An Analytical Framework

As NorthPoint looked at the market for risk management approaches and software tools which can help companies assess and mitigate IFRS conversion risks, we thought it would be helpful to develop a way to categorize the various approaches or tools that exist.

Our research indicated that the market for IFRS risk assessment and mitigation approaches and for software tools could be broken out in a matrix as illustrated below. Please understand that the tools and approaches in the market vary greatly and their respective differences are difficult to describe in a simple matrix. Regardless, we felt that a simple analytical framework provides a way to understand what is available and to assess the tool or approach most appropriate for what your company is trying to accomplish.

On the horizontal axis, the time orientation of the approaches and tools ranges from those that support a “snapshot” or risk assessment at a specific point in time, through to those that help to predict or forecast outcomes given accurate program plans and the application of tools by skilled and experienced professionals.

The vertical axis indicates the analytical orientation of the tools and approaches. The analytical aspects range from providing a diagnostic view i.e. “what are the issues you must manage”, to a more prescriptive view i.e. “what should you do about those issues”.

The point behind the framework is to help understand and categorize what type of approach or tool your company needs or is being offered by service providers.

For example, dependent upon where your company is in the IFRS conversion program lifecycle, it may be very appropriate to obtain a “snapshot” in order to help get the rest of the organization on board with the major issues to be faced. Until the SEC decides upon an IFRS conversion deadline, many companies in the US are doing exactly that to help build understanding of the dimension of the issues within their organizations.

Alternatively, if your company has started down the IFRS conversion program path and there is a requirement to ensure that risks will not impact schedule or budget, your service provider or program team will need to be both predictive and presciptive in terms of what must be done to maintan time and schedule integrity.

In my next post, I’ll start to fill in the blanks of the framework and provide some examples of tools and approaches available in the market today.

As NorthPoint researched the market for IFRS conversion risk management tools and approaches, a number of conclusions began to emerge from experience gained in other regions of the world which have gone through the IFRS conversion process:

• IFRS conversion efforts are likely to be large, multi-disciplinary and complex programs of change that extend far beyond any needed financial reporting changes
• Cross functional and multi-disciplinary teams which have not typically worked together before will need to be formed and will need to deal with subject matter that is new to the entire enterprise.
• Given the complexity and scale of IFRS conversion programs, there will be multiple sources of significant risks that will need to be managed and mitigated during the years required to complete a conversion program at most companies
• The software tools used by some audit and professional services firms in support of a diagnostic effort are limited to a “snapshot” of a client’s current situation and can only provide limited prescriptive guidance to a client once an IFRS conversion program commences.
• No software tools exist that identify and consider all the steps, tasks and processes (STPs) needed to successfully execute an IFRS conversion program
• Given the size and scale of conversion programs, professional services firms are building, licensing or customizing existing robust program management tool kits to support their clients’ needs for program management office support and tools
• The best available conventional approach to deal with IFRS program risk management today is people-based. Companies are retaining advisors who are qualified, experienced and have been through multiple successful complex programs of change. These types of professionals are scarce and therefore relatively expensive.

As there are different types of tools and approaches available to support risk management for an IFRS conversion program, we thought it would be helpful to develop a framework to categorize the tools and approaches that do exist. In my next posting, I’ll review the framework and provide some examples of its application in considering approaches to IFRS conversion risk management.

While several recent surveys indicate that CFO’s are somewhat divided on the need for IFRS conversion, it is clear that the IFRS conversion effort will be welcomed by public accounting firms, software providers and systems integration and outsourcing firms alike. Part of the reason for their enthusiasm is that estimates suggest the overall market for IFRS conversion services in the US will be between $90 and $125 billion over the next five years.

Anticipating that the SEC will soon issue a clear roadmap and timetable for US GAAP to IFRS conversion, each of the “Big 4” public accounting firms and 12 out of the remaining 16 firms in the top 20 provide IFRS research, support resources and other services for both existing and potential clients. These services and other helpful information regarding the firm’s IFRS capabilities are easily accessible via the firms’ external websites.

Given the lack of clarity from the SEC regarding an exact date for IFRS reporting cutover, most public accounting firms today are supporting their clients with “diagnostic” services. These services are delivered by multi-disciplinary teams (made up of accounting, taxation, systems and technology, and human resources professionals) over a 6-8 week period of time.

The output from these diagnostic studies is typically a report providing an assessment of the likely scale and scope of effort required from the client when converting to IFRS. It also highlights, to the extent possible, likely areas of risk that the client will face during the IFRS conversion effort.

Our research indicates that there are many reasons companies conduct a diagnostic study. Among the most common are:

• Scoping – to understand the magnitude of effort and investment required for the conversion program
• Educational – to educate the executive team about the magnitude of the IFRS conversion effort
• Internal Marketing – to create a sense of direction and urgency within the organization and to allocate financial and human resources for the program ahead
• Preliminary Program Planning – to provide a foundation for a comprehensive conversion plan and to ensure that the needed Steps, Tasks and Processes (STPs) are considered
• Value Management – to ensure that opportunities to gain business value resulting from the IFRS conversion program are identified and pursued
• Risk Management – to ensure that risks associated with the readiness, implementation and final conversion program are identified and that effective mitigation approaches are established

NorthPoint’s research indicates that most US Fortune 300 companies have either already engaged or are considering engaging, a public accounting firm to conduct a diagnostic study over the next year. As the SEC announces a definitive timetable, the companies that have conducted a diagnostic study should be positioned to better understand the challenges they will face in their IFRS conversion program.

The first source of risk for an IFRS conversion program is the fact that it is a program. Within an IFRS conversion program there will therefore be multiple interdependent projects that address needed changes within and across different functions, processes, information systems, geographies, business ventures, et al needed to complete the IFRS conversion effort.

In large companies, an IFRS conversion program will take multiple years to complete successfully. During that time, multiple projects will need to be executed to deliver their expected outputs e.g. an enhanced and IFRS compliant financial reporting system, a new asset tracking process and supporting system, a new compensation procedure for the sales force tied to compliant revenue recognition. All of these individual projects which comprise the IFRS program will need to be identified, planned, resourced and executed through to completion.

To help manage a major program of change such as an IFRS conversion program, companies will establish a Program Management Office, or PMO. A PMO has multiple roles and responsibilities, and there are many good sources of information regarding PMO structures, best practices, software tools, etc. available on the web. However, this blog is not one of them…

Having said that, one of the critical purposes of a PMO which we do focus on is to help the professionals who run them identify and manage risks within and across the overall IFRS conversion program. Risk can be defined as likely areas of potential future harm that can arise from a present action or inaction. The other side of risk which is not often focused on is that risk, if managed properly, can be be a tremdous source of business value.

The critical aspect of a PMO’s role in managing risk for an IFRS conversion is to first identify sources of risk and then control those risks to ensure they do not negatively impact the conversion schedule or cost.

Helping clients identify and mitigate enterprise and program risk is our mission at NorthPoint Software and Services LLC. Our newly launched software tool, IFRS Risk Assessor (IRA) takes advantage of the data and results (all while vigorously protecting our client’s confidential data) from over 1,000 programs of various types (e.g. IT, Product Development, Service Development, JVs, M&A, Security) that we have conducted risk assessments for.

While an IFRS conversion program is unique due to its nature and its application at any given client, we have been able to leverage our proprietary data to develop Best in Class performance attributes for program execution – and an IFRS conversion program is exactly that – a major program of work.

In subsequent postings, I’ll drill down into the areas of program risk we focus on and provide some practical guidelines for IFRS conversion program managers – and their constituents – to use to help ensure success.

Based upon experience gained in other countries which have made the conversion to IFRS, the effort required to make the conversion will be significant in terms of both time and money. For example, a survey conducted by Accenture in December 2008 of 200 executives at US companies larger than $1 BN indicated that these executives expect to spend between .1% to .7% of revenue for their US GAAP to IFRS conversion.

Regardless of how you count it, those percentages quickly add up to real money. For a $15 billion revenue company, expected costs could therefore range between $15 M and $105 M for their IFRS conversion efforts. Obviously, many different factors will play a role in the ultimate cost (more about that in later postings) for a company, but IFRS conversion should not be discounted as only an “accounting” issue.

IFRS conversion efforts will have impacts on many parts of a company. Beyond the need to change underlying accounting practices and policies, many diverse areas of a company will be impacted. For example, other areas of significant impact will include:

• taxation policies and practices
• information systems
• asset tracking and reporting
• human resources
• compensation
• financial instruments
• inventory treatment

I could go on with a list of impacted areas within a company, but the main point being is that an IFRS conversion effort is a major program of change for companies. As a major program of change, by definition it will be a risky proposition. The purpose of this blog is to explore and discuss aspects of IFRS conversion risk and discuss tools and approaches (software or people based) that exist to help mitigate those risks for companies.

Recognize that my company, NorhPoint Software and Services LLC, has just released a software tool called IFRS Risk Assesor, or IRA, so my posts will be a bit biased. We have been around since 1992, and have deveoped other enterprise risk management tools which can help organizations manage risk (or create value which is really just the flip side of risk) in other aspects of their business. Learn more about us at www.thenorthpointgroup.net .

Moreover, since I was deeply involved in the design and launch of our product, I really do believe its capabilities are unmatched in helping companies (or their professional services partners) identify critical IFRS conversion program risks and develop effective mitigation strategies for those risks.

I hope that you have an opportunity to stay with this blog and that you are able to learn things of value that will help you and your companies or clients be more successful in your IFRS conversion efforts. I look forward to your contributions and comments and hope we all end up better informed and more effective in our IFRS conversion efforts.

However, our research and experience at NorthPoint indicates that technology only represents about 15% of the risk faced by a major program of change such as IFRS. The balance of risk faced by a major program of change such as IFRS fall into two other broad categories:

• Management – how the management team establishes, drives and sustains the program of change represents approximately 65% of the risk; and,
• Marketing and Communications – how the need for the program of change is communicated, “sold” internally and externally to critical stakeholders, and how the impacted stakeholders understand “what is in it for them” to adopt the initiative into their daily routine. This category of risk can represent up to 35% of issues we encounter in our risk assessment process.

The mathematicians (or accountants) among you may observe that the three major risk categories add up to around 115%. The reason for this seeming anomaly is that there are overlapping risk factors across the three major categories of risk that we assess via the NorthPoint software tools.

Aspects of Technology Risk

Even though our research and experience indicates that technology only represents 15% of the risks faced by an IFRS conversion, there are good reasons to ensure that any technology risks are identified and mitigated. Given the potential lead times and costs involved in mitigating previously unidentified technology based risk, the consequences could be disastrous from an overall IFRS conversion program point of view.

Some common risk categories we encounter that are primarily technology based include:

• Does the team have the Knowledge, Experience and Performance (KEPtm) with the technology used to support the IFRS conversion? For example, if the team is using the IFRS conversion to build support to convert from a custom developed or less widely used ERP system to SAP or Oracle – do they have the KEPtm to identify and mitigate risks associated with such a major conversion effort?
• Are there multiple ERP or accounting / reporting systems being used within the company and / or it’s JVs or subsidiaries? For example, if a company has grown by acquisition over the years, there may be multiple vendors or versions of ERP systems in place across the organization which may represent major risk as it relates to producing IFRS compliant reporting for comparative purposes.
• Is there an information technology outsourcing partner involved in developing, supporting and maintaining the company’s application portfolio? If there is, significant effort may be involved to ensure that the outsourcing partner will support the IFRS conversion effort and that no contractual or financial issues impede the IFRS conversion program.
• Does the IT organization have a complete plan to support the IFRS conversion that has been validated by the IFRS program management office? Given the importance of information technology on operational and reporting processes, the CIO must be an integral part of the overall governance structure and his / her organization must have a robust plan to support the IFRS conversion program.

The aspects of risk described above are only a few of the more common technology based risk factors NorthPoint encounters in assessing an IFRS conversion program. In subsequent postings, I’ll go into more detail on other risk factors we evaluate.

As always, if you would like more information on NorthPoint and our IFRS Risk Assessor (IRA) software product, please visit our website at http://www.thenorthpointgroup.net/

On the surface, IFRS KEP(tm) is a straightforward concept, but we find it to be a root cause of difficulties that companies experience in implementing large programs like an IFRS conversion. For example, members of the IFRS conversion program may be well trained in the differences between US GAAP and IAS and can cite impacted standards from memory. In other words, they are very knowledgeable.

In this example, regardless of how knowledgeable the team members are, the risk emerges when many of the team members have limited practical experience or demonstrated performance in implementing an IFRS conversion program. Without practical experience or demonstrated performance, there is a risk of the conversion becoming an “academic” exercise without consideration of risk factors that an experienced, high performing and knowledgeable team would identify and address.

In other cases we have seen, lack of deep knowledge of the implications of an IFRS conversion on the part of a very experienced and high performing program manager, combined with an inability to learn or have access to knowledgeable IFRS resources, have caused conversion programs to underestimate or worse yet, miss critical IFRS accounting and reporting conversion issues.

Because the program manager did not understand the implications of IFRS A&R issues, a significant amount of re-work and re-documentation was required to ensure compliance with reporting standards. This re-work was able to correct the problem and ensure compliance, but cost the company significant time and money to complete.

Assessing KEP(tm)
As with alignment of the IFRS conversion program with corporate strategy, our software assesses KEP(tm) by having the IFRS program team and its sponsors score a number of weighted statements on a -4 to +4 scale in a facilitated workshop.

A few sample statements targeted at assessing KEP(tm) below illustrate:

• The internal ABC Corp organizations have been identified and trained and have the KEP(tm) required for total compliance with IFRS
• There are certified key personnel in ABC Company that have the KEP(tm) that can locally identify issues and strategy deficiencies that effect IFRS plan and performance
• The Governance Committee has effective process for assuring support of the external auditors, mission, KEP(tm) , resources and committed approved plan for IFRS implementation

Having knowledgeable, experienced and proven performers on an IFRS conversion program team is critical to successful program execution. If an IFRS conversion program team scores low on the KEP(tm) assessment, this represents a major risk to the success of the program from both a time and cost performance point of view.

A key deliverable emerging from the IFRS Risk Assessor software is a risk index. Some data from our research illustrates how important KEP(tm) is. With respect to our risk indices, the lower the score means the lower the risk. For example:

• If an IFRS conversion program scores 85% – a good score – on KEP(tm), this adds 13.5% to the overall program risk index.
• If the KEP(tm) scores 65%, this will add 38% to the overall program risk index.

As you can see by the impact on our risk index, having a knowledgeable, experienced and high performing team is a critical factor for IFRS conversion program success.

Although each company’s situation will be unique, possible risk mitigation approaches could range from:

• identify respected personnel with high KEP(tm) individuals or professional services firms to support the IFRS conversion program team
• executing additional training for PMO and governance committee to increase required knowledge within the organization
• developing effective teaming process across the enterprise

If you have further questions on KEP(tm) and how it applies to an IFRS conversion program, or any other major program or initiative, please visit http://www.thenorthpointgroup.net/ and review our white paper file or send us a question via the contact link at the site

How we Engage Clients in Risk Assessment Process
To provide better context, I want to take a moment and provide a high level description of the method we use with our clients to enable them to assess their program risk.

In order to obtain consensus on critical risk factors and better understanding across the management team responsible for IFRS conversion program success, we facilitate a 4-6 hour workshop. During this facilitated workshop, the team evaluates and scores their performance against a series of up to 245 statements. These statements address performance against multiple sources of risk inherent in a major program of change as well as those unique to an IFRS conversion program.

After completion of the workshop, we take the results of the client’s assessment and compare them to our database of over 1,000 risk assessments of similar scale initiatives and determine where the client scores relative to Best In Class performance. We then provide feedback to the client team in a follow on facilitated workshop and help them develop risk mitigation plans for the risks that, if not dealt with effectively, will have a negative impact on their IFRS conversion program.

As always, if you would like more detailed information on our approach, please contact me directly via the comment section or visit our website at http://www.thenorthpointgroup.net/

Alignment With Business Strategy
Given the potentially large scope and scale of an IFRS conversion program and the investment required to execute it, one of the first sources of risk we have clients evaluate is the extent to which the IFRS conversion program is in alignment with corporate strategy.

To help clients assess the alignment of the IFRS conversion program we have them score, on a scale of -4 to +4, their current status against up to 20 weighted statements which address the alignment of the program with their corporate strategy. The reason it can be “up to 20″ is we allow for inclusion of JVs, subsidiaries or other organizational possibilities in our assessment process.

A sample of some of the statements we have clients assess include:

• There is a review process for IFRS that accurately assesses the IFRS Conversion Program Plan for each organization as well as the overall enterprise;
• Each organization to the department level has developed, committed and has the full capabilities to accurately and effectively use IFRS when implemented;
• The enterprise strategy has been validated for each internal organization that affects or is affected by IFRS by a certified public accounting firm in good standing

By having the clients understand, discuss and gain consensus on their organization’s current score across the strategy oriented statements, the client team will gain insights on how they have aligned the IFRS conversion program with their corporate strategy. Moreover, by going through the process and debating their responses, they will also develop a clearer understanding of where they may need to do a more robust job of ensuring alignment as they move forward on the conversion program.

As regular readers will know, the primary purpose of this blog is to help practitioners – either individuals within companies impacted by US GAAP to IFRS conversion or their professional services partners – effectively identify and manage risks associated with IFRS conversion programs of work.

A question some of you may be asking is “What are the risks associated with an IFRS conversion program and why are they different than any other major program of change?” To help answer your questions, I thought it would be helpful to break down some standards we benchmark at NorthPoint and describe some unique risks brought about by an IFRS conversion or convergence program.

Some Caveats
Several caveats first. To do an decent job of explaining our perspectives, it will take a number of postings – so stay with me. To explain our perspectives, I will be breaking down some of the main components associated with IRA, NorthPoint’s IFRS Risk Assessor software. If you are interested in learning more about IRA, please visit our website at http://www.thenorthpointgroup.net/ for more information.

Finally, recognize that there are no “standard” paths or answers that will help companies avoid major risks and be successful in their own IFRS conversion program. Each company has a unique culture, history and situation that has a major impact on what needs to be done to ensure their overall success.

The Basics – Program Management
There are a number of broadly defined areas of risk associated with any major program of change. The first risk is the scale and number of “moving parts” associated with managing a program. An IFRS conversion / convergence effort is by definition a program as there will be a series of individual projects associated with it.

For example, within a manufacturing company, there may be projects to:

• convert the general ledger to a version of SAP / Oracle that supports dual reporting for GAAP and IFRS for comparative purposes;
• build a new IFRS compliant cost accounting system; and
• train the manufacturing cost accounting group on the new standards and implications associated with IAS 16 and how they will use the new cost accounting system

This is only a simple example – think about the number of business processes, systems and people that will be impacted in a large organization and you can appreciate the scale and scope risk that must be effectively managed in an IFRS conversion program. The potential number of individual projects could range in the hundreds.

The leaders of the IFRS conversion / convergence program are responsible for the overall success of the program within the company. However, their success is very dependent upon understanding and monitoring the outcomes associated with the individual projects that will make up the IFRS conversion program. Moreover, each individual project within the program will have its own set of risks that must be identified and mitigated, so it will be a daunting task for even the most experienced and capable of program managers to manage such a complex program of change as an IFRS conversion.