Partial clearing

By Tim Reason

Budgeting software isn't the key to corporate finance reform, but it can help CFOs manage expectations in a sinking economy.

If the reach of the US's Sarbanes-Oxley Act of 2002, and similar proposals being mulled over in Brussels, can be measured by marketing spin, then policymakers have indeed instituted sweeping corporate reform. Vendors of all kinds of business software, including budgeting and planning (B&P) tools, have been quick to tout their applications as cure-alls for the new compliance headaches that these proposals will create, or already have created.

Of course, the new and proposed laws never mention software and have little, if anything, to do with B&P. 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 in the trenches. "If Enron had the most sophisticated enterprise performance management tools, do you think it would have made different decisions?" asks Lawrence Serven of management consulting firm The Buttonwood Group. "Of course not."

But over-eager public relations aside, the message from software vendors isn't totally wrong. Although new legislation might not necessarily address guidance directly, investor scepticism gives companies plenty of reason to shore up the consistency and accuracy of their forecasts.

Perhaps more importantly, the vagaries of today's economy have made it essential for firms to be able to adjust forecasts. Indeed, in a survey conducted jointly by CFO Research (a sister organisation of CFO Europe) and Cap Gemini Ernst & Young (E&Y) just after the WorldCom scandal broke, 81% of CFOs said that accuracy of revenue and earnings forecasts was their highest priority, and 63% complained of inadequate, poorly integrated budgeting and forecasting systems.

The desire for integration provides additional justification for discussing B&P software and new corporate governance regulations in the same breath, because the software is often part of broader packages of financial software that can help with reporting and disclosure compliance.


The Big Package
For its part, Sarbanes-Oxley requires management to assess publicly "the effectiveness of the internal control structure and procedures of the issuer for financial reporting" and submit that assessment to auditors-a process that could include evaluations of the controls built into the reporting software. CFOs must also now disclose material changes in a firm's financial condition "on a rapid and current basis", produce quarterly and annual reports faster, and certify the accuracy of results. According to Alan Yong, an analyst at IT research firm Aberdeen Group, these and other rules "will necessitate significant investment in financial software."

Rich de Moll, Cap Gemini E&Y vice president of finance and employee transformation, agrees, adding: "There should no longer be any walls between actuals and the budgeting process. 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 as opposed to combining "best-of-breed" products, noting, "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.

Although not a public company, Childrens Hospital Los Angeles (CHLA) illustrates the trend. It bought a B&P system as part of a larger, enterprise-wide roll-out 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 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 marked up and sent around the firm-a process that is repeated several times before all of the information is entered into spreadsheets and uploaded on to the old budgeting system. Ultimately, says Cascione, "we hope to go to paperless budgeting through the [PeopleSoft] portal technology."

She also expects that the new system will make it easier to run budget scenarios. "For example," she says, "if [a health insurer] says it wants to negotiate new rates, we could input them and see what the impact is throughout the organisation."


Updating the forecast
Brian Reilly, CFO of building-materials distributor Allied Building Products, uses a Cognos system installed in June to speed up the New Jersey-based company's routine evaluations of its approximately 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.

Likewise, Huntsman relies on Applix iTM1 budgeting and forecasting software to meet the demands of auditors, investors and lenders for various snapshots of the future. "We are always generating five-year forecasts for different scenarios," says Jim Bell, the chemical company's director of corporate finance. "We have to answer every question they can imagine." Many of the scenarios deal with different pricing assumptions about raw materials, such as ethylene and crude oil, a front-page issue today. "If we do indeed go to war [with Iraq], it would necessitate immediate re-forecasting," says Bell. "We would see movements in the market right away."

There are also more mundane reasons for re-forecasting. In addition to five-year forecasts, Huntsman uses rolling monthly forecasts to recalibrate results for the balance of the year. "The way the economy has been lately, the most recent three months often aren't what you thought they'd be four months ago," says Bell.

Of course, says Buttonwood's Serven, companies must be careful not to get carried away by modelling capabilities. "Companies that go overboard in modelling 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% of CFOs report having dynamic budgeting and forecasting based on operational drivers today, 52% expect to have such capabilities within three years. To get there, of course, they'll need the support of senior management-and, again, new corporate governance rulings play an indirect role.

"Audit committee members are going to want to understand the financial system architecture," predicts de Moll and, of course, board members will want to 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, [corporate governance legislation] should move senior management to support it," says de Moll. In other words, even as vendors use new legislation to sell CFOs the importance of financial systems, CFOs themselves may be selling the very same thing to CEOs and other board members.


On budget
A selection of B&P software providers

* ERP vendors that provide B&P software as part of their financial suites and, in some cases, as standalone products. **Microsoft acquired the B&P providers listed in the past 18 months. Check their websites for more details. Microsoft also makes Excel, which remains the most popular B&P tool.

Additional research for the software listing was provided by editorial intern Lynn Doan.