The Future of Account Reconciliations - Enabling Agile and Intelligent Finance Operations
1) Executive Summary
Reconciliations are a critical process for finance operations. While the process is transactional and repetitive, it often determines the close timeline. Also, if not done accurately, companies can potentially incur significant costs to restate financials going back several quarters. Over the last decade, reconciliations have become more complex and carry increased risk of errors due to higher number of products, geographical markets and financial systems. To address these challenges, leading insurance companies have partnered with shared services providers to streamline their processes, source appropriate talent, apply industry best practices, and better manage inherent operational and financial risk. Working with these solution providers, they have consolidated disparate reconciliation activities under a scalable, flexible and agile Center of Excellence (CoE) service delivery model. When stable, they implemented standard tools and templates along with a fit-for-purpose governance model to eliminate waste and bring transparency to the process. This approach has delivered a more resilient and efficient reconciliations function, improved risk management, and lower operating costs.
In this paper, we make the case that the reconciliation process is not peripheral to the CFO function, but a core part of finance operations performance. It also explains why an effective and efficient reconciliation function should be set up as an integrated CoE service delivery model, instead of managing it as a set of fragmented and distributed sub-processes. A CoE model for reconciliations can create real impact and deliver tangible business outcomes - a simpler, standardized and scalable process with fewer hand-offs, process efficiency and increased capacity, enhanced visibility and control, reduction in reconciliations volume, and improved process analytics - adding up to an overall faster close.
2) Key Challenges in the Current Landscape
Insurers face several challenges in effectively managing the reconciliation process. Typically, decentralized groups spread across multiple locations require multiple hand-offs resulting in inefficient processes burdened with frequent errors and correction cycles. This is generally the top pick for less than ‘adequate’ ratings by the auditors.
In certain cases, lack of standardization, inconsistent reconciliation policy adherence, and weak enforcement can often derail the operations. In other cases, lack of a workflow tool and manual classification and tracking of open items hinders the process. Most insurers do not have (near) real time visibility of reconciliation tasks (due to paper or excel-based models), visualization tools, and self-service capabilities.
The fact that the reconciliation function has moved from bank account balances to complex intercompany and customer ledger accounts has further exposed the challenges posed by the current landscape. As a result, Insurance CFOs are looking for solutions that do more than just conduct transactional reconciliation tasks.
3) Why a Reconciliation CoE?
The Center of Excellence based service delivery model for reconciliations allows insurance companies to improve operational and financial control, boost efficiency, and reduce risk. This approach reduces infrastructure and recurring technology spend by streamlining the systems, simultaneously creating an ecosystem for continuous improvement and innovation. Consolidation of processes and investment in talent allows implementation of best practices over time. Specifically, it can deliver the following tangible benefits:
- Process Effectiveness: Provides a streamlined, scalable platform for reconciliation, exception management and receipts/payment investigation
- Cost Optimization: Optimizes cost of delivering finance operations by bringing in efficiency and higher per user output
- Improved Risk Management: Lowers the risk rating and provides audit comfort by minimizing unreconciled balances and establishing a controlled environment
- Customer Experience: Ensures superior digital experience via personalized user interface and integrated back end technology to provide real time data and insights
- Better Talent Management: Optimizes the deployment of resources that contribute to significant cost savings and creates an ability to better support peak demands through flexible staffing models
As a result, companies implementing this model can reduce costs and free up staff for more value-added work. At the same time, exceptions can be dealt with quickly and approved by the right people at the right time. This improves process visibility, giving CFOs a more accurate view of business performance as well as a faster period-end close.
4) Key considerations when choosing a CoE model for the Reconciliations function
Most of the CFO functions are undergoing a massive digital transformation in the wake of current pandemic. We expect a similar trend for reconciliations where analytics based insights and use of automation and machine learning will drive the digitization of existing processes. For example, machine learning based probabilistic algorithms can produce a 95% + automated match rates for unreconciled balances. A CoE model is best suited to leverage digital technologies and test innovative solutions to further improve the process performance.
Insurance CFOs who are considering setting up a reconciliations CoE should keep the following additional factors in mind:
- Talent: Reconciliations have traditionally been a manual activity, using basic desktop tools and spreadsheets. With the increasing emphasis on use of digital technologies and troubleshooting skills, basic accounting or data entry skills are clearly not enough. For example, employees need to be experienced in obtaining data insights using automation tools. Such cross-functional talent should be housed in a CoE set up with clear career paths and on-going professional development.
- Best Practices: Reconciliations have become too complex to be managed as ad hoc processes. There is a need to develop policies and procedures that are proven effective and create a blueprint for efficient reconciliations. A CoE provides a mechanism where such best practices can be identified, implemented, and matured. For example, we have helped our clients develop and include following best practices in their reconciliation processes:
- Financial transaction journey mapping to document and create proper audit trail of line items
- Account grouping that ensures reconciling journal entries are posted in the appropriate ledger accounts to give an accurate view of the balances
- Standard Reconciliation information sheets document and provide required supporting details of reconciling items
- Reconciliation policy design including support and complexity matrix, reconciliation categorization and threshold limits reduces overall non-complaint accounts and supports prioritizing for optimal resolution
- Complexity and skill set mapping aligns the right skill set with a unmatched item as per the complexity levels
- Systems and Technology: Often, steps within the reconciliation process are distributed across systems. A centralized approach allows companies to implement a platform (such as Blackline) that brings these segregated tasks on to a single system. A digital CoE strategy achieves this goals by effectively consolidating data across business units, and enhancing business intelligence through advanced and predictive analytics. Ultimately, it delivers a collaborative platform that drives transparency and innovation.
- Governance Structure: With the formation of a CoE, the governance of reconciliation related functions becomes leaner and more efficient. Integrated dashboards that include end-to-end information on reconciliation activities provide for better real-time monitoring and reviews. Not only is it easier to design policies and ensure adherence, continuous monitoring can actually generate newer, data-based insights for better decision making.
- Operating Costs: Centralized reconciliations functions allow for the pooling of costs and sharing of resources across business units and markets. This not only provides investment flexibility to the function, it also strikes an optimal balance between cost and effective operations. Further, a CoE model can significantly reduce the time-to-market for insurance products, potentially contributing to revenue generation opportunities.
5) How EXL can help?
Case Study: A global risk management and insurance service provider, headquartered in New York, with $10B+ in revenue
In one example, EXL assisted its insurance client with transforming the reconciliation process through a CoE based service delivery model. This included consolidating reconciliation activities, as well as enhancing the capabilities by implementing best practices related to the people, processes, and systems. End result was an efficient and more effective reconciliation function, operating under an optimized governance model.
EXL adopted a 2-stage implementation approach that focused on defining the CoE model initially and optimizing processes and platform later.
- Phase 1 (3-5 months) – Build and Implement the CoE
- Consolidated reconciliation activities by centralizing the processes into a single delivery center. Identified and eliminated hand-offs by creating a simpler process with fewer hand-offs
- Aligned the skill set with the work type. Built competency center for accounting activities, by entity, by BU for skill development, harmonizing team structure, and team set up
- Standardized the reconciliations process across process inputs, reconciliation templates, review checklist, rejection reason codes, and open item classification methodology. Optimized the process by rationalizing reconciliation frequency based on risk and due dates
- Enhanced process governance by enforcing compliance to Global Reconciliation Policy, properly tracking delinquent reconciliation, standardizing reconciliation support, identifying manual risks and implementing process controls
- Phase 2 (6-8 months): Optimize and Automate Reconciliation Process
- Aligned IT architecture with best-in-class practices. Increased penetration of Blackline as a centralized platform for reconciliation across all entities. As a next step, implemented Blackline Task module to perform automatic roll-forward, identify dependencies and track close process real time
- Implemented EXL’s Smart Match Solution that leverages AI to drive attribute based matching. Also deployed electronic evaluation checklist with established parameters and perform independent reviews
- Deployed control mechanisms to mitigate risk such as reconciliation reports to review open items and better manage open item management
- Developed KPIs and success measures to reflect the health of business including analysis of required adjustments with relevant impact type to support P/L exposure
- 20% process efficiency and increased capacity through reconciliation rationalization, automation, and use of platform solutions
- 90% reduction in non-compliant accounts through automated and rule-based matching, exception management and open item resolution
- Increased SOX control driven by improvement in documentation, accuracy, and transparency
- 99%+ consistent achievement due to standard, repeatable process
- Real-time reporting and improved analytics
Partner, Finance Transformation, Insurance
Vice President, Growth Leader, Insurance
VP Finance & Accounting, Insurance
VP Finance & Accounting, Insurance