Few analysts have a better perspective on the state of corporate financial management than Robert Kugel, CFA. As senior vice president and research director at Ventana Research, Kugel heads up a financial performance management practice focused on the application of IT to financial process optimization. Since earning an MBA in finance and accounting at Columbia more than 20 years ago, Kugel has been an equity research analyst at First Albany Corp., Morgan Stanley and Drexel Burnham; a McKinsey consultant; an Institutional Investor All-American; and a Wall Street Journal All-Star. He has hands-on experience in the aerospace and defense, banking, manufacturing, retail, and consumer services industries.

Recently, Teradata Magazine sat down with Kugel to explore how CFOs can better leverage IT to provide financial analytics that improve enterprise performance.

Robert Kugel, CFA, senior vice president and research director of Ventana Research, says financial organizations need to learn how to ask their IT systems the right questions.

Q Where do you see the greatest opportunities for finance to better leverage IT resources to enhance its value to the organization?

A I think the broader issue here is that people in finance organizations are often not aware of the capabilities and limitations of IT. Frequently they ask IT systems to do the wrong things and don't know how to ask them to do the right things.

For example, there are a lot of aspects of ERP [enterprise resource planning] systems that are structured to look like automated versions of paper-based systems. The notion of ledgers and sub-ledgers is really a practical necessity in paper-based systems but not in computerized systems. Many companies don't use end-to-end processes because their thinking is still constrained by the limits of their old paper-based systems, and their new electronic systems continue to foster those limits.

Now, it may be that they have simply structured their electronic systems as automated versions of their paper-based systems, but that structure doesn't deliver the real potential of computer-based systems. It's the proverbial paving over the cow paths rather than rethinking the process.

Think about how accounting practice would have evolved if relational and multi-dimensional databases had existed when double-entry bookkeeping was invented. They would absolutely have used those structures; it's a much better tool for diving into the minutiae than the typical general ledger structure. But now we have general ledger structures in computerized systems that are throwbacks to paper. It's very primitive.

Q To the degree that it's a mind-set that's the obstacle, not the technology, how do you deal with that?

A Well, I guess that's my mission in life. You deal with it through endless repetition, and ultimately people will see that there is a better way. But it's going to take time, and the people that are in front will reap the benefits, because understanding how to use technology in the finance organization will produce far more effective and efficient results.

Q According to your reports and articles, the value of data is directly related to the availability of supporting context. You've drawn attention to the lack of operational and competitive data in many ERP systems, and you've campaigned for better integration of planning and budgeting data to improve both processes. Is some infrastructure-level support for data consolidation and integration a prerequisite for improving finance management?

A Infrastructure-level support for data consolidation and integration are required if you want to succeed at finance management, because the reality is that an effectively built data infrastructure is the backbone of decision support. You've got to ask whether the absence of data is preventing you from achieving objectives. Are people and man-hours that should be applied to high-value activities being diverted to lower-value ones? Are errors making your processes unreliable? What's the root cause of those errors?

These are simple questions to ask but difficult ones to answer, because companies are all over the map. Mid-sized companies have one set of infrastructure issues; smaller enterprises have another. The largest companies have the most difficult data issues to address, and the level of complexity increases exponentially. Simplifying and consolidating systems becomes far more important.

Q The expanding capabilities of ERP solutions seem to parallel the increase in data warehouse functionality. How do you differentiate the potential contributions of ERP and data warehouse systems to financial performance management? Is there an optimum distribution of roles and responsibilities across the two types of systems?

A One of the things we've found is that companies are both asking too much and too little of their ERP systems. They ask them to do things they're really not designed to do efficiently and simultaneously don't ask them to do enough of the things they really could do better. In large organizations particularly, it makes sense to centralize data handling and analysis. That's an example of something ERP systems should be doing less.

The root cause of this is confusion in the minds of people in finance organizations about which functions you should centralize within your ERP system and which things it really isn't designed to do efficiently.

Q That said, do you think ERP systems can meet the needs of next-generation finance capabilities?

A When I talk about ERP I mean the components of the traditional transaction processing and record keeping system such as the general ledger, inventory and fixed asset management, et cetera. Today, most software companies that have been major ERP players also offer other enterprise software, including information management, performance management and analytical applications. An ERP system alone is inadequate for the analytical needs of today's financial organizations. Companies increasingly need an integrated view of their business that brings together financial and operational data and the capability to easily and flexibly analyze and report on all aspects of their business in a way that is relevant to the recipient of that information.

ERP systems alone were not designed to meet the needs of these requirements. And it is not advisable to attempt to meet both the operational and analytical needs of an organization from this single system because of the inherently different natures of the two challenges. Now, if your ERP system provider offers a range of software, it may make sense to use some of their other applications, but not necessarily. Most larger companies have software from many different vendors—usually more than one for ERP—so buying other software from an ERP company won't necessarily drive the benefits you would get if everything really were running on a single system.

Q You've pointed to business performance management and automation as essential tools for improving efficiency, both in financial and operational performance. In your opinion, where does a modern data warehouse—one with active feeds, operational workloads and near real-time transactional data—fit in the effort to build and automate end-to-end business workflows?

A It definitely removes barriers to automation and to management by exception. And as you automate routine tasks there's more time to spend on the things that really matter. So instead of having MBAs wasting time making spreadsheets—because that's the only way you have of getting together information from various systems for analysis—you set up repetitive analyses within IT systems that are completely automated. You free up those very intelligent people to go do more value-added stuff—analysis, commentary and recommendations—that improve operating results.

Q So if you fix the data infrastructure, automate processes, build exception reporting and event triggers to identify areas of concern—are there opportunities to link financial results and analyses over to the operational side of the business? And how does that change the way you run your business?

A Well, the consequences of change in the environment definitely become evident sooner, so you can take informed action faster. That's the magic of having a combination of the financial and operational data readily available and part of an ongoing business analysis process.

I've done workshops where I've asked people what leading indicators they use in their business, and the response has been silence and blank stares. But people need to begin thinking about business in those quantitative terms. They need to begin running the business by plan, not just by budget, and planning means working with things, not just money. If you don't have plans in place that are driven on the underlying detail of "number of units times rate," it's awfully difficult to disaggregate when things go wrong. So planning is vitally important, but it requires that you have both an operational and financial view of the company.

Q That requires you to spend the hard work and time to understand what the real drivers of your business are, and what the connection points are. But that quantitative understanding gives you a concrete basis for planning. If you want to increase the number of deals you're doing, it helps to know your close rate, and how many proposals your sales force is generating per capita.

A Right. If you're going to grow revenue by 10 percent through price increases, there's no point in adding accounts receivable clerks, because they're going to be handling the same number of invoices. That part of the business should not be given a 10 percent raise. But when budgets drive everything, people aren't necessarily looking for ways to optimize the business.

You have to analyze and plan to discover what trade-offs are necessary to achieve an objective. What things are possible? Which are easy and which are hard? It's not that people don't do this, sort of. But the difference between sort of doing it and really doing it well is the difference between second place and success.

Q The entire point of any analytic solution is to help grow a company's bottom line. How can finance organizations help their marketing and operational managers understand profitability at a more granular level—whether based on individual customer, product or account-level views?

A The whole notion of how you measure customer profitability is still very much a work in progress. Certain industries and companies that were fortunate enough to have the right structure and the right data are doing it really well. But even in industries like retail banking, where customer profitability has been in the forefront of people's minds for a couple of decades, it's still a struggle to figure out how to measure and manage it. It's extraordinarily complicated and it's deeply entangled with your strategy, among other things.

But there are techniques for activity-based measurement and management that are better than they were in the past. There's a whole data dimension involved that you have to manage to do the analysis. But identifying your most and least profitable customers and products is an area where most companies can do more, and probably should.

Q What's the upside for a finance organization that successfully delivers an effective set of financial performance management tools to the operational side of the business?

A Well, I think it gets to the question, "Do you sincerely want to change your life?" If you truly want to play a role in the operational success of the company, then you will concentrate on becoming more effective through more effective use of IT. It's as simple as that. The upside is that your work will be recognized as more important. You will be seen as an operating partner who's providing information and processes that enable others to succeed. If you play the role of lifting unnecessary administrative burdens off of people's shoulders and making it easier for them to do the work they're supposed to be doing, you're going to contribute to the success of the company and boost morale while you're at it. T

Bill Tobey is a senior technology writer at Ford Sherman, a communication services agency.

Teradata Magazine-December 2007