Assessment

Redefining Finance Processes - Most of the attention paid to Section 404 of the Sarbanes-Oxley Act has been on initial compliance. In 2005, we expect the focus to shift to a broader perspective. The overarching aim of section 404 is to place greater emphasis on preventing fraud rather than mainly on audits after the fact, and transform what were once informal control processes into formal ones. For many or most public companies, this change has increased the cost of managing their finance organizations. The increase, along with the severe consequences for control failure, has altered the cost/benefit relationships influencing how finance departments carry out their operations and the IT systems that support them. With the initial compliance phase done, we expect at least half of the companies covered by the Act will need to address compliance efficiency issues. We assert Sarbanes-Oxley will force companies to make fundamental changes in their financial processes to regain efficiency lost in a more formal control environment. To address the requirements of this environment, companies must make some significant changes to their IT systems. These include eliminating as many manual processes as possible, reducing use of spreadsheets in controlled processes, supporting the purely administrative compliance functions (e.g., documentation), financial and management reporting, and even rethinking how statutory consolidations are performed. Achieving compliance efficiency will be a key objective of senior finance executives this year, in our judgment. Our research this year will explore ways organizations can redefine processes and how IT can support these efforts.

Budgeting and Planning - Adoption of budgeting and planning software will continue to accelerate in 2005. Dedicated software has been around for more than a decade, but our 2004 study confirmed companies continue to use spreadsheets as their basic tool for managing the process. However, there is growing awareness that using spreadsheets stands in the way of making budgeting and planning a more effective management tool. Our research shows finance professionals are interested in improving their budgeting and planning process to create greater insight into operations, increase their budgets' accuracy as well as align objectives and resources more closely within and across business units. Although putting dedicated software tools in place improves the process, Ventana Research contends it will take several more years for a majority of finance organizations to adopt best practices such as rolling quarters planning and budgeting, exception-based reviews, external benchmarking and goal-setting, etc. As hard as it may have been to convince senior finance people to change software tools and begin the reformation, organization-wide process changes such as moving away from the annual cycle are harder to implement. In addition to budgeting software, finance organizations can adopt specific tools for workforce planning and expense management. Our research in 2005 will focus on how companies can increase the effectiveness of the planning and budgeting process, and how IT can address these issues.

Profitability Management - Ventana Research believes effective profitability management (especially customer profitability) will be an important differentiator of performance over the next three years. Companies must develop a focused, consistent approach to managing profitability that incorporates three essential elements: strategy, analytics and information technology. We advise companies to address this issue at a corporate level instead of taking a silo approach. In our judgment, CFOs should take the lead in shaping, organizing and coordinating these efforts to give initiatives a senior level focus and because the resources required for analysis and implementation can be found in the finance organization. Information technology will be one of several key components to the success of profitability enhancement initiatives, enabling corporations to gain important insights into what drives margins and allowing them to measure how well the initiatives are paying off.

CFO Effectiveness - Ventana Research contends that a majority of CFOs and their finance departments continue to spend too much time dealing with transactions processing and other administrivia that distract them from more strategic and value added activities. This issue has been around for more than a decade and will continue to be an issue in 2005. Finance organizations made substantial investments in automating the basic accounting and reporting functions over the past decade and have become demonstrably more efficient. However, CFOs must take these efforts one-step further and focus on their effectiveness. They need to go beyond reporting to provide greater internal/external insight to the entire corporation. Frequently they need to add more analytical or decision support to address critical issues. For example, is the company selling the wrong products or servicing the wrong customers? Are we missing opportunities to improve supplier performance? How do our indirect costs stack up to our competitors'? One of the benefits we assert finance executives will achieve by redefining their business processes for a more formal control environment (as discussed above) is the ability to shift activities from low value-added activities such as transactions processing and error correction to more strategic ones. CFOs should view compliance as a leadership issue and look for ways to reduce the administrative burden of regulation. In addition, with more CIOs reporting to them, CFOs must ensure their company is maximizing the value of their IT assets.

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Ventana Research advises our clients that their finance departments must focus on ways to improve corporate profitability, using IT resources wherever necessary to make this possible and practical. Corporations invested trillions of dollars over the past decade on software and systems. Until Sarbanes-Oxley, these investments produced a tangible dividend in the form of a sharp increase in the efficiency of finance departments. However, we expect the cost of Sarbanes-Oxley compliance has reversed this steady improvement. Finance organizations must now start a process of making their core processes more controllable. The efficiency improvements this will produce should enable companies to invest more time in supporting strategic initiatives such as more effective planning and profitability management.