At our Workday Rising user conference in November I had the pleasure of talking with David Dobrin, an industry analyst who always seems to have an interesting idea to kick around. We were talking about the reporting that comes out of traditional business and financial systems and how it seems to generally disappoint. My view is that this is because these systems were built to do financial accounting (GAAP), and when we ask them to do more, they struggle. That is when David delivered the gem of the conversation: “Of course, because operational reporting is disruptive.” Huh! Now that’s an interesting thought.
David was referring to the concept of disruptive technology introduced by Clayton M. Christensen in the bestseller, “The Innovators Dilemma.” To paraphrase, Christensen argues that the logical, competent design approaches that are critical to the success of an “experienced” technology (in this case traditional financial systems) are also the reasons they cannot address new, evolving demands. Think about that; getting business information out of accounting systems is so difficult that it can only be delivered through a different technology. So David was saying that our systems today not only don’t do a good job beyond financial accounting and reporting—it is actually much deeper than that. It’s that operational business reporting is actually at odds with financial reporting.
I hadn’t really thought of it exactly in that way before, but it makes sense, as traditional financial systems built for accounting are based on core principles that deliver adequate balance sheets and other statements, but are not designed to deliver insights for effective business management. Consider some of the core principles of financial accounting:
- Going Concern—the assumption that the accounting entity will live forever. What about things that don’t live forever, such as projects?
- Legal Entity—GAAP delivers its statements for legal entities, structures that are established for legal and tax purposes. Yet companies rarely organize operations by legal entity, favoring organization by region, channel, product, and lines of business. It’s virtually impossible to get accurate metrics on cash flow, return on investment, and return on assets from the legal entity view.
- Matching Principle and Periodic Measurement—the principles that give us the laborious period-end financial close processes. GAAP values accuracy over timeliness; operations would rather have timely information that is generally correct.
Even at the atomic level, accounting and business reporting are at odds. The lowest level of the financial accounting model, the journal entry, places high, almost sole value on the economic classification of business activity represented by the natural account number. Accounting systems collect this information via the chart of accounts while the valuable management information—the who, what, when, where, and why of operational business events—ends up on the cutting room floor during the journal entry creation process.
So a system based on the above principles and models will be, by definition, not just ignorant of but actually antagonistic to meaningful management information. And when the accounting system cannot deliver adequate operational information, as Robert Kaplan explains in his book, “Relevance Lost: The Rise and Fall of Management Accounting,” “Where an ineffective accounting system prevails, the best outcome occurs when managers understand the irrelevance of the system and by-pass it by developing personalized information systems.” In other words, the approaches and systems required to produce relevant management information significantly disrupt the accounting system, literally causing the disintegration of enterprise information. Amazing really, that the pursuit of relevant business information will “break” the systems organizations have implemented in hopes of delivering that information.
The technology remedy for this challenge has been to layer additional business intelligence software onto accounting software and operational systems to try to recreate a management-relevant view, which in turn creates a heavy, complex, expensive, and always disappointing “Franken-soft,” a term coined by analyst Brian Sommer to describe the stitched-together product suites of the traditional business software suppliers.
The only true fix to this problem requires re-imagining, redesigning, and ultimately rebuilding a new breed of business software. And that’s what we’ve done at Workday. Workday Financial Management takes advantage of new technical innovation to provide an application designed from the beginning and at its core to support both accounting and operational information needs.
We’ve accomplished much of this using an innovation called Worktags, which I wrote about in a previous blog post. Worktags are keywords assigned to business events, so our customers can aggregate, report, and analyze their business information within Workday. By capturing the who, what, when, and where of operational business events, Workday delivers business intelligence as part of a unified financial (and human capital management) system.
Accounting and business intelligence needn’t be at war, but peace won’t come in the form of a stitched-together offering. A unified approach is the only path forward.