It wasn’t too long ago that corporate accountants could take their time assembling, analyzing and packaging financial data for executives. It took a while to massage the numbers, but that wasn’t a problem because the competition was moving at the same sluggish pace.
But in the past few years, as e-commerce has sent business time lines into warp speed, annual budget cycles and monthly financial reports have proved to be inadequate tools for managing the rapid pace of change at many companies. To keep up, many have adopted real-time reporting.
According to International Data Corp., spending on real-time reporting reached US$1.05 billion in 1998. According to IDC analyst Henry Miller, the total is expected to exceed US$4.1 billion by 2003. That figure includes worldwide spending on end-user query and reporting software.
A major factor in the growth of real-time reporting is the fact that e-commerce makes it possible to gather more data significantly faster than before. At the same time, production cycles are shorter and the pace of innovation has accelerated.
Traditional financial managing and reporting systems weren’t created to deal with such a fast pace. “Budgets tend to be retrospective,” says Randall Russell, director of research at the Balanced Scorecard Collaborative Inc. in Lincoln, Massachusetts. “They give you a view of what happened last time, but don’t tell you what the drivers are for next year.”
A senior manager should be focused on strategy rather than the annual budget, Russell added. “An annual budget cycle is woefully inadequate for today’s competitive environment,” he says. “If you look at the market – look at competitive dynamics – it’s a recipe for disaster.”
A NEW ECONOMY COMPANY
In September 1995, The Dow Chemical Co. in Midland, Michigan started planning its real-time reporting system. It went live in January 1997, and received national recognition for its innovative and effective methods.
Today, all the information the company tracks is done by an automated, paperless system. “We opted to create a global data warehouse and a series of data marts,” explains Mike Costa, Dow’s director of finance. “Then we deployed some enterprise software – specifically Business Objects and Power Play. So we went from a batch mode with paper reports to pretty close to real time.”
Real-time reporting allowed Dow to retire about 1,300 legacy logistics and manufacturing systems, and made it possible to get reports to management instantly, says Costa.
At Dow, 30 data marts – or mini-data-warehouses – cover areas such as maintenance, logistics, inventory management, sales management, production, expense reporting, capital spending, fixed-asset monitoring and personnel data.
This data is constantly made available to about one-third of the company’s 39,000 employees. “It starts with senior management and goes right on down to the people who are doing day-to-day operations,” says Costa.
A handful of standard reports are available, but most users build their own reports out of whatever subset of the warehoused data they need. “They’re easy to do,” Costa says. “So the big savings is instead of trying to design hundreds of reports for people, you empower them to get what they need.”
Research from Balanced Scorecard shows that nine out of 10 companies fail to execute the strategies they set for themselves, that only 5 percent of employees understand company strategies, that 60 percent of companies fail to link their budget to their strategies and that 85 percent of companies’ executive teams spend less than one hour per month discussing strategy.
Russell suggests companies keep an eye not only on income and expenses but also on such areas as customer satisfaction, internal processes and employee growth and learning.
Companies can determine which reporting cycles work best for them by looking at how decisions need to be made. For example, decisions pertaining to pricing, including raw material costs or competitors’ price cuts, require up- to-the-minute data. However, decisions regarding fixed assets can wait longer.
The process turns conventional financial reporting thinking on its head, says Jon Scheumann, a consultant at Boston-based Gunn Partners Inc., who helps companies make the transition to real-time reporting.
“It’s almost like reverse logic. You have to think backward from decision to information, then to the cycle times,” says Scheumann.
Once the critical data is identified, it can be collected in a central data warehouse and made available to everyone who needs it. According to Scheumann, automation usually pays for itself in 18 to 24 months or less.
He warns, however, that the savings aren’t always obvious.
“What you’re doing is looking at making investments to have a positive impact on the performance of the business,” says Scheumann. “That could show up in increased market share or increased profit margin – you have to be insightful and creative as to how you look at cost benefits.”
Automation price tags could run to the millions of dollars for companies that start from scratch, says Neil Lazar, a director at AnswerThink Consulting Group Inc. in Hudson, Ohio. But the costs can be much less for companies that already have enterprise resource planning systems and a fair amount of integration between operational and finance systems.
However, if a company wants to do real-time reporting manually, it should rethink what reports are needed, says Lazar. “You want to do as little of it as possible because it’s very time consuming and very labor intensive,” he says.