Ventana Research Analyst Perspectives

Modern ERP Improves Organizational Performance

Posted by Robert Kugel on Apr 16, 2021 3:00:00 AM

The ERP system is at the core of nearly every organization’s record keeping and business process management. Its smooth and uninterrupted functioning is essential to an organization’s accounting and finance functions. In manufacturing and distribution, ERP manages inventory and logistics. Some organizations use it to handle human resources functions like tracking workers, payroll and related costs.

ERP systems were a major advance in business computing when they emerged in the 1990s, but their subsequent evolution was slow and mainly a series of incremental refinements. Now, the technology underpinnings of ERP systems have begun to change fundamentally, which will enable organizations to restructure and redefine core departmental processes in ways that add considerable value to what is mainly an administrative function. Our ERP research includes work in four advanced uses of technology with the ability to substantially improve the performance of ERP systems, and in turn, the performance of finance and accounting departments. These uses are:

  • Continuous accounting
  • Digital finance
  • Virtual auditing
  • The central ledger

I’ve been using the term “continuous accounting” to describe an approach to managing accounting operations that improves departmental performance by distributing workloads continuously over the accounting period to eliminate bottlenecks and optimize when tasks are executed. Much of what we think of as “normal” departmental procedures are rooted in the centuries-old limitations imposed by paper-based systems and manual calculations. Periodic processes came about because they were the best approach to organizing, coordinating and executing the calculations needed to sum up the debits and credits in journals and ledgers. Today’s ERP software offers organizations greater flexibility to schedule how and when they perform their work. The traditional monthly, quarterly and semiannual cadences of the accounting cycle are no longer set in stone. The timing of tasks in these manual systems represents a trade-off to optimize efficiency and control — waiting for a sufficient volume of entries to justify taking accountants temporarily offline to perform manual summations, adjustments and consolidations, while not waiting so long as to jeopardize financial control.

Ventana_Research_Benchmark_Research_Office_of_Finance_19_15_A_Fast_Quarterly_Close_20200924 (1) (1)Until recently, most ERP systems were not able to process transactions data fast enough to provide organizations the option to schedule their accounting cycle tasks and distribute workloads across the period. Today’s ERP systems have this capability, which can better utilize accountants’ time, reduce the stress caused by heavy workloads with short deadlines, and accelerate the close because less work must be done at the end of the period. Closing sooner provides corporations more time to perform analysis of the period and craft the management discussion and analysis (MD&A) of the results, which is especially important for publicly traded companies. Completing the close earlier also provides executives and managers with performance information sooner, enabling them to respond to issues and opportunities faster. Yet, our Office of Finance Benchmark Research revealed that one-half of organizations take longer than six business days to complete their quarterly close compared to a generally accepted benchmark of one business week.

Digital finance may sound futuristic, but the technologies are already here and will evolve rapidly over the next five years. One way in which digital finance affects ERP systems is the use of application programming interfaces (APIs) and robotic process automation (RPA) to mechanize repetitive, data-related manual tasks. APIs and RPA enable organizations to maintain data integrity continuously in end-to-end processes that span multiple systems. This is the second pillar of continuous accounting. Moving data manually by rekeying it or using spreadsheets is time consuming, and because it introduces the possibility of data errors and inconsistencies, requires further time-consuming checks, reconciliations and corrections to ensure that all financial systems “tick and tie.”

Digital finance also includes artificial intelligence (AI) using machine learning (ML), which is poised to become a core capability of ERP systems. Accounting involves repetitive actions such as invoice processing and payment matching that follow a set of rules AI can automate, saving considerable time. AI-enabled ERP will be able to monitor individual and departmental processes to automate whole sequences, ensure consistency and supervise data entry for errors and omissions. AI will also reduce staff training requirements as the system “learns” how to navigate a sequence of steps in a process and guides a new or temporary hire through them. However, vendors face the challenge of translating AI’s potential into products that work well enough to avoid frustrating users. Past examples of failed computer-enabled systems include the Apple Newton, which famously botched its handwriting recognition capability, and Microsoft’s “Clippy,” which was supposed to be a reliable assistant helping Office users to perform standard tasks.

VR_2021_Digital_Finance_Assertion_1_Square (1)A third capability of modern ERP software, especially cloud-based systems, is its ability to support what I call a “virtual audit". When offices were locked down, external auditors were forced to do remote audits, which are largely the same as an on-site audit, but with little or no face-to-face contact. A virtual audit uses technology to redefine and streamline how auditors conduct an annual audit by providing direct but controlled access to an organization’s finance and accounting systems. The objective is to make the process as self-service as possible for the auditor. The key is having the appropriate technology in place. In the case of ERP, accessing a cloud-based system poses fewer potential issues than those deployed on premises, but on-premises systems do not necessarily prevent a virtual audit. We 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.

Finally, technology will enable larger organizations to adopt what I refer to as a “central ledger” approach to recording accounting transactions to address issues arising from the need to consolidate the accounting recorded in multiple ERPs, which is a common problem. Our Next-Generation ERP Benchmark Research found that 69% of organizations with more than 1,000 employees have ERP systems from multiple vendors. Consolidating the accounting information from more than one system is always time consuming.

In a central ledger structure, there is a single “headquarters” ERP that combines transactions from every ERP and/or financial management system in the organization. Transactions entered into each of the systems are cross-posted to the headquarters ERP system, and any adjustments made within the headquarters system is cross-posted back to the ERP of origin. A central ledger approach enables an organization to do a rapid close at the corporate level by combining all accounting data, automating reconciliations, and applying continuous accounting principles to reduce period-end workloads. A central ledger can also provide senior executives greater visibility into an organization’s financial condition on an ongoing basis.

VR_2021_ERP_and_Cont_Acct_Assertion_1_SquareAlthough the concept of the central ledger is straightforward, making it work has so far proven problematic. Ultimately, though, the kinks will be worked out and the central ledger will become the preferred approach to consolidating disparate ERP systems. Indeed, by 2025 Ventana Research asserts that one in five organizations with 1,000 or more employees will have a central ledger accounting architecture, enabling them to do a continuous virtual close.

ERP is a bedrock technology in every industry and all but the smallest organizations. Finance and accounting departments have harnessed technological advances to transform and streamline operations. Moreover, the nature of business and services is changing, as are the expectations of customers and workers. There is a demographic shift underway in the ranks of senior executives and managers as Baby boomers are being replaced by a generation who grew up with computer technology. Those just entering the workforce have never experienced a world without the internet and would have trouble identifying a floppy disk. Consequently, expectations for how software should behave have never been more demanding, stoked by familiarity with user-friendly consumer applications. This demand is putting pressure on vendors to offer software that is capable and easy to engage. Finance executives must embrace these evolving technologies to ensure that their department performs to its highest potential.

Regards,

Robert Kugel

Topics: Office of Finance, Financial Performance Management, ERP and Continuous Accounting, robotic finance

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.