Executives who invest heavily in client-facing and revenue-generating technology generally see strong returns on that investment. Meanwhile, investments in financial systems are typically deprioritized or seen as a drag on profitability. This underinvestment reduces the ability of a company's finance department to measure, analyze and provide useful input that drives optimal business decisions.
We postulated that investing in financial systems infrastructure and the corresponding ability of the finance department to operate in a timely manner and to drive effective business decisions would lead to better overall company results -- and we conducted the WeiserMazars 2012 Insurance CFO Survey to assess this hypothesis. While the results were drawn from the insurance industry, we think they are widely applicable to businesses of all types.
We focused on the relationship between information technology and finance in order to assess the ways that infrastructure decisions help or hinder the finance group in effectively impacting the overall business. Four key conclusions were drawn:
1. A faster close cycle is strongly correlated with improved financial performance.
2. Infrastructure investments that keep pace with growth in revenue show financial benefits.
3. Strong working relationships between finance and technology result in better financial infrastructure.
4. Replacing or tackling inefficiencies surrounding aging legacy systems allows more efficient and effective business analysis.
Survey participants were divided almost evenly between those generating a return on capital of greater than 10 percent and those with an ROC of less than 10 percent. Survey responses showed that particular behaviors related to infrastructure and the resulting capabilities in the finance department corresponded to the separation in performance between the high performers (ROC over 10 percent) and the lower performers (ROC below 10 percent).
A STRONGER CLOSE
Financial analysis is more useful to driving business results than financial data aggregation and basic reporting. The speed at which an organization can close the books is a useful proxy measurement for the ability of an organization to perform rapid analysis for management use.
Using this measurement, high-performing companies in our survey closed their books in under 15 days, with the best performers achieving a close of under 10 days, where the close is defined as the number of business days between the sub-ledger close and when the chief financial officer signs off on final earnings numbers. Separating these firms by ROC, a clear distinction is noted. Sixty-seven percent of the companies that closed in under 15 days had an ROC over 10 percent. Conversely, 67 percent of companies that closed in more than 15 days had an ROC under 10 percent.
One CFO specifically commented on their department's change from a 20-day close cycle to an eight-day close cycle. According to the CFO, the team was able to shorten the organization's reaction time to changing conditions within all areas of the company. This allowed the group to provide decision-driving analysis in all areas, which, in turn, helped improve profits.
KEEP PACE WITH GROWTH
After years of expansion, both geographically and by adding products, the insurance industry has generally cut back on finance infrastructure investment in order to contain costs in the face of a softening market. As a percentage of revenue, the insurance industry lags behind most other industries except mining and construction on IT spending, so this cutback, while not completely eliminating projects, has had a generally deleterious effect on operational performance as limited spending was further restricted. Because finance generally shows up close to the bottom of investments in infrastructure on most insurance companies' lists, the effects of reduced infrastructure investments are felt most strongly in this area.
Both high- and low-performing survey respondents indicated that finance infrastructure requires investment to integrate legacy systems and improve data quality. Companies reporting a greater than 10 percent ROC also generally reported a more integrated financial platform and a greater degree of investment in infrastructure.
WeiserMazars' experience indicates that a more integrated financial platform yields multiple operational benefits, including improved data quality, reduced rework and "massaging" of results, a greater ability to drill into data to measure geographic and product line profitability, and an ability to hire more analytical and business-focused resources, instead of those focused on data aggregation.
STRONG WORKING RELATIONSHIPS
CFO survey respondents reported that a large challenge exists in gaining the alignment and support of IT. However, a strong contrast exists in the reported ability to do this between CFOs at high-performing and lower-performing companies.
Of CFOs at high-performing companies, 82 percent reported that IT was well-aligned, that spending was well-managed and that effective software and processes were implemented to reduce organizational burdens. Of CFOs at lower-performing companies, 60 percent generally reported that IT did not understand their needs and implemented systems that did not improve processes.
To counter this deficit in effectiveness of implementation, CFOs who perceive a misalignment in IT's deliverables reported a strong desire to have IT report to them and to outsource a large portion of the organization. This stands in stark contrast to most CFOs at high-performing companies, who see IT as a valuable partner and who are generally not seeking to change the existing reporting structure to gain more formal control.
Additional comments from CFOs indicate that joint ownership of finance infrastructure projects is a major success factor in making IT spending effective at improving finance department processes. Survey respondents who indicated a positive working relationship with IT generally noted that IT had dedicated resources for finance that understood the specific needs of the organization. In contrast, one CFO expressed frustration that IT recently held a major system update during a quarter close.
REPLACING LEGACY SYSTEMS
Legacy systems have a negative impact on the quality of data available for financial analysis and slow analysis and reporting processes. Fifty-four percent of respondents stated that the challenges of integrating legacy systems prevented the adoption of new technology platforms that would aid in improving finance department processes. Half of the CFOs who were surveyed identified legacy systems as a major source of data quality issues that slowed analysis and required a different set of talent in their origination, generally categorized as "data crunchers," instead of analysts with strong business knowledge.
This indicates that higher-performing companies replace legacy infrastructure more rapidly, have less reliance on key legacy personnel, and have fewer Excel-based processes. Based on our experience, there are three main ways for CFOs of organizations with limited technology support to reduce legacy system dependence:
1. Disintermediate legacy platforms. Identify technologies that can wrap around legacy systems to remove direct dependencies, permitting future flexibility by isolating the systems and providing cleaner data access.
2. Implement incrementally. Break large-scale change initiatives into short-duration, impactful change efforts with well-defined outcomes. This reduces implementation risk and provides faster benefits for the finance department.
3. Use the cloud. Work with technologies that are offered in the cloud on a Software-as-a-Service basis. This reduces upfront costs and largely removes the need for direct IT support during implementation.
SUMMARY
Survey results strongly indicate that investments in financial infrastructure are directly correlated to improvements in profitability. With the goal of improving ROC, finance executives should seek to wisely invest allocated infrastructure spending by focusing on projects that support growth in revenue. Improvements can be made by sunsetting legacy systems or otherwise disintermediating them from operational processes, improving the speed of the close process, and improving data quality while reducing manual processes. When supporting such improvements, the relationship of IT and finance is paramount. Ineffective infrastructure and IT/finance relationships lead directly to lower ROC.
Michael Flagiello is a partner, and Lou Brothers is a senior manager, at Top 30 firm WeiserMazars.
