The Cost of Inaction

When to Act

Do companies need to act with any urgency to modernize their Finance systems, processes and teams? Well, it turns out they do. Here are just some of the challenges out there:

Inefficient, error-prone or obsolete financial systems often trigger lots of overtime for the accounting team and that’s a real problem. In one client, the accounting team was incurring an extraordinary amount of overtime every month just to get the books closed. While the company had grown markedly over the last decade, they were still using accounting technologies more appropriate for a much smaller entity.

This overtime did not come with extra pay for the accounting staff and was triggering a number of personal problems for them, too. People were having to choose between their job and their family or vacations. Their professional and personal balance was way out of whack. The most telling thing was seeing so many of their peers leaving to go to other firms that treated their people better.

Morale clearly suffered here, and HR was losing the war for talent in this group. No one wanted to work for an organization like this.

After implementing new financial systems, overtime demands dropped significantly. Morale and retention also saw major improvements. All it took was new financial software and a new closing and consolidation toolset.

Businesses may struggle to provide timely, accurate information to lenders, bankers, regulators and others if the current systems are outdated, underpowered or patched together. One client utilizes numerous financing lines of credit to acquire assets that it leases to third parties. These agreements have a number of covenants and strict reporting requirements.

The accounting organization in this firm was significantly stressed in trying to collect all of this data – especially given the numerous and tight deadlines for these reports and the difficulty in getting this information out of current systems. Moreover, whenever data was being transcribed from different sources (e.g., operational reports, accounting reports, etc.), it rarely meshed due to reliance on (error-prone) spreadsheets, data latency issues across different systems and other issues. Any errors probably required hundreds of hours to research and correct. But, should an error make it through to the bank, it would cause embarrassment and potentially huge financial consequences to the firm.

New systems helped mitigate much of this issue.

Bad or underpowered accounting systems can derail potential M&A deals.  On a couple of occasions, I’ve seen the due diligence teams of potential mergers walk away from deals as the systems of one firm cannot handle a material influx of new accounting transactions or business complexity.

In situations like this a business may never get another opportunity to acquire this firm or a firm like it. There are usually only a limited number of potential M&A candidates for a firm to choose from, and once a company is snapped up by another, the opportunity is usually gone forever. When bad accounting solutions create the potential for this kind of opportunity cost, they must be replaced.

Successful mergers and acquisitions create their own tough accounting technology problems. Post-merger, your firm can suddenly double the number of financial systems it possesses. That means, some data is stored in some systems and others in different systems. Even if both firms used some of the same software products, the way that each firm configured these products or how each firm defined what key fields mean doesn’t mean deal synergies will occur (e.g., is “customer” a paying customer in the current year? Could it be a non-current former customer? Could it also be a potential customer or prospect?).

After a firm completes a couple of acquisitions, the combined accounting operation may be the proud owners of dozens of redundant but distinct systems that store data in different levels of detail, across different dimensions and even in different accounting calendars. The result is that accounting can’t quickly view, report or analyze data across the company.  Closing windows become longer. People will argue over what data means and the veracity of same.

Accounting leaders in businesses with lots of M&A activity must act as inaction can lead to an expensive, paralyzing state.  All of these data islands (and the thousands of spreadsheets that try to span these) must get replaced with a single suite of integrated accounting applications.

Businesses can’t ignore the useful life of a software package. Some packages are appropriate for a start-up. Some are designed to serve small businesses. Others are best for mid-market or large enterprises. As companies grow, they will outgrow their technology.

This is actually a great problem to have. Your firm is prospering and it needs new financial accounting technology. The best firms know the “best used by” date of their software and proactively upgrade (or downgrade) when appropriate.

Sometimes technology must be replaced as it doesn’t have enough horsepower functionally for the firm’s growing complexity. When firms expand across country borders, move into unrelated lines of business, etc., their current system may materially underperform. Businesses can tell when this is happening when their reliance on spreadsheets starts growing faster than the company’s top line.

Who’s Most At-Risk

Firms that experience rapid growth are often conflicted. They frequently need to make substantial upgrades but want to defer these as long as possible as systems changes could be highly disruptive to the company. Unfortunately, waiting is rarely a good option as the company could be 10-40+% bigger when they are finally forced to change finance technology. That increased company size (and complexity) will make the inevitable upgrade bigger, more expensive and maybe lengthier than desired.

Companies that grow slowly (i.e., grow at a rate closer to GDP or cost of living growth) can often stay on current systems for many years. Furthermore, if they keep existing systems current on maintenance, they may be able to use the same software for up to a decade.

Companies that defer upgrades and accumulate technical debt are always at risk. Their solutions will be out-of-date and lack many of the advanced technologies now available in newer versions of the product.

What Finance Should Cost

Depending on the benchmarks used, Finance functions can cost 4% of total revenues in some companies; however, the best operations provide financial accounting services at one-tenth of that cost (0.4% of total revenue). When financial accounting processes and technologies are well-designed and utilize newer productivity enhancing technologies (e.g., big data powered analytics), then shareholders benefit.

Highly efficient and effective finance operations can also provide a competitive advantage via their low-cost structure and high levels of service. They can also, by dint of their highly integrated, real-time and multi-dimensional solutions, deliver better insights to guide the firm. This is especially true when finance solutions can meld financial, operational, external and other data into meaningful analytics, forecasts and briefing books.

Bottom Line

If you’re the kind of CFO that wonders what your legacy will be after you retire, ponder this: Is the firm (and the accounting function) better off than it was when you found it? One CFO I meet had not changed a single financial accounting system in his 15-year tenure, but he wouldn’t leave until he had replaced the core accounting systems and brought in a new, better consolidation and planning tool.

What will be your legacy?