Treasury Today Country Profiles in association with Citi

Close to the edge: improving period-end processes (part one)

Stacks of full folders

Lack of documentation and too many manual processes in the financial close process are a drain on resources and potentially a source of compliance and audit risk. But ultimately the quality of the results also impacts on the ability of the company to make accurate business decisions. Is close process automation the answer?

For a large international corporate, the financial close process can involve thousands of tasks that must be carried out for each period-end. In all too many cases these tasks are undocumented and manually executed which means time and resources are wasted trying to meet strict deadlines or fixing problems afterwards. Failure to produce accurate close data can force compliance and audit issues and even diminish the company’s ability to make confident strategic business decisions. In short, too many companies are on the edge when it comes to their financial reporting.

At least this is the understanding drawn from ongoing research by process automation firm, Redwood Software. By working with Global 1000 companies that use SAP applications (and it lists big names such as Airbus, Walmart, 3M, Tesco, Shell and Daimler amongst its clients), it is aiming to better understand the gap between perception, reality, and best practices when it comes to the financial close process. Its findings indicate a worryingly high volume of undocumented processes and spreadsheet-led manual activities. Data gleaned from 56 businesses so far indicate that 82% of financial close processes are completely manual. The research also reveals that up to 23% of financial close transactions that are formally documented are never actually executed.

The enterprises interviewed by Redwood to date have an average of 83 separate legal entities. The financial close typically takes seven days to complete, requiring 142 full-time equivalents (FTEs) for each entity to analyse data, adjust, review and create reports. Where companies have different monthly, quarterly and year-end processes, complexity abounds potentially requiring up to 8,300 FTE days being dedicated to the close every year.

Why so manual?

The reason for the lack of efficiency is easily understood if it is considered how far the typical finance back office structure of many businesses has progressed over the past few decades, says Neil Kinson, Redwood’s VP EMEA. Compare the level of automation of a car manufacturing plant of the 1950s to one today and they would look very different. But draw the same parallel with the typical finance back office and whilst today’s set up may have computers and telephones, the number of people and the kind of things they do are largely the same in that they are still heavily reliant on manual activity. “We have not seen the kind of step change in productivity or automation that we have elsewhere,” states Kinson. His “mission” is to try to address that situation.

By analysing the close processes of a business, it becomes apparent that many tasks are “repetitive and mundane”. The potential for error will thus often be derived from the monotony of the task if it is executed manually, not its complexity. KPMG has noted that the average manual processing error-rate in this environment is around 15%. Even if this figure is wildly pessimistic, scaling up the error rate for a business that must execute many thousands of close process tasks each period will still introduce a significant level of risk – and cost – that simply does not need to be there. Kinson acknowledges that the errors may not all be of material significance to the final reporting “but there will nonetheless always be an overhead in finding and remedying them”.

If other business functions can move forward, why is the close process still seemingly stuck in manual limbo? For Kinson, one common sticking point when engaging with potential customers around automation is “convincing people of the art of the possible”. Aside from being too busy to engage with process optimisation, many just don’t believe that some of their processes can be automated; others still think that the effort of doing so will outweigh the value of automation.

“That is partly because as an industry we have oversold and under-delivered, particularly in the finance space,” he admits. “People perceive the close process issue purely as one of data quality. They believe the way to address it is to bring in some kind of process governance or workflow tool to control the individual tasks,” he notes. These solutions may well control the order of work and afford better awareness of where the company is in the close process, but Kinson argues that they do not address the need to reduce manual intervention. If anything, they add to the manual requirement by continually asking staff to update the status of their activities. However, if close processes are automated, that validation can be in-built so that only exceptions need to be manually tackled. If the rules and logic of a task can be defined, it may even be possible to establish automated remediation.

Building support

The businesses that are most receptive to close-process automation are those that have already started a finance transformation journey, driven perhaps by a cost or risk imperative, says Kinson. From here it is usually but a short step to get alignment with the concept “as long as you get to the right level within the organisation”. Actual decisions around automation will typically rest with the controller’s office but increasingly individuals with responsibility for shared service centre (SSC) implementation are taking an active part.

Indeed, the move to an SSC is often a catalyst for automation as high volume, low complexity transactional tasks such as accounts payable (AP) and accounts receivable (AR) are often the first to migrate. But Kinson observes that resistance to process automation often increases the further you go up the process chain, simply because businesses are reluctant to lose control and oversight of their processes. The individual responsible for an SSC migration is thus the “natural ally” of the close process automation provider because they understand that automation offers consistency of process across regional units or entities.

Whilst automation of higher level processes may induce a degree of nervousness in operational staff, Kinson notes that the higher up the management hierarchy you go, the more receptive people are to the concept. This, he comments, is why it should have resonance with the treasury community where there is “an increasing focus on governance and the overall enterprise risk, as the role moves beyond traditional treasury activity”. However, he warns that some of the reports following assessment do make for difficult reading. “People tend to get defensive when you present results that show a certain percentage of tasks in their documentation never get executed. You have to be very careful about how you position that conversation otherwise they will immediately start questioning the integrity of the data and the approach, rather than acknowledging the issue.”

Next week we look at how to start an automation project.