Robert Kugel's Analyst Perspectives

People used to use the phrase “the last mile” solely to refer to a condemned prisoner’s path to execution. Then the telecommunications industry picked it up to describe that part of a circuit between a major trunk line and a subscriber. Later still a defunct software company, Movaris (now part of Trintech), used the phrase in an analogy to refer to the set of activities that take place between when a company closes its books and the point where it finishes its external reporting activities, such as disclosing periodic earnings and financial conditions to investors or filing financial statements with regulators or lenders. It was an attempt to focus attention on the need to automate and better coordinate the multiple, disparate but interconnected threads that have to be orchestrated to complete the external reporting tasks accurately and on time. Personally, I’ve never cared for the phrase being used in this context; there are really multiple “last miles,” with multiple and sometimes overlapping destinations. I prefer “the close–to-report cycle” because it’s more precise in its description, and because rather than pointing to finality, “cycle” defines it for what it is – a repetitive periodic activity. And because it is periodic and repetitive, it benefits from process optimization and automation, which can substantially reduce the effort required to complete a cycle and alleviate the stress certain departments often feel as deadlines loom.

The close-to-report cycle suffers from the same sorts of issues that hold back progress in improving the execution of the financial close. Earlier this year I completed our latest benchmark on the financial close process. The research shows that companies are taking longer to close their books (on average one day longer for both the monthly and quarterly/semi-annual close) than they took five years ago. Only 15 percent of companies say increased regulation and a poor economy have been issues that lengthen their close. Instead, the research suggests that the biggest factor lengthening the financial close has been the persistence of heavily manual and overly complicated processes coupled with a general reduction in headcount in finance organizations since the onset of the last recession. With fewer hands to do the work, it takes longer to complete the accounting cycle.

The same issue is at play in the rest of the close-to-report cycle. Creating external reports requires considerable choreography, especially in larger companies, because it requires the efforts of multiple people in multiple functions in multiple locations. These sorts of reports bring together data from multiple sources, not just from the financial consolidation system. They are assembled in a template (sometimes one that is legally or contractually determined) and consist of boilerplate sections, text-based narratives, tabular presentations of data and references such as footnotes. Happily, these are just the sort of documents that lend themselves to automation. Today, this software is most often part of a broader financial performance management suite offering.

In many respects, I think the United States Securities and Exchange Commission (SEC) did large and even large midsize companies a favor when it implemented its interactive data mandate, which requires companies tag their periodic reports using eXtensible Business Reporting Language (XBRL). Since companies are already pressed for time to complete their periodic filings, the tagging requirement has forced some to automate their close–to-report cycle in order to complete a heavier workload with no change in reporting deadlines. Using software to manage and automate the process speeds up this repetitive task, as built-in process management functions streamline handoffs and reduce administrative burdens. The software diminishes the potential for errors and cuts the amount of time required for editing and correcting documents. If the technology is used properly, I expect some if not most companies can produce XBRL-tagged SEC filings sooner and/or with less effort than they manually create filings without the tags.

Moreover, companies can use this sort of software for more than just creating and editing XBRL-tagged documents. Finance departments can and should use the same application to manage the creation of all of their external reports that involve combining numerical data (both financial and operational) with written narratives. Examples include reports to non-financial regulatory authorities and reports required by lenders or lienholders. (In time, it’s probable that some or most of these parties will require tagging.) Businesses may also find generating reports useful for internal purposes, such as those for the board of directors or the audit committee,

Every organization should eliminate wasted time in the financial close and in the creation of reports that follow from it. Such time could be better spent on other activities, such as enabling a company to consider different reporting options or allowing for deeper analysis. To date there’s been encouraging initial adoption of automated tools, but too many companies still rely on purely manual processes. We include automation of the close-to-report cycle in our Financial Performance Management Value Index because it’s essential to the efficiency and effectiveness of the finance function.

For too many companies, the close-to-report cycle is a nerve-wracking, nail-biting exercise of lashing together numbers and narrative, checking and rechecking to ensure accuracy and (for those reporting to the SEC) tagging these reports. It’s time for companies to put a smile in their last mile by automating a process that clearly benefits from eliminating time-wasting manual effort.

Regards,

Robert Kugel – SVP Research