Virtual Close: Not So Fast

Whatever happened to the "virtual close"? Three years ago, as E-business dominated corporate agendas, it seemed that all companies would soon be able to close their books and produce financial statements in scarcely more time than it takes to click a mouse. A handful of companies, notably Cisco Systems, were lauded for showing the way. By 2000, in fact, Cisco CFO Larry Carter was almost blasé about his company's hard-won ability to close its books quickly, noting that the real achievement was not the fast close per se but the better decision-making it allowed.

Yet research by KPMG Consulting Inc. shows that companies have made virtually no headway in achieving the virtual close. Surveying 550 companies, KPMG found that the average close took 8 days in 1999; two years later it had decreased by just 1 day. When you look at the entire process — closing the books, getting preliminary results to management, having auditors sign off on the results, and issuing a press release — no progress at all has been made. The typical respondent needed 34 days to achieve that in 1999, and the same number last year.

Details, Details
What's gone wrong? For one thing, "executives are simply underestimating the amount of work that it takes to tighten the cycle," says Jens Raschke, a senior manager at KPMG. "They understand that there's a problem, but they often think the solution is just a matter of reducing cycle times with new, flashy technology; they don't see that it's about going down into the small details that are causing the problem and fixing them, one by one." Put another way, ultimately it's about process, and changing processes requires strong leadership and sustained commitment.

There's another reason that CFOs cite for their slow reporting — fear. Mindful of reporting-related corporate scandals, companies are understandably concerned about jeopardizing the quality and credibility of the information they report for the sake of faster cycles. It's a valid concern, but that is no excuse for CFOs to stop driving through improvements, says Raschke. "There doesn't need to be a trade-off," he says. "Remember, the only way you can get faster is if you improve the quality of your processes."

Someday, but Not Today
Besides, with the credibility and integrity of corporate disclosure practices now under heavy scrutiny by regulators and investors alike, any move to improve the timeliness — not to mention the accuracy — of the information a company discloses is welcome. As Eve Greb, a ratings specialist at Standard & Poor's, puts it: "From our point of view, [world-class fast closes] have a positive effect on the company." She agrees with one CFO's assessment that "it shows that management is on the ball." Greb was speaking before the Securities and Exchange Commission voted 5­0 to require companies to produce more-timely quarterly and annual statements as a way to boost investor confidence. Meeting those new requirements (10-Ks must now be filed 60 days after the close of the fiscal year versus 90, while quarterly reports must be filed within 35 days versus 45) won't require real-time capabilities, but they do add impetus to a movement that seemed inevitable two years ago but then foundered.

Some companies believe they can deliver real-time closes eventually, but the majority concede that for now, they need to address such nitty-gritty issues as systems standardization and integration. Best-in-class companies such as Cisco offer some object lessons. First, all make sure their processes and procedures are consistent and reliable by, for example, introducing a single chart of accounts for their entire organization. Second, they have standard, companywide data warehousing or similar technology, and have automated most — if not all — of their processes. More often than not, that means they've installed Web-based applications or interfaces to connect consolidation tools and local companies' general-ledger systems. Finally, fast-close projects at best-in-class companies are a work in progress, requiring continuous vigilance and rejuvenation.

Drilling Down
One new champion of the fast close is Germany's Veba Oel. The $26 billion oil and petrol-retail company recently took 18 months to complete a fast-close project, "and we're still learning," says Bärbel Klatt-Seipelt, who began leading the project in 2000.

The learning curve has, in fact, been steep. Before the project began, fast closes at Veba Oel "were in many respects a mess," says CFO Thomas Hetmann. A big part of the problem was that few processes were standardized across the company, which comprised three businesses for marketing and distribution, refining, and upstream production, with about 100 subgroups filing reports to them. The upshot: Hetmann's team in Gelsenkirchen faced the monthly chore of chasing late reports, manually keying in missing data, and addressing discrepancies between the various units' reports in order to close its books.

Needless to say, fast closes were unthinkable. "It was so frustrating for staff to deal with all our inefficiencies that they had pretty much given up trying to be fast," says Hetmann. But pressure to be faster was mounting — E.On, Veba Oel's parent at the time, needed to begin moving toward quarterly reporting to meet stock-exchange regulations in Frankfurt.

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