The Curious Case of Financial Consolidation
By frank.buytendijk on Sep 08, 2009
One of the goals of a data warehouse is to provide a single source of the truth, as the basis of management information across the organization. Data is collected from various transactional systems, is integrated and aggregated, and made available through business intelligence tools and performance management applications. According to analyst firm Gartner, performance management comprises financial consolidation, financial reporting, scorecards, planning and budgeting, and profitability management.
However, many finance professionals question the need for a data warehouse as the source for their financial consolidation process, instead of linking financial consolidation directly to their general ledgers. They are right. I'll discuss why, from an architectural, procedural and practical perspective.
Although financial consolidation is generally accepted to be an important, if not crucial, part of performance management, financial consolidation has some characteristics fundamentally different from other a management processes. In fact, as a management process it looks more like transactional process. Most management processes, such as plan-to-act or analyze-to-adjust are iterative of nature, and very hands-on. Users take an explorative view on the data, where one question leads to another. Financial consolidation, as part of record-to-report, in contrast, behaves more like transactional process, such as order-to-cash or procure-to-pay. Financial consolidation should be linear of nature, and as hands-off as possible. The level of automation and standardization should be as high as possible, to secure a reliable, auditable and repeatable process. As a consequence, for financial consolidation purposes there is no added value for adding the data warehouse as an intermediate storage stage in a further transactional process.
Financial data has specific requirements regarding the chain of custody. It needs to be 100% accounted for, auditable and every step needs to be retraceable. Based on Sarbanex-Oxley regulations both the CFO and CEO need to personally sign for the accuracy of the information. Routing the financial data from the general ledger through the data warehouse before feeding it to the financial consolidation system is not only an unnecessary step, but it endangers the chain of custody. It introduces governance issues, as the data warehouse processes and houses many types of information owned by multiple business domains.
Due to US GAAP and IFRS regulations, financial data transformations are highly standardized. Although the ETL (extract-transform-load) or data integration tool used by the data warehouse may functionally be able to deal with the complexity of financial data transformation and integration, there is no point in reinventing the wheel, if this logic exists prebuilt in standard financial consolidation packages. Best-of-breed prebuilt functionality allows finance professionals to make allows finance professionals to make ledger-to-headquarters mapping decisions directly, and see the impact on the balance sheet balances, financial ratios and accounts. These requirements, particularly in multiledger environments, can live at odds with IT-managed complex ETL processes that should be focused on maximum control and stability.
Does this mean that the Finance department should be excluded from the data warehouse? Not at all. The majority of finance run processes, and a large part of finance-related information are managerial of nature. Operational management needs to have insight in the financial consequences of their operational decisions, and require financial management information. Financial management, in return, needs to be able to access operational management information, to gain insight in the business' value drivers, and as such improve and maintain financial predictability. Also from a planning perspective, operations and finance need to be integrated. Financial and operational information both belong in the data warehouse, in an integrated manner.
Once it is understood that financial consolidation is fundamentally not a management process, but an operational process, the architectural issue disappears. The financial consolidation system, like any other transactional system, should be seen as a source to the data warehouse. This might raise the issue of timeliness. Financial consolidation takes time, and other types of data might be routed into the data warehouse sooner or with a higher periodicity. That problem can be solved like with any other source system; distinguishing between preliminary and final data loads.
Keeping financial consolidation outside the data warehouse architecture is not an 'exception to the rule', but a matter of architectural soundness, combined with an understanding of governance issues and simply a practical solution. Key to keeping the architecture 'clean' is the understanding that financial consolidation is not a management process, but transactional of nature.