Millennium

Delivering Finance Transformation: A pandemic shouldn’t mean pushing back

As of early 2021, the backdrop for a major finance office transformation project could hardly look more challenging. Organisations remain in recovery and stabilisation mode. Roles have been amalgamated, workforces are largely scattered and budgets are under pressure. So does this mean that transformation ambitions are being put on ice for the time being? Far from it.

According to Deloitte, 73% of organisations were using automation, machine learning and similar technologies at the end of last year, up from 58% prior to the pandemic. These capabilities certainly proved their worth, with two thirds (68%) of business leaders using automation to respond to the impact of Covid.

This is exactly the time when legacy systems and processes could benefit from an injection of efficiency. But if the finance department is grappling with organisational disruption, how do you go about getting your plans off the ground?

Here’s a closer look at the Covid-related barriers to finance transformation execution, and how to overcome them.

The Challenges

Competing Priorities

According to your original plans, 2020 may have been your year for overhauling outmoded finance processes and updating your reporting capabilities. However, once the pandemic arrived, priorities shifted. CFOs frequently take the strategic lead on transformation, with considerable input from IT. Inevitably though, IT departments suddenly found themselves having to devote time and resources to the rollout of technologies such as video conferencing, VPNs, laptops and printers for home use, as well as the provision of remote support. New tech for finance may have got pushed to the back of the queue.

By now, the initial technical set-up woes linked to the sudden shift to home working are largely behind us. But if IT is still focused on things like cloud architecture, the introduction of new collaboration software and enabling blended home/office working, it could be that the implementation of specialist finance technology remains pretty low down the priority list.

A reduced workforce

When the staffing budget is under pressure, the office of finance is not necessarily immune to cutbacks. And if team members are furloughed or let go, it usually means a larger workload for those remaining.

Against this background, the focus may very well be on keeping the lights on: i.e. while focusing on core tasks with a skeleton staff, the feeling is that there simply isn’t the bandwidth to devote to transformation projects.

Scattered employees

Typically, a finance transformation strategy covers a review of organisation-wide reporting processes, a review of your data sources and architecture and side-by-side analysis of possible new solutions to adopt. Next comes implementation, migration, training and optimisation. It’s a lot – and it usually involves multiple stakeholders from across the company.

Effective communication is key to the delivery of any project; especially if you have to coax busy people into action! In normal times, when everyone is in the same building, all of those ad-hoc mini-meetings and impromptu watercooler moments can actually go a long way in keeping things moving. If interaction is currently mostly limited to your morning Zoom meetings, it can be hard to build any kind of impetus.

The Solution: Getting Finance Transformation Back on Track

Restate the business case for transformation

You can characterise technologies as either ‘business critical’ or ‘nice to have’. And right now, many organisations are focusing solely on the former.

This is the time to restate the case for office of finance transformation, not as a luxury, but as something that’s absolutely critical to building business resilience. By way of illustration, here’s a rundown of what’s typically expected of the finance department in the current climate, and at how transformation projects can directly address these critical requirements:

We expect finance to ‘do more with less’. New capabilities such as automated close and consolidation, budgeting and forecasting will help reduce the huge amount of resources expended on routine tasks. Regardless of any staffing pressures you may be facing, your regulatory and compliance burden remains stubbornly real. Specialist solutions to address specific compliance issues (for instance, lease accounting and revenue received) will go a long way in helping you stay on top of your obligations.

We need finance to be more involved in strategy. Updating your reporting capabilities will reduce the time needed for manual-heavy tasks, freeing up time to devote to strategy. Also, for your input to be of real value, you are going to need the ability to track, measure and analyse key metrics and deliverables.

We need to predict future events and respond quicker to change. Volatility and unpredictability are likely to be permanent features on the landscape. When Gartner asked top CFOs to list their priorities for 2021, “Advanced data analytics technologies’ came top. To us, this comes as no surprise. Weathering the storm demands the ability to model for a range of scenarios, to analyse rapidly changing conditions in real or near-time, and to pivot quickly: something that’s very difficult if you are still struggling with Excel for modelling.

As a CFO, you may currently be experiencing board-level pushback to transformation due to budget restraints or staffing limitations. If so, it’s worth stressing that if the finance function is to deliver the type of business-critical insights expected of it, it is imperative that processes, workflows, reporting and analytics capabilities are rendered fit for purpose.

A new approach to management

With authorisation to proceed with your transformation strategy in place, it’s important to consider the practicalities of execution.

If you have led internal change projects in the past, bear in mind that this one may require a slightly different approach. Remote working means that short-notice, face-to-face roundtables may no longer be an option. The same goes for being able to pop your head around colleagues’ doors to check on progress.

Tip: in addition to regular video-con updates, where multiple stakeholders have designated tasks to complete in order to progress the project, a simple project management tool such as Trello can make all the difference in keeping matters on track.

Also, when it comes to actual implementation, beware of false assumptions on what is and isn’t possible remotely. You may be pleasantly surprised here. For instance, Millennium Consulting’s experts are routinely able to manage and execute all aspects of new finance technology implementation remotely. This includes scoping and planning, right through to migration, installs, configuration and training.

Filling in the skills gaps

Even in ‘normal’ times, managing and executing finance transformation is not easy. It demands expertise in data management and architecture, reporting best practice, an eye for the right technology to avoid making expensive mistakes, the know-how to configure it correctly and put it to work, together with project management experience to bring everything together.

The skillset may seem daunting: even more so if Covid-related budget restraints make it difficult to hire new talent. This is where external input can prove invaluable. Rather than the ‘hard sell’ on favoured technologies, or rigid, needlessly expensive support packages, what you really need is unbiased expert advice and targeted input to complement your own internal resources.

Ready to get your finance transformation project back on track? Speak to Millennium Consulting today.

AI replace human decision-making

AI delivers the full picture

What do customers really think about our brand? Where is the next big trend coming from? How can we tell when a client is about to leave for a competitor, or a piece of machinery is about to malfunction?

Conventional performance management solutions and other types of business software are fine for basic number crunching but isn’t always capable of answering these kinds of big questions.

Humans are much better at interpreting nuance. Trouble is, we cannot be expected to read absolutely everything that may be relevant to business decisions, and we can’t be on call 24/7.

An estimated 73% of company data goes unused for data analysis. Often, this is because certain datasets are too difficult to interpret: data is unstructured, or else there’s just too much of it.

AI happens to be extremely useful at sifting through and making sense of data that would otherwise be out of bounds to decision makers. Examples include sentiment analysis tools that can constantly scan swathes of content on social media platforms to pick out insights, or finance regulatory tools that can ‘read’ complex documents and flag up compliance issues. Over time, a manufacturing plant monitoring tool can ‘learn’ to recognise the various combinations of readings that might indicate performance issues. When these circumstances arise, the issue is automatically flagged up.

In these use cases, AI opens up data streams that might otherwise be difficult to interpret in large quantities. It doesn’t have to make the role of human decision makers redundant. Rather, it picks up on insights that would otherwise be missed and makes sure you are in possession of the full facts before deciding what action to take.

Looking to the future

What about AI’s role when it comes to day-to-day processing decisions?

Take decisions linked to consumer credit, for instance. Where individual employees are left to decide what credit options should be made available to customers, it’s easy for bias to creep in, or for inconsistencies to emerge. If you have an AI-based tool that’s able to process a customer’s details and assess their risk based on set rules, there’s the potential for much more consistent decision making across the business.

But of course, any AI solution is only as effective as the algorithm behind it. To avoid bias (along with risky approvals), continued human oversight is essential. Otherwise, you risk systemising into the decision-making process the very things you want to avoid.

At its best, AI disrupts the human decision-making process. With the ability to read and interpret vast quantities of data, it has the potential to put relevant information at your fingertips faster than ever before.

A recent estimate for the banking sector suggests that we can soon expect decision-making processes to be 34% informed by machine algorithms and 66% by human judgment. This is probably a realistic interpretation of what the future holds: AI will have a big part to play in informing decisions, but the final decision will remain with people.

Rules engine and subledger technology: what every CFO needs to know

Transform your processes and liberate your finance team 

From revenue recognition through to the treatment of leases – not to mention a raft of sector-specific rules and standards, the compliance burden faced by CFOs is growing year by year. Managing it requires effective internal controls, auditability and of course 100% accuracy.

Added to this, the routine reporting workload remains as relentless as ever. Familiar tasks such as reconciliation and final report preparation continue to consume a huge amount of time. In fact, currently, 87% of finance professionals are still obliged to work overtime in the run-up to the financial close.

Expectations of the finance department are also changing. With high volumes of valuable data at their fingertips, there is growing pressure to put this data to work and to use it to generate solutions to business problems. CFOs themselves are keen to find new ways to add value to their organisations. The trouble is, without streamlining routine operations there is rarely time for finance to contribute more fully and help formulate corporate strategy.

A subledger system integrated with an accounting rules engine can help overcome this deficiency. With this type of technology, transactions can be stored, processed and posted automatically to the general ledger. For the finance department, this means less time spent on manual tasks, increased accuracy and greater compliance with standards. It also frees up internal resources, providing more time to focus upon added value tasks and strategy.

This guide aims to provide an insight into the use of subledger technology, its benefits to the CFO, how it can help address specific compliance requirements and what should be looked for in a subledger.

Part 1: Subledger technology explained

The general ledger is the foundation of a company’s accounting system. As a key reference point for the finance team and other business insiders, keeping it accurate and up-to-date is essential.

For any large organisation however, hundreds or even thousands of weekly accountable transactions are not unusual. Many will be straightforward, while others will need to be processed in a particular way to comply with internal policies and with general accounting principles and standards.

Manual processing of these transactions can be both resource-intensive and subject to error and therefore an automated subledger approach offers more efficient processing.

Key characteristics of subledger technology:

• The subledger provides a database for logging, storing and processing a subset of double entry accounting records.
• Subledgers can be set up for any areas of the general ledger e.g. accounts payable, accounts receivable, fixed assets, product inventory and purchasing etc.
• An automated system allows multiple subledgers to be connected to the general ledger.
• Transactions are automatically generated and posted to the general ledger.

Transactions however are not always straightforward and it’s not always enough to merely summarise a group of transactions and post them to the general ledger.

This is where a rules engine can help. A rules engine is essentially a software tool that automates the steps that make up a business process. With a subledger solution, you can apply specific rules to determine the way in which transactions are processed (before they are posted to the general ledger) to comply with all relevant accounting principles and standards, internal policies, as well as handling what can often be complex multi-entity, multi-currency calculations. Rules can be set and then applied to ensure transactions are processed correctly.

Part 2: The benefits provided by using a subledger

More effective use of time and resources

Especially in the current climate, businesses demand up-to-date insights and new ideas. From workforce and asset deployment through to analysis of product-line profitability, they need to drive efficiency and identify new commercial opportunities. In all these areas, the CFO has an important role to play.

However, if the finance department is spending time mainly on routine tasks such as transaction processing, reporting and compliance, then there simply isn’t the bandwidth to devote to adding value to the organisation. What can be automated to deliver greater efficiency? This is the key question to be addressed by any finance department seeking to become more strategy-focused.

PwC highlighted the fact that in areas such as management reporting, tax and general accounting, there’s the potential to free up between 30 and 40% of time by introducing automation and process efficiencies. By dramatically reducing the time needed for manual transaction entry and reconciliation, subledger technology goes a long way to help the finance department become a valuable and trusted partner to the business.

Greater consistency and fewer errors

Subledger technology allows transactional data to be processed and automatically posted to the general ledger according to pre-defined rules. With large organisations and groups, it’s especially easy for processing inconsistencies to arise. Through universal rules, processes are rationalised, eliminating manual-entry error and inconsistency, providing increased confidence in the integrity of the financial results.

Enhanced compliance and auditability

Regulations such as IFRS15, IFRS16, IFRS17 and LDTI require finance departments to ‘show their workings’; to have their underlying operational data available for disclosure in order to demonstrate adherence to regulatory standards. Using the right subledger solution, allows drill down to the general ledger at transactional level and provides a full audit trail. Likewise, the rules set for data processing and accounting are transparent and easily verifiable. In the event of any regulator queries a solid foundation for compliance can be easily demonstrated.

An up-to-date financial picture

During the current year, the COVID-19 pandemic has demonstrated how quickly market conditions and expectations can change. The general ledger provides the foundation not only for accounting, but also for rolling budgets and forecasts. To provide the most value, it needs to keep up with what’s happening on the ground. Subledger technology reduces the time and manual input required for transactions to be fed to the general ledger. It helps transform the general ledger from a periodically revised accounting tool into a reliable and up-to-date information asset.

Enabling analytics and generating insight

The subledger’s primary purpose is to allow automated processing and data feeds directly through to the general ledger. But the general ledger doesn’t need to be the only destination for this data. Depending on the specific rules set, the rules engine powering the subledger effectively cleanses transactional data and ensures that data from multiple sources is processed in a consistent manner.

This helps the creation of a ‘ledger-certified’ foundation not just for statutory accounts but also for management reporting and analytics. As well as connecting to the general ledger, a feed can be set up directly from the subledger to data analytics or business intelligence tools of choice.

Part 3: Compliance troubleshooting: Subledgers and accounting standards in focus

Here is a closer look at how subledger technology can help tackle the compliance challenges raised by specific accounting standards and principles.

IFRS 15

The challenge

The ‘revenue recognition’ standard determines how revenue should be recognised and reflected in an organisation’s financial statements and balance sheet. It sets out a standard five-step model for recognising revenue effectively. For high volumes of long-term contracts with multiple elements, there is a considerable challenge in making a distinction between the different elements in the contract, recognising revenue for each of them.

The solution

At what point should revenue from a particular contract be recognised within the profit and loss and balance sheet? A subledger with a suitably configured accounting rules engine can help manage data processing, calculations, reporting and an automatic feed to the general ledger, complete with a clear audit trail. This ensures that consistent revenue recognition policies are applied, keeping the general ledger up to date, while also providing the ability to drill down into individual contracts to check data regarding, for instance, contract balances, performance obligations and contract costs.

IFRS 16

The challenge

IFRS 16 marks a once in a generation shift in the categorisation, calculation and presentation of leases for financial reporting purposes. The most obvious impact concerns the layout of financial statements: specifically, a wide range of financial liabilities that were previously held off-balance sheet as operating leases must now be shown on the balance sheet.

Behind this presentational change, there’s a significant and ongoing data management challenge. As a start, you need to identify and classify all leases that come into play within the business. For the relevant calculations, data must be standardised – often filling in the gaps arising from incomplete information. It can prove particularly resource-heavy where the information needed is spread across different departments and formats and these is extensive reliance upon spreadsheets.

The solution

A dedicated lease accounting subledger helps ensure that all relevant leases are appropriately accounted for on the balance sheet. The lease subledger will also need to include sections covering areas such as discounting of future lease payments, ROU asset depreciation and liability amortisation. This information needs to be accessible when needed without the general ledger becoming cluttered by detailed entries for each lease.

A subledger solution preconfigured for IFRS 16, allows automation of complex calculations (e.g. asset depreciation and applicable interest). It also means that all relevant information such as changes in rates or terms, extensions, renewals or impairments can be easily managed, without the need for multiple data entries.

IFRS 17

The challenge

The stated aim of the new reporting standard for the insurance industry is to provide greater transparency concerning an insurers’ financial position, performance and risk exposure. For insurers on the ground, this means collating and processing potentially enormous amounts of additional data, such as historical policies and an increased number of calculations. Given the volumes of data involved, the complex interplay of different categories of actuarial and accounting data and the calculations required, the sole use of a general ledger for accounting becomes practically unsustainable.

The solution

What’s needed is a subledger and accounting rules engine specifically configured for IFRS 17 compliance. The standard requires regular recalculation of the performance of applicable insurance contracts over their lifetime. A subledger solution can allow this to be carried out automatically, giving the ability to store the calculation results at each measurement period – and provide a fully auditable data trail.

Part 4: Choosing a solution

Start with your specific problem. If you already using an enterprise resource planning (ERP) system such as SAP or Oracle then you are likely to find that it has a subledger component. A good example is the S/4 HANNA-based subledger for SAP which provides a ‘catch all’ solution aimed at handling the regulatory and reporting requirements for financial institutions, insurance companies and similar enterprises.

Such solutions may carry impressive functionality, but because they are designed to handle a range of compliance needs, they often demand a considerable degree of bespoke configuration for them to address the problems to be solved. If there is the need for a quick implementation with a minimum of technical input, an out-of-the-box subledger solution configured for specific compliance requirements may be a good option.

Examples include the IFRS 16 lease management solution provided by Legerity and the IFRS 17 insurance accounting subledger from Aptitude.

Aim for seamless integration

Adopting a subledger solution does not have to mean a complete overhaul of your existing technology stack. Millennium Consulting specialises in helping equip you with the type of subledger technology that addresses your specific requirements, while ensuring full integration with existing systems.

Supporting wider transformation initiatives

Compliance is often the primary driver of subledger adoption however organisations may require a more efficient system to handle the increased data processing and calculation burden that the new standard brings. A compliance challenge may also be the springboard to achieve additional business benefits. The subledger provides a way to harness potentially enormous volumes of granular data and provides the opportunity to consider how else this data may be put to work for the purposes of analysis, forecasting and delivering timely business insight.

What next?

Starting with your specific goals and operational and requirements, Millennium Consulting can help you implement best-of-breed subledger technology and processes. To keep on top of compliance, assign finance team resources to more profitable use and to build the foundations for stronger business insight, speak to Millennium Consulting today to discover how we can support you.