Financials in the cloud

Perspectives from an early adopter

Mike Cordova, vice president and controller at AAA of

Northern California, Nevada & Utah

With commentary from:

Ron Walker, principal, KPMG LLP

Fiona Grandi, partner, KPMG LLP

Michael Petrena, director, KPMG LLP

kpmg.com

Financials in the cloud | 1

Due to reorganization, AAA of Northern California, Nevada & Utah needed to implement a new enterprise resource planning system, and stand up a new finance and accounting function—all in about five months. See how the organization did it—and the learnings along the way.

Amid an operational divestiture from an affiliated company in early 2011, AAA of Northern California, Nevada & Utah had an opportunity to build a new financial structure, but it needed to do so quickly. Under pressure to disentangle its operations and set up payroll, the auto club didn’t have time for a year-long implementation of a traditional enterprise resource planning (ERP) system.

It also had limited resources, since most of the organization’s financial staff would stay with the other company. And, as a 100-year-old organization that had been long tied to a much larger bureaucratic infrastructure, the club had a financial picture that wasn’t completely clear, so it needed to be conservative in its solution.

The club decided that instead of encumbering its capital with on-premise financial software and servers that it would have to support, it wanted to focus on the things it did well—namely, enhancing services for members. The club sought to use its cash in a more nimble, eloquent way.

2 | Financials in the cloud

The solution: a cloud-based modelThe club’s solution was a cloud-based ERP provided by Workday, which was selected for its well established human resources capabilities, along with a newly released financial package for general ledger. Furthermore, the cloud-based ERP gave the club the flexibility to outsource the transactional components of its order-to-cash, procure-to-pay, and record-to-report processes—along with information technology (IT) support—to WNS.

With this leading model of service delivery incorporating cloud solutions, outsourcing and insourcing, the club achieved fast implementation and lower cost. In addition to standing up a new finance and accounting structure in just a few months, the club reduced its F&A costs by more than 30 percent, thanks to improved efficiency, elimination of disparate systems, and reduced headcount.

The solution has also enabled the club to tap other kinds of value:

• Making investments back into the business. In addition to improving the bottom line through the outsourcing of transactional work, the club is helping the top line by employing higher-value financial staff. For example, these staff are focusing on expenses versus revenue, consistent and reliable processing of member transactions, and other ways to improve efficiency and increase value for members. Furthermore, since the organization now has a stabilized F&A platform, its leadership can focus its attention on innovative offerings for the membership.

• One source of truth. Traditionally, the club’s membership data—including identification numbers, membership types, the number of family members per membership, and so on—was scattered among multiple systems, so if the club needed to make a change to a member’s data, it often needed to do so in several places. Now that the data lives in a cloud platform, the club has one source of truth, instead of multiple data sources that it has to reconcile.

• Freed-up IT resources. The cloud solution also freed up funds that would otherwise have been used for IT resources. For example, instead of hiring IT staff to reconcile the membership data in multiple systems, the club can now use those funds to hire other, more valuable resources such as agents to recruit more members, or analysts to evaluate the needs of the membership. Moreover, the club no longer has to invest in software upgrades and server planning, which are instead handled by cloud providers.

• Standardization and controls. With the cloud-based ERP and outsourcing of transactional work, the club has eliminated bureaucracy and inefficient, manual processes. For example, Workday provides auto-documentation for audits, which otherwise would have to be done manually, and the system provides the club with flexibility to add more controls.

Limitations of the model—and how to address themWhile cloud-based ERP is a great way to get up and running quickly without worrying about support, customization is limited. Managing financials in a public cloud

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environment is a nascent technology that will continue to mature, so buyers have to be willing to take a ride on something that is still in the making.

In fact, since Workday is a general F&A solution, AAA has added several bolt-on cloud applications to fill the gaps for industry-specific capability. (See page 4 for more on AAA’s cloud portfolio.)

“You might get 90 percent of your problems solved with a cloud ERP, but there are going to be limitations that you will have to work through,” said Mike Cordova, vice president and controller at AAA of Northern California, Nevada & Utah. “So even though you’re working with cloud-based systems, it’s still important to assess your requirements and find the right provider, or potentially the right set of providers.”

Some early-adopter observations:

• Revenue recognition. AAA found that Workday could handle the club’s general ledger and basic financial needs, but it couldn’t do everything, such as revenue recognition for a membership-based organization. For example, a 12-month AAA membership can be canceled at any time with a partial refund, but the Workday system recognizes each membership as a one-time revenue transaction. In the event of a cancelation, therefore, the club would have to manually amortize the transaction over a 12-month period to recognize a portion of the revenue. In response to this limitation, the club integrated Aria Systems’ cloud-based platform for revenue recognition.

• Legacy processes. The club had many inefficient membership systems and other legacy processes, built up over 100 years, that it didn’t have time to reengineer for Workday. So the club has been reworking these processes to fit them into bolt-on applications. For example, the club is using Trintech Cloud Solutions to automate reconciliation, while increasing standardization and reducing the club’s need to rework legacy processes.

• Upgrades. Software-as-a-service (SaaS) upgrades don’t always happen at the most convenient times, so it’s important for the club to plan ahead, explain to teams what’s happening and when, and ensure that important work won’t be put at risk.

4 | Financials in the cloud

Chart

AAA in the Cloud June 2013

Customer Phone Contact Center Agent

Customer Online AAA.com

Customer Face-to-face

Sales &Service Agent

Cashier

Customer Mail Lockbox

Boomi(Real-TimeIntegration)

ManagedFileTransfer

WNS

● Lead Management● Subscription Profile Management● Pricing & Quoting

CRM

SALESFORCE

Point of Sale

● Payment Processing● Product/SKU Management

● Applications, Storage

RETALIX

HCL

Financial/HCM

● Financials Management● Human Capital Management

WORKDAY

Subscription/Billing/AR

● Membership Subscription Management● Billing Management● Revenue Recognition● AR Subledger

ARIA

Recon & R2R Close

● Reconciliation● Close Process Tracking

TRINTECH

Governance, Risk,Compliance

ARCHER

WNS

AAA in the cloud

By Michael Petrena, director, KPMG Shared Services and Outsourcing AdvisoryWorkday cannot address all of AAA’s F&A needs, so the organization developed a cloud portfolio of point solutions. These applications, each of them focused on a small subset of functionality, all tie back to Workday as the general ledger, and they are integrated through Boomi middleware:

• Salesforce.com. This application serves as the default screen for member service agents to use in managing leads, tracking member data, and performing other functions related to customer relationship management.

• Aria. This platform, which sits on the front end of the order-to-cash work stream, manages member subscriptions while also serving as a billing module and subledger for accounts receivable.

– Working together, Salesforce.com and Aria replace AAA’s legacy, mainframe-based Huon membership system.

• Trintech. For payment reconciliation, AAA enlisted a Trintech application, which pulls information from the membership system and can be integrated with Aria and Workday. A key feature is source to subledger, ensuring that the system reflects all payments received from AAA’s multiple sales channels: online, face-to-face, mail, and phone.

• Retalix. This application serves as the enterprise point-of-sale system for AAA’s 96 branches as well as tracks payments for virtual branches such as call center or lock box.

• Archer. This application serves as a repository and work flow for managing processes and controls related to financial, operational, and compliance risk.

Considering integration risksThe advantage of being an early adopter with point solutions is accessing leading functionality along with having a major influence on the point solution’s development roadmap. The downside, however, is the risk associated with a daisy chain of interdependent applications.

Unlike a traditional ERP, point solutions are not tightly integrated, but they all feed information to one another. That means a failure in one solution could have a downstream effect on another. Similarly, an upgrade to any one component of the portfolio could have a wide impact.

Amid these risks, it’s important for organizations to have multilevel business continuity planning and strong processes.

Financials in the Cloud | 5

Understanding point solutions

6 | Financials in the cloud

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“Before entering our cloud arrangements, we asked providers how much influence we would have on the timing of upgrades,” Cordova said. “When they push down these upgrades, what kinds of options do we have? If it’s over a three-week period, can we choose the days, or will they force the upgrade regardless of what we’re doing? We asked these kinds of questions as part of our requirements conversation.”

• Risk of vaporware. The club found that because many cloud providers are new to the market, their promise doesn’t always map to capability. So proof of concept was very important. In the case of revenue recognition, for example, the club provided sample data to two prospective providers and invited them to a “bake-off” to demonstrate their capabilities. Despite promises to the contrary, one provider’s system was not able to amortize the club’s membership revenue.

• Impact to the balance sheet. In a cloud model, unlike an on-premise solution, the club doesn’t own the assets. So instead of amortizing the investment over several years, the club took the full cloud expense at the time of purchase. “In our case, the expense was offset by our savings, but the impact to the balance sheet was still an important financial consideration,” Cordova said. “At this early stage, the accounting industry is not completely clear on how to treat the expenses of a cloud-based operating model.”

• Information security. The club had some concerns about the security of its membership information in Workday’s public cloud environment. But as a nonprofit organization that doesn’t face as much regulation as some other entities, the club was comfortable with the segregation of its information. Banks and other highly regulated companies may have different requirements for data security.

“Since Workday is a new platform for cloud-based financials, buyers must be willing to move to a more generic model that they won’t be able to customize to the nth degree,” said Ron Walker, principal in KPMG LLP’s Shared Services and Outsourcing Advisory practice. “But there’s a silver lining: because the platform is so new, Workday is doing upgrades every few months, versus the less frequent releases for an on-premise ERP, so the platform is constantly improving.”

In addition, Cordova said, since all of Workday’s customers are taking a similar ride, the club has benefited from a “crowd-sharing” community of Workday users who discuss their use of the system. “People will ask for solutions from other Workday customers, and we can take that solution and apply it to our work flow,” he said. “It’s an open forum for questions and answers on an evolving technology.”

Financials in the cloud | 7

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Governance, risk, and compliance in the cloudSince AAA wanted a cloud-only ERP, it also needed a cloud-based application for managing risks and controls. And not just for finance; rather, the club wanted a central repository and work flow system for all controls related to financial, operational, and compliance risk, from month-end reconciliations to personally identifiable information.

The club selected EMC’s Archer application, which would enable the organization to document, monitor, and update its processes and controls. For example, an employee who is responsible for the monthly reconciliation of travel sales could use the application to document his or her process, identify any issues, explain the resolution, and perhaps update the control to biweekly instead of monthly.

However, the Archer application didn’t immediately fit the club’s needs.

“Vendors of cloud-based software typically design platforms to appeal to broad business requirements, not for specific nuances,” said Fiona Grandi, partner in KPMG LLP’s Risk Consulting practice. “In AAA’s case, 90 percent of the business comes from membership, which creates different kinds of requirements for controls—requirements that the vendor didn’t necessarily understand. AAA needed to work with its advisors and the vendor to make the cloud solution valuable for its situation.”

Moreover, AAA wasn’t trying to develop new processes for controls. Rather, the organization already had processes that it wanted to document and automate. That means the Archer system needed to be tweaked to replicate AAA’s way of doing things, so the organization could, in theory, lift its processes and drop them into the automated platform. This tweaking required a third-party expert to explain the requirements to the vendor and help configure a solution.

Another potential challenge related to cloud-based governance applications is the lack of immediate ROI. For example, just because an organization automates a process doesn’t mean it can eliminate 10 jobs. Instead, the value of a risk-management application often comes in the form of knowledge transfer—that is, documenting legacy processes in the system and scaling them across the business. This value takes time to manifest, so it’s important to manage expectations.

8 | Financials in the cloud

Final thoughtsFor an entity that needed to quickly disentangle from a large affiliated organization with bureaucratic processes, a cloud-based ERP was the best solution. The Workday model enabled AAA to implement back-office services for F&A, human resources, payroll, and IT in just a few months versus the year-long implementations typical of on-premise ERPs; and the organization achieved millions of dollars in cost savings. Furthermore, the club’s hybrid model—combining cloud solutions, outsourcing, and insourced services—reflects an enviable level of maturity that many organizations strive to achieve. With this model, the club is managing multiple solutions through an optimized balance of internal and external capabilities.

However, managing financials in the cloud is not without its limitations and challenges. As with any other arrangement, the organization needed to closely evaluate its requirements and identify the right cloud providers. And now that AAA has a portfolio of multiple SaaS systems with underlying integration, it is working to manage the associated risks.

So far, though, the benefits outweigh the challenges. As an early adopter of financials in the cloud, AAA sees a bright future for its back-office processes.

For more information, please contact the following:

Mike CordovaVice President and Controller AAA of Northern California, Nevada & UtahE: michael.cordova@goaaa.com

Ron WalkerPrincipal, Management ConsultingKPMG LLPE: rwalker@kpmg.com

Fiona GrandiPartner, Risk ConsultingKPMG LLPE: fgrandi@kpmg.com

Michael PetrenaDirector, Management ConsultingKPMG LLPE: mpetrena@kpmg.com

kpmg.com

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