The ability to effectively manage a company’s financial and operational data is quickly becoming a measurable component of profitability. Illustrated by the fact that investors are asking to have not just IT infrastructure, but also the validity and integrity of the data contained within these systems assessed and valued. The ability to efficiently mine and manage a company’s financial and operational data can contribute to the company’s ability to properly measure and maintain its profitability. Moreover, investors, analysts and others will use this data to assess the health and well-being of an overall business. Therefore, it is extremely important that this information be treated as a company’s crown jewel and not a thorn in its side.

 

Quick Strike First Steps

 

How can you assess whether or not your company is effectively managing its financial and operational data? Start by asking the following questions:

  1. Does your company have a chief data officer (CDO)? This is a senior management position that maintains oversight of the information contained within the financial and operational systems of a company. For example, in 2005, Usama Fayyad was named CDO at Yahoo, Inc., the first such title in the industry. According to Fayyad, the reason for this appointment was simple – “to build a bridge between data and business and to explain that data is a strategic asset, not an IT service.” The CDO would be responsible for the integration of information (not infrastructure) and ensuring that there is normalization and consistency of data across the business and applications.

  2. Financial Data:

    • What is the timing of the month end accounting close cycle? If it is greater than five business days, then you are probably using processes outside of the general ledger (GL). This process results in variance between what is in the actual GL and what is reported to the business leaders, or perhaps more damaging, the marketplace. The most common cause of errors is employees’ manually entering, changing, adding or deleting data. The repository of these errors typically is the offline, standalone spreadsheet. One-third of the participants in a survey believed that correcting errors prolonged their close by one or two days, and nearly a quarter (22 percent) thought it extended the process by three or more days. The effect of such activities results in nonstandard data coursing throughout the main systems of the company.

    • Does the company maintain a database to manage the terms of your supply, inventory, customer or other major contracts? If not, then you probably are inconsistently applying terms and are not optimizing the company’s contract asset. If yes, then you probably are working off of old information; when contracts are updated, most companies are required to apply a formal process to ensure that their terms/contract management database gets updated to reflect the revisions. This is another example of nonoptimization of a company’s asset.

  3. Operational Data: Does your company have a customer profitability model? 
    • If not, then your company is not using the information contained in their systems to ensure that the needs of one of its most important assets, its customers, are being managed properly.
       
    • If yes, is the model linked to the main financial and operation system? It is not uncommon for companies to have offline (standalone and not linked into their main financial or operational system) models. However, these offline models are generally not accurate because they do not reflect real-time data. This causes customers and clients to be measured inaccurately and can lead to lower organizational profits.
  4. Does your company perform an annual data quality and integrity check? In the same vein as a financial audit, a company should now consider having an independent party review its financial and operational systems for consistency, normalcy and quality. These reviews are becoming more commonplace and can allow for investors and management to receive a report that would provide them with areas in which to improve the information they rely upon to make decisions. These improvements would be measurable and could lead to improved decision-making and profits.

An example of where these questions can directly lead to improved earnings or cash management is a retailer that had not managed the payment terms of their contracts properly. For years, they had been paying according to the terms that were in their accounts payable (AP) system. Upon a cursory review, it was determined that they had been paying several suppliers one to three days early and receiving no compensatory benefit. As a result, a full review was done of more than 10,000 contracts. After the review was complete and the proper terms were implemented, the company realized in excess of $10 million per week in additional working capital. This is but one example of how a yearly data quality and integrity audit and/or the role of a CDO can provide immediate value to an organization.

 

Enterprise data management (EDM) is a phrase that has been around a long time, but one that has not been fully embraced by corporate executive management teams. It is through the application of EDM that a company can ensure that its critical customer, financial and operational data are properly linked, managed and reported upon. Companies that have grown through acquisition typically have no (or at best inconsistent) EDM because they have acquired legacy systems and are unwilling to integrate the information or IT infrastructure to the normalcy or consistency of data across the business. Other factors that are driving EDM include increased pressure to show return on IT investments, a commoditization of data storage and recent amendments to the Federal Rules for Civil Procedure governing production of electronically stored information (ESI).

 

While the cost of integrating IT infrastructure can be significant, the cost of developing standardized reporting from disparate systems is relatively inexpensive in comparison and can produce significant measurable results. For example, the cost to migrate a financial system from a newly acquired business to the same chart of accounts and software system of the parent organization can cost $5 to $45 million dollars and require up to three years to implement, while relying on external hardware and software vendors to address key compliance issues. However, the cost of hiring data management and financial reporting specialists to implement a reporting system that standardizes and normalizes the information contained within these two systems can cost only 10 to 20 percent of that number and produce results within three to six months. These results are typically then formalized and used on a going-forward basis.

 

Navigating Through the Enterprise Data Jungle

 

So what does all of this mean, and what steps can be taken for a business to resolve these issues? First and foremost, a company needs to define what data quality means for their business. Aside from the basic parameters, which include valid, available and accurate data, a company needs to consider how this information is to be interpreted by end users as well as its relevance in management’s strategic decision-making. For example, day-to- day operating reports and quarterly filings, used for different functions and both augmented by a slew of notes, should in fact be derived from the same source data.

 

Often, certain operational reports are extracted and manipulated from a feeder system or site-based database for use at a specific location. This extraction occurs prior to any consolidation (i.e., inter-company transfers or overhead allocations) performed at corporate headquarters and will lead to issues once these reports are compared. Adding to this confusion is the fact that many companies utilize a summarization tool to consolidate information, effectively eliminating the traceability of transactions and impacting key financial data mining capabilities such as transfer pricing.

 

Without the ability to effectively back-trace the data that is being relied upon to make strategic decisions, management should not feel comfortable in using this data for major reporting or forecasting purposes. The role of EDM is to ensure that all management information is traceable, reliable and standardized across the business.

 

Data is a significant asset of the company and should be protected and managed accordingly.

 

Recent press indicates that most companies are not considering the information contained within their IT systems as an asset. However, managing data effectively can be the difference in achieving a strategic advantage (Wal-Mart), enhancing revenue (Amazon.com) and reducing costs (Dell). Not viewing data as an asset is the single largest mistake that any company can make because it is not the system that makes a company what it is, but rather, it is the information contained within the system that allows the company to maintain it customer relationships, provide financial reporting, identify areas for growth and ultimately determine the profitability of the organization overall. Therefore, time, money and effort need to be focused on maintaining, integrating and managing this important data asset. Effective EDM or the attention provided by a CDO will help a company to realize the profitability and decision-making that will make the company a success.

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