Category Archives: Risk Management

A Year After Silicon Valley Bank’s Collapse, What Have We Learned About Managing Counterparty Risk?

Posted on by • Posted in Capital and Asset Resiliency, Counterparty Risk, Counterparty Risk Metrics, Cybersecurity, Default Risk, Growth and Profitability, Loan Portfolio, Market Risk Outlook, Risk Assessment, Risk Diversification, Risk Management, Risk Mitigation, Risk Prediction Models • Leave a comment

https://www.kaufmanhall.com/insights/article/silicon-valley-banks-collapse-what-have-we-learned-about-managing-counterparty

On March 8, 2023, Silicon Valley Bank (SVB) announced a $1.8 billion loss from the sale of securities to cover a decline in clients’ deposits. The following day, SVB’s stock dropped 60% and the bank saw a historic $42 billion in withdrawal requests. Twenty-four hours later, SVB was under the control of U.S. banking regulators and concern turned into panic across the banking sector.

More recently, the cyberattack on Change Healthcare raised the issue of counterparty risk in a different sector. Provider organizations—especially those that had become predominantly reliant on Change Healthcare for health plan payment processing—experienced serious cash flow issues.

Both the SVB and Change Healthcare incidents brought to the fore significant new risks that were at least in part driven by rapidly evolving technological change. An April 28, 2023, report by the Federal Reserve responding to SVB’s collapse noted how “social media enabled depositors to instantly spread concern about a bank run, and technology enabled immediate withdrawals of funding.” The Change Healthcare cyberattack was the most dramatic example to date of a problem that is growing quickly across the healthcare industry, as cyber criminals seek access to data-rich health records. U.S. Department of Health & Human Services data shows a 93% increase in large data breaches the healthcare sector from 2018 to 2022 and a 278% increase in large data breaches involving ransomware over the same period.

Lessons learned over the past year

The SVB collapse and Change Healthcare cyberattack have taught several important lessons:

  • The risk of contagion is real. The problems of one organization can quickly spread across an entire sector. In the case of SVB, instability and uncertainty led to a flight to safety, as both corporate clients and consumers shifted their deposits into what the Federal Reserve describes as “systemically important institutions,” leaving regional banks scrambling to reassure clients of their financial health.
  • Not all risks can be anticipated. The Federal Reserve report on the SVB collapse notes that “as risks continue to evolve, we need to…be humble about our ability to assess and identify new and emerging risks.”
  • Solutions take time to implement. Major relationships with a bank, a payment processing platform, or any other significant counterparty can not be shifted overnight. It can take weeks—or even months—to identify a new partner and implement the processes and technologies needed to transfer data and funds. Existing clients of the new partner can experience impacts as well if a major in-flow of new clients strains the partner’s ability to service its accounts.
  • Risk diversification must be a priority. These events are generating a “hyper focus” by boards, C-suite executives, and finance and treasury professionals to diversify risk within their major counterparty relationships and create formal counterparty risk policies.
  • Not all risks can be fully mitigated. Having a balance sheet that can weather the storm if a risk materializes is of paramount importance. Measuring and monitoring counterparty risk should be part of a broader, systematic approach that balances risks and resources across the organization.

Measuring counterparty risk

While one of the lessons learned is that not all risks can be anticipated, there are focus areas specific to different sectors that, even within a rapidly changing macroeconomic environment, will help provide a fuller view of risk. Using the banking sector as an example, key focus areas include:

  • Market risk outlook. This outlook combines debt ratings and long- and short-term counterparty risk metrics, along with an understanding of country risks for banks not headquartered in the United States.
  • Capital and asset resiliency. This focus area evaluates the quality of bank assets and liabilities to measure balance sheet strength throughout the business cycle.
  • Growth and profitability. Here, the overall performance of the banking partner is measured to understand the systemic importance of the institution and how well it is positioned for long-term growth.
  • Loan portfolio. This focus area measures the mix of loan exposure, highlighting commitments to various industries and the breakdown between consumer and corporate debt.

Representative metrics for each of these four focus areas are provided in Figure 1.

Figure 1: Metrics for Measuring Counterparty Risk

Focus AreaRepresentative Metrics
Market Risk Outlook• Bank Credit Default Swap• Long-Term Debt Rating• Moody’s Long-Term/Short-Term Counterparty Risk Rating
Capital and Asset Resiliency• Tier 1 Capital (%)• Total Debt to Assets• Coverage Ratio
Growth and Profitability• Net Income• Market Capitalization• Efficiency Ratio
Loan Portfolio• Total Loan• Residential Real Estate Loans• Credit Card Loans

Staying focused on the challenges of today and tomorrow

Comprehensively measuring counterparty risk can give early insights into troubled situations that could lead to severe business disruptions. Within the banking sector, the focus for 2023 was on banks effectively managing risk through an elevated rate environment. As we move through 2024, the challenges might look significantly different.

With uncertainty around the path forward for the U.S. economy, mixed signals on bank financial performance, and a highly contested election shaping up for the end of the year, there will continue to be a heightened focus on effectively managing a bank group to ensure business resilience and continuity in times of stress.

Just last month, the failure of Philadelphia-based Republic First Bank was a reminder of the continued pressures on the banking industry.

Beyond the bank financial worries of the past year, the recent disruptions related to the Change Healthcare cyberattack have brought a new focus to the technological resilience of core services partners. Organizations should be digging deeper into the cybersecurity investments of their key partners and investigating the outside technology that is leveraged by these partners.

In all cases, organizations should be asking how and to what extent they should be diversifying risk in counterparty relationships. Both known and unknown risks will continue to emerge. Managing counterparty risk must be a comprehensive and ongoing exercise to both evaluate and mitigate against that risk.

Counterparty risk, also known as default risk, is the chance that a party in a financial transaction will not fulfill their obligations. This can occur in credit, investment, or trading transactions. For example, in a reinsurance transaction, the reinsurer may not reimburse the insurance company for claims, which could lead to financial shortfall.

15 innovative ideas for fixing healthcare from 15 brilliant minds

Posted on by • Posted in Capitation, Change Agent, Change Mindset, Competition, Disruption, Disruptive Technology, Empowering Patients, Empowerment, Fixing Healthcare, Health Equity, Healthcare Reform, Innovation, Innovative Care Models, Integrated Delivery System, Leadership, Life Expectancy, Medical Education, Mortality, Payment Models, Payment Reform, Physician Burnout, Prior Authorization, Quality of Care, Risk Management, Risk-Based Compensation, Risk-Based Contracting, Social Determinants of Health, Thought Leaders • Leave a comment

https://www.linkedin.com/pulse/15-innovative-ideas-fixing-healthcare-from-brilliant-pearl-m-d-/

After 18 years as CEO in Kaiser Permanente, I set my sights on improving the heatlh of the nation, hoping to find a way to achieve the same quality, technology and affordability our medical group delivered to 5 million patients on both coasts.

That quest launched the Fixing Healthcare podcast in 2018, and it inspired interviews with dozens of leaders, thinkers and doers, both in and around medicine. These experts shared innovative ideas and proven solutions for achieving (a) superior quality, (b) improved patient access, (c) lower overall costs, and (d) greater patient and clinician satisfaction.

This month, after 150 combined episodes, three questions emerged:

  • Which of the hundreds of ideas presented remain most promising?
  • Why, after five years and so many excellent solutions, has our nation experienced such limited improvements in healthcare?
  • And finally, how will these great ideas become reality?

To answer the first question, I offer 15 of the best Fixing Healthcare recommendations so far. Some quotes have been modified for clarity with links to all original episodes (and transcripts) included.

Fixing the business of medicine

1. Malcolm Gladwell, journalist and five-time bestselling author: “In other professions, when people break rules and bring greater economic efficiency or value, we reward them. In medicine, we need to demonstrate a consistent pattern of rewarding the person who does things better.”

2. Richard Pollack, CEO of the American Hospital Association (AHA): “I hope in 10 years we have more integrated delivery systems providing care, not bouncing people around from one unconnected facility to the next. I would hope that we’re in a position where there’s a real focus on ensuring that people get care in a very convenient way.”

Eliminating burnout

3. Zubin Damania, aka ZDoggMD, hospitalist and healthcare satirist: “In the culture of medicine, specialists view primary care as the weak medical students, the people who couldn’t get the board scores or rotation honors to become a specialist. Because why would you do primary care? It’s miserable. You don’t get paid enough. It’s drudgery. We must change these perceptions.”

4. Devi Shetty, India’s leading heart surgeon and founder of Narayana Health: “When you strive to work for a purpose, which is not about profiting yourself, the purpose of our action is to help society, mankind on a large scale. When that happens, cosmic forces ensure that all the required components come in place and your dream becomes a reality.”

5. Jonathan Fisher, cardiologist and clinician advocate: “The problem we’re facing in healthcare is that clinicians are all siloed. We may be siloed in our own institution thinking that we’re doing it best. We may be siloed in our own specialty thinking that we’re better than others. All of these divides need to be bridged. We need to begin the bridging.” 

Making medicine equitable

6. Jen Gunter, women’s health advocate and “the internet’s OB-GYN”: “Women are not listened to by doctors in the way that men are. They have a harder time navigating the system because of that. Many times, they’re told their pain isn’t that serious or their bleeding isn’t that heavy. We must do better at teaching women’s health in medicine.”

7. Amanda Calhoun, activist, researcher and anti-racism educator: “A 2015 survey showed that white residents and medical students still thought Black people feel less pain, which is wild to me because Black is a race. It’s not biological. This is actually an historical belief that persists. One of the biggest things we can do as the medical system is work on rebuilding trust with the Black community.”

Addressing social determinants of health

8. Don Berwick, former CMS administrator and head of 100,000 Lives campaign: “We know where the money should go if we really want to be a healthy nation: early childhood development, workplaces that thrive, support to the lonely, to elders, to community infrastructures like food security and transportation security and housing security, to anti-racism and criminal-justice reform. But we starve the infrastructures that could produce health to support the massive architecture of intervention.”

9. David T. Feinberg, chairman of Oracle Health: “Twenty percent of whether we live or die, whether we have life in our years and years in our life, is based on going to good doctors and good hospitals. We should put the majority of effort on the stuff that really impacts your health: your genetic code, your zip code, your social environment, your access to clean food, your access to transportation, how much loneliness you have or don’t have.”

Empowering patients

10. Elisabeth Rosenthal, physician, author and editor-in-chief of KHN: “To patients, I say write about your surprise medical bills. Write to a journalist, write to your local newspaper. Hospitals today are very sensitive about their reputations and they do not want to be shamed by some of these charges.”

11. Gordon Chen, ChenMed CMO: “If you think about what leadership really is, it’s influence. Nothing more, nothing less. And the only way to achieve better health in patients is to get them to change their behaviors in a positive way. That behavior change takes influence. It requires primary care physicians to build relationship and earn trust with patients. That is how both doctors and patients can drive better health outcomes.”

Utilizing technology

12. Vinod Khosla, entrepreneur, investor, technologist: “The most expensive part of the U.S. healthcare system is expertise, and expertise can relatively be tamed with technology and AI. We can capture some of that expertise, so each oncologist can do 10 times more patient care than they would on their own without that help.”

13. Rod Rohrich, influential plastic surgeon and social media proponent: “Doctors, use social media to empower your audience, to educate them, and not to overwhelm them. If you approach social media by educating patients about their own health, how they can be better, how can they do things better, how they can find doctors better, that’s a good thing.”

Rethinking medical education

14. Marty Makary, surgeon and public policy researcher: “I would get rid of all the useless sh*t we teach our medical students and residents and fellows. In the 16 years of education that I went through, I learned stuff that has nothing to do with patient care, stuff that nobody needs to memorize.”

15. Eric Topol, cardiologist, scientist and AI expert: “It’s pretty embarrassing. If you go across 150 medical schools, not one has AI as a core curriculum. Patients will get well versed in AI. It’s important that physicians stay ahead, as well.”

Great ideas, but little progress

Since 2018, our nation has spent $20 trillion on medical care, navigated the largest global pandemic in a century and developed an effective mRNA vaccine, nearly from scratch. And yet, despite all this spending and scientific innovation, American medicine has lost ground.  

American life expectancy has dropped while maternal mortality rates have worsened. Clinician burnout has accelerated amid a growing shortage of primary care and emergency medicine physicians. And compared to 12 of its wealthiest global peers, the United States spends nearly twice as much per person on medical care, but ranks last in clinical outcomes.

Guests on Fixing Healthcare generally agree on the causes of stagnating national progress.

Healthcare system giants, including those in the drug, insurance and hospital industries, find it easier to drive up prices than to prevent disease or make care-delivery more efficient. Over the past decade, they’ve formed a conglomerate of monopolies that prosper from the existing rules, leaving them little incentive to innovate on behalf of patients. And in this era of deep partisan divide, meaningful healthcare reforms have not (and won’t) come from Congress.  

Then who will lead the way?

Industry change never happens because it should. It happens when demand and opportunity collide, creating space for new entrants and outsiders to push past the established incumbents. In healthcare, I see two possibilities:   

1. Providers will rally and reform healthcare

Doctors and hospitals are struggling. They’re struggling with declining morale and decreasing revenue. Clinicians are exiting the profession and hospitals are shuttering their doors. As the pain intensifies, medical group leaders may be the ones who decide to begin the process of change.

The first step would be to demand payment reform.

Today’s reimbursement model, fee-for-service, pays doctors and hospitals based on the quantity of care they provide—not the quality of care. This methodology pushes physicians to see more patients, spend less time with them, and perform ever-more administrative (billing) tasks. Physicians liken it to being in a hamster wheel: running faster and faster just to stay in place.

Instead, providers of care could be paid by insurers, the government and self-funded businesses directly, through a model called “capitation.” With capitation, groups of providers receive a fixed amount of money per year. That sum depends on the number of enrollees they care for and the amount of care those individuals are expected to need based on their age and underlying diseases.

This model puts most of the financial risk on providers, encouraging them to deliver high-quality, effective medical care. With capitation, doctors and hospitals have strong financial incentives to prevent illnesses through timely and recommended preventive screenings and a focus on lifestyle-medicine (which includes diet, exercise and stress reduction). They’re rewarded for managing patients’ health and helping them avoid costly complications from chronic diseases, such as heart attacks, strokes and cancer.

Capitation encourages doctors from all specialties to collaborate and work together on behalf of patients, thus reducing the isolation physicians experience while ensuring fewer patients fall through the cracks of our dysfunctional healthcare system. The payment methodology aligns the needs of patients with the interests of providers, which has the power to restore the sense of mission and purpose medicine has lost.

Capitation at the delivery-system level eliminates the need for prior authorization from insurers (a key cause of clinician burnout) and elevates the esteem accorded to primary care doctors (who focus on disease prevention and care coordination). And because the financial benefits are tied to better health outcomes, the capitated model rewards clinicians who eliminate racial and gender disparities in medical care and organizations that take steps to address the social determinants of health.

2. Major retailers will take over

If clinicians don’t lead the way, corporate behemoths like Amazon, CVS and Walmart will disrupt the healthcare system as we know it. These retailers are acquiring the insurance, pharmacy and direct-patient-care pieces needed to squeeze out the incumbents and take over American healthcare.

Each is investing in new ways to empower patients, provide in-home care and radically improve access to both in-person and virtual medicine. Once generative AI solutions like ChatGPT gain enough computing power and users, tech-savvy retailers will apply this tool to monitor patients, enable healthier lifestyles and improve the quality of medical care compared to today.

When Fixing Healthcare debuted five years ago, none of the show’s guests could have foreseen a pandemic that left more than a million dead. But, had our nation embraced their ideas from the outset, many of those lives would have been saved. The pandemic rocked an already unstable and underperforming healthcare system. Our nation’s failure to prevent and control chronic disease resulted in hundreds of thousands of unnecessary deaths from Covid-19. Outdated information technology systems, medical errors and disparities in care caused hundreds of thousands more. As a nation, we could have done much better.

With the cracks in the system widening and the foundation eroding, disruption in healthcare is inevitable. What remains to be seen is whether it will come from inside or outside the U.S. healthcare system.

Recalibrating a Responsive Capital Formation Program

Posted on by • Posted in Board, Capital Deployment, Capital Deployment Conviction, Capital Formation, Capital Formation Program, Counterparty Risk, Credit Quality, Credit Ratings, Federal Reserve, Federal Reserve Board, Public Debt Issuance, Risk Management, Unemployment, Unsustainable, Unsustainable Trends • Leave a comment
https://www.kaufmanhall.com/insights/blog/recalibrating-responsive-capital-formation-program?utm_source=mkto&utm_campaign=ken-weekly-blog&utm_medium=em&utm_term=230419&mkt_tok=NjU0LUNOWS0yMjQAAAGLOMvf3wlrxQiskARfvorkxds3JTcMc2G14da58d1UuzTNzCzrZEaiyJy2hHeespDdrd8KiyubgmMV4JOGL5KEPV10rjDGvAJRDvsOf_ctkbuh

Current Funding Environment

Wednesday’s inflation print showed a March increase of 0.1% versus February and a year-over-year increase of 5.0%, both of which were better than expected. Markets rallied following the news, at least until the specter of recession caused a reversal of equity gains. The game remains the same: markets want easy money and inflation plus unemployment plus recession equals Fed policy and interest rate levels. Memories of the long 1970s slog through declining and then accelerating inflation levels suggest that it’s too early to declare victory (5.00% is still a long way from the Fed’s 2.00% target range). Nevertheless, hopes increased that the Fed may truly be at or very near the end of its tightening cycle.

Unsustainable Trends

The web version of The Wall Street Journal got rid of its special section on the “2023 Bank Turmoil,” which is a sign that we’re past the worst of this chapter in the Dickensian saga in which our financial system hero navigates all sorts of unfortunate characters and events in search of a new “normal.” Banking distrust ripples continue, with various clients sharing the work they are doing to peel back layers of counterparty risk to understand whether threats loom in downstream financial dependencies. Our regulatory infrastructure has shown itself to be a mile wide and an inch deep, which fuels the kind of skepticism about the reliability of designated watchdogs that leads to self-directed risk assessments.

At one level, this is a helpful and important exercise. The credit and financing structure of any complex healthcare organization is just another supply chain, and it is good to understand how yours works and whether there are vulnerabilities that should be investigated. But it is equally important to assess whether the progression of COVID to inflation to Silicon Valley Bank has caused your organization to drift from risk management into retrenchment. Organizations naturally migrate along a risk continuum as they shift between prioritizing returns or resiliency. The important question isn’t which of these bookends is right, but rather what shapes the migration; the defining event is the journey, and

the critical Board and C-suite conversation is whether your risk management program is enabling or constraining future growth.

We continue to monitor the extraordinary decline in not-for-profit healthcare debt issuance. Sources we rely on show healthcare public debt issuance through Q1 2023 down almost 70% versus Q1 2022. Similar data sources aren’t available, but anecdotal input from our team suggests a comparable drop-off in healthcare real estate as well as alternative funding channels. At the same time, although margins have recently improved, operating cash flow across the sector has been weak over the past 12-18 months. If capital formation from internal and external sources is a sign of vibrancy, healthcare is listless.

The primary culprit isn’t rates; the sector has raised capital in much higher rate environments with fewer financing channels (including most of the pre-2008 era). Instead, the rationale most frequently advanced is concern about the reaction from key credit market constituents during this time of unprecedented operating disruption. Of course, this makes sense, but sitting underneath this basic rationale is the question of what might be called “capital deployment conviction.” Long experience confirms that organizations armed with a growth thesis they believe in aren’t shy about “selling” their story to rating agencies and investors and are willing to suffer adverse outcomes on rates, ratings, or covenants, if that is the price of growth. This isn’t happening right now, which introduces the troubling idea that issuance trends are about much more than credit management.

No matter the root cause, recent capital formation is not sustainable.

Good risk management leads to caution in challenging times, but being too careful elevates the probability that temporary problems become permanent. $2.8 billion in quarterly external capital formation ($11.2 billion annualized—pause and let that annualized amount sink in) is not sufficient to maintain the not-for-profit healthcare sector’s care delivery infrastructure, especially when internal capital generation is equally anemic. But introduce any competitive paradigm and the underinvestment that accompanies this level of capital formation becomes a harbinger of hard times to come. To riff on Aristotle, capitalism abhors a vacuum, and organizations looking to avoid rating pressure today may be elevating the risk of competitive pressure tomorrow; and it is easier to cope with and eventually recover from rating pressure than it is to confront the long-term consequences of well-capitalized and aggressive competitors. Retrenchment might be the right risk management choice in times of crisis, but once that crisis moderates that same strategy can quickly become a risk driver.

Machiavelli, Sun-Tzu, Napoleon, George Washington, and other great tacticians all advanced some variation of the idea that “the best defense is a good offense.” In the world of risk response, this means that the better choice isn’t to de-risk and hibernate but rather to continuously reposition available risk capacity so that you keep the organization moving forward. Star Trek’s philosopher-king Captain James Tiberius Kirk captured the sentiment best when he said, “the best defense is a good offense, and I intend to start offending right now.”

While getting back on the capital horse is important, clearing rates, relative value ratios, risk premia, and flexibility drivers have all reset over the past 12-18 months, so recalibrating a good capital formation program requires reassessment and may lead to very different tactics.

This means that a critical step is to get organized around funding parameters:

debt versus real estate versus other channels; MTI versus non-MTI; tax-exempt versus taxable; public versus private; fixed versus floating. The other important part of this is gaining conviction about capital structure risk versus flexibility: do you want to retain flexibility at the “cost” of incurring the market risk embedded in short-tenor or floating rate structures or do you want to sell flexibility in exchange for capital structure risk reduction?

Healthcare hacking on the rise

Posted on by • Posted in Cybersecurity, Data Breaches, Data Privacy, Data Security, Health System, HIPAA, Hospital, Hospital Industry, Information Security, Information Technology, Internal Audit, Internal Control, Legacy Technology, Privacy, Rev Cycle Management, Revenue Cycle, Risk Management, Risk Mitigation • Leave a comment

https://mailchi.mp/ef14a7cfd8ed/the-weekly-gist-august-6-2021?e=d1e747d2d8

From the largest global meat producer to a major gas pipeline company, cyberattacks have been on the rise everywhere—and with copious amounts of valuable patient data, healthcare organizations have become a prime target.

The graphic above outlines the recent wave of data attacks plaguing the sector. Healthcare data breaches reached an all-time high in 2020, and hacking is now the most common type of breach, tripling from 2018 to 2020. This year is already on pace to break last year’s record, with nearly a third more data breaches during the first half of the year, compared to the same period last year.

Recovering from ransomware attacks is expensive for any business, but healthcare organizations have the highest average recovery costs, driven by the “life and death” nature of healthcare data, and need to quickly restore patient records. A single healthcare record can command up to $250 on the black market, 50 times as much as a credit card, the next highest-value record. Healthcare organizations are also slower to identify and contain data breaches, further driving up recovery costs.

A new report from Fitch Ratings finds cyberattacks may soon threaten hospitals’ bottom lines, especially if they affect a hospital’s ability to bill patients when systems become locked or financial records are compromised. The rise in healthcare hacking is shining a light on many health systems’ lax cybersecurity systems, and use of outdated technology.

And as virtual delivery solutions expand, health systems must double down on performing continuous risk assessments to keep valuable data assets safe and avoid disruptions to care delivery.

Colonial hack a wake-up call to CFOs with legacy systems

Posted on by • Posted in Audit Trail, CFO, Cloud, Cloud-Based Technology, Cybersecurity, IT Security, Legacy Systems, Risk Management, Risk Mitigation, Risk Tolerance, Security Risk • Leave a comment
https://www.cfodive.com/news/colonial-hack-wake-up-call-cfos-legacy-systems/600219/?utm_source=Sailthru&utm_medium=email&utm_campaign=Issue:%202021-05-17%20CFO%20Dive%20%5Bissue:34273%5D&utm_term=CFO%20Dive
What is a cyber attack? Recent examples show disturbing trends | CSO Online

CFOs whose finance and accounting functions are built on legacy computer systems got a stark reminder last week from the Colonial pipeline hacking of what’s at stake if their system is breached.

The hack to Colonial’s system led to widespread gas shortages throughout the East and reportedly forced the company to pay $5 million in ransomware to get the instructions for reclaiming its data. 

“For finance departments, the cybersecurity risk is huge,” Samir Jaipati, a finance solutions leader with EY Americas, told CFO Dive in an email. “Something built on outdated technology won’t be able to keep hackers out.” 

Security specialists generally agree legacy, on-premises systems starting from about 10 years ago typically have solid cybersecurity features built in, but those that are older might require significant upgrades if they’re going to stand a chance against today’s sophisticated hackers.

The risk for CFOs who must manage their processes on an outdated system is they’ll try to get by with short-term fixes that won’t solve the systemic problems they face. 

“These temporary fixes aren’t as dependable and in the long-term may cost more,” said Kaipati.

Best effort

For CFOs who don’t have the time or budget to implement the system overhaul they need or to transfer their processes to a more secure on-premises system or to a cloud-based system, the best step is to do a comprehensive review of their end-to-end finance processes to audit for consistency and reliability, said Steve Adams, Gartner finance director. 

He suggested reviewing the organization’s record-to-report process from start to finish to understand where non-secure platforms are used, whether there are audit trails that don’t exist, and if exogenous data is incorporated. By eliminating these and other red flags, CFOs can go a significant way to clean up their processes and reduce risk without making system changes, Adams said. 

CFOs taking this approach should first engage their IT business partner and ask for a full audit of the cybersecurity capabilities of the suite of financial applications and to use that review as a starting point to making improvements, he said. 

Wider integration

Legacy systems pose a broader problem than just security risk; they can impede company growth because CFOs aren’t generating the data or producing the analytics that can help them identify ways to make more money or reduce costs in the same way they can get from sophisticated cloud-based solutions. 

Nor can legacy systems be expected to be as good at integrating data throughout the organization in the same way as cloud systems.

For CFOs who can do it, switching from an old on-premises system to the cloud can be a game-changer, said Manish Sharma, an Accenture operations group executive.

“CFOs that are agile and able to overcome these restrictions by scaling digital and cloud-powered technologies have been able to break down data silos and siloed ways of working to support the ever-evolving business strategy with speed and flexibility,” he said. 

The importance of using up-to-date IT was emphasized in a recent Accenture report that found “future-ready” leaders are emerging ahead of the pack with higher efficiency and profitability by scaling digital capabilities in ways to improve operational maturity.

“These leaders use better, more diverse data to inform decision-making as part of a cloud-powered continuous feedback loop,” said Sharma.

Flexible categorization

Another benefit of moving to the cloud or a hybrid cloud-on-premises arrangement is cost flexibility. 

On average, the cost of managing an outdated IT system can cost a business around $3.61 per line of code or over $1 million for an application with 300,000 lines of code, said Kevin Shuler, owner and CEO of the Quandary Consulting Group, a Denver-based IT firm. 

“It accounts for customizations, maintenance, reporting, server and hardware, etc.,” he said. 

While replacing the old with the new might appear to be prohibitively expensive at first glance, Shuler noted what can put a CFO more at ease is the costs are more transparent than maintaining a legacy system.

“Better, they can be categorized as either an operating expense or a capital expense since a lot of software is classified as a service rather than software,” he said. 

This gives flexibility to the CFO’s finances and forecasting. It also means more resources can be available for modernized systems. 

“That means you can get superior resources at a lower cost than trying to pull from a pool of highly specialized and competitive contractors who work mainly with legacy systems,” he said.