“I’m not blaming any meltdown in systems. This was more simple,” Rod Kent, chairman of Bradford & Bingley, told reporters in early June. He had the grim task of announcing that the UK’s largest buy-to-let bank had been hit hard by the subprime crisis and needed to raise more than the £300m (€380m) it was expecting from a previously announced rights issue. The “simple” reason behind the bank’s unexpectedly large cash call, he said, was the speed at which the executive team was getting data. “The mortgage situation changed swiftly at the end of April when arrears started rising and net margins decreased,” he explained. “We did not have access to this new financial information until the end of May.”
In a world where information is readily available from whizzy, web-enabled IT systems, few expect the pace of reporting to be the main culprit for such troubles. But for many experts, Bradford & Bingley’s crisis comes as no surprise. While it is true that since the late 1990s companies have taken great pride in their ability to accelerate the closing of their books, some have taken their foot off the accelerator in recent years. These companies harbour compliance-driven fears of disseminating inaccurate information, claiming that they now emphasise quality rather than speed of disclosure.
The argument doesn’t wash with David Jones, director of Paragon Consulting Group and chairman of BPM International. “I’m a great advocate of the fast close,” he says. “A fast close is synonymous with finance efficiency.” If systems and processes are working well, the close is too. Bradford & Bingley offers an object lesson in what happens when reporting cycles fail to keep up with the ever-increasing pace of business.
Against this backdrop, new analysis of closing cycles by Paragon and BPM shows that, unlike Bradford & Bingley, the majority of companies are speeding ahead. Over the past five years, 60% of the largest European companies have reduced the time between the year-end and their results announcements by an average of ten days. The biggest reductions have been in the Netherlands, France and Switzerland, where 70% of the largest companies have trimmed timetables by 14 days. Despite Europe’s improvements, however, Jones notes that the pacesetters are in the US. This year the average preliminary results announcement in the US took 29 days, compared with 50 days in Europe.
Digging into the European data, the star of the research is Novartis, a Swiss pharmaceuticals firm that released its latest preliminary results 17 days after its December 31st close, one day faster than the previous year. Other fast closers include Philips Electronics (21 days) and LVMH (37 days). Both Philips and LVMH are among the handful of companies that the researchers commend for “exceptional improvement” over the past five years, having reduced year-end reporting cycles by more than 40% on average. (See “Faster and Faster” at the end of this article.)
How do companies like Novartis, Philips and LVMH do it? Along with standardised processes and data sets, they have robust ERP or business process management systems enabling automated, centralised consolidation, Jones explains. He also mentions their ability to prevent inter-company reconciliations from bogging down group closes, and their desire for continuous improvement, regularly monitoring and finessing each part of a close in a general drive to make finance more efficient and add more value.
Crime and Punishment
Peter Kane understands the merits of a fast close only too well. When he was appointed director of performance and finance in 2006 at the Home Office — the government body overseeing domestic security in the UK — it took an astounding nine months to close its annual accounts. One reason for the inertia, as Kane would soon find out, was due to a newly installed ERP system suffering from severe teething problems. Amid general under-investment in finance, Kane also faced concerns about “whether the capability was in place to manage and operate the new system,” he recalls.
The situation reached a critical juncture in early 2006 when the National Audit Office slapped a disclaimer on the Home Office’s 2004/05 accounts, criticising them for not offering a true and fair view of the organisation’s finances. “It was the worst-case scenario the finance team could find itself in,” says Andrew Tivey, partner of advisory services at Ernst & Young, which was called in by the Home Office shortly after the disclaimer to help improve reporting and control.
The turnaround team addressed the problem from several angles. In order to raise the finance department’s skills levels, for example, a “buddy programme” was set up so that senior managers, including Kane, were partnered with Ernst & Young consultants. Together they agreed on a timetable of improvement, with the following two years’ accounts delivered late but as clean as possible, while the 2007/08 accounts — which are currently on target to be closed this summer — would be delivered both on time and clean. “It was important that we met those dates and got people to believe again that they were capable,” says Kane.
It was also important that other stakeholders — the National Audit Office as well as the Treasury and the Home Office’s audit committee — were involved in the turnaround. Every three months they met as members of a new assurance board to monitor the close process. Thanks to the board, there was “more of a sense of a common purpose and of tackling the problem together, rather than people just standing on the outside and lobbing criticisms or comments in,” says Kane.
Now that the Home Office is close to meeting its three-month deadline for the current year-end close cycle — a standard period for a government department — will Kane push for more acceleration? “We’ll keep it under review, but I think there are diminishing returns from a much faster close,” he cautions.
Flight to Quality
Not everyone agrees. Veteran fast-close experts, such as Erwin Schneider of Roche, believe that the faster finance teams complete close cycles, the more time they have for value-adding activities like planning and forecasting. Fast closes are a “necessity, not a luxury,” says Schneider, Roche’s head of corporate finance accounting.
Following a fast-close project launched in 2001, the SFr46 billion (€28 billion) Swiss drugs firm is today number six in the Paragon/BPM European ranking of fast closers, releasing its preliminary results 30 days after a December 31st close, eight days faster than the previous year.
When Schneider was assigned to the project, quarterly reporting took 20 days to complete, and monthly reporting simply wasn’t done. The goal was to introduce monthly reporting and shorten the close to five days thereafter.
Before this could be achieved, however, Schneider had to address internal resistance. Colleagues were concerned that the quality of the data would be affected if reports were produced too quickly. His response was, “An acceleration is only possible if you achieve better quality data,” he says. If the numbers are correct to begin with, it takes less time to check and rework the data. “For me, it was never a question of making a compromise,” Schneider says.
Hard work ensued. “If we wanted to get from 20 days to five, it couldn’t be achieved through just working longer hours or working faster,” he says. “We would have to start from scratch and rethink the whole process.” This included implementation of reporting and consolidation software, saving Roche two to three of the 15 days it was looking to shave off the process. The remaining 12 or so days were freed up through more standardisation, improved data quality and streamlined processes. And like at the Home Office, training — particularly in accounting — was a key factor in the initiative’s success. Some 700 employees have since taken part in an internal training programme at Roche.
Now that the company is able to produce timely, data-rich monthly reports, the focus is on quality control. Today month-end reports from operating units are benchmarked against 10 criteria, such as the number of corrections group finance has to make. The results are then made available to all units. “This is an efficient and effective communication mechanism for us to give feedback on where [the units] need to improve, but it also exerts pressure on local affiliates to do a good job,” says Schneider.
The reporting team at Roche’s headquarters in Basel is also improving its own performance. “We have a monthly process with some 200 tasks, which are planned to the hour, to the person,” notes Schneider. “Everyone knows who has to do what by when.” For year-ends, the number of tasks increases to around 1,000, but much of the monthly and quarterly work essentially feeds into this process.
Though the company “absolutely achieved” its objective, in Schneider’s opinion, Roche is not standing still. “Even if we are now saying we are satisfied with the five-day close, this whole fast-close project has shown and instilled even more innovation on the finance side,” he asserts.
As Bradford & Bingley executives face shareholder anger this summer, they will likely rue the lack of such innovation, and launch projects to speed up the flow of information inside the company. After all, there is no time to spare.
Eila Rana is senior editor at CFO Europe.