Ventana Research Analyst Perspectives

Digital Process Reengineering Improves Business Performance

Posted by Robert Kugel on May 28, 2021 3:00:00 AM

Business process reengineering (BPR) was a consulting fashion in the early 1990s that spurred many companies to purchase their first ERP systems. BPR proposes a fundamental redesign of core business processes to achieve substantial improvements in market and customer responsiveness, productivity, cycle times and quality. Those early ERP systems provided a platform to manage cross-functional business processes with much greater flexibility and efficiency than had been possible in the past, partly because it took advantage of the commercialization of relational database technology, the graphical user interface, client-server networks and event-driven programming. ERP and other digital systems support business process reengineering by guiding the step-by-step execution of the redesigned process to ensure that it is performed consistently. They also automate the handoffs between individuals and departments as well as manage approvals and exceptions to accelerate completion of that process and permit supervisory personnel to spend more time focusing on matters that require their judgement and experience and less time on administrivia.

These days, the term “digital transformation” is in vogue. This sort of process reengineering employs technologies that provide organizations more options to redefine how existing work is performed or to extend the range of tasks that a company’s technology systems manage. The objective of a digital redesign is not just efficiency gains. It aims to use new technologies to redefine business models advantageously or alter an industry’s competitive balance of power – in other words, to create “digital disruption.” In finance and accounting, digital process reengineering can increase the effectiveness of the department by eliminating the need for low-value manual work that can be performed and supervised digitally so that the staff can focus on work that makes best use of their training, skills and experience.

Businesses operate in the same way as a basic control system’s iterative four-step process: sense, interpret, decide and act. Digital process reengineering can be applied at any step of that process. For instance, the internet of things (IoT) extends the range of sensing devices and therefore expands the depth and resolution of the conditions affecting a business that a digital system can monitor in a continuous and timely manner that humans cannot duplicate. In business, for example, this can mean monitoring external data about environmental conditions (such as weather or soil moisture), market prices or consumer sentiment. Organizations might have embedded sensors, subscribe to data services or use robotic process automation (RPA) to collect an ongoing stream of digital data for analysis and determine how best to deal with conditions that are out of tolerance. Systems also can keep close tabs on business-transaction data or equipment health to support a just-in-time maintenance program that reduces unplanned down time and cuts maintenance costs.

In another area, big data management and processing techniques make it possible to handle the torrent of data from digital sensory devices as well as digital feeds from multiple sources to enable systems to interpret relevant external signals that the system is designed to use. Machine learning (ML) and artificial intelligence (AI) can reduce the need for human intervention in the four-step process, resulting in faster, more consistent execution by using automation to eliminate, in some cases, the need for a human to be in the loop. In other cases, using AI to provide guidance on alternative courses of action and potential outcomes along with a score of the reliability of the advice. Digital technologies expand the range of decisions that control systems can handle on their own. And the digital output of the control system can, for example, drive the completion of a transaction, provide input to a robot or generate an alert that requires a response by a human.

The Office of Finance has a wide range of functions and processes that are ripe for digital disruption. My research covers five topics related to digital process reengineering. First, I have been using the term continuous accounting for the past five years to describe a technology-led approach to managing the department. In part it means distributing workloads more evenly across the accounting calendar. That is important because historically it was necessary to bunch up workloads at the end of the month and quarter because of the limitations of paper-based systems. Unfortunately, until recently, even computer-based accounting, including close-related tasks, required batch processing or very long processing times which, in effect, required the same sort of end-of-month and end-of-quarter bunching up of work. Today, systems offer greater flexibility, meaning that many tasks, such as reconciliations, can be done weekly, reducing the amount of end-of-period work. This can shorten the close and de-stress the department, two important benefits. Our Office of Finance Benchmark Research identified a link between the use of software automation and length of the accounting close: fully 88% of organizations that use automation in substantially all of their close processes are able to complete the quarterly close within six business days compared to 59% that had applied it to some parts and just 40% of those that employ little or no automation.

Ventana_Research_Benchmark_Research_Office_of_Finance_19_19_Automation_Speeds_the_Close_20201110 (2)Second, the central ledger is designed for larger organizations with multiple ERP systems. The idea here is that every accounting transaction in every system is cross posted to a central ledger, which makes it possible to consolidate the books at any time, as often as desired, which can shorten the close. A central ledger also can be used for a synthetic close, a novel approach that creates virtual journal entries, allocations, accruals and so on to reduce period-end workloads and provide a very close approximation of the top-level financials at any time.

Third, I coined the term integrated business planning back in the 2000s to describe a process built on a unified software-and-data platform that enables each department and business unit to plan and budget in a manner that works for them, but the output of those plans can be shared and integrated across the entire enterprise. It is integrated because it brings together operational and financial plans and it is also integrated because it plans the income statement, balance sheet and cash flow statements concurrently. Our Business Planning Benchmark Research found that integrating planning is a more effective method: 66% of companies that directly link data to organization-wide plans have a process that works well or very well, compared to 40% where the information is copied and pasted and 25% where there is no linkage.

Ventana_Research_Benchmark_Research_Next_Generation_Business_Planning_02_integrated_planning_works_better_200210 (1)Number four on the list is the virtual audit. This is not the “remote audit” that companies adopted over the past year during lockdowns, which is just the same as on premises, except done remotely. The virtual audit is a different, open-book approach that gives the external auditor read-only access to financial systems. It replaces the time-consuming and burdensome “provided by client” list of documents, freeing up considerable amount of staff time. Ideally, some audit work is spread out over the calendar, enabling companies to address issues before year end and shortening the auditor’s workload for the annual statement. I assert that by 2025, more than one-half of organizations will have adopted some form of a virtual audit, saving staff time and cutting departmental costs.

VR_2021_Digital_Finance_Assertion_1_Square Virtual auditAnd fifth, as economies become more integrated and laws and regulations become more complex, companies that operate in multiple countries must use technology to manage their global tax exposure. There is great potential to apply AI to tax management because there is a considerable deal of ambiguity in tax codes. AI can automate the straightforward stuff giving professionals more time to focus on complex issues. And companies that have significant intercompany accounting volumes should adopt intercompany financial management (IFM), a term Ventana Research applies to a discipline for structuring and handling transactions within a corporation and between its legal entities designed to maximize staff efficiency and accounting accuracy while optimizing tax exposure, minimizing tax leakage and ensuring consistent tax and regulatory compliance. Today, IFM is an obscure topic, but I assert that by 2025, one-half of organizations with 10,000 or more employees will have implemented intercompany financial management to achieve tax, risk-management and financial-close benefits.

Digital process reengineering is not entirely new. In the 1990s, for example, 24-hour loan approval became possible using optical character recognition to accelerate processing of loan applications and using IT systems to manage parts of the approval process in parallel, rather than serial, fashion. It relied heavily on an early form of big data analytics - the credit score - to support the decision-making process. Organizations have been using digital technologies since then to make incremental breakthroughs to achieve business breakthroughs. What is new today is the scope, scale and availability of the technologies and techniques that will make digital process reengineering a common feature of business management.

Using digital process reengineering successfully will be an increasing challenge for business executives. They need it to respond to the digital disruptions that are increasingly common as entrepreneurs utilize available technology innovations to create new product or service categories or create more effective business models to compete with established ones. It is equally important to be able to distinguish between the overblown or immature technologies fancied by technologists that will have limited market impact and those that represent real opportunities for those who understand how to exploit them.

Regards,

Robert Kugel

Topics: Office of Finance, Business Planning, Financial Performance Management, ERP and Continuous Accounting, robotic finance, Predictive Planning, lease and tax accounting

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.