The Cloud

What Ever Happened to the Virtual Close?

CFOs are once again trying to perfect the process of closing the books.
Russ BanhamNovember 1, 2011

Remember the “virtual close”? A holy grail of finance efficiency — and a badge of honor for finance teams that could achieve it — the virtual close (sometimes labeled a “soft close”) was touted as a way to facilitate faster and more accurate dissemination of financial results via a nearly instantaneous “close and disclose” process. The promised benefits were substantial: senior managers would gain faster access to the financial information at the heart of their decision-making, and finance staffers would be liberated from the drudgery of a lengthy close process, and would thus have more time to actually analyze financial results.

Then along came SOX, IFRS, and XBRL. Finance executives swimming in this alphabet soup of increasingly rigorous accounting regulations, standards, and technical requirements renewed their focus on accuracy rather than speed. The new rules didn’t just distract; in some cases they actually reintroduced manual processes that had been eradicated. Suddenly, the virtual close became a low priority, and by the time the financial crisis hit in 2008, it had completely faded from view.

Well, almost. Now that companies have adjusted to the new standards, a tighter close process is climbing back up the finance wish list. Companies are once again addressing the need for a faster, higher-quality close, with the goal of getting accurate, comprehensible information about the business to senior managers as fast as possible. As Prat Bhatt, corporate controller and principal accounting officer at Cisco Systems, puts it, “The virtual close is alive and well, but it has evolved.”

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Not Always Faster, but Better
One facet of its evolution is that companies are taking a more deliberate approach to speeding the close. Even with the aforementioned roadblocks now disappearing, companies are weighing the benefits of speed against the potential pitfalls. “As you speed up the close, you have to beware of using more estimates or accruals,” says Steven M. Bragg, CFO of XeDAR Inc., a technology consulting firm, and author of the book Fast Close. “In essence, the longer it takes to close, the less likely it is that the financials will be wrong, and vice versa. You would be more likely to go slow if an upgrade project like an ERP installation put the entire close at risk of being screwed up.”

Others share this view. “There is no reason to go particularly slow or fast with the closing process; the important thing is to know what you are trying to accomplish from a fast close and develop a business plan for finance transformation to achieve it,” says John Van Decker, a research vice president at Gartner.

Bhatt agrees that patience is vital. “The purpose of redesigning the close process should not be solely focused on doing it faster,” he says. “Spending time upfront to determine your objectives is critical. Once the objectives are defined and the organization is working toward these common goals, key metrics such as cycle time tend to improve anyway.”

Sandra Hartman-Holbrook, financial manager at Dow Chemical, which is working to speed its closing process, also says that finance departments should take things slowly, at least at first. “Too many companies may chase this dream without adequately understanding the impediments in the way,” she says.

Dow was careful not to take a clean-slate approach to its newly accelerated closing process. “We replicated what we were already doing, but with higher quality data,” Hartman-Holbrook explains. “We felt that if we made too many changes too quickly, we wouldn’t be able to find the cause of the issues if we encountered them.”

Cisco is a widely acknowledged pioneer of the virtual close, having been heralded a decade ago for its ability to close the books with the click of a mouse, churning out consolidated financial statements and balance sheets in less than a day. “Our objective wasn’t necessarily to close the books faster, although there is some inherent advantage to that, but to design a process for continually monitoring critical business information,” says Bhatt. “Having accurate information to run the business when you need it is a core principle of the virtual close. We’re still closing our books in less than a day. Are we doing it faster than 10 years ago? No. But, we’re doing it better.”

Still on the cutting edge of the close process, Cisco now uses collaboration technology that allows finance to monitor the close and virtually connect the various teams involved in the effort globally. A key objective of the process is to allow the CFO to get updates on financial information when it is needed to allow timely decision making. Finance-team members also communicate on key issues via online discussion forums shared with all members of the process.

The role that technology plays can’t be overstated: a fast close requires the ability to generate and compile a huge volume of internal financial information quickly in order to report the consolidated results to regulators, investors, and other stakeholders. “If anything, the need for a fast, quality close has become greater,” maintains James Fisher, vice president of marketing in the finance solutions practice at ERP giant SAP. “We’ve seen increasing pressure on margins and budgets, and continuing volatility in various markets. Compliance and risk management are intensifying, and the regulatory landscape is becoming more complex.”

Fisher is not alone in this view. “Investors still want information rapidly, and so does management,” says Frank Brod, chief accounting officer and corporate vice president of finance and administration at Microsoft. “Closing the books has become more complicated, difficult, and time-consuming due to Sarbanes-Oxley and XBRL [extensible business reporting language] reporting requirements, but management still wants to know what is going on daily and not just historically.”

XBRL, which requires companies to tag their 10-Q and 10-K reports with descriptors to enable electronic data mining, had foisted nearly 200 hours of additional work quarterly on Microsoft’s finance team — an effort that was slowing the pace of its closing and reporting process, says Brod. To get back on track, the company turned to its own technology arsenal and overhauled its processes as well.

Rather than have finance staff in each organization submit financial analyses as spreadsheets attached to e-mail messages or posted to departmental file shares, they post them to a new “Financial Close” portal, a centralized collaboration and document-sharing web-based repository. The financial statements and supporting documents are interlinked to 10-Q or 10-K forms, so that finance and management, as well as auditors questioning a figure, need only click to see the documentation behind them. To date, Microsoft’s finance team has halved the “close-disclose” cycle, from approximately 16 days to 8.

Consolidated Closing
Dow Chemical is on a similar mission, prodded by the need to absorb a major acquisition. In 2009, it acquired Rohm & Haas, a maker of acrylic paints, adhesives, and packaging materials, for $18.8 billion. “We’ve been an SAP shop for 20 years and supercustomized it over that time,” says Hartman-Holbrook. “Two years ago we began to upgrade the system. Then, we bought Rohm & Haas, which ran a different system and had its own intricate closing schedule, also maintained in multiple spreadsheets and including some local plants with their own closing time frames.”

While Dow eventually plans to integrate Rohm & Haas into its own system, the company sought a faster way to centrally manage and control the close process in the near term. Part of the answer was SAP’s Closing Cockpit, a centralized template containing all the tasks involved in the quarterly and year-end close for management and monitoring purposes.

“Previously, we had everything scheduled in a mainframe environment, setting up these jobs in different regions because of space constraints,” says Hartman-Holbrook. “We had a mainframe for Asia-Pacific, another for Europe, another for Latin America, and so on. Everyone had their own checklists and a schedule, and there was no reporting back to see where we were. We were awash in spreadsheets. Today, those tasks are centralized, which lets us reach over to other systems within one template.” The result is a unified global close schedule for all of Dow, “with the ability to view the status of the close,” she says.

Firearms and ammunition maker Freedom Group has also refined its close process on the heels of an acquisition spree. The company decided that it wasn’t cost-effective to integrate other manufacturers it had acquired into its ERP system. But this took a toll on the closing and reporting process. “We had acquired Dakota Arms, Advanced Armament, Barnes Bullets, and Mountain Khakis all within the last two years,” explains Melissa Anderson, director of corporate finance at the $744 million company. “When all of our companies resided in one ERP system, our review, closing, and reporting processes all flowed nicely, and we managed an efficient closing time line. But that became more complex when we added new companies that weren’t on the same system.”

In order to integrate these companies into Freedom Group’s reporting system to deliver consolidated financials and analytics quickly (and, as Anderson says, “without too much pain in the pocket”), the company tapped a planning-and-consolidation application that allows it to combine data from multiple sources within its reporting system. “We now have a central repository for all Freedom Group information, including financials and other metrics,” Anderson says.

As a result, the company achieved significant efficiency gains, thanks to the improved consistency, accessibility, and visibility of companywide information. It also has been successful in reducing both time and cost when integrating new acquisitions — the original problem thwarting a smooth close.

Closing in the Cloud
Smaller, cost-conscious companies are paring their closing times via remotely hosted software and services, too, using applications from cloud ERP vendors like NetSuite and enterprise-performance-management vendors like Host Analytics and Workday.

Mirion Technologies, a maker of radiation-monitoring equipment, with $250 million in annual revenue, is relying on a cloud service to consolidate and report faster. “We were formed from several small companies, with multiple products and markets and a collection of outdated local ERP systems,” says Diana Lowell, Mirion’s global controller. “The conventional wisdom is to put all the companies on the same ERP system, which would have cost us millions and distracted finance for three to five years. While there are great tools for integrating the consolidations, budgeting, and forecasting, we don’t have the IT resources to be chasing them.”

Host Analytics does the chasing for them, collecting financial data from Mirion’s subsidiaries to produce the actual close in the cloud. The company has reduced the cycle time by 20 days. “It’s not cutting-edge like what Cisco is doing,” says Lowell, “but it is a big improvement.”

Cover-All Technologies, a developer of software for the insurance industry, is another small business now closing in the cloud. “Our existing on-premises system could not support our compliance needs,” says Ann Massey, the company’s CFO. “Prior to moving to the cloud, we experienced strong growth, but the volume was hard to manage. We had a lot of silos and management challenges because we didn’t have essential data in one place.”

The difficulties affected Cover-All’s close cycle, which grew to two weeks. Switching to an integrated cloud-based application that connects finance, sales, service, and fulfillment has helped the company reduce that to four days. Says Massey, “The time-savings has permitted our finance department to do more strategic planning to help grow the company, and we were able to save on personnel costs as well.”

Gartner analyst Van Decker says the revived efforts to close the books faster are a boon to companies, auditors, analysts, boards, and the public. He attributes much of the success to better software, but adds that there is something else at play, too. “A quality close requires not just the right technology, but also the right mind-set to achieve it in the first place.”

Dow’s Hartman-Holbrook says companies should focus on processes. “Concentrate on how and when the major [global] tasks should be completed and in what sequence, and then make modifications regionally. Our close schedule was managed centrally at headquarters, but required finance to meet with stakeholders and business partners to ensure the best-quality data. It takes a lot of collaboration to get all the dependencies and timing of different tasks down to a science.”

Russ Banham is a contributing editor at CFO.