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Software // Information Management

OFR, Reporting and Business Intelligence

Don't invest in IT just to satisfy regulations.

VentanaView™

Summary
Securities regulation has been a race to the top for the past decade, as countries enact new legislation and rules to enhance the timeliness, truthfulness and transparency of publicly quoted companies’ reports to shareholders. In the U.K., the Accounting Standards Board enacted more stringent requirements for a listed company’s operating and financial review or OFR (akin to the management discussion and analysis report in the U.S.). To manage the process of creating a useful and auditable OFR, companies need a solid set of financial and operational data and the ability to analyze and report on it. Ventana Research believes these rules will require most companies to expand the scope of their existing OFRs and revamp the way they collect and analyze operating and financial data. To do so, we expect a significant minority will have to invest in new software or systems.

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The OFR is an explanation companies must provide in their annual reports of the main trends and factors driving their results and those likely to affect their future performance. New rules covering the OFR have been issued by the U.K.’s Accounting Standards Board (ASB) as Reporting Standard 1 (RS1), under the ASB’s new legal powers. RS1 lays out in a more specific fashion the comprehensive requirements for the OFR made under the Companies Act. The new rules apply to companies with financial years beginning on or after April 1, 2005. Less stringent rules apply to smaller companies.

The degree of the challenge posed to CFOs by the new OFR regulations varies among companies. The maturity of the company’s existing OFR is one factor. From Ventana Research’s reading of annual reports, some companies already appear close to complying with RS1, while those that in the past have published only a cursory review will need this next year to determine what information they must publish and the context in which to provide it. From an information standpoint, companies will need to have both operational and financial data available to make an informed (and verifiable) report on past results and future trends, which means they must have systems adequate to support the acquisition and analysis of data.

In theory, a company could create a splendid OFR using paper-based ledgers and an abacus. The reason for investing in technology is to make the process of creating the OFR faster, more efficient and more reliably consistent. Ventana Research believes most Global 2000 companies have at least some of the information and technology assets in place to handle the requirements, but they may not be using them effectively. They may have gaps that require a software fix, architecture and configuration issues, or process problems that must be resolved. Our recent study on reporting, consolidation and closing (sponsored by Cartesis, Clarity Systems and Cognos) found that a solid majority of finance and line-of-business executives and managers (mainly in North America) believe they receive at least an adequate amount of financial and operational data from their IT systems, but one-third do not think they have enough financial information, and 40 percent say they do not get enough operational data. If British executives and non-executive directors have the same view, many organizations will have to improve their IT systems to be able to conform to RS1’s requirements.

Assessment
The usual rule applies: making IT investments simply to comply with regulatory requirements is a mug’s game, whether it is Sarbanes-Oxley or the new OFR. Management, particularly in the finance department, must (and, we believe, easily can) find ways to achieve real business benefits from these sorts of investments. Companies that take too long to close or are unable to provide executives and managers with useful information about performance will discover that upgrading their IT systems to meet the RS1 requirements can pay other dividends as well. However, Ventana Research believes that realizing a return on the investment will happen only if the overall plan is to give employees a more timely set of relevant information and foster or extend a measurement culture that reinforces a performance management approach to their business.

About Ventana Research
Ventana Research is the leading Performance Management research and advisory services firm. By providing expert insight and detailed guidance, Ventana Research helps clients operate their companies more efficiently and effectively. These business improvements are delivered through a top-down approach that connects people, process, information and technology. What makes Ventana Research different from other analyst firms is a focus on Performance Management for finance, operations and IT. This focus, plus research as a foundation and reach into a community of over two million corporate executives through extensive media partnerships, allows Ventana Research to deliver a high-value, low-risk method for achieving optimal business performance. To learn how Ventana Research Performance Management workshops, assessments and advisory services can impact your bottom line, visit www.ventanaresearch.com.

© 2005 Ventana Research

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