Finance & IT: the transforming power of technology; Over the years, technology has reshaped the finance function--and sparked a profound change in the way business is done. But, surprisingly, much has stayed the same. A look at the juncture of business, finance and technology.

• Author: Cohan, Peter S.
• Position: Information technology

Will computers rule the world someday?, asked a June 1965 article in Financial Executive, "Whither the Machine in Another Ten Years?" It called that the "big 20th century question that joins earlier big questions mankind has pondered: If one sails West, will the ship fall over the edge of the World? Will man ever be able to fly? Will the Industrial Revolution mean the end of handicraftsmanship? Will the automobile mean the end of the horse? Will TV mean the end of Hollywood filmland productions and radio broadcasting?"

The article went on to say that some of the questions "have been resolved with a minimum of detriment to mankind; but never in so short a time as the mechanization of the business and governmental worlds through the medium of electronic data processing." Referring to a then-current list of 500 areas of applications of computers, it queried: "In 1975, what will be included in such a list?"

Imagine how the answers have changed since then!

It's undeniable that since the formation of The Controllers Institute of America 75 years ago, much progress has been made in conducting business and, specifically, in the finance function. However, regardless of the changes, the basics remain: Every business needs its finance department to produce financial statements, develop budgets, manage the company's cash cycle and interact with the financial markets.

The same Financial Executive article notes that at that time, computer makers "view this century's alarm over [man] being exchanged for a machine on either the decision-making level or the labor-level jobs as the result of 'pure science fiction.' They say that computers are merely tools to help man do his work faster and better--and will remain so."

From information technology's (IT) earliest iterations, there's been a perpetual "man-versus-machine," which-drives-which struggle. Back in '65, we were assured man would win over the technology. Here in the 21st century, with technology moving faster and getting smarter and more sophisticated, this struggle shows no signs of ending; and the question about which drives which still remains.

Another insistent issue concerns how finance should interact with the "business." Some executives have hoped for finance to be a strategic partner, but finance people have not always had the personal style and business savvy needed to assume the strategic role.

Evolution of Finance And IT

Jeff Henley, chairman of enterprise software-maker Oracle Corp., helps to provide a good overview of changes in the finance function due to the influence of IT during his storied career. Henley, an FEI member, was previously the firm's CFO for 13 years (1991 through 2004). Prior to that, he served as CFO for another company. All told, his career spans 39 years, thus far, and in helping to drive two major technology companies, he's had more than a front-row seat to the interaction of finance and business.

Henley views technology and globalization as the two biggest forces for change in the finance function. Technology has helped speed up the production of financial statements, simplified the development of budgets and the analysis of performance to plan, streamlined the cash cycle and enhanced the communication among finance-department employees, as well as between finance and its constituents--among them, business units, investors, banks and insurance companies.

Technology has also enabled the globalization of finance. It's now possible to perform many of finance's core activities in a single, and often low-cost location--such as India or the Philippines, where labor rates are much lower than they are in, say, the U.S. Further, Internet access has enabled businesses to communicate with their central locations 24/7--increasing finance's productivity--along with its value to the business.

What follows is a capsule of some significant transformations in finance enabled by these trends, and most notably the evolution of IT. While it is difficult to pinpoint precisely when each trend began, they follow in order of when they happened. The idea is that these have built on each other--enabling the transformation of finance from a narrow function that produced internal cost-accounting data to a more strategic one that acts as a business partner with senior management. To map out this evolution, the following transformations will be examined:

* Internal accounting focus [right arrow] Internal and external accounting focus;

* Paper and calculators [right arrow] Centralized IT [right arrow] Distributed IT;

* Limited evaluation of planning scenarios [right arrow] Infinite evaluation of planning scenarios;

* Isolated functional departments [right arrow] Integrated cross-functional processes;

* Many separate geographic subsidiaries [right arrow] Centralized global shared services;

* Finance as support function [right arrow] Finance as business partner.

* Internal Accounting Focus [right arrow] Internal and External Accounting Focus

One of the most fundamental changes in the role of finance is the nature of the accounting it performs. Observers with extensive experience in finance echo this change. FEI member Malcolm Schwartz, chief operating officer of CRS Associates LLC, who has devoted significant time during his long career to developing management accounting systems, comments on the history of the finance function: "In the 1930s, accounting was much more oriented towards management accounting and internal control. But the securities laws enacted [in 1933] in the wake of the stock market crash changed the focus to public accounting and disclosure."

Thus, prior to the U.S. stock market crash in 1929, managers expected the finance function to produce information that would help with internal control. With the formation of the U.S. Securities and Exchange Commission (SEC) in the 1930s, however, the finance function became much more focused on external accounting.

From the 1930s to the 1980s, the SEC required that disclosure documents be filed exclusively on paper. Thousands of companies mailed the SEC hundreds of thousands of documents. Each document was date-stamped, copied, sent to...