PARTIAL CLEARING
Budgeting software isn't the key to corporate finance reform, but it can help CFOs manage expectations in a tricky economy.
By Tim Reason and Karen Winton

Budgeting and planning (B&P) software vendors in Asia are licking their lips in anticipation of increased sales to the region's CFOs in the wake of the signing of the US' Sarbanes-Oxley Act six months ago. Calls for greater corporate accountability and governance, increased reporting requirements, better signing off on a company's books, improved ability to review and change budget and revenue forecasts and - more importantly - ensure their accuracy, have prompted vendors to tout their applications as cure-alls for the new compliance headaches the act created.

Of course, Sarbanes-Oxley never mentioned software and has little, if anything, to do with budgeting and planning. The act doesn't even include specific rules for market guidance - the one area of disclosure typically based on output from B&P software. And while it may be true that financial software in general can help strengthen controls within business units, such claims ignore the fact that the recent scandals were caused by the misdeeds of executives, not workers. "If Enron had the most sophisticated enterprise performance management tools, do you think it would have made different decisions?" asks Lawrence Serven of US-based research and management consulting firm The Buttonwood Group. "Of course not."

But overeager public relations aside, the pitch from software vendors isn't totally off base. Although the legislation doesn't directly address guidance, investor skepticism gives companies worldwide plenty of reason to shore up the consistency and accuracy of their forecasts.

According to Ray Kloss, director of product marketing and industry solutions in Japan and Asia Pacific for vendor PeopleSoft, the new "regime" based around corporate accountability and corporate governance has had a two-fold impact on the way CFOs in Asia Pacific want B&P software to work. First, they want the ability to assess, much more quickly and accurately, when - and where - there's going to be a deviation from the budget; and second, they want to use B&P software to parcel out responsibility for signing off on a company's books.

"CFOs are trying to use the software in a much tighter - almost a weekly level - cycle to identify first, if there's anything that would normally be hidden and second, to try to get transparency around where things are not going according to what the budget intended," says Kloss. For example, if one financial metric goes haywire, revenue might become a problem and as a result of that problem, other issues - such as expenses going out of line or costs starting to rise - come to the fore. "What would normally in the regular metrics not appear to be a big deal, when it's cascaded through the finances can be quite a deviation from the planned budget," says Kloss.

Indeed, the vagaries of today's economy have made the ability to quickly adjust forecasts essential. In a survey conducted jointly by CFO Research and Cap Gemini Ernst & Young (E&Y) just after the WorldCom scandal broke last year, 81 percent of CFOs said that accuracy of revenue and earnings forecasts was their highest priority, and 63 percent complained of inadequate, poorly integrated budgeting and forecasting systems.

Kloss adds that although CFOs are, ultimately, purely and wholly accountable for the books, "they want a few more butts on the line". He says that he has seen an increase in the number of CFOs using B&P software to parcel out responsibility - not relinquish it - and push departmental managers to sign off not only on their budget but also on their ability to achieve it through the more regular processes of measurement and control.

The Big Package

I'm a sucker for punishment. It came out of the blue. I had some interest in international accounting standards in a general way, and I had no idea that this group was working on it. But Arthur Levitt, then the head of the SEC, called me up one day and invited me to chair the oversight board. It sounded interesting, so I did it.

What progress have you made?

The desire for integration provides additional justification for discussing B&P software and Sarbanes-Oxley in the same breath, since the software is often part of broader packages of financial software that can help with reporting and disclosure compliance.

In the US, the new law requires company management to publicly assess "the effectiveness of the internal control structure and procedures of the issuer for financial reporting" and submit that assessment to auditors - a process that certainly could include evaluations of the controls built into the reporting software. Moreover, CFOs must now disclose material changes to a company's financial condition "on a rapid and current basis," produce quarterly and annual reports faster, and, of course, certify the accuracy of the results - reporting requirements that CFOs in Australia, China, Malaysia and Singapore are also now meeting. Research by Alan Yong, an analyst with US-based computer industry research company Aberdeen Group ("Baring the Financials: More than Current Financial Systems Can Bear?" InSight, Aberdeen Group, 2002), states that these and other rules "will necessitate significant investment in financial software." Yong argues, for example, that determining whether a change is material will require predictive forecasting - assigning probabilities of occurrence to each possible scenario. "In contrast," he notes, "forecasting techniques currently used in budgeting and planning exercises look at only the most probable scenario." Implicit in Yong's assertion that budgeting functionality may need to be broader is the idea that it must be integrated with other financial systems.

"There should no longer be any walls between actuals and the budgeting process," agrees Rich de Moll, Cap Gemini E&Y vice president of finance and employee transformation, who conducted the survey. "CFOs need to look at transaction systems as initial feeders, and the general ledger and account code structure as input points. All that needs to be consistently, seamlessly integrated into the budgeting process." De Moll is agnostic when it comes to buying a single suite of software versus combining various "best-of-breed" products, and notes: "There is probably no one vendor right now that provides all that any one company needs." But, increasingly, B&P software must be evaluated in the broader context of a customer's other financial software, as opposed to being judged on its merits as a stand-alone product category.

Although not a public company, the US-based Children's Hospital Los Angeles (CHLA) illustrates the trend. It bought a new budgeting and planning system as part of a larger, enterprise-wide rollout of PeopleSoft applications. "Out of all the systems we are replacing, our current budgeting and cost accounting system is the strongest and most stable," says Tricia Cascione, executive director of IT development and contract manager. "It wasn't that it was broken, it was that the enterprise-wide system is going to replace it."

Cascione, a CPA and former finance director and controller at CHLA, oversees all non-clinical applications and implementations at the hospital. "They pretty much wanted a CFO-type over IT," she says. That's because Cascione will oversee CHLA's three-year capital budget to replace more than 25 financial applications - ranging from grant budgeting to payroll to supply chain - with the PeopleSoft suite.

Although the need to support a better budgeting process didn't drive the change, the new system will be a big improvement, says Cascione. Currently, hard-copy budgets are sent out to managers, who mark them up by hand and return them - a process that is repeated several times before all of the information is entered into Excel spreadsheets and uploaded onto the old budgeting system. Ultimately, says Cascione: "We hope to go to paperless budgeting through the [PeopleSoft] portal technology."

Cascione also expects that the new system will make it easier to run various budget scenarios. "For example," she says, "if Blue Cross says it wants to negotiate new rates, we could input them and see what the impact is throughout the organization."

Indeed, the ability to reforecast and run alternative scenarios remains of greater interest to CFOs than any improvement to compliance. "CFOs see this economic volatility staying around a while, so they need adaptability," says de Moll..

Updating the Forecast

Brian Reilly, CFO of US-based building-materials distributor Allied Building Products Corp, uses a Cognos system installed in June 2002 to speed up the company's routine evaluations of its roughly 120 distribution branches. "We take a pretty hard look a couple of times a year to see if we should get rid of underperformers," he says. The system lets Reilly model the effects of eliminating a branch location and transferring assets and inventory to other locations.

Of course, says Buttonwood's Serven, companies must be careful not to get carried away by modeling capabilities. "Companies that go overboard in modeling completely lose any sense of responsibility for making the numbers," he warns. "You can use forecasting tools as a reality check, but they shouldn't let people off the hook for delivering the revenue figures they promised. That's the difference between crystal-ball forecasting and planning management."

At Allied, for example, branch managers are compensated for staying a certain percentage over a threshold rate of return. With purchasing of materials handled by a central office whenever possible, that gives managers incentive to keep a tight grip on costs. "Anything they can do to drive out costs is very effective," says Reilly. "If they save a dollar, it's a dollar straight down."

What the Future Holds

According to CFOs surveyed by CFO Research/Cap Gemini E&Y, the finance department's ability to predict future performance is poised for dramatic improvement. While only 14 percent of CFOs report having dynamic budgeting and forecasting based on operational drivers today, 52 percent expect to have such capabilities within three years. To get there, of course, they'll need the support of senior management - and, once again, the Sarbanes-Oxley Act plays an indirect role.

"Audit committee members [now] are going to want to understand the financial system architecture," predicts de Moll, and, of course, CEOs must now certify the financial results that come out of the company's financial systems.

"If the CFO puts together a business case for integrated business processes that include budgeting and planning," says de Moll, "I think Sarbanes-Oxley should move senior management to support it." In other words, even as vendors use new legislation to sell CFOs on the importance of financial systems, CFOs themselves may be selling CEOs on the very same thing.

Tim Reason is a staff writer at CFO in the US, CFO Asia's sister publication. Karen Winton is executive editor of eCFO and senior writer at CFO Asia. Additional research for the software listing was provided by CFO editorial intern Lynn Doan.