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DEC's decentralized financial system puts strategy above controls.

DEC's decentralized financial system puts strategy above controls In the 1970s, when Digital Equipment Corporation was experiencing growth rates of 30 to 40 percent annually, the firm's financial systems were known as "islands of automation." Now, Digital is nearing the close of a five-year plan to coordinate its information flow and let operating units make their own business decisions.

Why we did it Today's financial executive is in the middle of the trend toward decentralization of resources, while trying to support businesses that are faster paced than ever before. Traditionally, finance and accounting communications were narrowly prescribed, with most information flowing upwards to corporate headquarters, making it difficult for employees in a geographically dispersed company to manage data accurately and efficiently.

Now, more than ever, decentralization of administrative and financial functions requires that information move smoothly in multiple directions across computer systems and business functions. Management consultants favor this trend because they believe that finance and administration resources should be integrated throughout the company within individual business units. Under this management style, support staff becomes part of the decision-making process, and is better able to understand the issues managers face. Users are also closer to the computer power needed, allowing them to make business decisions faster with more information on hand.

Implementing a distributed financial computing system directly addresses the challenges managers face in attempting to effectively execute their multiple financial functions.

Unfortunately, many corporations are still locked into some form of their original, often centralized financial information system. Systems resources are often duplicated in similar function areas, resulting in needless replication of labor and difficulties in tracking financial data quickly and accurately. Digital Equipment Corporation faced this challenge and developed a five-year plan to create its own distributed financial computing system.

Decentralizing and reconstructing During the last decade, Digital has experienced dramatic financial growth and organizational expansion. During much of this time, financial computer systems struggled to keep pace. A centralized accounting system shouldered the burden of increasing decentralization. Financial programs varied from one operating unit to another, and the company's chart of accounts began to be characterized by a conglomerate of inconsistent approaches.

The simultaneous growth in revenue and the volume of accounting transactions at Digital had led to a complex financial reporting process. Every international subsidiary and manufacturing site submitted financial data directly to corporate accounting. The company's total net operating revenue had grown at an average of 27 percent per year. All accounting and reporting systems were extended to their limits to handle the ever-increasing volume. At one point, internal management reports grew to more than 1,700 pages.

Digital soon discovered that its financial groups had to become more flexible to change and grow with the organization. This need for flexibility plays hand in hand with the inevitability for change, and Digital's finance function moved into the role of a team player.

Because Digital is very much a user-oriented company, we realized up front that the users of our financial information--not the information systems people or the CIO--were the ones who had to define Digital's information problem and propose a fix for it. In 1984, our domestic operation, the biggest piece of the company, was largely centralized. We had about 55 ledgers, with full accounting units under each, which would funnel about 3,000 pieces of data to the corporate office each month.

So the people at corporate headquarters were extremely busy checking the incoming data for accuracy. And, indeed, the data quality suffered, because the operating units felt little responsibility for its quality. After all, they figured corporate would catch any mistakes. And when an operating manager needed statistics on some part of his operation, he had to get in line at corporate and wait for a report.

Corporate began to like its controlling role. But the situation was unproductive, and a lot of people were very unhappy.

The company required a major change--one that would involve extensive restructuring of the corporation's entire financial operation. At the center of this move was a core group of information system people and senior financial officers from each operating unit. The group's goals were to analyze the existing environment, set objectives, implement a financial organization development process, and establish major programs to be implemented in phases over a five-year period. The sophisticated, worldwide strategy formed by the group was called Digital's Financial Architecture, or DFA.

Creating a distributed foundation The DFA's five-year plan focused first on distributed accounting. Restructuring began by shifting the burden of data away from corporate finance and onto the shoulders of the operating units that originally generated it.

Today, six financial management centers in the United States and two consolidation centers outside the United States process, consolidate, and report fiscal and management data to corporate accounting. Processed data is then provided to each operating unit to perform the fiscal closing for operations within their regions' boundaries. Corporate headquarters receives only the necessary high-level information.

Under the old, centralized approach, each operating unit worked with non-standard charts of accounts that had evolved over the years to satisfy local information needs. Detailed, worldwide accounting information was sent directly to the corporate consolidation center. Consolidating and reconciling this volume of information consumed weeks of effort to "close the books" and generate the required reports.

Today, the responsibility of information storage and information processing has been shifted away from corporate finance. Reconciliation and processing activities have been placed where the data was created -- in the hands of the operating units.

The benefits of reconstruction Now, a worldwide system of information exchange is the basis for forecasting, managerial planning, and strategic planning throughout the organization. The time it takes to consolidate and report financial information from units around the world has dropped significantly and continues to improve amidst rapidly growing revenues and transaction volumes. Financial information is now available to company management and the investor community much earlier, and with greater accuracy than any time in the company's history. Whereas it once took almost five weeks to consolidate and report data, it now takes under three. In addition, the corporate reporting staff now operates at one-third its former size, even though the company is three times larger.

These and other improvements in forecasting, reporting, and cost control have contributed to the excellent financial state of the company. And the system continues to become more flexible and responsive to management's reporting needs as the enterprise moves ahead with implementation.

In short, through distributed computing, organizations are able to maintain the fundamental financial characteristics of stability, organization, and thoroughness. At the same time, flexibility at the management interface level to easily adapt to organizational and other environmental changes has altered the role of finance into one of a more strategic and productive business partner.

Distributed financial computing is in no way the nemesis of the more traditional approach. Rather, it is an implementation of technology with a clear business benefit--to take what's there and make it better. Advanced networking and interconnect technologies now make it possible for corporations to create a distributed environment utilizing the existing system as a building block, thus protecting the investment in the original system.

Too often we get caught up in the financial side of this equation: is the cost worth the savings? But the real issue is not the expense of the system reorganization but the strategic decision-making behind it.
COPYRIGHT 1989 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Digital Equipment Corporation
Author:Ryan, Bruce J.
Publication:Financial Executive
Date:Jul 1, 1989
Previous Article:What should a CFO know about dispersed computing?
Next Article:The role of the financial executive in deterring hostile takeovers.

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