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Hackett Group Research Confirms Companies are Responding to Sarbanes-Oxley

  Industry Statistics published in DM Direct Special Report
July 20, 2004 Issue
  By DM Review Editorial Staff

Largely as a byproduct of their Sarbanes-Oxley compliance efforts, companies have dramatically improved the reliability of their financial forecasting over the past year, according to 2004 Book of Numbers research into world-class finance performance from The Hackett Group, a business advisory firm and an Answerthink company.

Findings from The Hackett Group's 2004 Finance Book of Numbers show that more than two-thirds of all companies said they were now confident with their financial forecasting and reporting outputs. Only 9 percent of average companies made the same claim just a year ago.

But the improved forecasting capabilities have not come easily, and companies are also struggling with Sarbanes-Oxley compliance. In a reversal of long-term trends, companies were for the most part unable to reduce their overall finance costs, and monthly closing cycles have actually extended slightly over the past two years. Median companies now spend 1.08 percent of revenue on finance, according to Hackett. While that number has come down by 43 percent since Hackett began its research in 1992, median companies have seen little to no net cost reductions over the past few years. Companies are still finding ways to cut costs, but increased spending on compliance is largely offsetting these savings, according to Hackett. In addition, Hackett's research showed that a long-term trend toward shorter closing cycles saw a clear reversal in 2004, with both median and world-class companies now taking more than a week to close their books each month.

Many companies are missing the opportunity to use Sarbanes-Oxley compliance efforts as a way to drive toward world-class performance, reducing costs and improving both efficiency and effectiveness, Hackett found.

Hackett's 2004 Book of Numbers series has been produced annually for the past 12 years. This year, Hackett has made the research an integrated part of its new members-only Executive Advisory Programs, which are specifically designed to address the needs of C-level executives in finance, IT, HR, and procurement through a combination of world-class progress reports, original best practices research, confidential advisory services and member networking opportunities.

"With the SEC deadline looming, companies are making significant progress towards putting the necessary internal controls in place to achieve Sarbanes-Oxley compliance," said Hackett's Chief Research Officer Richard T. Roth. "Driven by this activity, and by other factors, including increased expectations from shareholders concerning overall corporate transparency, the reliability of companies' financial forecasts have improved dramatically.

"But the work is clearly taking its toll in other areas," said Roth. "For years companies have been able to cut overall finance costs and reduce time to close by streamlining their operations, implementing best practices, and improving their use of technology. For the moment, this has become almost impossible, because companies are being forced to spend anything they can save in other areas on Sarbanes-Oxley compliance initiatives. The changes in procedures, combined with greater overall scrutiny and review of financial results and forecasts by executives, auditors, and even, once they're made public, investors and financial analysts, mean that it takes longer to close the books each month.

"Our results show that most companies are clearly taking a very labor-intensive approach to solving these finance problems, investing significant time and energy to grind out the results they need," explained Roth. "This is a shame, because by doing this they're missing a real opportunity. Hackett's research proves that it clearly costs significantly less to run a world-class finance operation. Peak efficiency and effectiveness save money, and companies could be turning Sarbanes-Oxley into a wake-up call to drive process improvements and reap these rewards."

For 2004, a total of 67 percent of management at both world-class and median companies said they felt their forecasting process and reporting outputs had a high-degree of reliability. This represents a significant improvement over 2003, when only 9 percent of median companies and 33 percent of world-class companies made the same claim.

But Sarbanes-Oxley compliance efforts have also stalled and even slightly reversed the trend towards shorter close times. Average monthly close times for median companies rose from 5.2 days in 2003 to 5.5 days in 2004. World-class companies actually saw an even larger increase in close times, from 4.3 days in 2003 to 5.1 days in 2004.

According to Hackett's 2004 Finance Book of Numbers research, median companies now spend 1.08 percent of revenue on finance. This number has decreased only slightly since 2000, when median companies reported spending of 1.20 percent of revenue on finance. For 2004, world-class companies spent 31 percent less than their median peers on finance, only .74 percent of revenue. World-class companies also showed a slight decrease in finance spending over 2000, when they spent .90 percent of revenue on finance.

While finance spending was largely stable over the past few years, this represented a clear step backwards overall. Until recently, finance costs for median companies dropped significantly each year, for a 43 percent total decline since 1992.

While companies continue to cut costs in some areas, Hackett found that increased spending on compliance efforts has largely offset these savings. At median companies, spending on compliance has risen 38 percent since 2000, from .065 percent of revenue to .090 percent.

Hackett's detailed analysis showed that labor costs continue to represent the lion's share of finance expenditures, and are also an area where the performance of world-class and median companies clearly diverges. World-class companies spend only .46 percent of revenue on labor costs, supporting a staff of 63 FTEs/billion of revenue for finance, while median companies spend 65 percent more (.76 percent of revenue) and have almost double the finance staff, at 122 FTEs/billion of revenue.

World-class companies have reduced finance staff in part through the use of technology. According to Hackett's research, world-class companies spend 31 percent more on technology per full-time finance employee than their median peers. They make significantly more efficient use of ERP systems. While median companies rely on an average of two ERP systems, world-class companies now show an average of just one ERP system.

To achieve world-class performance, companies focus on a wide array of best practices in finance and other areas, Hackett's research showed. For example, world-class finance organizations are 46 percent more likely than their median peers to use a central data repository to generate business performance reports, and focus on 58 percent fewer budget line items in their analysis. They are also significantly more likely to have fully integrated budgeting and planning applications, and much more likely to use on-line tools to enable self-service for ad-hoc inquiries and financial reporting. Finally, they are twice as likely to use mature balanced scorecards with a mix of financial and non-financial metrics to analyze performance.

More information on The Hackett Group's Executive Advisory Programs and Book of Numbersresearch is available by phone at (404) 682-2323, by e-mail at info@thehackettgroup.com or on the Web at www.thehackettgroup.com.


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