Agility, transparency, velocity
Meet the challenges and seize the opportunities of corporate disclosure.
After a decade of spectacular financial scandals, high-profile business implosions and a global credit market collapse, at least one aspect of the economic future now appears perfectly clear: Corporate disclosure requirements are trending irresistibly toward transparency. Investors, regulators and other stakeholders are demanding financial performance and operational data in greater variety and detail.
A growing consensus holds that traditional financial reports don’t adequately depict risk or opportunity in the knowledge-based economy. Alternative standards are being proposed to better measure intangible value sources such as strategy, innovation, personnel and intellectual property. Other initiatives seek core-value information to illuminate an organization’s social, ethical and environmental behavior.
Resistance is futile
While greater disclosure might be anathema to management, transparency isn’t going to be optional. Companies generally want ready access to capital and sustainable relationships with the communities in which they operate, and too many parties have legitimate stakes in their prospects and performance. The only viable course is to accept an increasingly dynamic and revealing disclosure environment and to proactively develop the data management infrastructure and strategies necessary to meet changing requirements efficiently and cost-effectively.
The benefits will extend far beyond improved relationships with investors and regulators. More accurate, reliable and available management information will drive operational improvements throughout the business, reducing costs, slashing cycle times and revealing new revenue opportunities. The challenge will be to accurately understand the changing demands on the data management infrastructure.
A significant opportunity concealed within new disclosure requirements is the chance to better align internal decision support with external reporting, so day-to-day business decisions throughout the organization are based on the same performance metrics and operational data that drive investor and community expectations.
“Most people think of transparency in terms of disclosure to outside markets, investors, customers or regulators, but it’s also important to provide internal transparency,” explains John Hagerty, vice president of research at AMR. “Companies need to give their managers the right insights about what’s driving their business so that they can make the right decisions. We all need to be watching the same set of metrics. In fact, external transparency should really be grounded in a well-thought-out approach to internal transparency.
“Recently, we’ve seen a flurry of inquiries from companies about having to rethink the entire financial reporting infrastructure,” Hagerty continues, “because in order to get the efficiency they need to handle disclosure in a more dynamic fashion, they have to have the proper infrastructure in place.”
A key requirement of that infrastructure is the ability to provide decision support to both internal and external audiences from the same underlying data, consolidated and managed in an enterprise data warehouse (EDW).
“Internal transparency and external disclosure should both be driven off the same engine,” Hagerty says. “There may be internal and external versions with different levels of detail, but they really need to come from a single source. I think that many companies start down this path with the idea that the internal and external views are separate. They try to subset that information, to put some sort of firewall between what’s internal and what’s external. But one of the things we see is that it is very important for companies to have a unified view of all information that serves multiple masters.”
An EDW plays an important role in making sure the information organizations disclose externally is the same information that’s driving internal business decisions. And a real benefit comes from examining the business from the outside in.
“If you understand what each of your key constituent groups expect of you, it can give you a fresh perspective on where you should be putting your efforts,” Hagerty adds.
Prove what you disclose
Perhaps the most arresting aspect of transparency is that companies may have to do more than disclose additional operating and financial information. They may eventually be asked to prove the validity of the numbers they report as an integral part of each disclosure, whether those numbers reflect current financial performance, the future value of intellectual property assets or the size of an organization’s global carbon footprint.
“Businesses are certainly going to be asked to track and report a wider range of performance metrics,” says Mark Beyer, research vice president at Gartner. “But they’re also going to be asked to prove the numbers they report. We had financial reports before, and we still had a global meltdown, so the new demand will be to report the performance numbers, prove those numbers and then prove that your proof is valid. There’s going to be a whole series of new cross-checks that weren’t done before.”
The key to those proofs, Beyer says, lies in the metadata. “Metadata tells you who changed data and when they did it. It links you to the context around the change. If you’re doing metadata management correctly, it becomes very difficult to fabricate data. Metadata is so pervasive and diverse that trying to track it all down and managing it is a huge challenge. This is a problem because it is everywhere and difficult to collect and analyze. This is also part of the solution: Since it is everywhere, it is hard to change all of it and thus very difficult to hide unsupported changes in data.”
The solution to this problem may be to selectively integrate the metadata associated with key reporting metrics in the EDW, using the analytical resources of the data warehouse and business intelligence (BI) environment for forensic validation of all external disclosures. One result would be an entirely new role for the EDW in data governance.
Historically, service level agreements (SLAs) in the data warehouse were predominantly focused on data quality and performance optimization. “But the new SLA is going to add a level to assure me that the data I have is adequate for compliance. The ability to do the proofing is going to become part of the SLA,” Beyer says.
“At the end of the day, the CEO has to ask himself whether he’s willing to risk a new wardrobe of prison jumpsuits because his numbers didn’t stand up under scrutiny.”
Subsequently, investors will begin to demand forensic analysis to validate management’s claims regarding new business opportunities. “Don’t just show me a number that indicates an opportunity, but show me that your analysis follows the management principles we’ve agreed to in our organization,” adds Beyer.
Metadata analysis, however, can do much more than validate performance metrics. It can also help managers identify hidden revenue and cost-reduction opportunities. “For one thing, if I find areas where I’m not following my organization’s stated business and risk models, but where I’m getting great results that I can verify with metadata forensics, then I can take that new model and enhance my operating performance everywhere else that it applies,” Beyer explains.
In manufacturing, one such opportunity might involve an experimental reduction in warranty parts inventory. If this inventory has not driven up claims, then it’s possible that other parts categories can also be reduced with the same unaffected outcome. In banking, it might be a group of loan applicants unfairly penalized by overly broad risk models. “Of course, you don’t let data managers determine where perceived enhancements can be applied,” says Beyer. “That would be a business person’s job, and that is why they pay CFOs the big bucks.”
Come to grips with data governance
Another transparency impact that holds significant opportunities for wider operational improvement is the heightened importance it places on effective, enterprise-wide data governance.
“Disclosure requires data that is indisputable, assured, consistent and reliable,” says Claudia Imhoff, president of Intelligent Solutions. “If you’re going to hang your hat on the accuracy of your reporting, you’d better be sure of your data. There has to be a realization, right at the top of the organization, that if you scatter your information across the environment there is a high probability you will get really screwed-up results anytime you try to report on a real enterprise-type number. There needs to be centralized oversight of the data that’s being integrated, and of all the presentation and reporting applications that use that data.”
The need for disclosure gives credence and authority to the whole notion of data governance and to the importance of an EDW, according to Imhoff. “There have been a lot of potshots taken at the enterprise data warehouse—it’s too big, it takes too long, it doesn’t satisfy certain specific business needs. But at the end of the day, the CEO has to ask himself whether he’s willing to risk a new wardrobe of prison jumpsuits because his numbers didn’t stand up under scrutiny. A lot of companies used to look at data stewardship and decide that it just wasn’t a priority. All of a sudden it’s a significant capability.”
Organizations can simultaneously improve reporting integrity and protect their officers and directors from the liability risk of inadvertent misrepresentation by:
- Applying rigorous quality controls to financial and operational performance data
- Consolidating that information in an EDW
- Implementing policy controls requiring the exclusive use of warehouse data in all external disclosures
“One of the things we see is that it is very important for companies to have a unified view of all information that serves multiple masters.”
By automating data production and report composition, manual errors can be vastly reduced and the reporting process itself can be rendered largely transparent.
And the benefits of a single source of reporting and management information go right to the bottom line.
“When everybody is finally singing from the same sheet of music, companies can stop spending huge amounts of time, money and effort doing reconciliation—something that has no business value whatsoever,” Imhoff says. “It’s an enormous hidden cost that everyone sweeps under the rug and avoids measuring, but it’s huge. How many hours every day do analysts spend looking at spreadsheets and trying to understand why the numbers don’t match?”
Disclosure requirements are changing, whether organizations like it or not. A multitude of internal and external stakeholders are taking a much more assertive role in corporate oversight, and management must prepare to report against a widening range of financial and operational performance standards.
The improvements in data governance and management necessary to meet these new requirements will be significant, but they will return equally impressive benefits to companies that leverage them to streamline internal operations and enhance decision support. An EDW is the cornerstone component of a data management infrastructure that will make transparency a practical and cost-effective reality.