Digital procrastination - putting finance under the microscope

Brian Sommer Profile picture for user brianssommer February 3, 2022 Audio mode
Summary:
Three recent and different studies shone a bright light on the finance/financial accounting function and the systems these organizations use. One thread in each of them involved how slow these organizations are in dramatically reimagining Finance. Why?

I recently reviewed three studies regarding the Finance function and the systems in use.  These studies included:

  • Fluence Technologies’, The Roadmap to Modern, Mid-Market Finance
  • Sapient Insights 2021–2022 Enterprise Finance Systems Research, 3rd Annual Edition, Sapient Insights Group / Joe Almodovar & Stacey Harris, 2021
  • Esker’s, The 2021 State of Finance Report

Each report is insightful in their own way and there is very little in redundant observations among the three. Here are a few key takeaways from each.

The Esker report

Esker is a major process automation vendor with many solutions that target finance and customer processes.

Esker “asked 250 senior-level finance professionals and 750 finance and accounting practitioners a series of multiple-choice questions to gather industry perspectives on digital transformation, pain points and automation in the “new normal”.”

The Great Procrastination

What really caught my attention in this report was the recognition that Finance groups want to change, know they need to change, but, aren’t. Specifically, changes around digital transformation are getting good buzz but are getting stalled.

Here are a couple of spot-on quotes from their report:

For many companies without automation (shockingly, the majority), the race was now on to digitize just to stay afloat. According to our survey results, 76% of respondents say their company does not have the technology needed to maintain performance standards should something (such as another pandemic) force people to work remotely again. 40% believe their company would need a significant amount of additional technology to perform well, and more than 80% of professionals in the financial services industry say their organization does not have the technology needed to perform if their team was forced to work from home.

The inability of Finance professionals to Work from Home (WFH) at the onset of the pandemic was notable and something I have covered previously. Many financial applications in use were older on-premises solutions that weren’t designed for remote access or had clumsy WFH mechanisms. But there were other issues, too. Many finance activities, like accounting closings, budgeting and forecasting, are often completed via single-user spreadsheets: a technology choice that was not optimal during the pandemic or now.

The Esker report also showed that those organizations that had automated a function like cash conversion showed marked improvement. With those kind of proof points, you would think every company would embrace this kind of digital transformation. Right?: 

Even though 96% of survey respondents who haven’t automated their cash conversion cycle believe that doing so would make their business more efficient and successful, only 18% plan to automate their cash application in the next two years.

Which begs the question: if a vast majority of finance professionals recognize the clear benefits of digital transformation and believe that using paper-based processes leads to significant negative impacts on their business, why aren’t they choosing automation?

That’s actually a great question. And I’ll leave you to read the Esker report to see their answer.

My shorthand for this phenomenon is the Great Procrastination or Digital Procrastination. Whatever you call it, it could be hurtful for companies long-term. I’m well aware of the rationales/excuses as to why companies don’t pursue such change initiatives. When I wrote Digital With Impact, I had trouble finding great Digital Transformation projects. I found lots of Digital Misfires, though! I also stumbled on a lot of partial projects, great intentions and uncompleted adventures. Many of these reminded me of a neighbor I had growing up whose yard was full of incomplete ‘projects’. He had cars he was going to fix, gardens he was going to plant, a house he was going to paint, etc. Most of these never got done or were years and years late.

Businesses are no different. I just got an email today from a potential client that is putting their mini-transformation project on hold because they’re now too busy to work on it and it will be expensive. Projects either aren’t getting started or too many are simply baby steps that get billed as something more important. So many firms think that simply automating a task is transformational when it was simply digitization. Folks, not all digitization efforts are transformational and not all transformations require a lot of digitization.  Calling something digitally transformed doesn’t make it so.

Chances are, if you’re not radically reimagining what Finance can do (and acting on it), you’re either: undercapitalized, cheap, unimaginative, unwilling to get help or in a struggling firm. Delaying important and competitively necessary changes won’t make your firm stronger, more agile, etc. It makes you weaker, actually.  Change may be uncomfortable but it has to happen.

For more information on the report click on this link. For more on Esker’s solutions, I did a lengthy piece on Esker and their solutions last July.

The Fluence report

Fluence Technologies is an EPM/BPM (enterprise or business performance management) vendor whose executives and solutions are all about financial closings, consolidations, etc. They recently commissioned a study on the closing, financial reporting and consolidation space for the mid-market. Fluence, by the way, defines the mid-market as firms with revenues in the $50 million to $3 billion range. Their study respondents included: CFOs, CAOs, Controllers and VPs in finance and/or accounting.  

The Fluence report, while it’s not horror movie gruesome, isn’t a pretty read either. Survey respondents clearly want fully automated closing capabilities and other capabilities but only about 19% are actually satisfied with the solutions they have. Spreadsheet usage is not only endemic in the mid-market but spreadsheets are also being used to fill all kinds of product gaps, too.

The mid-market is a tough software space. Many mid-market firms have champagne tastes and beer budgets. They need a lot of the same functionality that large enterprises require but the capital and resources for these solutions is rarely there. It’s not surprising to find unfulfilled users here.

One stat immediately caught my eye, “89% (of respondents) state modern software is critical for recruiting and retaining finance staff”.  Amen.  In November 2021, I wrote about five CFO priorities. One theme that frequently popped up in that piece involved the use of antiquated finance technology. I noted then:

  • “Modern technology – Why do staffers hate old tech? Because there is no upside in learning obsolete technology. They’ll never find another employer who uses this stuff or will pay a premium for this knowledge. Your old software, equipment, IT, processes, etc. are liabilities to your firm.
  • Finance/Accounting professionals have choices now and what they DON’T want are employers that offer a chance to, once again, work with on-premises and/or green screen systems. Using the same tech as their parents is NOT appealing!”

What these professionals do want is:

  • “A Place that People Want to Work For – People want to work in an environment that is equipped with current/relevant accounting/finance technology and not reminiscent of a 1980s organization (e.g., fax machines, inboxes, on-premises software, etc.)”

Like many other reports/studies, Fluence study respondents indicated that:

  • 70% of them “had to re-evaluate their consolidation & reporting process post-COVID”
  • 66% of them said “standalone spreadsheets hindered informed business decisions”
  • 100% of them “want software that automates the close process”

A number of financial accounting and other back-office applications had to be replaced when the WFH mandates kicked in and old, on-premise or single-user solutions were no longer viable. My client/customer calls indicated a significant number of Payroll and budgeting/planning applications got upgraded or flat-out replaced during the pandemic. EPM/BPM solutions, because they include budgeting and planning functionality, were a frequent software purchase item the last 24 months.

Users don’t just want these new tools so that they can work from home. They want new generation tools to get out of, what more than one accounting professional has described to me as “spreadsheet hell.”  I’m also aware of younger to mid-level accounting professionals who expect firms to have heavily automated accounting technologies (e.g., RPA powered payables vouching and closing activities). They see their career as being a provider of business insights and not a clerical processor of routine accounting transactions. I don’t blame them. Repetitive, unimaginative work and error-correction tasks are mind-numbing and frustrating.

The close process, in these mid-market firms, seems troubled. The study noted:

Almost three quarters reported their close process was still manual to a degree. 

Ugh!

The report, correctly, also covers a number of people and career-based issues related to these topics. There’s a brief discussion regarding the employee experience. These people want better tools, for sure, but they also want a career path. In the mid-market, this is a real challenge as the finance teams are smaller and the career paths fewer.  And, regarding tools, the study found that:

“79% (of respondents) said “adequate.” Less than 2% considered the technologies they use for a critical area of the business to be cutting edge.”

I must admit that the idea of Finance as a critical business area and worthy of cutting-edge tech is a phrasing that I don’t hear. However, it is a great observation that should be discussed in a lot of executive committees.

The report has a number of forward-looking points, too, but I’ll let you read them for yourselves. The report is available here.

The Sapient report

Sapient Insights Group is “a research and advisory firm that focuses on equipping clients with the critical data and savvy business insights to drive enterprise-wide people and financial outcomes – in their HR performance, change management, DEI, and technology transformation programs.”

One of the report authors is Stacey Harris. I’ve known Harris, a fellow analyst, for quite a while. For some time, she’s led an annual effort documenting the state of HR technology. That report gets lots of attention in the HR community, especially from HR vendors.

In recent years, she’s expanded that view to also cover Finance technologies. As one of the few analysts who covers both spaces, I wanted to see what she and her teammates at Sapient had uncovered.

For this report, you’ll want to block some time. It weighs in at over 100 pages. I can’t give the report a fulsome bit of coverage as there is just too much to cover. I’ve included the link to the report at the end of my remarks so that you can peruse it at your convenience. (Full disclosure: I wrote a forward for this report).

Cloud adoption

Sapient noted:

HR cloud adoption rate far surpasses that of finance. HCM systems cloud implementations occur at 2.5 times the rate of finance systems cloud implementations. Financial cloud implementations are happening much more slowly for a variety of reasons. For example: In moving financial applications to the cloud, cost is a major roadblock for small companies and, to a lesser degree, medium companies ($51 million to $1 billion in annual revenues).

My analysis: Finance has been slower to move to the cloud than HR. One reason I’ve noted this is that many, many HR solutions were native-Internet apps way back in the late 1990s.  Cloud based HR apps were essentially all there were for the last 15+ years. If a company wanted to get an on-premises HR solution in recent years, they would have only a few of them to choose from and what was there was often outdated or seriously expensive.

Finance application vendors did take longer to get to the cloud. In fact, most cloud Finance solutions had to start off as small or SMB solutions until the software and its underlying technology could handle:

  • Complex accounting (e.g., global inter-company transactions)
  • Various reporting requirements (e.g., IFRS, GAAP, Cash, Accrual, regulatory, etc.)
  • Revenue recognition and other new standards
  • Large and complex reporting data volumes
  • Actual, budget, statistical, memo and other record types
  • Etc.

By the time many accounting vendors started to work on a more technically relevant solution, they had to also:

  • Create a new technology stack/platform
  • Embrace new micro-services and integration requirements
  • Employ new database technologies (e.g., in-memory) and/or different data repositories to handle big, dark, transactional, archival, event and other data types
  • Build their own cloud data centers (or work with a hyperscaler or hosting firm)
  • Determine when and how to use advanced technologies like AI/ML, chatbots, RPA, workflow/exception handling, collaboration, etc.

Porting old on-premises financial products to the cloud may have been a short-term answer for some vendors but it wasn’t going to deliver, long-term, what buyers really wanted:  all-new cloud financial apps that made the most use of modern technologies. Because all-new solutions would need shaking out, vendors would not necessarily roll these out to large enterprises at first. They would instead let small and mid-sized firms battle-test these all-new products.

There were also some big change management, inertia and budget issues that blocked the initial embrace of cloud financial apps. Ask any financial accounting/corporate accounting executive and they’ll tell you how they rarely have any time to even think of anything but the business. Every hour of their work lives is consumed with closings, audits, transaction processing, error corrections, accruals/reversals, responding to customer and supplier inquiries, preparing management reports, dealing with bankers and loan covenants, etc. It’s hard for most of these people to imagine when they would ever have 6-months straight to work exclusively on bringing a new financial system online. Often, these old, patched up and spreadsheet-assisted financial systems remain until they are close to imminent failure.

More cloud adoption coming though

Sapient also found that:

Finance cloud usage predicted to jump. Financial cloud subscriptions are projected to increase by 30% in the coming months – a sign that finance leaders may be seeing the cost and resource advantages of cloud over on-premises hosting.

and

Still, current finance cloud usage is much lower than expected. While 40% of companies use some form of cloud technology for their finance systems, only 20% are solely on cloud-based finance environments. And, at this point in time, we also note that 42% of finance functions in the cloud are using infrastructure as a service.

My analysis: I’m not surprised that cloud usage will go up but I suspect that’s due a lot to the retirement of many full-on-premises alternatives today and the desire by vendors to move more and more customers off a perpetual license and maintenance model to subscription pricing.

The Sapient report does provide a lot of detailed insights where they show how some companies may prefer a modern cloud solution that might be hosted by the application vendor, a third-party hyperscaler, a third-party hosting firm or on a customer-owned cloud-in-a-box environment.

No matter how you want to slice it, I’m just glad to see that more firms are finally going to kick those old solutions to the curb.

There’s a lot more to this report. It covers matters such as:

  • Role of finance as a strategic partner
  • Finance interest in cybersecurity
  • Business intelligence
  • Technical debt in finance apps
  • Growing acceptance of enabling technologies
  • Outsourcing of finance operations
  • Use of RPA (Robotic Process Automation)

You can read the report here.

My take

All three firms looked at similar but different respondents and asked some interesting questions. I wasn’t expecting the results to be so consistent.

What I took away is that:

  • There’s lots of room for improvement with Finance technology
  • Bad/old finance technology is a drain on employee morale and contributes to a poor employee experience (EX)
  • Cloud adoption is mostly occurring on the edges of financial accounting technology (e.g., T&E processing) while functions like general ledger are still cranking away with old technology.
  • Spreadsheet usage is still omnipresent and every firm should be asking: Why?
  • While I don’t consider a mobile version of a finance application to be an ‘advanced technology’, the numbers and uses of these advanced technologies are still limited.
  • Where advanced technology was noted was often in RPA areas.
  • Big data is not showing up in these studies except as a data feed, possibly, to some RPA applications
  • Soft issues, like change management and career paths for finance staff, may not be getting addressed
  • Multi-tenancy was not directly addressed in these studies but I suspect it could be more important to small and mid-sized firms. Larger firms may be clinging to private cloud or hosted solutions even though these may present larger price tags over time.
  • Finance is behind other functional areas (e.g., HR) in cloud adoption.  Finance is, though, utilizing cloud applications at the margins.

If you’re a finance or accounting professional, do a brown bag lunch soon and ask three colleagues to each study one report. Invite your CFO or Controller to the lunch.  I’ll bet the discussion will be most illuminating…..

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