Is the finance profession ready for its digital future? More from Mark Nittler

The news that longstanding Workday executive Mark Nittler left the company this month reminded me of some conversations he and I have had over the past year or two, on whether the finance profession is ready to embrace the digital future.

As Dennis wrote on Friday, Mark has been instrumental in defining the architecture of Workday Financials in a way that reimagines enterprise financials, capturing much more information and thus enabling far richer reporting of business metrics. But he has become concerned that finance teams don't always have the skills and culture to embrace the new digital capabilities the technology is opening up. The profession — along with the old-school financial and ERP software most enterprises still rely on — is too set in its ways, as he told me earlier this year:

The skills — the talent and technology that are in the market today — were not built to do what we want them to do.

Those skills are focused too narrowly around preparing accounts that conform to GAAP (generally accepted accounting principles) and IFRS (International Financial Reporting Standards), and lack a broader appreciation of business analytics, he explains.

Most of the education in accounting is targeted to a path that creates CPA partners. The CPA partners, they're in this very narrow channel where there's this whole world of financial analysis and reporting that — we're not creating the software to do that — we're also not creating the talent to do that.

The talent to do that needs to be much more analytical, needs broader business skills, it needs a more comprehensive view of all the pieces and how they relate to each other, and an ability to interpret that data beyond just a financials statement.

Finance profession faces a stark choice

The danger Nittler foresees is that, if the profession is not able to broaden its horizons, then others will take on that role of strategic financial analysis. The profession faces a stark choice, he believes.

You have got to get a different perspective on this. For two reasons. One is, your work product needs to be broader. Two is, your profession will narrow — maybe not die, but narrow — if you don't. Because that's the data that people want and if you don't provide it, somebody else will. So you're going to get business analysts coming out of IT, each organization creating their own business analytic groups.

What I tell these [finance] guys is, 'Look, your profession by definition is being expert at business measurement. Open the aperture. Nobody is better positioned to do this than you are. But not if you keep training and doing and thinking the way you're thinking.'

It's a matter of getting the balance right between three important functions that finance fulfils, as he explained to me in an earlier conversation.

Painted in a really broad brush, finance has three big functions. One is to process transactions and make sure everything balances, to make sure all the GAAP, IFRS stuff gets done. The second is to make sure you establish effective internal control and governance across the organization.

The third is partnership, which would be providing great analytics to the business, for decision-making across the board. To provide forward views, understanding of future potentials, planning — in essence financial analysis and planning.

The partnership aspect also involves being responsive to business change, he adds.

Establishing an agile organization and set of processes so that — the way I describe it is — finance doesn't have to be the business prevention team. When [the business] comes with a new business model or a new product, [finance] doesn't say, well we can't do that, because the rev-rec [revenue recognition] accounting, we can't do that in our system.

Digital future of finance

Most finance functions, says Nittler, are too weighted towards transactions and governance, with too little emphasis on the partnership angle. For finance, therefore, digital transformation means reversing the emphasis:

If you look at the resources allocated to each of those buckets, we're way over-weighted into the tactical, non-strategic stuff, with transactions and governance squeezing out the partnership opportunity for finance. The other extra added thing is, we're spending more money than we want to, to get that result.

I think transformation is flipping that model so that you're reallocating resources towards the partnership area. You're essentially automating down or out transaction processing and governance control, so that you're optimizing your partnership ability to deliver analytics, financial analysis, planning capabilities to the business and more agile processes, all at lower cost.

The Workday architecture provides the technology to enable that transformation because of its embrace of principles established in the early 1980s by William McCarthy, Professor of Accounting and Information Systems at Michigan State University. He proposed using information technology to store a richer data set. This is known as the REA accounting model, which stands for resources, events, agents. As Nittler explains:

Instead of building systems around a view of the transactions, why don't we capture the transactions essentially whole, with much more rich information in them? If we do that then we can use that same set of data to report on product, to report on profitability, to report on accounting, to report on anything. To turn it upside down, it's a 'do accounting last, not first' kind of view.

REA stands for resource, which is the stuff of the transaction, the thing that has value inside the transaction. Event is the activity — is it a buy, is it a sell, is it a transfer? — and agent is who. If you capture those things about every event that happens in the business, then you've got a set of data that you can use to materialize accounting balances, but you can also use it for these other things.

At the time McCarthy wrote his paper, computing couldn't offer sufficient data storage, processing power and database architectures to fulfil the model. But two decades later, when Workday got started, it was a different story. "That was the vision of Workday Financials from the beginning," says Nittler. Since then, the data that can be collected has grown even more, with the emergence of big data and now the Internet of Things, he adds.

As you start thinking about IP addresses in every light bulb, the amount of data that's going to come in, that you have the ability to work with — but maybe even the responsibility to work with — is going to have a dramatic impact on what happens in finance.

Thinking about the bigger picture

On the ground, though, Workday can encounter resistance from some quarters when it spells out this vision to prospective customers. Creating these richer datasets can mean extra data entry tasks when adding sales orders or purchases into the finance system.

While finance and business leaders value the results, accounts payable often push back. "I've seen people get fired over that," says Nittler. If the accounting function isn't thinking about the bigger picture, it's a difficult sell.

If they go in and say, 'My job is to enter journal entries, make sure I have reasonable internal control and produce a GAAP IFRS P&L,' there can be a negative aspect. I've had people tell me, 'It's not my job to worry about the management information. Somebody else does that.'

When that happens, we've got problems. Or we've got to rope those people in. But often times they're at loggerheads and the accountants don't want to release any of the data control because they're worried about governance. So to go to add [new metadata] to the transaction set becomes impossible.

The solution is for enterprises to bring a more diverse mix of skills into finance roles, he believes.

The ones that are most successful, if you go through that whole career arc, you recruit for more diversity. I think sexual diversity matters — people do come with different perspectives — but also functional diversity.

So you don't get everybody out of a CPA factory. You look for people who have a manufacturing background, you look for people that have a service background, you look for people that have different backgrounds, but who exhibit analytic skills. You recruit for that at the beginning, so you have more diversity.

Then as you bring them in, if you're big enough, you have management rotation where ideally you're putting these people into different roles — come into finance, go out into the field, come back into finance. You do those things a few times, so you really have experience and understanding and empathy for what's happening in those organizations.

Increasing automation will also have an impact, he adds.

As you automate more and more of the transaction processing activities, the skill level shifts from that transaction processing to a more holistic [view]. As we get more economically efficient transaction processing, those people-as-robots will go away, and then what's left will be, by definition, this other [category] which will evolve enough learning how to manage.

In a perfect world, CFOs will take a lead in building the right skill sets in their organizations, he adds. But he's fearful that many in the profession are too set in their ways.

If finance decides that the operational aspects of finance are going to be GAAP IFRS, they will let all of that other stuff go to IT, data science teams, whatever. They'll get disintermediated. I could see that happening if they don't embrace this idea. I hope they don't, being a finance guy.