linking numbers and narratives - cfo · linking numbers and narratives: correlating quantitative...

LINKING NUMBERS AND NARRATIVES

Correlating Quantitative Reports with Qualitative

Analysis

A report prepared by CFO Research in collaboration with IBM Business Analytics

CFOresearch

Linking Numbers and Narratives: Correlating Quantitative Reports with Qualitative Analysis is published by CFO Publishing LLC, 51 Sleeper Street, Boston, MA 02210. Please direct inquiries to Matt Surka at (619) 790 3211 or [email protected].

CFO Research and IBM Business Analytics developed hypotheses for this research jointly. IBM Business Analytics funded the research and publication of our findings.

At CFO Research, David Owens directed the research and wrote the report. CFO Research is the sponsored research group within CFO Publishing LLC, which also includes CFO magazine, CFO Conferences, and CFO.com.

July 2012

Copyright © 2012 CFO Publishing LLC, which is solely responsible for its content. All rights reserved. No part of this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without written permission.

A report prepared by CFO Research in collaboration with IBM Business Analytics

LINKING NUMBERS AND NARRATIVES

Correlating Quantitative Reports with Qualitative Analysis

CFOresearch

“Less time checking, more time analyzing” 1

Getting the most out of narrative analysis 6

Sponsor’s perspective 8

Contents

Linking Numbers and Narratives:Correlating Quantitative Reports with Qualitative Analysis

© CFO PUBLISHING 2012 1

The numbers don’t always tell the whole story.

That’s one of the messages heard from the sur-vey conducted by CFO Research, in collabora-tion with IBM Business Analytics. We surveyed finance executives from U.S. companies on the tools they use in preparing their financial statements and on how they are incorporating narrative elements into both internal and ex-ternal reporting. These narratives can include disclosure statements, management discus-sion and analysis (MD&A), footnotes, variance analysis—anything that can be used to provide the “story to tell,” as a controller from a manu-facturing company writes in the survey.

Survey respondents largely agree that financial statements, annual reports, and management re-ports can—and should—do more than just col-lect and display a company’s numbers. Finance executives recognize that the value of narrative discussions of financial results extends beyond their use by investors, analysts, and regula-tors. A large majority of respondents (85%) say that their own management benefits from the analysis and insights developed from the close and reporting process. In addition, 69% say that narrative analysis is just as useful (43%) or even more useful (26%) for management than it is for investors, shareholders, and analysts.

Narrative analysis can be put to use, for example, in “planning before the end of the quarter to get alignment on probable key issues,” according to one respondent. A director of finance at a financial services company sums

About the research

In May 2012, CFO Research, in collaboration with IBM Business Analytics, received 200 responses to an online survey of finance executives based in the United States.

Respondents work for companies in a broad range of market segments, as follows:

Note: Percentages may not total 100%, due to rounding.

Annual revenue:$100M-$500M 32%$500M-$1B 20%$1B-$2B 13%$2B-$5B 13%$5B-$10B 9%$10B-$20B 7%$20B+ 8%

Respondent titles:Chief financial officer 26%Director of finance 25%VP of finance 20%

Controller 17%EVP or SVP of finance 4%Treasurer 4%Other 6%

Industry:Auto/Industrial/

Manufacturing 17%Financial services/

Real estate/Insurance 15%Public sector/Nonprofit 9%Wholesale/Retail trade 9%Chemicals/Energy/Utilities 8%Health care 8%Food/Beverages/

Consumer packaged goods 7%Transportation/Warehousing 7%Business/Professional

services 4%Hardware/Software/

Networking 4%Pharmaceuticals/

Biotechnology/Life sciences 4%Telecommunications 4%Media/Entertainment/

Travel/Leisure 3%Aerospace/Defense 1%Construction 1%Other 2%

“Less time checking, more time analyzing”


2 © CFO PUBLISHING 2012

up the view of many other respondents when he writes that the goal of narrative analysis is “providing information which adds value and is not found elsewhere.”

The question, then, becomes one of finding ways to extract the most value from the numbers. Overall, respondents say that narrative analysis should discuss the “issues that [the numbers] identify rather than the numbers themselves,” as the CFO of a consumer goods company writes. But to get the most out of their numbers, finance staff need to spend “less time checking, more time analyzing,” writes the VP of finance at a telecommunications company.

Indeed, the survey suggests that, for most com-panies, creating the story from the data can take

Better integration and standardiza-tion in systems and processes will improve both the financial close and the value of narrative analysis.

up a good deal of management’s and staff’s time alike. Nearly nine out of ten respondents say that their companies spend either a moderate or a substantial amount of staff time and manage-ment time in preparing narrative portions of financial reports. (See Figure 1.) Respondents agree that better integration and standardization in systems and processes will improve both the financial close and the value of narrative analysis. If the goal of narrative discussions is to establish a “clear relation between financial data and substance (non-financial information),” what’s needed most to enhance the value of financial reporting, says a VP of finance at a manufacturing company, is “more automation, more variance analysis/explanations, and less keying of information into spreadsheets.”

Figure 1. Many finance executives say that narrative portions of financial reports consume a substantial amount of their staff and management time.

How much staff time is required to collect, consolidate, and prepare the narrative portions of your financial reports?

How much management time is required to analyze, approve, and review the narrative portions of your financial reports?

Minimal11%

Minimal13%

Moderate49% Moderate

56%

Substantial41%

Substantial31%



However, nearly two-thirds of executives say their companies still must manually update narrative portions of their reports if any data point changes. (See Figure 2.) Nearly all respondents (86%) report that it takes them several days or more to collect and consoli-date the data needed for narrative discus-sions. Once the data is in hand, say a little more than 80% of respondents, they then spend at least several more days analyzing the data and writing narrative.

Automating the financial close and reporting process provides some traditional benefits: closing faster, for example, and having greater confidence in the integrity and accuracy of the data. The more a company relies on personal productivity tools (word processing, Excel, email, etc.), the more difficult it is to maintain data security and ensure accuracy, survey respondents tell us. (See Figure 3 on page 4.)

And about 60% of respondents say that the number of handoffs involved in preparing financial reports significantly increases the risk of error.

As Figure 3 shows, between 40% and 50% of survey respondents say that a reliance on personal productivity tools also makes it more difficult to audit financial statements, update them, and collaborate in preparing them. These difficulties are more likely to come into play with activities outside of the formal require-ments of the reporting process. Figure 4 (page 4) shows that only about a third of the finance executives in our survey report that they have to rely extensively or exclusively on personal productivity tools to accomplish their local and group closes; but half of the respondents say that their companies depend more heavily on these tools for disclosure management and “soft” closes or management reporting.

Figure 2. Few companies are able to take advantage of the benefits of automation in updating the narrative portions of financial reports.

Do your company’s information systems automatically update narrative analysis and discussions any time an underlying data point changes?

63% 26% 8%

No, we must manually update all reports any time a

data point changes

Some, but not all reports can be

updated automatically

Yes, every time a number changes, the system automatically

updates reports



Figure 3. Reliance on personal productivity tools makes many financial close activities more difficult.

Does reliance on personal productivity tools make it more or less difficult for your company to carry out financial close activities?

More difficultNot more difficult

Perform account reconciliation

Audit financial statements

Collaborate in preparingfinancial statements

Update financial statements

Ensure accuracy of data

Maintain data security 68%

47%

43%

41%

31%

62%

29%

49%

56%

55%

69%

38%

Figure 4. Most companies still rely heavily on personal productivity tools to carry out portions of the financial close and reporting process.

“Less time in preparation = more value for the company.”


Note: For each category, 0%–3% of respondents said, “Don’t know/Not applicable.”

Relies extensively or exclusively on personal productivity tools

Disclosure management

“Soft” close, flash and management reporting

Local or sub-groupconsolidation and close

Enterprise close and consolidatedfinancial statements

56%

35%

49%

29%


“Since [financial statements] are prepared so long after the fact, they are not used by management.”

Consequently, about six out of ten finance executives in the survey agree that they are spending more time developing narrative than in the past; in fact, they are spending more time than they should. (See Figure 5.) And time is value—many respondents would agree with the simple formula proposed by a VP of finance at a $1B+ company in the pharma-ceuticals/life sciences industry: “Less time in preparation = more value for the company.” As a director of finance from the health care industry notes, “Since [financial statements] are prepared so long after the fact, they are not used by management.”

Figure 5. Companies are spending more time developing narrative discussions of financial results.

“My company now spends more time developing narrative discussions of financial results than it has in the past.”

“Checking, correcting, and updating data references in narrative discussions takes more time than it should.”

Neither agree nor disagree20%

Neither agree nor disagree22%

Agree strongly15%

Agree strongly13%

Disagree strongly5%

Disagree strongly4%

Agree somewhat46%

Agree somewhat46%

Disagree somewhat15%

Disagree somewhat15%



Delivering value from narrative analysis, our respondents agree, starts with identifying the numbers that make a difference among the myriad data points generated for financial reporting, and getting that information into the hands of management quickly.

The amount of time spent on narrative is related to the degree of automation of financial-close activities. Those relying exclusively or exten-sively on spreadsheets are much more likely to characterize the amount of staff time required for narrative analysis as “substantial” (55% of spreadsheet users vs. 35% of all others), as well as the amount of management time required (42% vs. 27%). Extensive use of spreadsheets also requires more iterations, adding more time to the process: those saying they rely either exclusively or extensively on spreadsheets are much more likely to report that they must go through multiple iterations to update data points and narrative content (52% vs. 29%).

The ultimate goal, writes a VP of finance from a $10B+ company in the leisure industry, is to “streamline the time to collect so man-agement can spend more time analyzing and discussing.” To other finance executives in the survey, this would allow them to trans-form a static, numerical snapshot of past per-formance into forward-looking analysis that takes the “big picture” view of the business. The CFO of a $1B+ manufacturer says his company’s management would benefit from “reducing the amount of minute data required by regulations and returning to the standard

“Streamline the time to collect so management can spend more time analyzing and discussing.”

of discussing the business from ‘manage-ment’s view’ in the MD&A.” A VP of finance in health care is looking for narrative “to be more forward-looking/predictive versus an exhaustive but often incomplete discussion of what already happened.”

In the same vein, a finance manager in the public sector advocates focusing “more on leading indicators than on lagging perfor-mance.” As he says, management needs to “fix the future, not worry about the past. Sure, you can learn from past mistakes, but you need to know more quickly whether the future is at risk.” And a director of finance in a pharmaceutical company writes, “We need to better tie in metrics and other non-GAAP information to enhance internal reporting and communications. The more we can sensitize stakeholders to the impact of our key metrics, the more aware they will become as opportu-nities to move the needle present themselves.”

For this reason, “preparers of narratives need more visibility into what is actually driving the results,” writes a director of finance in the entertainment industry. This entails “more direct input from business leaders rather than central units preparing” the narrative, says one senior VP, and “more responsibility for higher-quality analyses at the business-unit level,” according to another executive.

This kind of “direct input” depends on how well the financial system can support shar-ing and discussion of the data underlying the

Getting the most out of narrative analysis


Management needs to “fix the future, not worry about the past.”


analysis. A finance executive in financial ser-vices says what is needed most is “enhanced collaboration among units and stronger alignment with a mission-critical focus.” Less time spent on simply getting the data together can translate into better collaboration with and involvement of business management; the survey shows that heavy spreadsheet users are more likely than others to say that the use of personal productivity tools interferes with col-laboration (54% vs. 38%).

Respondents list a number of other enhance-ments they are looking for in narrative devel-opment processes and tools:

n “Automatic notifications from the system when various parts of the close are completed, and the ability to drill down into the details supporting the various numbers in the financial close process”

n “More and better business rules (e.g., variance triggers and limits) to flag issues and concerns in the analysis process”

n “Greater flexibility in creating standard, presentable reports in the enterprise system”

n “Standardization of the personal produc-tivity forms used that supplement direct inputs into our enterprise system. Forms should match the system inputs.”

n “Automatic feed of financial data to 10-K/10-Q drafts”

What’s needed:

“Be more forward-looking/predictive.”

“Enhanced collaboration among units and stronger alignment with a mission-critical focus.”

A VP of finance from the food-and-beverages industry encapsulates the view of many of the respondents when he writes: “We are in the process of integrating external reporting, our single-instance global enterprise resource planning, and planning and budgeting (combi-nation of different systems and spreadsheets) into one tool—once completed in 2014, we expect to have found the Holy Grail.”

Getting the most out of narrative analysis


8

Working with CFO Research, IBM’s goal for this study was to gather finance executives’ views on how analytics are being used today in the reporting process (both internal and external), and how they should be used in the future. The following is our interpretation of some of the findings from the survey, and what they mean to IBM’s solution offerings. Some key facts that we would like to highlight:

n 85% of finance executives said that their companies’ management benefits from the analysis and insights developed from the Financial Close Management (FCM) process.

n 69% of finance executives agreed that “narrative analysis is useful for management in addition to investors, shareholders, and analysts.”

n 90% of finance executives reported that moderate (49%) or significant (41%) staff time is required to collect, consolidate, and prepare the narrative portions of financial reports.

n 87% of finance executives reported that moderate (56%) or substantial (31%) management time is required to analyze, approve, and review the narrative portions of financial reports.

With the fast-paced and ever-changing uncertainty surrounding the global economic marketplace, it is critical that companies find ways to change their financial close systems going forward. IBM believes that any decision to automate these systems should be accompanied by a simple, yet powerful, value proposition: time, control, and confidence.

A system that can add time allows the finance and analytic functions to gain bandwidth to do more than just administer and collect information. It gives them the time to review the data and add value through analysis, thereby providing insight to the internal and external consumers of the various reports.

Any reporting system must provide its users with control over the process through visibility and auditability of the data that is leveraged in the reporting cycle. The days of manual versioning and ticking and tying that used to be instrumental for many organizations when adhering or conforming to various mandated and regulated governance and compliance requirements must become a thing of the past.

Lastly, a system must provide confidence in the preparation process of any report. The ability to source data from any repository required to generate the report—as well as ensure that every instance of the data is updated seamlessly when the originating values in the source systems are changed—is paramount. The type of data required should

not impact the ability to streamline the automation of a process. Whether the data is financial, operational, a collection of metrics, or a group of statements of public sentiment, the need is the same when it comes to reporting. When multiple users from various areas of an organization are working on such reports, the system must be able to allow these users to work simultaneously and collaboratively, with transparency and accountability of actions ensured through a rigorous change management control process.

IBM is confident that our Disclosure Management solution with Cognos FSR and our FCM product offering, which also includes Cognos Controller for financial consolidation, delivers on the key value proposition requirements:

n Cognos FSR is a reporting platform that empowers non-technical staff to manage and monitor any reporting requirement with automated data integration, in a controlled and collaborative environment that includes integrated tagging capabilities for various taxonomy filing requirements. Cognos FSR enables the delivery of the value proposition for more than just external reporting by providing the reporting platform that is required in today’s marketplace when it comes to “Correlating Quantitative Reports with Qualitative Analysis.”

n Cognos Controller is an application-based consolidation offering that provides visibility into the consolidation process and empowers finance to manage and maintain it without a reliance on IT resources during the time-crunched close cycle. It also allows finance to leverage the system to accomplish traditional close process tasks without the need of IT coding skills.

Disclosure Management is truly a revolutionary tool that is critical for any organization. The ability to streamline a reporting platform and appease all reporting needs without being limited to just data generation is paramount. Organizations realize that this system approach to all quantitative and qualitative reporting requirements reaches beyond the typical reporting tools and is a must-have product in today’s demanding global environment.

Sponsor’s perspective


Request a call

To request a call or to ask a question, go to ibm.com/business-analytics/contactus.

An IBM representative will respond to your inquiry within two business days.

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