Compliance costs halt savings gains.

• Author: Marshall, Jeffrey
• Position: QUICK STUDY

Compliance-related issues have reversed a decline in finance cost reductions that had been witnessed for more than a decade, at least for "average" Global 1000 corporations. Top performers, on the other hand, are continuing to drive down their costs, and the gap between them and the average group is widening.

This was a key finding from recent data compiled by The Hackett Group, which studies a series of corporate functions each year for its Book of Numbers. Hackett, which specializes in benchmarking studies and related analysis, created the 2007 edition, entitled "Performance Metrics and Practices of World-Class Finance Organizations," after reviewing detailed process-level metrics from more than 200 benchmark studies.

Specifically, Hackett found that the average Global 1000 company is spending 12 percent more in finance activities than it did three years ago, "and it's very likely that these companies will face long-term challenges in their efforts to continue to reduce finance costs."

Hackett concludes that the Sarbanes-Oxley Act, Basel II and other compliance mandates have caused most companies to "hit the wall," and they are finding themselves "hamstrung by the highly complex, non-standardized environments they have created, where processes remain fragmented and technology has not been used to best advantage."

The response to Sarbanes-Oxley, in particular, has created two distinct classes based on their quality of design and overall management of compliance, says A. Bryan Hall Jr., managing director at Hackett. "Most companies have simply embedded a higher-cost process," he said in an interview, while, for the best-run companies, "Sarbanes was only a hiccup."

Hackett determined that world-class companies have highly standardized process environments in finance, with more automated controls and clearer lines of responsibility for internal audit. "Instead of spinning their wheels on compliance issues, world-class finance organizations have been able to continue to make progress in terms of improving efficiency and effectiveness."

Automation, with attendant lower labor costs, is a huge factor in the gap between average companies and the top ones. Hall notes that average companies have only 15-20 percent of their finance functions automated, but that rises to 75-80 percent at world-class organizations.

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