Financial Operations Magazine Spring 2015 by Lloydmedia Inc

Q1 Spring 2015 • Canada’s Independent Magazine

AP/AR REPORT A cash management culture – from automation to optimization

AML: Beneficial Ownership Determination

Technology: AR as a Business Driver

Governance: The strategic CFO PM40050803

Contents

Q1 SPRING 2015

Volume 2 Number 1

4 News 28 Events

19 Technology

29 industry Update

In the cloud: AR is a business driver, not just a cost centre

Features 10 AP/AR Report

22 Governance

Insights into optimizing your working capital, the B2B payment system, process automation, and invoice to contract matching

26 The Problematic Database

Is shadow data hurting your business

The Strategic CFO

30 The Cyber Security War

24 Compliance

Less than half of Canadian organizations believe they are winning

AML – Beneficial Ownership Determination

Also Publishers of

Advertising Sales Mark Henry mark@financialoperations.ca

Publisher and Editor-in-Chief Steve Lloyd steve@financialoperations.ca Editor Karen Treml karen@financialoperations.ca Creative Direction / Production Jennifer O’Neill jennifer@financialoperations.ca Photographer Gary Tannyan

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NEWS Report rates Canada as top regulatory environment for financial services The Toronto Financial Services Alliance (TFSA) and Z/Yen, a UK think-tank, released a report that ranked Canada and Singapore as the top regulatory jurisdictions for financial services. Based on a survey of financial services professionals and other research, the results showed the following rankings in terms of the regulatory environment for financial services: • Tier 1- Canada, Singapore • Tier 2- Switzerland, Hong Kong, UK, U.S. • Tier 3- EU, Dubai The survey asked respondents questions regarding financial stability, market confidence, financial crime, consumer protection, regulatory compliance, predictability, customer service, and openness to foreign businesses. “The report reaffirms the attractive regulatory environment Canada currently has for financial services and how important it is for government regulatory policy to maintain this advantage”, says Janet Ecker, president & CEO, Toronto Financial Services Alliance (TFSA). Despite Canada’s relatively strong rating, most survey respondents felt that future regulations will become more onerous, less easy to comply with, more costly, less effective, and become a greater barrier to entry. Key Facts: • The full report, including the survey, can be found at Comparative Regulatory Environments. • The Banker publication currently ranks Toronto as the sixth most important global financial centre. • Toronto is the second largest financial centre in North America by employment. • Canada is ranked as having the soundest banking system in the world, by the World Economic Forum, for the seventh year in a row.

How FinTech will shape innovation 2014 was the biggest year in FinTech by far, with billions invested in innovative startups that challenged the status quo in the financial sector. But how will 2015 see FinTech players crack the mainstream? The first month of 2015 has already gone well for the likes of Transferwise, who landed a not-too-shabby $58 million to expand their peer-to-peer transfer platform from US VC group Andreessen Horowitz Ventures. The investment comes as part of a turnaround in the European tech sector, which has often missed out on funding from Silicon Valley investors who preferred startups that were closer to home. International tuition payments startup peerTransfer also picked up $22 million, which will help the platform add more universities in the UK, Canada, and Australia, and also South East Asia, where the company is yet to have a presence. More and more students will be able to pay tuition fees in their own currency, saving them from the pitfalls of the inefficient and highly expensive cross-border transfer space. The money transfer market is likely to expand even more in 2015, with more companies challenging banks and existing players to provide a more transparent and cheaper service to those sending money abroad, especially for remittance purposes. Mobile money has had a big part to play in the remittance market. MPesa and many of its competitors already act as a collection option for several remittance providers, and other companies, such as South Africa’s newly launched Mama Money, are tackling some of the most expensive remittance corridors in the world. Mobile money gives many in emerging markets better control of their finances and access to financial products that they would have otherwise been unable to reach. Peer-to-peer lenders are doing the same job for small businesses and individuals unable to access funding from traditional lenders. 2014 ended with a $1 billion IPO for Lending Club and a boost for other P2P lenders as many started to partner with banks to expand their consumer base. The next year is likely to see more agreements of this kind as banks realize the worth of peer-to-peer lending. The more innovation we see in FinTech, the more people have control of their money. The last month has already seen Capital One acquire money management app Level One, and Money Dashboard raise $2.5 million to expand its Edinburgh-based personal finance platform. While early adopters drove financial innovation in 2014, over the next year mainstream adoption will come from the realization that better technology in this area means a higher level of financial control for everyone.

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For breaking news and in depth news features, visit our website at www.financialoperations.ca

NEWS Salaries on the rise as Finance, Accounting and IT employers face recruiting and retention challenges As the global economy continues to heal, Canadian Finance, Accounting and IT employers need robust recruiting and retention strategies to succeed in outperforming the competition in 2015 and beyond, says Peter Jeewan, President and CEO of Lannick Group, one of Canada’s largest regional finance, accounting and IT recruitment specialists. According to the 2015 report, the top seven Finance/ Accounting/IT jobs for increased demand and salaries in 2015 are: 1.

Manager of Financial Reporting

$80,000 - $110,000

Manager of Planning and Analysis

$85,050 - $120,000

Tax Manager

$89,067 - $143,000

Mobile Web Developer

$75,000 - $110,000

Front End Web Developer

$75,000 - $98,000

IT Security Analyst

$85,000 - $115,000

Manager of Application Development

$90,000 - $125,000

escalate. The demand for professionals with the skills and knowledge to create new tools and experiences — including front end and mobile developers, as well as user interface (UI/UX) professionals —will continue to grow exponentially as mobile device usage continues to skyrocket. • The hiring environment also continues to ramp up in finance and accounting. There is heightened demand for expertise in regulatory compliance, taxation, auditing, financial analysis and business systems. To attract and retain top talent in today’s market, employers must offer substantial pay increases and more incentives such as the ability to work remotely, flex hours, increased vacation time, tuition reimbursement, on-site parking, RRSP matching and stock options. • Canadian finance, accounting and IT hiring managers still place a premium on strong leadership and analytics, but now also seek professionals who can translate numbers into solutions and strategies. • Strong verbal, written and presentation capabilities have always been key. However, these skills are more important than ever before, because increasingly diverse workplaces, markets and mediums demand simple, clear, cogent communication. And while many professionals may possess the ideal combination of education, know-how and technical expertise, just as many fall short on the communications side of the equation. With respect to other attributes, employers want collaborative, self-motivated team players.

Other key 2015 report findings: • The largest gains in salaries were in the Finance and Accounting sector where increases of 4.79 per cent are predicted; IT salaries aren’t too far behind at 3.45 per cent. • “Today, IT employers need people who can bolster their competitive edge by delivering strategic objectives and fostering innovation. In short, the best technology out there still needs an exceptionally competent human being to make it shine,” adds Igor Abramovitch, Vice-President of Lannick Technology. Twenty years ago, there was no way to predict how the “world wide web” would impact our lives. Today, Internet technology has not only revolutionized business; it has changed the world. As Canadians transition from desktop to mobile devices (tablets, smartphones) in growing numbers, the need for expanded mobile initiatives and applications continues to

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Jeewan continues, “The ever-evolving regulatory landscape means that highly specialized skills in risk, compliance, internal audit and system security continue to be in great demand. Another emerging trend we’ve seen is entry level hiring: rather than searching for the ideal candidate with all the right education, qualifications and prior work experience, many companies now hire new graduates with the right soft skills and personality to fit into the existing corporate culture—then train them to suit a custom need.“ Demand will be brisk across both sectors in 2015. In fact, there will be a shortage of mobile application designers, business systems analysts, corporate accountants and internal audit managers. Jeewan concludes, “Many factors—skill shortages, retiring baby boomers, increased job hopping thanks to technology literally putting new opportunities at employees’ fingertips—will ensure that finding top notch talent will continue to be a significant challenge in 2015.”

To send press announcements, please direct them to Karen Treml, Editor, at karen@financialoperations.ca

Financial Operations | SPRING 2015 | www.financialoperations.ca

‘Invigorating Banking’ survey shows ‘core is crucial’ After years of focus on the front office, mobile and channel, banks agree that the issue of core banking migration for the benefit of true modernization can no longer be ignored. This is one of the striking results of the ‘Invigorating Banking’ survey, by Dutch FinTech company Five Degrees. The survey, done in co-operation with Finextra, also shows that 65 per cent of the respondents agree that their current core technology no longer supports its needs. The survey was conducted in the last quarter of 2014 with the aim to identify the need for core banking transformation in order to modernize the banking environment in the current climate of technology advances, regulatory pressure and changing customer behaviour. With 126 responses from 96 financial institutions representing 38 countries, the survey gives a good flavour for the appetite for change, the drivers, drawbacks, customer demand, and the benefit/threat of new entrants. Modernization into the core Most poignantly, 65 per cent of the banks agree that the modernization issues can no longer be fixed with ‘skins’ and upgrades of the channel and front end technology. With the rise of API banking, the regulatory push for a more transparent and level playing field, lets banks realize that modernization needs to be taken into the core of the banking infrastructure as well. In terms of drivers most banks agree: 96 per cent want a seamless experience across all channels, 87 per cent aim for self-service, 74 per cent want/need to drive cost down and 63 per cent of the respondents want to prepare their bank for the world of APIs. 64 per cent of banks feel that customers prefer simplicity over a rich user experience and 43 per cent say they find it hard to get boardroom sponsorship for a cumbersome project like core modernization and 40 per cent fell they lacked a strategic modernization plan. Finally only 15 per cent would stick with their current technology provider that did not provide open standard (SOA) technology. 33 per cent stated they would consider working with a new vendor with state of the art technology, even one with fewer references than the incumbent players.

March is ‘Fraud Prevention Month’ – is your business protected? Cyber-attacks, data breaches, and losses of consumer information are dominating the headlines, making ‘Fraud Prevention Month’ more relevant than ever before. These attacks and related cyber security-based threats pose a mounting risk for Canadian businesses of all sizes. It’s no longer a question of if an attack will occur, but when. In fact, 60 per cent of KPMG C-Suite survey respondents reported recently increasing their budget to secure data against the threat of cyber-attacks. As Fraud Prevention Month kicks off, KPMG has identified three themes which are particularly applicable to Canadian business. Executive impersonation fraud In these scams, criminals use email to impersonate a company executive and trick the organization’s finance team into transferring money to a fake account. Often, the habits of the executive are studied by criminals who use irregular circumstances to make out of character transactions and urgent requests for funds. Financial institution fraud Banks and financial institutions face a myriad of complex cyber security challenges including compliance pressures, emerging threats and material risks. These challenges are compounded by the rising risk posed to banks by third party data loss incidents that force financial institutions to assume the costs incurred through the cancelling and reissuing of credit and debit cards. Small/medium enterprise fraud Small businesses regularly focus on the bare minimum to meet compliance requirements and stay in business, despite being just as vulnerable to hackers and cyber-attacks as larger organizations. Unlike larger organizations, these enterprises are often unable to recover from the financial and reputational repercussions of an incident.

www.octacom.ca 1.888.739.1934

Financial Operations | SPRING 2015 | www.financialoperations.ca

AP/AR REPORT

Optimizing Your Working Capital Making it work for you

By Brian Stewian

eadlines these days are dominated with news of falling oil prices and the sinking Canadian dollar. We’re in the midst of a challenging and volatile economy with disruptions from increased competition to technology challenges to limited opportunities for growth. Businesses are under pressure to increase profitability and shareholder wealth. Most companies have already cut back on capital expenditure and implemented cost reduction initiatives, but this has not been suffice to meet market expectations. As such, management have turned their attention to optimizing working capital to generate the necessary cash needed to grow, invest in capital projects and product launches and maintain dividends. Many businesses don’t realize how much cash is trapped in their balance sheet. Freeing up that cash – by optimizing working capital – does more than improve operational efficiency. Liquidity funds growth lowers costs, maximizes shareholder returns, and provides flexibility to take advantage of investment opportunities. Working capital is impacted by both

“Remember that working capital optimization isn’t just a finance issue, it’s an operational one…” individuals and processes within an organization and outside. To maximize working capital it is critical to develop strategic relationships with customers and suppliers as well create a cash culture with your organization. Let’s look at two key elements of working capital, accounts receivable and accounts payable.

Five ways to free up cash in your accounts receivable Most businesses have formal accounts receivable policies, but not all businesses adhere or keep them updated. In a sales dominated business culture, companies may extend credit, offer discounts, or ignore payment terms in hopes of landing a new sale. The result is your company ends up financing your customers’ business. Below are a select few examples of leading practices that

Financial Operations | SPRING 2015 | www.financialoperations.ca

your organization should implement related to accounts receivables: 1. Customer credit approval. While the sales department may be eager to extend credit to a new customer, not all customers are credit worthy. You need to be certain they have the financial stability to settle invoices and reputation for paying on time. By applying consistent policies in determining when to grant credit and how much, you will reduce the risk of bad debts. Companies need to consider actions that are the best for the organization as a whole, not just one department. 2. Customer master data. Records including customer details, credit limits, and payment terms must be reflected accurately in your billing system. An invoice error isn’t a mere glitch – it’s an

AP/AR REPORT impediment to you being paid on time and adversely impacts your cash flow. 3. Invoicing. It may seem straight forward but many companies struggle with invoicing. Too often, invoices include errors or are sent late or not at all. Automate invoices to reduce time and human error, and use exception reports to flag anomalies like sales exceeding credit limits. Implementing an online customer portal can also reduce manual hours and costs spent dealing with disputes and collections. 4. Cash application process. Troubles can arise even when customers pay their bills; when payments come in, it’s essential they go to the correct account in a timely manner. A mistake can waste considerable time, so do it right the first time, such as by applying payments to specific invoices rather than just crediting the account. 5. Collection process. Every business enjoys collecting revenues, but not all businesses have processes to ensure it’s done in a timely basis. A lack of accurate and complete records can make it impossible to know which amounts are collectible or in default. Real-time reporting and pro-active measures are key to managing your accounts receivable.

Six ways to optimize your accounts payable There is more to accounts payable than paying invoices on time. By adopting standardized and streamlined best practices, your organization can improve liquidity by negotiating improved payment terms or taking advantage of volume rebates/discounts. 1. Vendor selection. Set up a preferred supplier list. Preferred suppliers provide the benefit of maximizing value on price, product quality, delivery, and service. Limiting the number of suppliers will increase the volume with your individual suppliers and increase your purchasing power to negotiate the most preferable buying terms. Remember to regularly seek better opportunities: a vendor may price-match a competitor or offer volume discounts. 2. Supplier master data. Keeping accurate and complete master data – including product/service details, delivery

timelines, supplier responsibilities, and any applicable regulatory compliance requirements – reduces the possibility of errors or supply disruptions. 3. Contractual review process. To prevent inaccurate – or fraudulent – vendor invoices, it’s crucial to frequently review vendor contracts. Having a central team review contractual terms against actual terms and vendor performance will ensure standards are being met and limit cost leakages. If vendors are not adhering to contracts, penalties, better payment terms, or discounts should be negotiated. 4. Procurement process. Some businesses have hundreds or thousands of suppliers, challenging their ability to track invoices against signed purchase orders effectively. Lax procurement policies and procedures leave you at risk of overspending. Businesses should track internal buying against approved budgets. Too often businesses procure too much, carrying more inventory than they can turn over, resulting in cash flow difficulties or obsolete inventory. Finding a balance between the amounts invested and meeting customer expectations is key. 5. Invoicing process. Having an efficient and effective invoicing process in place can improve your liquidity position. An efficient invoicing process sends invoices on a timely basis ensuring they are complete and correct prior to delivery. Sending electronic invoices to your customers will reduce costs and unnecessary rework or delays. 6. Accounting and reporting process. Before you can actively manage payables, you need to know that your financial records and reports are accurate, complete, and up to date. Without this information, you can’t be sure how much or how often you are paying your suppliers, or whether you are getting the most favourable payment terms.

Getting cash-fit Start with taking a look at your balance sheet – how and who is financing your business? Is your company heavily reliant on debt? What are your short term objectives and how will you fund these projects? Does your organization have a strong cash culture?

Most organizations have a lack of fiscal discipline. Fixing this is a responsibility of all functions, not just Finance. In an uncertain and volatile economy, companies need any competitive edge they can get to stay ahead of the pack. With a formalized working capital strategy your organization can outperform the competition, improve cash flow management, operate more efficiently, reduce cost of capital, and avoid financial risk. With the right kind of working capital strategy and a culture of financial discipline, your company can also unlock significant amounts of cash in your balance sheet. Isn’t it time to get your cash working hard for you? Brian Stewien is a leader in the Performance Enhancement Advisory practice in Toronto with more than 14 years of experience, specializing in working capital optimization, performance improvement / turnaround, cost reduction, integration and market analysis. He has advised and led many strategic review assignments for both large and small clients across a variety of industries in both North America and Africa including retail, hospitality, automotive and manufacturing. Working hand-in-hand with management and senior stakeholders groups, he has successfully helped his clients in identifying, assessing, prioritizing, planning and implementing various strategic business initiatives. Brian is a registered chartered accountant in Canada and South Africa, and a Six Sigma Green Belt practitioner.

Building a cash management culture Accounts receivable and accounts payable are just two elements of working capital. Making a real improvement in your working capital requires companies implementing an organization wide cash management culture. To successfully build such a culture requires a top-down approach which involves clearly defining objectives up front, assigning responsibility, and tracking progress against key metrics. By developing and communicating firm-wide policies on budgeting, forecasting, and financing organizations will optimize their cash resources. Strategy is nothing without implementation. Remember that working capital optimization isn’t just a finance issue, it’s an operational one. All departments – from sales to marketing to procurement – must strive for a common goal for the best results.

Financial Operations | SPRING 2015 | www.financialoperations.ca

AP/AR REPORT

The B2B Payment System

Fixing invoicing and payment processes accelerates growth of B2B commerce By Bob Cohen

he current B2B payment system is broken in many ways. Buyers have the upper hand when it comes to payments, since many companies are holding onto their cash and extending payment terms to suppliers. In fact, some large companies have been stretching out payment terms up to 60 to 100 days. While it may initially appear to help the buying organization by

Financial Operations | SPRING 2015 | www.financialoperations.ca

providing the working capital to invest in its business, distribute to shareholders, or use in other ways, it’s not a tenable long-term solution. The practice of extending payments creates cash-flow problems for suppliers and hinders them from accurately forecasting their cash position beyond ten weeks – which can lead to financial instability, supply chain risk, and can impact economic growth. This practice also puts pressure on buyer/supplier relationships.

AP/AR REPORT It all starts with the invoice Delayed payments, however, are not always planned, but also result from paper invoices and slow and time-consuming manual processes. Once a paper invoice is prepared by the supplier, it is often sent by mail, which can take days or even a week. Then it must be scanned or input into a system before it can be processed by the buyer. Manual processes often result in greater errors, settlement and dispute-resolution problems, and poor data quality. Without an automated process, it’s very difficult to keep track of invoices and they can easily go missing or become buried on someone’s desk. Once an invoice is input into the accounting system it is then routed for review and approval, which provides additional opportunities for them to become lost or delayed. It currently takes an average of 13.5 days for organizations to process an invoice and 55 days from invoice receipt to payment. As a result, many companies are not able to take advantage of early payment discounts and instead are saddled with late payment penalties and strained relationships with suppliers. Manual invoicing processes create other problems for buyers and suppliers. There is little visibility into liabilities and spend, making it difficult for companies to manage working capital and cash flow. Additionally, since companies don’t have a view across all of their invoices, they may be missing out on volume discounts and other opportunities. With more than 150 billion paper invoices issued around the world every year, the problems caused by manual processes are pervasive. Today’s global commerce environment adds more complexity to the invoice process, requiring companies to be able to address multiple currencies, tax regulations, and languages, and making it extremely difficult to do business without automated processes. While accounts payable (AP) is one of the last areas of an organization to be automated, many companies are recognizing that by automating, they are able to gain control and visibility over their spend and working capital, while reducing costs and improving relations with suppliers. Organizations and governments around the world are moving toward e-invoicing, conducting electronic payment processes over business commerce networks, which enable buyers and suppliers to send and receive invoices anywhere around

the world instantaneously. Many governments are mandating e-invoicing so they can decrease costs, improve tax compliance and efficiency, and reduce fraud. There are two main invoice processes that can be automated – sending and receiving invoices, and processing them. Yet, only 29 per cent of companies are currently implementing e-invoicing to send and receive invoices electronically according to ‘ePayables 2014: The Quest’, research conducted by consulting firm Ardent Partners. The research study, however, found that best-in-class organizations that automated key processes – such as e-invoicing and invoice automation – realized a huge advantage over their counterparts. These leaders can process an invoice in 3.7 days compared to 17.1 days for other organizations. And the savings benefits were substantial too. While it cost best-in-class firms $2.42 per invoice, other organizations spent more than seven times more. Similarly, the 2014 Billentis report, ‘E-Invoicing/E-Billing – Key stakeholders as Game Changers’, found that using electronic and automated invoice processes can result in savings of 60 to 80 per cent compared to traditional paper-based processes.

Aligning invoicing and payment Fixing the invoicing problem is one part of the problem. Organizations also have to be willing and able to tackle the payments bottlenecks, to stop hoarding cash, and to pay on time. While the vast majority (88 per cent) of respondents surveyed by Basware and MasterCard in the ‘Creating Payment Energy’ study agree that suppliers should be paid promptly, 57 per cent admitted to having actively delayed payments in the past 12 months. Two thirds acknowledged that they have used payment terms as a strategic lever to help manage cash flow. At the same time, these businesses recognize the consequences of late payments – 90 per cent acknowledged that payment delays have wider repercussions for businesses, such as impacting the ability to pay staff or reducing investment. Yet timely payments are key for helping suppliers reduce credit lines, be able to invest more in their businesses overall, improve relationships with creditors and reduce resources on payment settling. To get paid more quickly, some companies turn to factoring, which is not always the best option, since this traditional approach can carry

a high level of risk and cost to borrowers. Different approaches are being developed to address the payment problem, which provide a win-win for buyers and suppliers alike. One approach is to streamline the process to make it easier for buyers to take advantage of early payment discounts. Suppliers would likely be receptive to this approach – nearly 80 per cent of suppliers in the ‘Creating Payment Energy’ study indicated they would readily exchange a discount if it meant an early payment. Yet nearly that same number of buyers is unable to take advantage of early payment discounts from their suppliers, mostly due to internal payment process bottlenecks. Buyers that are able to take advantage of early payment discounts benefit from reduced costs and improved relationships with their trading partners. However, in order to confidently pay suppliers early without risk of negative impact to their business, buyers must have accurate visibility into the financial status of their business, and an efficient automated payment processes. Another approach is to connect the invoicing process with the payment process so suppliers can get paid quickly without any burden for buyers. By leveraging automation to quickly process invoices, and connecting business commerce networks handling e-invoicing with electronic payment networks, suppliers can get paid fast upon invoice approval, and buyers can maintain or extend their terms. This e-payment approach is beneficial to both buyers and suppliers and supports the free flow of cash. By removing the bottlenecks of inefficient manual processes, cash hoarding, late payments and extended payment terms, cash can flow more freely between trading partners. And by establishing a mutually beneficial approach to payment, buyers and suppliers will improve the financial health of their organizations. And when there is a tipping point of companies implementing these practices, we will be able to have a thriving global B2B commerce marketplace that ultimately helps propel economic growth. Bob Cohen is Vice-president, North America, for Basware, a leading provider of cloud-based purchase-to-pay and e-invoicing solutions that enable better buying, selling, and connected commerce for organizations around the world. He can be reached at robert.cohen@basware.com or (203) 487-7900.

Financial Operations | SPRING 2015 | www.financialoperations.ca

Making the Case for Process Automation in Financial Services What does automated A/R look like?

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Financial Operations | SPRING 2015 | www.financialoperations.ca

AP/AR REPORT

By Steve Divitkos

he term ‘process automation’ can mean many different things to many different people. Most frequently, people associate this term with things like advanced robotics (for example, that trusty robot that just helped fulfill your most recent Amazon order), or heavily mechanized manufacturing lines. Interesting as these things may be, the reality is that for the vast majority of us, these types of technologies don’t often have a direct effect on our day-to-day business lives. Instead, most people are typically concerned with the basic business processes that cause them to expend meaningful amounts of time and effort on a daily basis; things like issuing invoices, filling out and approving standard paperwork, and approving expenses – processes that are often overly manual, overly time consuming, or prone to human error. Although these things appear modest when compared to orderfulfilling robots, companies across industries are becoming increasingly aware of the time and cost savings that are likely to accrue to them if they were to completely automate these day-to-day business processes. Over the past half-decade or so, several software solutions have come to market to help companies do just that. Before you’re in a position to recommend one of these solutions to your IT manager, CIO, or CFO, however, you first need to have a basic understanding of how and where automation is likely to create value. To help answer this question, let’s walk through a typical example of a business process that lends itself well to automation. It’s important to note that there are an endless number of other possibilities; accounts receivable is just one.

Accounts receivable collections: the manual example Most businesses have customers that owe them payment. That means that most businesses have accounts receivable. That also means that most businesses would like to find a way to collect those receivables faster

(cash now = good; cash later = bad). In the absence of automation, a typical invoicing and collections process might look something like this: 1. John Smith, A/R Clerk at Company XYZ, manually creates an invoice for distribution to a customer 2. The documents that support that invoice (contracts, product spec sheets, signed order forms) are manually printed and sorted 3. Supporting documents are attached to the printed invoice, and are then physically mailed to the customer 4. The same package is scanned and filed away for internal record keeping 5. John writes a reminder in his calendar to follow up with the customer if payment isn’t received in 30 days 6. A week or two later (or longer, depending on where you’re located), the customer receives the paper invoice and disputes a charge because there is no supporting documentation for it 7. John repeats steps 2 to 4 for the missing information 8. In an effort to stretch their payables, the customer sits on the invoice for a few weeks 9. After 30 days pass, John Smith emails the customer and reminds them that payment is due 10. John writes a reminder in his calendar to follow up with the customer if payment isn’t received in 60 days 11. The customer has been busy with other things and as a result payment hasn’t yet been received by Company XYZ 12. Now that 60 days have passed, John Smith emails the customer and reminds them that payment is due 13. John writes a reminder in his calendar to follow up with the customer if payment isn’t received in 90 days 14. The customer finds the invoice from a few months ago and remits payment to Company XYZ 15. John receives notification of payment

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AP/AR REPORT and goes into Company XYZ’s accounting system to manually enter the payment amount 16. John is sure to manually attach all correspondence between Company XYZ and the customer for internal record keeping purposes If you’re exhausted just reading that, imagine being John Smith, and imagine having to do that dozens of times per day, every day, five days per week, 250 days per year. Try to fathom the incredible amount of time that’s being wasted and the cash that isn’t being collected by Company XYZ.

Accounts receivable collections: the automated example Let’s compare the process above with one managed by a very simple software solution that automatically generates and sends invoices (directly from Company XYZ’s accounting system) along with their supporting documents. Let’s further assume that the same solution sends automated billing reminders to the customer’s payables clerk at following pre-defined periods of nonpayment. What are some of the benefits that this solution might create? • Saving time – Here’s a list of the things that our friend John no longer needs to do: print the invoice; print the supporting documentation; scan the invoice; scan the supporting documentation; mail all documentation to the customer; follow-up in the event of late payment; key payment information into the accounting system; keep internal records of all correspondence on file • Reducing potential for human error – In a manual collections process, what happens if John forgets to attach supporting documentation for any of the charges? What happens if he’s late in mailing the materials? What happens if he forgets to follow up after 30 or 60 days of non-payment? What happens if he makes a mistake in keying the payment amount within the accounting system? What happens if he forgets to take care of his internal filings, and Company XYZ is getting audited next year? • Saving money – Now that John has been liberated from performing these

repetitive administrative tasks, he can be redeployed to a more valuegenerating activity within the business. Now that everything is electronic, Company XYZ can stop wasting money on printing, mailing, scanning, and physical document storage. Now that the collections process is automated, ‘days sales outstanding’ have been reduced substantially, such that they can now use that cash for other corporate purposes. Now that the CFO has perfect visibility into the automated collections process, there is greater certainty about Company XYZ’s cash flow requirements. Automating collections of accounts receivable is one of the most basic use cases for business process automation software. If a process this simple can yield such meaningful results, how much more value can you create by automating more complex processes? How much time and energy can be saved if you can properly regulate the movement of information and documents between geographies, branch offices, computer systems, departments, and companies?

Process automation – where do we start? How do you take that very first step? When approaching the project of automating your business processes, it’s important that the initial project scope should not be too complex or too large. Think ‘walk before run’. To get buy-in, and hopefully a reasonable ROI, the ‘landing spot’ or ‘candidate process’ that you pick should be one that is important and significant but not overly complex.

Which processes will automate relatively easily? Processes that fit well into this category include: • electronically capturing and flagging documents related to the opening of new accounts • indexing of different types of data, for example: depository, client ID, account number, and document type • accounts receivable automation for sending past due notices • automated notifications when a service level is not being met

Financial Operations | SPRING 2015 | www.financialoperations.ca

When done manually, these highly repetitive processes require people to spend considerable amounts of time both gathering and acting on the relevant information.

Once automated, what can you expect? Once automated via process automation tools, there should be three outcomes: • the process will work and the business no longer has to perform the function manually • there should be an ROI based on the fact that a staff person does not have to spend time doing this and can now be re-deployed to higher value activities. Perhaps you can also defer hiring another collections clerk? • from an IT or business perspective, there should be a learning opportunity that allows the business to understand how this process has worked, what the process automation tools have delivered, and evidence for other business units that could benefit from increasing levels of automation. After you achieve the desired outcome for the ‘candidate process’, you can expand the project to include everything from sending and receiving emails, to routing KYC documents from a fax server to the appropriate departments for processing, to investment document indexing and storage. Then watch as you drive ROI through increased process automation across the enterprise. Remember, walk first by starting small, then you can run with fully automating an endless number of processes and administrative tasks that are highly manual, highly repetitive, or highly labour-intensive. The greatest benefits of an automated business process are typically realized with the receivables and payables departments. Accurately capturing, quickly verifying, and efficiently processing information results in shorter billing cycles, and thus reduced A/R and improved cash flow. Steve Divitkos is CEO of Microdea Inc. where he has broad oversight over strategy, finance, and operations. Microdea is a leading Enterprise Content Management company and one of the 500 fastest growing companies in Canada. Steve holds an MBA from the Harvard Business School.

Our Commitment to Canada

With a Track Record of Proven Performance Throughout the World

Businesses of all sizes throughout Canada have recognized the tremendous efficiencies associated with transitioning from paper-based check deposit processes to a remote deposit capture solution. With remote deposit capture, both banks and credit unions can offer their business clients the opportunity to scan and transmit images directly from their business locations to the branch. This unique deposit system allows financial institutions the ability to provide their existing business clients with additional convenience, improved funds availability, and faster return item notification. Banks and credit unions that offer remote deposit capture solutions to their commercial and small business accounts can gain substantial market share and achieve lower operational costs.

Visit our website or give us a call to discuss how Panini can partner with your ﬁnancial institution.

+1.937.291.2195 info@panini.com www.panini.com

AP/AR REPORT

Invoice to Contract Matching The Cure for Contract Leakage and Cash Management

By Chris Rauen

n the world of accounts payable, approving invoices that don’t conform to contract terms may be an epidemic. While procurement may do a good job of negotiating contracts with suppliers, someone needs to be the enforcer. How can companies ensure that their employees are buying from the right suppliers at the right price, thereby eliminating contract leakage that could cost an organization tens to hundreds of millions of dollars each year? In the past, companies lacked the resources and manpower to monitor contract leakage – the amount you spend on goods and services above what your procurement organization has negotiated – during the invoice approval process. Now, because of the rise of business networks, companies and their suppliers can collaborate across the procure-to-pay process to ensure the enforcement of contracts, saving a significant amount of time and money.

The perfect payable Trading partners that have embraced purchase order (PO) and invoice automation

over a business network can ensure the ‘perfect payable’. Buyers can deliver an electronic purchase order that the supplier can ‘flip’ into an electronic invoice, guaranteeing the two-way match and, in the process, ensure that the invoice complies with a preferred supplier and a negotiated price. Today, the same level of control can be extended to non-PO invoices by matching the invoice against – or creating an invoice from – a contract. Organizations can apply this automated matching process to any of the four contract types: a supplier-level contract, commodity-level contract, catalog-level contract, or item-level contract, a subset of the catalog-level contract. Let’s look at an example of how this process works. Imagine that you have signed an 18-month contract with a paper supply company. The supplier offers a 10 per cent discount off list price for its paper based on anticipated volume of business and minimum order amounts. All purchases below order minimums are at list price. With the agreement in place, the paper supplier provides you with a catalog to simplify the ordering process. This allows you

Financial Operations | SPRING 2015 | www.financialoperations.ca

to create a catalog or item-level release-order contract – where the invoice will be tied to a purchase order – and incorporate the 10 per cent discount into pricing terms. You set up minimum release amounts and provide unrestricted release access. Orders from the catalog are sent to the supplier electronically and, since the invoice is generated from the order, the match is automatic – driving touchless invoice processing. Another option would be to use a nonrelease-order contract. In this case, there is no PO and the supplier would invoice directly off the contract. You could also automate the coding process by associating account codes to a project, account, cost element, or some other parameter, and define them in the contract. That way, the supplier will be sure to include it on the invoice and eliminate a common non-PO invoice exception. For a service invoice, additional documentation such as a bill of lading, time sheet, or field ticket may be required. In this case, you could simply add the required document as an attachment to further expedite the processing of these invoices. As you evaluate the different options for

AP/AR REPORT

applying contract invoicing, consider the savings potential from preventing contract leakage. As an example, let’s take the case of a Fortune 500 company with $8.5 billion in revenues. If its rate of contract leakage is $5 million per billion dollars of spend, that figure comes to $42.5 million. At $19 million per billion dollar of spend, the savings are a whopping $161.5 million. In either scenario, the potential savings are substantial.

A new way to manage cash Another component of the return on investment from contract invoicing involves early payment discounts. To an organization that takes weeks to process an invoice, an early payment discount can be a rare occurrence. As contract invoicing can compress the invoice processing cycle time from weeks or months to days, new opportunities to capture discounts arise. Earlier, we described a contract invoicing scenario where an existing discount was automatically applied. However, with today’s business networks, you can now propose and earn discounts on virtually any approved invoice, and offer discounts to every supplier

connected to your business network. These include dynamic discounts, where you can earn a discount on a sliding scale up to the due date of the invoice. As part of an e-invoicing initiative, you can target and enroll suppliers in early payment discount programs, defining a hurdle rate or rate of return on early payment discounts for all your suppliers or tailoring different hurdle rates to specific supplier groups. In all cases, you control the amount of cash you want to apply for these programs. Once that upper limit is reached, no more discounts will be taken. The value that early payment discounts offer suppliers, especially small- and mid-size suppliers, is huge. Many suppliers don’t have access to bank loans or lines of credit and look for sources of liquidity to meet their cash flow demands. Early payment discounts serve this purpose, allowing your suppliers to apply early payments to fund their daily business needs and ensure they can meet your ongoing demands. These opportunities are more valuable when suppliers can also initiate discount proposals to you on select invoices, and make counter offers on your discount proposals to them.

By leveraging a business network in this way, buyers and suppliers have the opportunity to manage their cash in a more collaborative fashion. The incentive for buyers is the risk-free, double-digit returns on cash that are well above prevailing short-term rates of return. In addition, there are the cost savings, where Ariba customers are realizing more than $2 million in savings from early payment discounts per billion dollars of spend. How did we get to a discussion of cash management from contract invoicing? That’s the power of today’s business networks, where business process improvement triggers the potential to dramatically impact working capital. As you probe further into what business process improvements such as contract invoicing can deliver to your business, the advantages of transacting with suppliers over a business network become more compelling. Chris Rauen is Solutions Marketing Manager, Financial Solutions, for Ariba, Inc., an SAP Company

Financial Operations | SPRING 2015 | www.financialoperations.ca

Technology

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Financial Operations | SPRING 2015 | www.financialoperations.ca

Technology

In the Cloud AR is a business driver, not just a cost centre By Kurt Matis

hese days, when it comes to accounts receivable, change is the only constant. In 2013, 50 per cent of B2B remittances were made by check – a 75 per cent decrease from 2004. With automated AR, mobile purchasing, and web transactions all on the rise, the payments industry is seeing lots of change and it’s not going to stop any time soon. Customers love the convenience of paying bills online, banking with their mobile devices, and being able to quickly and accurately track their payment records. Companies have responded by offering multiple payment methods and channels, building and investing in separate platforms to make sure they meet their customers’ needs. The problem, of course, is that the resulting solutions are siloed, requiring increased training, oversight, and manual reconciliations that cost time and money and are prone to error. It’s a big problem. According to a 2014 study by ACI Worldwide and Wiese Research Associates, more than half of U.S. businesses use siloed electronic bill presentment and payment (EBPP) solutions – costing them $1 billion each year. So how can you stop spending money on manual work and start giving your business a competitive edge? By consolidating your platforms and processing payments in the cloud.

“When you automate processes, you can shift resources from manual oversight and reconciliation to data analysis – leaving humans to do the work we’re best at …”

Simplify your systems When you automate processes, you can shift resources from manual oversight and reconciliation to data analysis – leaving humans to do the work we’re best at: interpreting data; identifying challenges and inefficiencies; and building strategies that deliver solutions. Let the computers do the highly repetitive, manual stuff. That’s where the value of automation can be easily implemented. Straight-through processing (payment acceptance, processing, and posting in a single pass) helps you create consistency and efficiency in process rules and workflows, regardless of what payment method was used – once you’re on one system, it shouldn’t matter whether the payment was in cash, cheque, ACH, credit card, or mobile payment. You’ve got one ‘go-to’ platform and repository for streamlined oversight and management of all payments across your entire business. Being on one integrated receivables platform also delivers enhanced reporting and reconciliation since all payments are running through a unified interface. Consolidating all your payment methods and channels onto one platform saves you costs by eliminating manual work, but it also does something much more valuable. By combining all those data streams into one system, you can incorporate data analysis into your environment, turning a cost center into a strategy engine that can give you realtime visibility into your receivables stream. By analyzing your remittances, you can find ways to improve your processes, make your company more profitable, and understand the factors that led to success – or not – for any given time period. Knowledge is power, after all. Better yet, the data is free and you’ve had it all along – you just haven’t had the ability to sift through it for the good stuff.

Financial Operations | SPRING 2015 | www.financialoperations.ca

Technology Streamlining your platforms also helps you gain in flexibility – particularly if your business operates overseas, or has unpredictable surges in cash flow. For example, one FTNI customer once had over 25 different banking relationships, each with different processes for check scanning and reconciliation. At the end of each month, they had to manually reconcile it all. It was a headache until they moved to straightthrough processing on one integrated receivables platform. Since then, they’ve been able to significantly consolidate those banking relationships down to less than six – thus reducing complexity and ultimately processing and posting payments faster. The customer can see what’s being processed and posted across their entire business in real time and they can manage their system centrally.

Secure your data with the cloud (yes, the cloud) With cloud computing, straight-through processing is now an affordable and effective reality – but concerns about security and complexity may be stopping you from adopting the very technologies that can help you take your security to the next level. The fact is, moving to the cloud is not the threat you might imagine it to be. In fact, it may actually increase the security of your data, by putting it in the hands of security experts. Cloud providers hire security experts who are up to date on industry certifications like PCI and HIPAA compliance. They have to be: security is not a part-time job for them. What’s more, they don’t have just one or two security experts on staff, they build dedicated security teams. And they can help you move to a truly secure payment model without spending tens (or even hundreds) of thousands of dollars. You can make the move on your own timeline, giving your customers time to adopt the new platform as they like. And because cloud computing utilizes flexible pay-as-you-go pricing, you can make changes as the market demands (and your business grows) without large upfront costs and the delays of purchasing, implementing, and maintaining hardware.

Partner with a pro When you’re looking for a payments partner who can help you transition your receivables processing to the cloud, look for expertise in the payments industry first. By establishing

expertise in payments, your new partner will be intimately aware of all the applicable compliance requirements. You don’t want a vendor who’s going to use your company to cut their teeth on PCI compliance. You want someone with the ability to do large-scale processing, who has all the certifications for your market, and has best practice security measures in place to further protect your critical data. And, if you think you might expand, make sure you’re working with a company who can handle your growing needs. You want a partner who has the capacity to keep up with your growth and the insight to help you navigate the ever-changing payments landscape. Look for a vendor who partners with a reputable cloud hosting provider, as well. You’re not just looking for a payments provider; you’re making sure that whoever they are running on has security built in as opposed to bolted on. Look for someone who takes security as seriously as you do. For example, at FTNI, everything we do is subjected to the same security standards as our credit-card processing (PCI) – in other words, it meets the toughest standards in the industry. Another vendor might have a different level of security when it comes to personally identifiable data (PII). There’s no such thing as your data being too secure. With all the advances in security, there’s a lot to consider when you’re faced with deciding what measures will best suit your business. Partnering with proven providers who can bring expertise in both payments and cloud security can help you understand how your business benefits from the latest security protocols, such as end-to-end encryption, multi-factor authentication, and multi-layered security at the hosting level. For example, end-to-end encryption (E2EE) is one of the most talked about proactive security measures right now. At its core, E2EE ensures that all payment data remains encrypted not only when in transit (i.e., from initial entry into your payment system interface all the way through processing and posting), but also while payment data is at rest (i.e., after payments have posted and are stored via archiving requirements). Be sure to find a partner who will help ensure that you’re leveraging this and other best practices to ensure the highest security standards are in place to protect your payments data.

Financial Operations | SPRING 2015 | www.financialoperations.ca

Move at your own pace Cloud-based payment processing easily adapts to your schedule and unique business needs. Because you don’t have to buy and configure hardware, you can start with the highest-leverage projects to address immediate business needs and easily add additional functionality in the future. If you’re still leery of moving all your payment processing to the cloud, you can space out your deployments as business needs arise. Start where your current pain is. Are you looking to accept online payments? Are mobile payments your next frontier? You don’t have to eat the proverbial elephant in one bite. By moving to a single, cloud-based receivables processing platform, you can address your current needs while also building the foundation for the strategic consolidation of your legacy systems and processes. You can develop new business process as the need for them grows, mapping them to the next stage of development as you – and your customers – are ready.

The bottom line: The cloud’s the thing There’s never been a better time to start taking advantage of the new technologies that are driving B2B payments processing. We’ve moved from paper-based invoices and manual reconciliation to electronic invoices, credit cards, ACH payments, and now, online and mobile payments. With all these new ways to pay, it’s easy to get mired in platform chaos – but doing so comes with increased costs and opportunity loss. Find a partner to help with the technology and get your business onto one platform. Do that, and you’ll lower your costs and strengthen your decision-making process with sweet, free data. Kurt Matis is the President and CEO of Financial Transmission Network, Inc. (FTNI). He brings more than 25 years of financial and operational management experience and insight to FTNI’s clients. Before founding FTNI, he co-founded L&M Energy Partners, LLC., where he designed and rolled out the company’s Automated Contract Tracking Software, which is used by customers throughout the U.S. From 1999 to 2003, Mr. Matis was the Chief Financial Officer of R.J. Thompson Holdings (RJT), which was acquired by TD Waterhouse. He received his BSBA from the University of Nebraska at Omaha with majors in Finance and Banking, and his MBA from Creighton University, for which he was inducted into the Beta Gamma Sigma Honor Society. Mr. Matis holds a CPA certificate with the State of Nebraska and is a member of the AICPA and the Nebraska Society of CPAs.

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Governance

The Strategic CFO Modernizing the budgeting, planning, and forecasting processes to gain deeper insight and drive better decision-making By Robert Hull

ur recent ‘CFO Executive Survey’ revealed many interesting trends related to the way today’s CFOs think about their roles and responsibilities within their organizations. Of particular interest was that the majority of respondents said they view their responsibilities similar to those of navigators, firefighters, traffic cops, and psychologists. All of these roles are responsible for timely risk management and ensuring the general well-being of groups of people. So while CFOs may not put out actual fires or take responsibility for the physical safety of others, they do feel a great sense of accountability to ensure the financial health and stability of the broader organization. That overarching sense of accountability is partly a result of the shift in the role of the CFO to match the business world’s rapid pace of innovation, specifically to evolve from a tactical finance professional into a decisionmaker, strategist, and business leader. In our survey, 84 per cent of survey respondents said “thinking and acting strategically” was the most important skill a CFO needs to have

in today’s market, followed by the ability to “adapt to internal and external changes,” at 64 per cent. There is no question that the role of modern CFOs is shifting to a more strategic one. Yet no matter how much the role transforms, it will always be a position deeply rooted in budgeting, forecasting, reporting, and analytics. The CFO is responsible for providing essential insight into operational impacts on cash-flow and overall financial health. This process must be streamlined, provide an efficient quality control check for both potential and anticipated fiscal performance, and clearly indicate how much capital is needed, for what, and when. The level of leadership and influence that finance leaders and teams can provide is directly correlated to their ability to provide timely, accurate historical data to managers across the organization, to engage those managers in a dialog regarding future activity in their functional areas, and to provide an efficient process around this data gathering and dissemination process. The more efficient this process is and the less time finance spends simply managing data, the more time finance will have for analysis, insight, and

Financial Operations | SPRING 2015 | www.financialoperations.ca

engagement in strategic decision making across the organization. Yet far too many companies are still using labour intensive and error prone tools to complete these crucial tasks. The result is added risk, drained resources, and missed opportunities for the finance team to take a more strategic leadership role within the organization. So how can CFOs lead a more streamlined and collaborative budgeting, forecasting, reporting, and analysis process to deliver critical financial and operational information to the right people across the organization?

Stop the spreadsheet sprawl and embrace the power of automation The answer starts with automation. Datadriven decisions are no longer optional for modern organizations. Within today’s information-heavy, highly complex companies, data-driven decisions are essential to success. That data must be consolidated from multiple sources, must be timely, and must include both historical data as well as future projections. As CFO, you are responsible for providing accurate, timely data and you cannot afford a ‘spreadsheet sprawl’

Governance in which your management team is forced to rely upon shared spreadsheets and emailed reports, all with little or no version control and no means of creating an ongoing dialog among team members. Studies have shown that nearly 90 per cent of spreadsheets contain errors. By continuing to manage your budgeting, forecasting, reporting, and analysis processes through heavy use of spreadsheets, CFOs are subjecting their analysis to human blunders, compromising the integrity of the data that ultimately lands in the hands of executive decisionmakers, and relegating their finance teams to a role of tactical data manager. The effectiveness of Excel as a personal finance tool is undeniable. When it comes to fundamental business finance functions, using a spreadsheetcentric system is time-consuming, error prone, and a productivity killer. Just as a surgeon uses bestin-class tools to perform an operation, a successful CFO must be equipped with best-in-class solutions to find, measure, and deliver the right data, to the right people, at the right time. Such a solution should promote prompt and decisive action by providing a comprehensive, 360-degree viewpoint of operational and financial analytics. The ability to take prompt and decisive action based on collaborative, fact-based analysis is a main reason why so many of todayâ&#x20AC;&#x2122;s organizations are embracing modern FP&A technology. Specifically, theyâ&#x20AC;&#x2122;re switching their legacy systems over to cloud-based solutions. Shifting to a cloud-based corporate performance management system gives finance teams access to data from anywhere, more efficiently consolidates and centralizes financial information, and makes it easier for users to

create accurate budget and forecasts with deeper and more valuable analysis. In turn, the comprehensive information the CFO is able to provide fellow executives leads to faster, more informed decisions. And the efficiency gains in process turn into time spent thinking and acting at a more strategic level within the organization. Modern, cloud-based performance management solutions can provide many critical capabilities to finance teams looking to reposition themselves in a more strategic role. Specifically, such a solution can provide: 1. Increased process efficiency. Automated consolidation of data, drag and drop reporting, browser-based data entry, and workflow management tools all help to streamline budgeting, forecasting, reporting and analysis. Time saved is time available for more productive pursuits. 2. Visual analytics and dashboards. Finance teams are comfortable with numbers. Non-financials managers may not be. Providing them with visual representations of data can help to better engage them and provide them with the insight they need to make more informed decisions. 3. Scenario analysis. Finance teams need to be able to evaluate multiple possible outcomes by varying key business model drivers. Creating and comparing scenarios is much more efficient with a modern performance management tool, allowing rapid scenario creation and comparison without creating version control headaches for finance.

4. Self-service reporting and analysis. Data is only useful if it can be accessed readily by all management team members. Browser-based, drag-and-drop reporting tools make report creation and data interrogation possible for management team members without putting the burden on finance teams to support such requests. Drill-down capabilities allow managers to bring the data to life, drilling into areas of concern and finding new insights that illuminate better decision making.

Change the conversation: analytics for all To lead more strategically, CFOs need to bring their teams and the organization as a whole to a new level of budgeting, forecasting, reporting and analysis. Outdated

systems such as spreadsheets hinder that progress by making the process inefficient, errorprone, and not collaborative. Cloud-based performance management solutions can provide much needed relief and can enable analytics beyond the finance organization. In doing so, CFOs can elevate their role within the organization to a more strategic level by shifting time spent by the finance organization away from low-value data management tasks to more valueadded data analysis and more collaborative business forecasting overall. Robert S. Hull is founder and chairman of Adaptive Insights, an intuitive, cloudbased solution for corporate performance management. Prior to founding Adaptive Insights, Hull served as CFO for a number of market-leading software companies, including LoopNet and Risk Management Solutions.

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Financial Operations | SPRING 2015 | www.financialoperations.caâ&#x20AC;&#x192;

COMPLIANCE

AMLâ&#x20AC;&#x201C; Beneficial Ownership Determination Who are the beneficial owners? How is it verified? By Matthew McGuire

nti-money laundering consultants across the country are crying foul about efforts by the regulator to clear up compliance expectations. Until December 2014, areas of regulatory uncertainty were resolved by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) hotline, by confidential policy interpretation requests, through deficiency letters in the examination process, or by paying an outside advisor. Many of those advisors have cancelled their golf memberships over the holidays since FINTRAC published the complete text of every single one of its policy interpretations

24â&#x20AC;&#x192;

Financial Operations | SPRING 2015 | www.financialoperations.ca

COMPLIANCE

on their website. Even policy interpretations requested by examiners to their FINTRAC kin are included in the set, which consist of over 1,000 opinions separated into 13 topics. In alphabetical order, here are those topics; • Administrative Monetary Penalties (9) • Ascertaining Identification (285), • Beneficial Ownership (34) • Compliance Regime (73), • Ongoing Monitoring (9), • Business Relationship (20) • Money Services Businesses (86), • MSB Registration (58) • Record Keeping (144), • Reporting (342), • Third Party Determination (37), • Politically Exposed Foreign Person (32), and; • Other (73) With enough time and Google, any reporting entity or compliance professional can resolve areas of ambiguity and guidance gaps. These interpretations, although without the force of law and not binding on reporting entities, have become the defacto rule book for reporting entities to understand the expectations of FINTRAC and help avoid Administrative Monetary Penalties. Reporting entities can disagree with FINTRAC’s position and adopt contrary practices, but only if they relish the adrenaline rush that comes from federal court argumentation.

Beneficial ownership determination One particularly frustrating topic the policy interpretations almost resolve is that of beneficial ownership determination – an obligation brought about by legislative changes that become effective in February 2014. Essentially, it requires financial institutions and securities dealers to take reasonable measures to verify the accuracy of the information they collect about those that own or control 25 per cent or more of their clients that are entities (corporations, partnerships, or trusts) – and then to keep that information up to date on a risk-sensitive basis. Three often-posed questions arise from that new obligation: • How do I figure out who the beneficial owners are? • What is considered a reasonable measure to verify the beneficial ownership information I collect?

FINTRAC has helpfully responded to 34 questions that get us closer to answers, which we have set out according to those queries.

1. How do I figure out who the beneficial owners are? FINTRAC is looking for the following people to be identified as beneficial owners; whether a corporate, or non-corporate entity, directors, anyone who directly or indirectly owns or controls 25 per cent or more of the shares in a company. In the case of a trust, FINTRAC also identifies the trustees, as well as any beneficiary or settler of the account as a beneficial owner. Prior to verifying the accuracy of this information, it should theoretically be collected from the prospective client. There is no limit on the class of person connected to the prospective client from whom the information could be collected. In one policy interpretation, FINTRAC recognized that non-voting shares should be considered when determining an natural person’s percentage of ownership, but did not explain how the calculation would be performed – for example, whether voting shares are given the same weight as nonvoting shares in calculating a percentage total. It is clear from the policy interpretations that the concept of ownership and control are separate but potentially overlapping categories. In the case of a corporation, the legislation speaks to the control of shares, whereas in the case of partnership it specifies control of the entity. An issue not addressed by the policy interpretations is whether share control could conceivably be achieved by derivative or convertible instruments. Similarly, whereas directors may control 25 per cent or more of a corporate entity (because there are only three directors, for example), it is not clear whether they by definition control 25 per cent or more of the shares.

2. Assessing what constitutes reasonable measures for verifying beneficial ownership information collected? FINTRAC considers asking the client to provide the relevant documentation as reasonable measures to validate ownership information. Although reporting entities may rely on the information provided by the client, they must exercise judgment in determining whether the documentation is complete and

appropriate. FINTRAC refuses to confirm the exact measures required to confirm the accuracy of the information provided by the client, and the reporting entity must therefore change tactics or add additional measures when a submission does not meet all specified requirements. The FINTRAC policy interpretations have specified the following as acceptable means of documenting beneficial ownership, so long as they contain sufficient information to verify all of the required beneficial ownership information (sufficient information is not specified in any of the policy interpretations): • CRA Schedule 50 • Corporate registry profile • Client Attestation FINTRAC does accept that the accuracy of beneficial ownership can be achieved by getting an individual to certify to attest to the accuracy of the information. It does not appear to limit the classes of persons that would be reliable as attestors, nor did it explicitly agree that an attestation by the applicant’s lawyer or accountant was necessarily more reliable than from an officer or director. One method of achieving attestation is through web-based forms, such the Attestanet platform. Regardless of the method employed, all reporting entities must ensure that the documentation used to satisfy beneficial ownership requirements identifies ownership, control, and structure of an entity in order to be compliant with the new legislation. Failed verification requires a default to high risk and identification of the most senior officer of the entity. Even though reporting entities have this new resource from FINTRAC to better navigate and interpret the legislation, there is no substitute for professional judgement and well-documented approaches to defend against poor exams and penalties. You may also wish to consult an otherwise unemployed AML compliance advisor. Matthew McGuire, CA, is the National Leader of MNP’s AML Services line, part of the firm’s Investigative and Forensic Services practice. To learn more about FINTRAC compliance requirements, contact Matt McGuire at 416.263.6959 or matt.mcguire@ mnp.ca, or your local MNP Advisor.

Financial Operations | SPRING 2015 | www.financialoperations.ca

Business

The Problematic Database Is ‘shadow data’ hurting your business?

By Roxana Safranek

hat is shadow data? The literal definition is “databases that are built and used inside organizations without the knowledge or approval of IT.” The practical scenario may be such that individual employees build databases using Excel spreadsheets, or keep their notes on their desktop using Word, an Outlook contact file, etc. Imagine a scenario whereby an important customer calls asking why they did not receive the documents they were waiting on.

After further investigation, you confirm the documents were sent – to the wrong address. The customer insists they have given you their new address several times. The culprit is probably a ‘shadow database’. It is likely the person she told made a change in one database, but not in the database that was used when mailing the documentation. The scary part with this scenario is that it could happen again to the same customer when dealing with a different department in the same company.

Financial Operations | SPRING 2015 | www.financialoperations.ca

This type of inefficiency reflects poorly on the company and shakes customers’ confidence. In a business climate where creating a good customer experience is critical for success, this type of activity can be back breaking.

Shadow databases create inefficiencies One of the main reasons shadow databases create such a problem is because manually updating and syncing information between a

Business

• Shadow data leads to disparate and conflicting reports and inaccurate analysis Another pitfall of shadow databases is the inefficiencies they create. In today’s competitive landscape it’s critical to maintain operational efficiency, intuitive processes, and a great customer experience; shadow databases can derail all of these objectives. According to findings of an Accenture online survey of more than 1,000 U.S. / UK companies, 59 per cent of managers said that as a consequence of shadow databases, they miss information that might be valuable to their jobs because it exists somewhere else in the company. Forty-two per cent of respondents said they accidentally use the wrong information at least once a week, and 57 per cent of respondents said that having to go to numerous sources to compile information is a difficult and time consuming process. Additional inefficiencies and productivity issues reported were: • Corporate knowledge assets are not visible to the entire company • Manual data flows are not formalized and operate in a sub-optimal way with workers unknowingly duplicating efforts • Customer specific preferences and servicing notes are not likely to be included in shadow databases

Shadow databases are the symptom not the illness

centralized database and a shadow database can be time-consuming and, consequently, is often overlooked. This leads to old, incorrect data somewhere – either in the shadow databases, or in the central database, or most likely, both. Other problems with shadow databases are: • These databases typically aren’t adequately secured or backed up • No one is designated to update and cleanse the shadow data

It is easy to blame the business group or individual users for building shadow databases, but generally the blame isn’t on them. Shadow databases are typically built when users feel there isn’t another way to easily get at the data they need. In order for businesses to address this common complaint, and potentially eliminate the need for shadow databases, it is essential to integrate business processes with a single database. To achieve this it’s important to implement a management system with a framework that supports seamless integrations, with the ability to reach across business lines. By implementing a flexible architecture, you can break down the data silos which will improve efficiencies, data quality, and data security, but that’s just the beginning. Implementing an end-to-end system with a single database

also yields cost savings and improved business productivity, including: • Improved visibility Real-time visibility of data is important in making timely informed decisions. When information can be accessed instantly, without wasting resources on data extraction and tying data from different sources together, employees are better informed and can make more accurate, faster decisions. • Unified business processes across the enterprise With a single, integrated platform encompassing all functional areas, employees no longer have to re-enter data in different systems reducing inconsistent or inaccurate data. • Improved customer service The quicker and more efficiently a customer’s needs are addressed, the more likely they are to continue doing business with you. With an integrated system, you can more easily service your customer’s needs by having the right data available at the right time. • Better analytics and reporting A single integrated database also improves analysis and reporting. Having all the data in one database allows users to drill down and parse through the data any way they want. This improved level of visibility into the data delivers more detailed and accurate metrics which directly correlates to better, more informed business decisions.

Summary Shadow databases can create a number of risks for businesses. Because they require a manual coordination of efforts, they often lead to duplicate entries, inconsistencies, inaccuracies, and confusion across the business. The obvious result of this is wasted time and lost productivity, but that isn’t the only cost. The integrity of the information and customer loyalty is also on the line. Roxana Safranek is Director of Marketing for LeaseTeam, Inc. She has more than 18 years of marketing and business development experience with 14 of those years being in the software industry. Roxana is responsible for marketing, communication, and business development for LeaseTeam. LeaseTeam provides solutions that flexibly manage the entire lifecycle of equipment finance contracts, for an array of business types, portfolio and ticket sizes, and financial products. (www.leaseteam.com).

Financial Operations | SPRING 2015 | www.financialoperations.ca

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EVENTS 2015 April April 2 Lloydmedia Inc. - Payments Business Magazine Mobile Payments Workshop Toronto, ON www.paymentsbusiness.ca April13-16 NAPCP 16th Annual Commercial Purchasing Card and Payments Conference San Antonio, TX www.napcp.org April 15-18 Factoring Association 21st Annual Factoring Conference New Orleans, LA www.factoring.org

MAY

April 19-22 NACHA, The Electronic Payments Association, Payments 2015 New Orleans, LA www.nacha.org

May 5-7 Cartes North America 2015 Las Vegas, NV www.cartes-america.com

April 20-22 IOFM Accounts Payable Summit Toronto, ON www.iofm.com/canada

May 11-12 FC Business Intelligence Analytics for Insurance Canada Summit Toronto, ON www.analytics-for-insurance. com/canada/

April 22-25 PaymentsSource 27th Annual Card Forum & Expo Chicago, IL www.paymentssource.com

May 11-13 WB Research eTail Canada 2015 Toronto, ON etailcanada.wbresearch.com

May 11-14 IFO Fusion 2015 Forum & Expo Orlando, FL www.financialops.org May 12-14 Finovate Finovate Spring Conference San Jose, CA www.finovate.com May 14-15 Commercial Payments International Global Commercial Cards & Payments Summit 2015 Singapore, MY www.commercialpayments. com

Visit us online www.financialoperations.ca/events.html 28

Financial Operations | SPRING 2015 | www.financialoperations.ca

INDUSTRY UPDATE

IDC Financial Insights Reveals Chief Risk Officer Predictions Through 2016, 75 per cent of the CRO’s time will be focused on risk data architectures, credit analytics, fraud and cyber security, and creating new risk efficiencies

nternational Data Corporation (IDC), in its ‘IDC FutureScape: Worldwide Risk Management 2015 Predictions Web’ roundtable, highlighted predictions based on a new IDC FutureScape report. Featuring financial industry analysts Michael Araneta, Andrei Charniauski, Li-May Chew, Charles Kolodgy, Michael Versace, and James Wester, the roundtable discussion provided organizations with insight and perspective on long-term industry trends along with new themes on the horizon. The ‘Predictions Web’ conference series and accompanying IDC FutureScape reports are designed to help company leaders in risk and security capitalize on emerging market opportunities and plan for future growth. The predictions from the IDC Financial Insights Risk FutureScape include: 1. Risk data aggregation, analytics, and reporting consumes 75 per cent the Chief Risk Officer (CRO) agenda in 2015. 2. Led in part by big data solutions, fraud and financial crimes analytics will set global financial institutions back US$2.8 billion for software and services by 2016. 3. Thirty per cent of top compliance functions introduce a technological means, business processes, and metrics to manage and minimize conduct failures. 4. Institutions increase investments in risk culture through enterprise education by more than 15 per cent in 2015. 5. Industry clouds disrupt legacy risk

operations and contribute to a 10 per cent reduction in Know Your Customer (KYC) and other compliance costs by 2016. 6. Virtually all CROs will be engaged in credit risk modernization initiatives through 2016. 7. By 2016, threat intelligence security services market will growth at a 20 per cent compound annual growth rate (CAGR), with consulting services leading the growth. 8. To meet the demand for convenience, 10 per cent of mobile-initiated commerce will be biometrically secured by 2016 and password usage begins to show signs of decay. 9. By 2017, with workable boundaries of regulation at state and federal levels, financial institutions find their role in crypto-currency clearing. 10. Through 2016, operational risk spending will grow at an eight per cent CAGR, almost twice the average growth rate for all IT industry spending. According to Michael Versace, Global Director for Risk and IT Strategy at IDC Insights, “There seems to be no end to above average growth rates in risk technology and service investments across all three financial services sectors, and all global regions. However, while the waves of regulation continue to pound against margins and profitability, solutions built on cloud, big

data, and analytic platforms are offering more opportunities every month to scale and strengthen the CRO’s ability to mitigate risk, perfect risk taking, and contribute to growth and shareholder value.” The IDC FutureScape report that this Web conference is based is available at www.idc. com/Predictions2015. About IDC Predictions A hallmark of IDC’s offering for three decades, the annual Top 10 Predictions reports provide our outlook on the IT market, across industries, in the coming year. During the next 90 days, IDC will publish Top 10 Predictions documents for 2015. About IDC FutureScape IDC FutureScape reports are used to shape IT strategy and planning for the enterprise by providing a basic framework for evaluating IT initiatives in terms of their value to business strategy now and in the foreseeable future. IDC’s FutureScapes are comprised of a set of decision imperatives designed to identify a range of pending issues that CIOs and senior technology professionals will confront within the typical three-year business planning cycle. About IDC Financial Insights IDC Financial Insights assists financial service businesses and IT leaders, as well as the suppliers who serve them, in making more effective technology decisions by providing accurate, timely, and insightful fact-based research and consulting services. Staffed by senior analysts with decades of industry experience, our global research analyzes and advises on business and technology issues facing the banking, insurance, and securities and investments industries. International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology market. IDC is a subsidiary of IDG, the world’s leading technology, media, research, and events company. For more information, please visit www.idc.com/financial, email info@idc-fi.com, or call 508-620-5533. Visit the IDC Financial Insights Community at http://idc-community. com/financial.

Financial Operations | SPRING 2015 | www.financialoperations.ca

Industry Update

The Cyber Security War Less than half of Canadian organizations believe they are winning

ccording to a study released by Canadian IT solutions integrator, Scalar Decisions, only 41 per cent of Canadian organizations believe they are winning the cyber security war. The research was conducted with over 600 IT and IT security practitioners in Canada, and found that the primary challenge respondents cited was a lack of in-house expertise. Almost half (49 per cent) of respondents believed that they do not have a sufficient number of in-house personnel who have such critical qualifications as job experience, professional certifications, and specialized training. Entitled ‘The Cyber Security Readiness of Canadian Organizations’, the study examined how prepared Canadian organizations feel to respond to security attacks, how much the average attack costs, and what strategies and technologies are most effective in combatting security attacks.

Other key findings Respondents experienced an average of 34 attacks in the past 12 months. • On average, each incident cost $208,432 in cleanup, lost time, disrupted operations, damage or theft of IT assets, and damage to reputation. • The majority of respondents believed

the frequency, sophistication, and severity of attacks had increased when compared with the previous year. • Forty-six per cent of respondents experienced an incident in the last year that involved the loss or exposure of sensitive information. • Thirty-five per cent of respondents said their firm experienced a loss of intellectual property or other commercially sensitive business information due to cyber-attacks within the last 12 months, with 32 per cent of this group believing the theft caused a loss of competitive advantage. • The research identified a subset of the sample that self-reported they had achieved a more effective cyber security posture (they rated themselves as seven or higher on a one to 10 scale of cyber security effectiveness). This ’highperforming’ group represented 48 per cent of the sample, and when compared with the ‘low-performing’ group, it was found that: • High performers had almost 50 per cent more of their overall IT budget dedicated to security (11.8 per cent vs eight per cent). • High performers were more

Financial Operations | SPRING 2015 | www.financialoperations.ca

likely to have their cyber security strategy aligned with their business objectives and mission. • High performers were more likely to measure the ROI of their technology investments. • High performers were 28 per cent less likely to have experienced an attack in the last 12 months that led to the loss or exposure of sensitive information. • Among both high- and low-performing groups, the technologies showing the greatest ROI were security information and event management (SIEM), identity management and authentication, and network traffic surveillance. Paul Kerr, president and CEO of Scalar Decisions, says that with the rise in frequency and severity of security threats, it’s not surprising that the majority of Canadian organizations feel ill-prepared to meet IT security challenges head-on. The growth in outsourced security services highlights the fact that most organizations need to look to third-party providers in order to gain skills and personnel that they do not possess in-house. Dr. Larry Ponemon, chairman and founder of Ponemon Institute agrees and says that the security practices of high-performing organizations provide guidance for other companies on how they can improve their cyber security readiness. The study highlights that organizations which adopt a strategy to prepare for, defend against, and respond to security threats are likely to fare better in the cyber security war.”

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