, it looked at where and how to market worldwide and whether to offer rebates, which can significantly impact short-term profit margins when you account for exchange rates. "Before, such data was several months old and available only by a lot of hand work," says Hansen. "Now, we pick up several months."
Cisco's Carter notes, "The essence of virtual finance is the finance organization moving from being a gatekeeper of information to being a catalyst for change throughout the company."
In the end, it comes down to one thing: Vision. 
May/June 2001
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