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One trend in business software that’s still in its early stages but gathering momentum is the availability of modeling tools that fill the gap between desktop spreadsheets and enterprise systems. Granted this “early stage” has been under way for quite some time, but the technology has finally progressed to the point where I expect it to get increasing market traction.

The temptation for business modelers and analysts is that it is very easy to create models using spreadsheets like Microsoft Excel. Tens of millions of people worldwide are trained in using spreadsheets, so it’s often a default choice. Desktop spreadsheets are handy because they make it simple for anyone to translate their concepts into a computer model. As someone who has done this for more than 30 years, I can attest that analysts skilled in using spreadsheets mentally frame business issues and relationships in a grid structure. It’s relatively easy, for instance, to create a dynamic integrated income statement, balance sheet and cash-flow model in a spreadsheet; it’s a laborious process to construct one using a relational or multidimensional database. Yet especially where complex calculations are used or where the models involve more than a few dimensions (more on this below), models created this way are error-prone and “brittle,” which means that they break quickly when someone tries to make a change to the original construction.

In contrast, more sophisticated business intelligence tools or dedicated enterprise planning applications, which can produce more powerful and flexible models, have required formal training. Although some individuals and/or companies have been willing to make the investment in such training, the majority have not, opting to keep using spreadsheets. I suspect the main reason is that the amount of training required and the frustration that most spreadsheet jockeys encounter when changing to a new tool have been too great. As well, there is a network effect in reverse: In any organization where many or even just several people share a model, all must be trained in using a tool or its usefulness is substantially diminished.

To be sure, the problem – and solutions to address it – is not new. For example, Essbase was developed in the 1980s partly to address the above issues. However, Essbase has been lightly adopted by purely business or financial analysts because of the training it requires. More recently, Microsoft has offered an Excel Server that can address some – but not all – of the shortcomings of shared desktop spreadsheets. (Note that for many companies this will require purchasing new versions of Microsoft Office and Microsoft SQL Server.) And the rise of model-building alternatives is part of a broader adoption of more powerful but easier-to-use alternatives that fit between Excel and enterprise systems. For example, BizNet Software offers what I would call an enterprise spreadsheet for more sophisticated reporting on other business applications using its in-memory computing technology.

So what is it that makes me see the barriers to going beyond spreadsheets for modeling beginning to fall?

One reason is that organizations increasingly want more value from modeling and analyses. Spreadsheets are easy to set up, but as well as being error-prone and producing brittle models, they have other inherent flaws that limit their overall effectiveness when they are used to support repetitive and collaborative business functions. For example, they lack referential integrity, which means that adding rows and columns creates issues when multiple spreadsheets must be collated. Another is that they can readily handle two or three “dimensions” but grow exponentially harder to work with as modelers try to add more. Dimensions include time, corporate structure (divisions and business units), organizational structure (functions and roles), product lines, customers and currency, to name some of the more common ones, which obviously can overlap. Businesses are inherently multidimensional, so to be truly useful for assessing outcomes, choosing between options and making plans, models and analyses must be structured to reflect the various dimensions. Nor do spreadsheets compare well to in-memory computing, an increasingly popular technology that allows for more interactive interplay with models. This means, for example, being able to do detailed what-if analyses rapidly while in a business review meeting in order to determine what to do next about some opportunity or issue. Desktop spreadsheets seldom can do this interactively at a detailed level.

To get more value from modeling and analyses requires changing the balance of the work that business analysts do. Today, analysts spend too much time on the mechanics of analytics and modeling and not enough on analyses and their implications for the business, as our analytics research shows. A main reason for this waste of time is the limitations of spreadsheets.

The other reason I expect the barriers to change to fall is that the alternatives to spreadsheets are increasingly easier to learn and use. One example is Quantrix, which has been around for a decade and therefore was early to a market that has been slow to develop. It is one in the latest round of new tools that attempts to fill the gap between spreadsheets and enterprise BI and analytic applications. Quantrix requires training, but in my judgment, it’s not hard to pick up and not difficult for business analysts to adapt their spreadsheet skills to building models in this tool. Another example is Anaplan, which my colleague Mark Smith commented on. It is designed to replace spreadsheets in operational planning functions (such as sales operations or demand planning, to name just two) as well as in financial planning and budgeting. It, too, offers modeling capabilities that are more powerful and more flexible than spreadsheets yet not difficult for business analysts to learn.

I believe a lack of awareness of what’s possible is a major barrier to analysts adopting more capable tools for modeling, forecasting and reviewing. As the number of products that address the inherent limitations of desktop spreadsheets increases, marketing efforts in this area are going to gain attention. Companies are going to realize that they can achieve greater awareness and better decision-making if they have a more effective approach to modeling and analysis. There will always be a need for desktop spreadsheets, which serve the needs of tens of millions of users daily. But these tools no longer need be a barrier to modelers and analysts being able to do a better job of doing what they are hired to do: model and analyze.

Regards,

Robert Kugel CFA – SVP of Research

As this year begins, “finance transformation” is a trend gaining favor with strategic consultants. The term is associated with the objective of shifting the focus of CFOs and finance departments from transaction processing toward more strategic and higher-value functions. This objective is hardly new – it has been the purpose of my practice for the past nine years. Our research confirms that most people want their finance department to take a more strategic role in the management of the company. But although some progress has been made, Finance still spends too much time and effort on the mechanics of day-to-day operations.

In my experience, one important reason for this persistent focus on mechanics is that relatively few companies use available technology to support more effective approaches to managing the finance function. To get beyond this situation, CFOs and controllers must look at their existing IT systems with an eye to making better use of them to automate repetitive tasks and speed execution of cross-departmental functions. Doing that can free up time and money better spent on activities that return value, such as more insightful and actionable analyses or more accurate forecasting and planning. As I mentioned above, technology is only one of the four major factors that organizations must address. The others are people (improving skills and training, for example), process (better definition and documentation as well as instilling a culture of continuous improvement) and information (such as collecting scattered data or simplifying an overly complex chart of accounts).

Corporations use financial performance management (FPM) to address often-overlapping issues that shape a finance organization’s ability to manage its own operations and support the activities and strategic objectives of the company. FPM deals with the full cycle of the department’s functions, including corporate and strategic finance, planning, forecasting, analysis, closing and reporting. It involves a combination of people, processes, information and technology. Information technology is a key component used in supporting FPM.

Ventana Research’s Office of Finance practice selects a research focus topic based on two key criteria: It must have pressing relevance to finance executives as a means to improve their company’s performance, and information technology can play a role in addressing the issue. Our research agenda for 2012 emphasizes three broad technology-related themes serving the goal of finance transformation: promoting awareness of the application of advanced finance, more effective execution of the finance function and implementing change. Within each of these three themes we will be exploring a range of important topics.

Promoting Awareness of Advanced Finance

One of the more significant ways companies can transform Finance is by adopting agile business planning and driver-based modeling to augment and ultimately replace their annual budgeting and periodic reforecasting methods. Our business planning research shows that each part of a business manages multiple plans. Yet the only integrated plan in almost all companies is the corporate budget. While budgets are necessary they mainly serve the needs of Finance because they focus on fiscal control and cash flow, not planning operations and managing the integration of plans across the organization.

A second topic under this theme is applying mobility and cloud computing to finance and accounting. Mobility is increasingly important as executives and managers adopt tablet computers, smartphones and other devices that expand their ability to interact with their company’s information systems anywhere at any time. Smaller companies and those with dispersed locations will increasingly find cloud-based ERP solutions an attractive option. Even those that do not move ERP there can find areas (such as spend management or incentive compensation) where stand-alone cloud-based software can be the best alternative. Changing employment patterns and the evolution of the human resources (HR) function have spurred adoption of workforce management software that facilitates managing headcount and retaining talent in the cloud as well. Because Finance often is involved in HR processes, our research practice will look into it.

Another issue is the heavy reliance on monthly or quarterly accounting data leads to “managing by using a rear-view mirror.” Another advanced finance topic that supports finance transformation is the use of predictive analytics with large-scale data and in-memory computing. The expanding capabilities of technology are making it possible to spot issues and opportunities sooner and get a deeper understanding of the factors behind them. Doing so enables organizations to look ahead instead of behind.

More Effective Execution

Corporations are focused on the bottom line, and individual parts of the business have some combination of revenue and cost objectives. Yet most companies are missing opportunities to use technology to manage these more effectively. Often, efforts in one part of the business do not support or even touch the efforts of another, such as when incentives offered to achieve sales targets wind up lowering profits. Software available for pricing and profitability management substitutes analytics and a numbers-driven approach for gut-feeling and tradition. However, few companies are taking advantage of it. Use of spend management software to cut costs and increase cash flow visibility is in the mainstream, but it’s not always fully utilized, and there are still many companies that could benefit from its use. More cost-effective governance, risk and compliance management is available through software that manages these aspects of running a company, but here again few companies are applying them to increase automation, reduce busy work and avoid risk. Fourth on this list is the accounting close, a core function of the Office of Finance. Our research shows that closing the books sooner is important to finance executives, yet too little progress has been made in shortening the interval, especially for those companies that take more than a week to complete the process. And for corporations that must provide financial information to third parties, the process of creating these external reports now must be considered an extension of the close. For that reason, a fifth topic I will continue to explore in my research is the use of automation of external and internal financial reporting. All public and larger private companies can benefit from automating the production of regulatory and internal financial reports that combine text and numbers, especially when there is a requirement for tagging these reports using eXtensible Business Reporting Language (XBRL).

Implementing Change

I suspect that a big issue preventing Finance from transforming itself is just getting started with the effort. No matter how much people in a company may complain about their annual budgeting process, they need a practical way to implement an alternative. In this vein I will be exploring ways of implementing integrated business planning to achieve finance excellence. Similarly, companies can manage risk more effectively but must have a blueprint for incorporating risk analytics across business processes. Third, taxes of course are major expenses for companies. New technologies are available that will help them implement strategic tax management to lower costs and optimize their compliance risk.

Desktop spreadsheets are a fourth major issue for Finance that must be addressed. Spreadsheets have been an important productivity tool, but users routinely push them beyond their original role as personal productivity software to the point where they become colossal time-wasters. In recurring enterprise processes, their versatility is offset by the inevitable plethora of errors in data entries and formulas. Their inherent technology defects translate into barriers of inefficiency as people waste time struggling to find data entry errors, inaccurate formulas and mistakenly hard-coded values, all of which increase risk of financial misstatements avoidable through more automated methods. Until several years ago, companies have lacked workable alternatives, and newly available technology is not yet widely deployed. Since the spreadsheets used in enterprise processes or recurring analyses are not going away very quickly, corporations must find ways to control them and limit their negative impacts.

Finance organizations need to focus more on providing more valuable services to their companies, spending less time on “bean counting” and putting more effort into analytics that support the company’s strategic aims and enable their organization to make better, more intelligent operating decisions more consistently. Technology is a key component to making this possible because it can make it feasible to deliver these services. Whether it’s called “finance transformation” or something else, it points to the unmet potential of finance departments to play a more important role in supporting their company’s operations. To meet this potential, Finance must have a better understanding of what’s possible, identify the gaps between what it is doing and put a program in place to close those gaps. In most cases, technology can help them get to the desired state.

Regards,

Robert Kugel CFA – SVP of Research

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