Regulatory reform, ever-advancing technology and commercial pressures mean that finance departments have to constantly update and improve their procedures and processes. This difficult task falls to finance directors and chief financial officers, whose roles have evolved out of the backroom and onto centre stage in a matter of years.
Every commercial organisation has to embrace change and must constantly re-configure itself if it is to adapt to new market conditions and thrive. That is as true for banks as it is for any organisation, and within a bank it is often the finance department that is at the vanguard of change.
‘Finance transformation’ is such a commonly used term that it has almost become a cliché, but it is a vitally important aspect of any finance department. It has a very broad meaning, relating to anything that banks do to change, modernise or improve the role and operations of their finance departments.
Traditionally the finance director, or chief financial officer, and his or her team, focuses on crunching numbers and cutting costs, as well as pulling the backroom levers of control in areas such as compliance, risk management and corporate governance. However, over the past decade or so, the finance function has undergone a transformation.
The big picture
The finance function has become more proactive, aligning itself more closely to the bank’s business strategy, performing value-added tasks, and complying with an ever-increasing regulatory burden – without ignoring its traditional duties. The chief financial officer in most banks has therefore leapt onto the public stage to take a more visible commercial role, a role that constantly needs to be re-examined and adjusted.
That is the big picture. But even at the basic level, financial procedures and processes have to be reviewed and transformed. No matter how good the finance department’s processes are, they will often have to be updated, along with the associated software, and perhaps even the hardware.
The need for banks to transform is driven by a combination of commercial, regulatory and technological pressures, says Dr Nico Kohler, director of solution management, financial services, at software company SAP. “The commercial pressure comes from business line heads, who expect data to be correct and consistent,” he says. “They also want more information, provided faster and at a reasonable cost.”
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Moving the posts
The swathe of regulation emanating from international and regulatory bodies adds more complexity and means that processes and software must be adapted to ensure compliance. “For example, the current standard IAS 39 for the recognition and measurement of financial instruments is being replaced by International Financial Reporting Standards [IFRS] 9: Financial Instruments, which sets new accounting standards for the classification and measurement of financial assets,” says Mr Kohler.
“First, this means that the entire model regarding which transactions are measured at fair value versus at amortised cost is being changed. Second, impairment accounting is being significantly modified regarding the good book. And third, hedge accounting will be different in IFRS 9 compared with IAS 39.”
What sort of financial accounting processes is he talking about? The main ones are post, value, classify, adjust and close. SAP recently worked with a major European bank that had just acquired another bank, the objective being to reassess and integrate all financial processes. The bank’s requirements were to achieve data consistency, to prepare for forthcoming regulatory changes, and ‘faster close’ – creating period-end financial reports in a shorter space of time.
Dual challenge
Any transformation project faces two challenges: organisational and technical. From an organisational perspective, who ‘owns’ the project must be made clear, and the owner is typically the finance department. IT has an important role because it needs to ensure that data is delivered in the right way and in the correct granularity. Both finance and IT need to co-operate to guarantee success.
From a technical perspective, there are often many interfaces with the various legacy systems, and again it has to be clear who is responsible for those interfaces.
A successful project will also have to adhere to general project rules, such as defining clear targets well in advance, setting measurable milestones, and determining who is responsible for change management.
Software has to be introduced step by step, says Mr Kohler, because “a big-bang approach does not work”. It can be phased in in one of three ways: by country, by line of business, or by software layers. “The top layer is financial reporting, with state-of-the-art reporting tools. Below that we have financial consolidation. Then you have the general ledger for processing data on a general ledger account level. Integrated with the general ledger we have our accounting for financial instruments product. Whichever approach the bank takes, the key is a gradual approach,” adds Mr Kohler.
It is not usually possible to make do with minor software upgrades. A finance transformation project means that the bank changes its processes and therefore it needs completely new software to support these processes. The software not only has to be developed, but also tested before it goes live. In many instances the old system and applications will not be switched off so there is back-up in case anything goes wrong.
Future drivers
The finance and risk functions have been converging in recent years, a trend that will continue and drive further change. Finance executives have to get to grips with risk-management-related regulations like IFRS, Solvency II and Basel II (and soon Basel III), and to do that they must work closely with their colleagues in risk. Similarly, risk executives are co-operating more with the business lines and finance functions to ensure the risk-return balance is right.
“This convergence is strongly supported by the SAP banking platform,” says Mr Kohler. “Banks can run risk management scenarios, such as Basel II, and accounting, such as IFRS, on the same system with the same set of source data and with consistent methods; and a book value which was calculated by an accounting service can be used for Basel II as a basis for the exposure at default.”
Technological change will also drive future finance transformation programmes. For example, mobile phones will be increasingly used to provide finance teams with data, and in-memory computing will make it possible to provide even higher volumes of data in real-time.
