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Virtual Close: Not So Fast

Companies once assumed they'd be able to close their books in a day, but that goal has proved surprisingly elusive.

Whatever happened to the “virtual close”? Three years ago, as E-business dominated corporate agendas, it seemed that all companies would soon be able to close their books and produce financial statements in scarcely more time than it takes to click a mouse. A handful of companies, notably Cisco Systems, were lauded for showing the way. By 2000, in fact, Cisco CFO Larry Carter was almost blasé about his company’s hard-won ability to close its books quickly, noting that the real achievement was not the fast close per se but the better decision-making it allowed.

Yet research by KPMG Consulting Inc. shows that companies have made virtually no headway in achieving the virtual close. Surveying 550 companies, KPMG found that the average close took 8 days in 1999; two years later it had decreased by just 1 day. When you look at the entire process — closing the books, getting preliminary results to management, having auditors sign off on the results, and issuing a press release — no progress at all has been made. The typical respondent needed 34 days to achieve that in 1999, and the same number last year.

Details, Details

What’s gone wrong? For one thing, “executives are simply underestimating the amount of work that it takes to tighten the cycle,” says Jens Raschke, a senior manager at KPMG. “They understand that there’s a problem, but they often think the solution is just a matter of reducing cycle times with new, flashy technology; they don’t see that it’s about going down into the small details that are causing the problem and fixing them, one by one.” Put another way, ultimately it’s about process, and changing processes requires strong leadership and sustained commitment.

There’s another reason that CFOs cite for their slow reporting — fear. Mindful of reporting-related corporate scandals, companies are understandably concerned about jeopardizing the quality and credibility of the information they report for the sake of faster cycles. It’s a valid concern, but that is no excuse for CFOs to stop driving through improvements, says Raschke. “There doesn’t need to be a trade-off,” he says. “Remember, the only way you can get faster is if you improve the quality of your processes.”

Someday, but Not Today

Besides, with the credibility and integrity of corporate disclosure practices now under heavy scrutiny by regulators and investors alike, any move to improve the timeliness — not to mention the accuracy — of the information a company discloses is welcome. As Eve Greb, a ratings specialist at Standard & Poor’s, puts it: “From our point of view, [world-class fast closes] have a positive effect on the company.” She agrees with one CFO’s assessment that “it shows that management is on the ball.” Greb was speaking before the Securities and Exchange Commission voted 5­0 to require companies to produce more-timely quarterly and annual statements as a way to boost investor confidence. Meeting those new requirements (10-Ks must now be filed 60 days after the close of the fiscal year versus 90, while quarterly reports must be filed within 35 days versus 45) won’t require real-time capabilities, but they do add impetus to a movement that seemed inevitable two years ago but then foundered.

Some companies believe they can deliver real-time closes eventually, but the majority concede that for now, they need to address such nitty-gritty issues as systems standardization and integration. Best-in-class companies such as Cisco offer some object lessons. First, all make sure their processes and procedures are consistent and reliable by, for example, introducing a single chart of accounts for their entire organization. Second, they have standard, companywide data warehousing or similar technology, and have automated most — if not all — of their processes. More often than not, that means they’ve installed Web-based applications or interfaces to connect consolidation tools and local companies’ general-ledger systems. Finally, fast-close projects at best-in-class companies are a work in progress, requiring continuous vigilance and rejuvenation.

Drilling Down

One new champion of the fast close is Germany’s Veba Oel. The $26 billion oil and petrol-retail company recently took 18 months to complete a fast-close project, “and we’re still learning,” says Bärbel Klatt-Seipelt, who began leading the project in 2000.

The learning curve has, in fact, been steep. Before the project began, fast closes at Veba Oel “were in many respects a mess,” says CFO Thomas Hetmann. A big part of the problem was that few processes were standardized across the company, which comprised three businesses for marketing and distribution, refining, and upstream production, with about 100 subgroups filing reports to them. The upshot: Hetmann’s team in Gelsenkirchen faced the monthly chore of chasing late reports, manually keying in missing data, and addressing discrepancies between the various units’ reports in order to close its books.

Needless to say, fast closes were unthinkable. “It was so frustrating for staff to deal with all our inefficiencies that they had pretty much given up trying to be fast,” says Hetmann. But pressure to be faster was mounting — E.On, Veba Oel’s parent at the time, needed to begin moving toward quarterly reporting to meet stock-exchange regulations in Frankfurt.

So Klatt-Seipelt got to work, rooting out the “information bottlenecks” at the local level while also holding workshops with unit heads, accountants, controllers, and auditors to discuss how books were closed “product by product, process by process.” From there, the final pieces were put in place: new consolidation software for the entire group was rolled out and the company’s first-ever standardized, groupwide chart of accounts was introduced. Fast closes today are a “nonevent,” says Klatt-Seipelt, who adds that group-level intercompany reconciliation now takes less than a day a month compared with four days before the project began.

Hetmann is equally pleased with the results. “We now have a much better view of the capital being used and the performance of the business at each level,” he says. All this has certainly made life for his team in Gelsenkirchen a lot easier for at least one major reason — shortly after the fast-close project was completed in February 2002, E.On sold Veba Oel to BP of the United Kingdom, where the demands for fast consolidation and reporting are even greater. “I’m convinced that a big reason why Veba Oel was an attractive acquisition for BP was because we had completed projects like the fast close,” says Hetmann. “And even though we’re being reorganized under BP, the exercise certainly wasn’t in vain. Staff have now seen for themselves how finance and accounting can be reorganized to become more efficient.”

Real Time in No Time?

Not far from Veba Oel in Dusseldorf, a fast-close project at Henkel took a giant step forward when managers at the $13 billion maker of toiletries, home-care products, and industrial goods began using Web-based software for intercompany reconciliations. “Having Web-enabled software for intercompany reconciliations is a great way to let managers anywhere in the company see their receivables against the liabilities of their partners within Henkel,” says Matthias Schmidt, the company’s vice president of financial planning and controlling as well as the fast-close project leader. “The software — combined with tougher guidelines in terms of what the 280 reporting units are allowed to book and when — has really reduced the obstacles that were slowing down our closing process.”

But technology is transforming much more than reconciliations. As part of a wider global IT initiative, the company has been rolling out a groupwide database and financial system that — in the words of CFO Jochen Krautter — “will give us seamless, real-time virtual management.”

Although there’s still more work to be done before the implementation is complete, the company is already reaping rewards. First, the new technology has been helping Henkel bulk up management and statutory reports with additional disclosure, including more-detailed segment information. Second, automation tools have allowed the company to accelerate the consolidation of its financial figures so that they can be released to the public at record speed.

With the company’s auditors signing off on the 2001 accounts by February 14 this year, Henkel made its financials available to shareholders 45 working days after year-end — 10 days faster than in 2001. The aim is to sign off on the books by January 31 of next year.

Keith Brown, finance director at Gerber Foods, a £450 million ($700 million) U.K. drinks supplier, is hoping he can soon say the same. This summer his staff waved good-bye to the trusty spreadsheets that had long been used for consolidation and reporting, and moved to Web-based consolidation and reporting software. “Spreadsheets are fine if you want to use them alongside a good application for ad hoc analysis,” says Brown. “But once a company reaches a certain scale — like we have after a recent acquisition — they just become too cumbersome to be the sole tool for closing the books.”

And as with Henkel’s Schmidt, a big selling point for Brown is having software that’s Web based. “At first, the fact that the software was Web-based didn’t impress me much,” he confesses. “For me, other things like a good database were more important.” But now, as he prepares to launch the fast-close project in Germany, he’s sold. As he sees it, providing managers with access to a central database via Web browsers on their PCs is one of the best ways to guarantee that “you have only one version of the truth lying around.”

There is some good news: the KPMG survey found that while the average time to close the books has declined only 1 day, the median has dropped from 10 days to 7, and audit sign-off has dropped from 16 days to 10 (both average and median). Companies, that is, seem to be able to produce numbers faster, but are taking longer to release them, perhaps prompted by concerns over their accuracy. As they grow more comfortable with the technology and processes behind the numbers, and as they feel more heat from regulators and the public to report results in a more timely manner, they will likely trim days from all facets of the process. But at this point, the ability to close the books within a day is virtually unheard of, and seems likely to be a standard for which few companies aim.

Janet Kersnar is editor-in-chief of CFO Europe.


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