Big Data for Finance

From Rob Jenkins, SAP Global Center of Excellence (Originally posted on the SAP Analytics blog)

Big Data is often mentioned as one of the game-changing technology trends that every company must capitalize on to stay competitive. Most CIOs are familiar with how Big Data can be leveraged for transforming marketing (like multi-channel promotion effectiveness), manufacturing (defect prevention) or distribution (dynamic routing systems). In this era of technology innovation, the traditional constraints of storing and analyzing the 5 V’s of Big Data – variety, velocity, volume, veracity, value – have been all but eliminated.

The advances in massively parallel computing and columnar storage databases, along with the price declines in DRAM-enabling in-memory processes, have enabled performance gains by 10,000 times. And the innovation around capturing and analyzing unstructured data (such as social networking data) with user-friendly business analyst tools that require no programming brings a whole new perspective to analyzing and improving all business processes – from employee recruiting to product development to sales to customer retention.

Yet to date, finance hasn’t been a focus area for applying Big Data and analytic technology. As many CFOs expand their role to become a strategic decision-making partner of the CEO and take on operational oversight (including IT), they’re seeking ways to utilize Big Data and analytics to optimize finance processes for increasing efficiency and business insight. In fact, a recent study by Tata Consulting Services found that finance had the 2nd-highest level of expected return on investment (ROI) from Big Data.[i]

Businesswoman touching digital tablet in office

Big Data and Analytics Technologies Improve Finance Processes

CFOs know they need to translate data to decision in real time for competitive advantage.   Market signals can improve forecasting accuracy. Customer sentiment and buying behavior can improve price promotion modeling and “demand-shaping.” Assessing and proactively managing changes in customer payment behavior impacts working capital (DSO). Daily forecasting at retail store level optimizes the supply chain. Currency and commodity markets move in microseconds, so understanding the need for additional hedging in real time is critical.

And every CFO understands the need to focus on fraud detection by analyzing signals with real-time visibility to transaction data. Big Data and analytics techniques and technologies can dramatically improve the efficiency and effectiveness of all finance processes.

“Better, faster, cheaper” is the mantra for CFOs, and with Big Data there’s no need to use short-cuts such as averages. This means running more simulations with no latency – which leads to better decisions with live data. It also means reducing manual processes by simplifying data integration to eliminate reconciliations caused by duplicate and incorrect data.

Finance now has the ability to enable real-time scenario analysis based on market and internal process signals to optimize financial planning and analysis, consolidation and close, collections, and treasury and risk compliance, just to name a few.

Impact on Financial Planning and Analysis

From the development of strategy to budgeting/forecasting to reporting, Big Data and analytics cannot only transform the process but they can also change the way the organization thinks about business model agility. Imagine the CFO’s team using correlation analysis to determine which market signals impact revenue to increase forecast accuracy. Combing the analysis with visualization and spatial analysis BI tools can greatly enhance communication and understanding.

Or consider the ability to perform accelerated cost assignments using relevant drivers on massive data volume to arrive at accurate profitability by granular business dimension. Finance could drive cross-functional collaboration on product/service pricing by leveraging historical sales data to derive insights into demand elasticity by channel or customer category.

Impact on Accounting and Financial Close

Accounting, close, disclosure, and close governance can all be improved with Big Data and analytics. Finance can significantly reduce the time to close the books through accelerated runtimes for period-end reports and using statistical analysis on historical data to automate real-time accruals. Employee productivity is enhanced through self-service information access with visualization enabling rapid review, analysis, and reporting.

Intercompany transaction anomalies can be flagged for managing risk, while journal entry elimination and reconciliation is automated. Business rules and role-based workflow enhance close governance through exception-based approval routing.

Impact on Treasury and Financial Risk Management

Big Data and analytics enable the treasury team to gain immediate insight into liquidity information through real-time, centrally-managed cash forecasts. This zero-latency insight accounts for currency movements and signals if and when there’s a need for additional hedging.

Risk policy compliance is ensured with instant net-open positions (like commodity prices) monitoring. From an internal control perspective, fraud prevention can be enhanced by exposing problematic patterns in payables operations, cash balances, and journal entries.

Impact on Finance Operations – Credit and Collections, Payables, Supply Chain

Changes in customer payment behavior can signal cash flow problems. Reacting quickly, or using analytics to determine when to proactively manage payment terms or arrange alternate financing, can make the difference in getting paid fully on time and not getting paid at all. Some customers are more economically sensitive and liquid than others, and patterns can be amazingly predictable by analyzing the right variables.

Big Data and analytics can also identify process errors, such as duplicate payments by vendor or unusual changes in account balances. Supply chain negotiations can be approached with an entirely new strategy using price and transaction data to define shipment terms and reorder points while maximizing inventory turns and minimizing unit cost.

The Take Away

By applying Big Data and analytics across the portfolio of finance processes, the CIO and CFO can partner to transform the finance function’s efficiency and effectiveness. This enables the vision of “finance as a strategic partner” to become a reality.

[i] http://sites.tcs.com/big-data-study/big-data-roi-logistics-finance/

 

Will 2011 be the Tipping Point for Accounting Standards?

As we wrap-up 2010, and look forward into next year, I think 2011 is shaping up to be a very important year for accounting standards world wide. First, the initial wave of FASB / IASB convergence projects should be completed and compliance timelines announced. The expectation is for the new rules to become effective no earlier than 2013. These changes will impact customers reporting under both US GAAP and IFRS. Second, the SEC in the US is expected to provide an update on the IFRS Roadmap and adoption timeline. Many US customers are waiting for the SEC’s announcement before making final preparations for IFRS. On November 29, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), published their 3rd progress report on converging US GAAP and IFRS. Both FASB and IASB reaffirmed that the target completion date for the priority projects remains June 2011 or earlier.

In general, the key discrepancies or gaps are being closed. However, companies should realize that small differences will still exist. So, a successful convergence will not mean that the FASB and IASB standards become identical, but that they are closer than before with major differences resolved. Furthermore, this implies that a second transition step to IFRS may still be required for US GAAP filers if the SEC mandates IFRS adoption for public companies, though this transition is expected to be easier than if the FASB / IASB convergence projects had not been successfully completed. For a summary of the FASB/IASB’s update, please see the Journal Of Accountancy. On October 29, the SEC provided an update on their IFRS work plan. Though there were no major conclusions or announcements, it is clear that the SEC is diligently working on IFRS and is currently focusing on six major areas. In their update, they also raised logical concerns about the processes and organizations involved in setting IFRS standards. Though no exact dates are given, the SEC IFRS work plan updates will be made periodically, so expect another next Spring or Summer. For a summary of the SEC’s update please see the Journal Of Accountancy.

With so many important accounting updates expected in 2011, I think history will show that it was an important tipping point for accounting standards world wide. As you consider your New Year’s resolutions at your workplace, don’t forget to add one for accounting changes. Knowledge and advanced planning will be the best way to ensure success in 2011 as the accounting changes unfold. If you want some ideas for specific recommendations or action plans, please view the Fall Webinar Series and the IFRS Webinars and Recordings, both contain lots of excellent content from SAP and our partners.

We talk about value – but aren’t we still kidding ourselves?

Thirty years ago when I did my MBA, my professor and lunchtime running mate was the late Peter Doyle, who wrote the seminal book on what marketing was really all about called Value Based Marketing. He borrowed all the measures about value was from financial theory and then fleshed out what this meant for marketing folk in terms of strategy, tactics and metrics.  In the commercial world, value equates to total stakeholder return either in terms of annual dividends and the capital gain on their stockholding and Peter argued that everything marketing folk do should be focused on driving these. So he argued that tactics that drive customer loyalty ultimately help to drive the stability of earnings that should help strengthen the stock price. Although marketing folk tend to be fickle and change tack at the drop of a hat, successful marketing programs take months if not years to execute successfully and hanging in for the long haul generally pays off. All good common sense.

So how did we get to a situation where the average length of stock holding has shrunk from 5-6 years in the 1970’s down to 5-6 months today with the result that companies consistently compromise the ability of marketing folk to execute on well thought out strategies by constantly cutting budgets to ensure short-term quarterly earnings figures are hit?  Surely we’re selling ourselves short and ultimately exposing ourselves to competitors that are not so focussed on short terms gains such as privately owned companies or competitors from Asia Pacific that typically take a longer term view.

The UK’s new coalition government is making noises about introducing some form of legislation to curtail the short termism of modern capitalism. However it’s a long journey between the sound bite and legislation and I for one would encourage them to be radical with their thinking.  How about throwing out the one share: one vote principal and rewarding people and institutions with proportionally more voting power the longer they hold on to their stock? Or how about giving stockholders ultimate veto over CEO remuneration so that they too focus on long term value creation rather than cashing in their stock options at the earliest opportunity and hightailing into the blue yonder, leaving stockholders little or no better off.

We’ve talked about the theory of delivering shareholder value for too long.  It’s high time we put in place a governance mechanism to focus business leaders on actually delivering it.

PS. Fifteen or so years later I was running the sales and marketing for a privately owned company that really didn’t give a damn about making profits as long as we generated enough cash to invest in marketing that would drive long term value and allow the owners to sell it for what was a wonderful price earnings ratio. I met up with Peter at a masterclass he was running at Cranfield Business School and asked him to run a couple of sessions on marketing for our key account customers  at some expensive spa hotel over in the Cotswolds. I thought he’d enjoy it, but he waved me away with some half-hearted excuse.  It wasn’t till his death was announced a few months later that I understood the brush off.