Ralph Packard, chief financial officer of mutual-fund company Vanguard Group, calls his adventures of the past five years "Tour de Finance" -- a play on the world's most challenging bike race, the Tour de France. Packard has been replacing Vanguard's decentralized and somewhat antiquated financial-reporting systems with software from a single supplier that speeds decision-making and cuts costs. "When we're finished, in one or two years, it will all be new," says Packard. "Then," he laughs, "we'll work on implementing next-generation software."
It's a familiar refrain throughout Corporate America. Within companies large and small, demand is "greater than it has ever been," says Packard, for better financial information that's available at the speed of a keystroke. Shaken by the Enron and WorldCom accounting scandals, shareholders want companies to provide more granular reporting. CEOs and boards of directors want more data at their fingertips so that they can intercept and fix problems before they hurt the quarterly numbers. And regulators are requiring greater consistency and transparency of financial data.
And how: The Sarbanes-Oxley Act, passed in reaction to the corporate scandals of the past two years and set to take effect next summer, will hold CEOs and their chief financial officers personally responsible for the accuracy of their companies' numbers. Execs who mess up could face 20 years in jail.
CONTRADICTORY REPORTS. This new reality has registered with CFOs -- especially since many of them are ill-equipped to guarantee accurate financial reporting and forecasting. Indeed, only 9% of companies now characterize their forecasts as reliable, according to research by Hackett Group, an Atlanta-based benchmarking firm that in early summer polled more than 2,000 of the world's largest companies. That's one reason some companies have stopped providing public earnings forecasts in the wake of the corporate accounting scandals, says Rick Roth, Hackett's chief research officer.
In fact, Roth argues that even the most basic financial reporting is flawed in many instances. For instance, only 17% of the companies Hackett surveyed have created a consistent internal definition for what constitutes a sale. Thus, it isn't uncommon for companies to end up with internal reports that contradict each other, says John Van Decker, a senior program director with technology consultancy Meta Group in Stewartsville, N.J. To set things straight, corporate financial analysts have to perform tedious "reconciliations" that require lots of time and money -- resources that corporate finance departments increasingly don't have.
That situation is about to get more complicated. Sarbanes-Oxley will require companies to notify the Securities & Exchange Commission of material events, such as a late payment from a large customer, within two business days. Today, some corporations appear not to be aware of such events until the end of the quarter. And only 11% of the companies in the Standard & Poor's 500-stock index now meet the Sarbanes-Oxley requirement that they file their earnings reports within 35 days of the end of a quarter (vs. the 45 days that has been stipulated until now), according to a recent survey by Parson Consulting in Britain. "CFOs are walking a very tight rope," says Renee Lorton, senior vice-president and general manager for financial-management solutions at software company PeopleSoft (PSFT).
NEW CLOUT. Increasingly, these execs are turning to technology for help. They're buying packages that allow them to collect data consistently across their organizations, from the usual suspects -- SAP (SAP), PeopleSoft, and Oracle (ORCL). They're also buying software that helps them do better data analysis and planning from those three companies plus Hyperion Solutions (HYSL). And they're trying out forecasting software from one of the 100 or startups that have entered that red-hot market.
One primary goal of customers and software suppliers alike is to avoid the miscues that so far have attended the implementation of finance software. Installations of enterprise resource-management (ERP) systems, which are used to consolidate the recording of all the financial transactions in a company, still run more than 50% over-schedule and -budget on average, according to market researcher Gartner. That's a problem when you consider that, on the high end, such systems can cost hundreds of millions of dollars.
One thing that has changed already -- no doubt in part because such software is so expensive -- is that the CFOs, instead of CIOs, increasingly have final say over their companies' tech budgets. In fact, at many companies, such as technology service provider Unisys (UIS), chief information officers now report to CFOs, who are becoming as well-versed in technology as they are in debits and credits. And for good reason: "If you don't understand technology today, you don't understand business," says Louis E. Lataif, dean of the Boston University School of Management. That's why his school's MBA program now offers a joint degree in business and information systems.
PLATFORM FOR SAVINGS. Also, the increasing influence of CFOs over technology is boosting investments in finance-related hardware and software even as overall corporate tech spending remains flat. The world market for accounting and financial-management software will increase about 6%, to $9.9 billion this year, vs. a 5.7% gain in 2002 -- and should reach $12.7 billion by 2007, estimates Albert Pang, an analyst with tech consultancy IDC in Mountain View, Calif. By contrast, the overall market for corporate software is expected to grow only 1.8% this year, to $63.9 billion, after falling 2% last year.
Sarbanes-Oxley will account for a chunk of the increase. It will result in an estimated $2 billion in spending this year alone and more next year, since it will prompt 85% of America's largest 100 companies to overhaul many components of their financial-reporting systems, predicts IT consultancy AMR Research in Boston. And many companies are likely to go beyond what the act requires, both to prepare for what they expect to be further tightening of financial-reporting rules and to trim costs from their financial operations. "We're trying to use Sarbanes-Oxley as a platform to find efficiencies," says Unisys CFO Janet Haugen.
To save money, companies are continuing to move both sales and procurement online, which lets them do both 24 hours a day with fewer employees. They're also streamlining their ERP systems: About 40% of companies that buy a new system now opt for a single, standardized system companywide, says John Roberts, director of the Washington (D.C.)-based Working Council for Chief Financial Officers (WCCFO), a group of more than 300 CFOs. That new system replaces the 2.7 ERP setups -- which may not communicate with each other -- that an average company uses today, according to Hackett. Multiple systems are a big problem in big companies, especially after a merger or acquisition.
CHECK THE DASHBOARD. The hottest areas in financial software are tools that help create more accurate budgets, pull relevant data out of various reports, and do better financial analysis. Sales of such software are growing at a double-digit clip -- about as fast as for security software, says Toby Bell, a research director at Gartner.
One popular product is called a dashboard. Sold by several dozen companies, a dashboard provides a daily summary of a corporation's most important performance indicators -- just a few key ones vs. hundreds some CFOs get now. The indicators might include information such as how many days it takes to collect money from customers or a company's current debt.
Unisys' Haugen says she now looks at 10 different reports every month to get information she needs on everything from hiring to delivery times. The dashboard program she hopes to eventually install would pull the information out of Unisys' financial information systems on a real-time basis and place it before her daily.
MATERIAL EVENT, OR GOOF? Some dashboards -- which essentially overlay many other programs in a finance department -- can also create income statements and other mandated reports in three to five days. That's a huge help in meeting the requirements of Sarbanes-Oxley.
An important complement to any dashboard is analytical alert software, such as that sold by FileNet (FILE), Metastorm, and HandySoft. It monitors data such as customer payments, sales, and inventory, and alerts the CFO if a large account is seriously past due. The software also walks a CFO (or an underling) through the steps necessary to determine if the event is material -- or if someone simply forgot to record a check, says Daryn Walters, vice-president for world marketing and strategy at HandySoft.
Forecasting is another big growth area for finance software. That's because the tough economy has been forcing companies to try to plan further ahead than one year, says Tom Malone, president and CEO of Portland (Ore.)-based SRC Software, a privately held company whose products are used by customers as diverse as Harrah's (HET) Las Vegas hotel and casino and the cable-TV show C-SPAN. Typically, such forecasting software, which is also sold by a number of other startups and larger suppliers, helps corporations analyze everything from the need for and benefit of future capital spending to an acquisition's financial ramifications. The software also allows for what-if scenario playing.
PIZZA-METER. Companies whose businesses aren't hugely complex sometimes create their own financial software in an effort to hold down its cost. For instance, Domino's Pizza has written a program for store audits, which it does at least twice a year at each of its 7,291 locations. During a visit, auditors enter into their handheld devices data on how hot the pizza is, how fast it's made, and how clean the stores are, explains Ken Peebles, who oversees distribution, strategic operations, and customer satisfaction at Domino's.
Internal developers can quickly insert extra questions -- to gauge the reaction of customers, for example, to the company's latest promotion, which at the moment is Philly cheese-steak pizza. Now that so many unemployed programmers are available cheap, the do-it-yourself approach can be especially cost-effective, analysts say.
Either way, most finance projects today must deliver a return on investment in less than 12 months, says IDC's Pang. In the past, says Vanguard's Packard, his company couldn't always pay bills fast enough to take advantage of supplier discounts. But a recently installed accounts-payable product has solved that problem. Moreover, Vanguard's new e-procurement system has consolidated its purchasing to fewer suppliers, allowing it to negotiate deeper discounts. And once it centralized much of its accounting work, Vanguard cut staff. "The money we spent [on the system] paid for itself through more efficient processes," says Packard.
FREE TO FOCUS. The savings can be quite substantial: Entertainment giant Disney (DIS), which is in the midst of implementing a $400 million, 2.5-year project that's designed to replace its 31 different systems with a single one, estimates that the project will save it $130 million annually -- mainly on maintenance, says Pang.
Because the latest technologies automate what was previously hand work, they can also allow financial analysts and CFOs to focus on more important tasks. Kinko's CFO Mark Blinn says for the 15 years he has done corporate finance he has spent most of that time simply preparing information. "Now, technology frees you up to do qualitative work," he says. So, if sales spiked in a quarter, he can analyze what changed from the previous quarter and which event or decision triggered the change, Blinn says. The new systems "give ammunition to the CFO to show that we're delivering value to the company," says the WCCFO's Roberts.
They also disperse responsibility for making smart financial decisions, by turning unit or store managers into mini-CFOs. Take Kinko's, where each store today gets an e-mailed sales report daily that's generated by the centralized point-of-sale system, which also produces a full report monthly on how the store is doing. Within the next year, however, Kinko's will move to a Web-based system that will let store managers look at the information for their location at any time -- down to any level of detail they desire. This will "enable them to understand the impact of their decisions faster," Blinn says.
"ENTERPRISEWIDE VIEW." Many CFOs are quick to note that technology doesn't solve every problem. Most say even the latest packages leave plenty of room for improvement. "I don't see an immediate forecasting software solution [that works well]," says Blinn. So for now, financial planning remains as much art as science. "It's about understanding your business," Blinn says.
New technology also has some unwanted side-effects: A recent WCCFO survey of CFOs from America's 100 largest companies shows that many managers of corporate units or divisions feel that the additional reporting many of the latest systems require leaves them with less time to run their businesses.
Still, that may be unavoidable, given the desire to stave off more corporate scandals and to comply with Sarbanes-Oxley requirements. "At the end of the day, CFOs have to have an enterprisewide view, and they need as much information as they can get," says Roberts, of the WCCFO. "Nobody wants to be jailed," adds Boston University's Lataif. "CFOs have to rely on good technology tools."
The Tour de Finance has just begun. Over the next few years, it will change not just the way accounting and financial planning is done but the way most companies are run. By Olga Kharif in Portland, Ore.