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Enterprise resource planning (ERP) systems emerged in the 1990s. Even though they don’t do much in the way of planning, the systems provide companies a means of centralizing and consolidating transaction data collection (such as purchase orders, inventory movements and depreciation), automating the management of processes, and handling the bookkeeping and financial record keeping for these transactions and related processes. ERP systems are an indispensable piece of IT infrastructure in today’s enterprises. Alas, they also are inherently flawed. But perhaps not for much longer.

ERP systems are about to undergo a considerable transformation, driven by the growing availability of technologies that can address the shortcomings of today’s systems. As I noted in my research agenda on the Office of Finance, the demographic shift taking place in the ranks of senior executives and managers – from the baby-boom generation to those who grew up with computer technology – will drive demand for a new generation of software. Soon, to be competitive, ERP systems will have to deliver a better user experience, greater flexibility and agility, as I have said, as well as mobility and lower cost of ownership.

In many respects, today’s ERP systems are exactly what people don’t want anymore. They are notoriously time-consuming and expensive vr_ERPI_01_implementing_new_capabilities_in_erpto set up, maintain and modify. In our ERP research only 21 percent of larger companies said implementing new capabilities in ERP systems is easy or very easy while one-third characterized it as difficult. Because of this, the current generation of ERP software acts a barrier to innovation and improvement.

To be sure, more than any other piece of enterprise software, ERP systems are a challenge because of the complexities of business organizations. This isn’t going to change. I’ve spent decades examining all sorts of businesses from multiple perspectives – from strategic, high-level business models to footnotes in financial statements and the execution of specific manufacturing and financial processes. To the uninitiated, everything about business appears simple until they get into the details. Then, even when you strip out inessential elements, it’s still complicated. As well, in any organization, there are competing requirements and priorities at work when an ERP system is set up. Thus, when a global airline changed its inventory management system, consultants – with the accountants and auditors in mind – designed it to minimize the possibility of shrinkage. The old system allowed pilots to radio ahead to have needed spares on the ramp when they landed. The new system, however, required the defective part (say, a radio or a switch) to be returned before a new one was issued. Consequently, the airline soon found its $150 million aircraft with hundreds of passengers aboard delayed at the gate for an hour or more as $15 replacement parts were laboriously checked in and checked out.

Although some aspects of ERP will always be complex and require experienced assistance to design and maintain, techniques for mass customization can make it easier to implement, maintain and change, thereby eliminating a significant portion of the cost of ownership. To be sure, software companies have tried to minimize deployment costs. For a couple of decades, ERP vendors have offered packages aimed at specific industries such as aerospace and pharmaceuticals. Those addressing midsize companies, which have tighter budgets than large ones, offer out-of-the-box configurations aimed at even more specific types of business, such as steel service centers, manufacturing job shops or brewers. For more generic businesses, today’s cloud-based ERP systems are one solution to the problem of costly updates and reconfiguration. However, this option still may not be attractive if an organization is in a business that has very specific customization requirements that a more generic ERP systems cannot support well (for instance, process-manufacturing industries such as specialty chemicals manufacturing). Another issue that vendors such as Infor and Oracle are addressing is the challenge of updating on-premises systems. Their motivation in making updating as easy and inexpensive as possible is to keep existing customers on maintenance and not lose their annuity revenue stream. In the North American market (and to a lesser degree elsewhere), major upgrade cycles provoke companies to reconsider whether a new system from another vendor would be preferable. Some progress has been made over the years to minimize the difficulty and cost of configuring and updating ERP software, but much more is needed.

A second area of ERP systems that needs attention is the user experience, which is an increasingly important aspect of all business applications. The dull, cluttered and difficult-to-navigate interfaces that have been the norm are the result of inexperience in design and constrained computing resources. The next generation of ERP systems will be designed with decades of experience and far more powerful computing platforms and tools than the current one. In the 1930s, Raymond Loewy and others revolutionized the design of everyday objects, from soda fountains to locomotives and automobiles so that form and function combined to produce a better product. Apple’s success has much to do with brilliant integrations of design and technology. Today, it’s even more important to apply basic concepts of industrial design and ergonomics to creating user interfaces. This goes beyond making old code bases pretty. Largely because of tablets and mobile computing platforms, people now work with multiple types of interfaces and use a wider range of methods and gestures to interact with their devices. Next-generation ERP software must reflect these changes.

It’s also clear that ERP systems will be faster in the future, as technology such as in-memory processing will eliminate nearly all batch routines. Faster and more cycle times promote corporate agility because more frequent cycles become feasible and necessary information is available sooner. As well, another important change that is already under way is the ability to do real-time or near-real-time analytics on data held in an ERP system. This was to some extent feasible nearly 20 years ago with Coda (because it was built on a multidimensional database) and is part of Infor’s and Oracle’s longer-term architectural strategies.

Moreover, business and social collaboration is an important set of capabilities that has been taking hold in business, as our research found. Collaboration ranked second behind analytics as a technology innovation priority.  Perhaps because most of the attention on the benefits of collaboration so far has focused on front-office roles, there’s less awareness of its need in back-office and administrative functions, as I’ve pointed out before. Indeed, the same research reveals that those in front-office roles said business and social collaboration is very important to their organization five times more often than those in accounting and finance roles (21% vs. a mere 4%). However, it’s just a matter of time before the finance group understands that social collaboration has substantial potential to improve its performance. Rather than following a general broadcast model, social collaboration in ERP and other finance applications will need to understand that individuals belong to multiple groups. For example, people in a company typically have a general role (“I’m in Finance”) and one or more task-specific ones (“I’m the director of financial planning and analysis”). Some relationships are persistent while others begin and end with a project. Issues that arise may be open to all or confined to specific groups, subsets of groups or a private dialogue. Queries or comments may be general, specific or somewhere in between. Some conversations, especially in finance and tax departments, must be tightly controlled. Software that understands the context of the work performed and automates the process of managing the who, what and when of the communications will support more effective collaboration, faster completion of tasks, greater situational awareness within the organization and as a result better decision-making.

Last, mobile enablement is already an important capability of some ERP systems. However, it’s important that ERP vendors focus on those elements where mobility is important and optimize the user experience for the task and platform. Unlike CRM and sales force automation systems where sales and service must be accessible anytime and anywhere, mobility’s importance in ERP depends on who uses it and why. Certain tasks such as data entry are not well suited to mobile devices, while routine reviews and approvals are. These must be simple to configure and deploy as well as use.

The worst aspect of today’s ERP systems is that they inhibit change in corporations, especially in holding back finance organizations from playing a more effective role in the company. The lack of adaptability in these systems inhibits companies from making necessary changes in processes, stifling innovation. Poor user interface design as well as limited support for social interaction is an ongoing drag on productivity. Antiquated design hampers data availability. Today’s corporations are willing to put up with these issues because everyone is in the same boat. In the decade or so after the great Y2K ERP sales bubble, there hasn’t been much fundamentally new in ERP systems. This period of limited innovation fostered a substantial consolidation of existing vendors. It has justified the consolidation because companies have continued to pay rich annual maintenance fees.  However, the surviving on-premises ERP vendors are now confronted by a substantial number of cloud-based challenges. They also understand that they (and their competitors) are now in a position to use technology to create truly differentiated offerings. As such, I expect to see a new wave of product innovation in the coming years that will transform ERP into more flexible and usable software.

Regards,

Robert Kugel – SVP Research

Technology for the Office of Finance can have transformative power. Although progress has been slow at times, today’s finance organizations are fundamentally different from those of 50 years ago. For one thing, they require far fewer resources (chiefly people) to perform basic accounting, treasury and corporate finance tasks. In addition, public corporations report results sooner – sometimes weeks sooner – than they could in the mid-20th century. And finance departments are able to harness substantially more data and a wider array of analytics to promote insight and support more agile decision-making.

Even in this context, in many corporations the tax function remains a backwater in its use of technology. Most of their tax professionals are awash in desktop spreadsheets, tools that they initially thought would promote efficiency and accuracy. But the inherent problems with desktop spreadsheets make tax processes not only needlessly time-consuming (even using macros and other spreadsheet automation techniques) but also prone to errors and inconsistencies. This is especially true if people must enter the same information multiple times, which increases the chances of mistakes. In addition, assumptions made and rationales behind formulas used in data transformations may not be documented or readily accessible to others in the organization. This legacy can be problematic years later in an audit, especially if the individual who prepared the spreadsheet is no longer employed at the company. And with spreadsheet-driven processes, auditing taxes and the underlying data and calculations is difficult and time-consuming. On top of all this, the effects of the desktop spreadsheet’s inherent shortcomings multiply with the size of a corporation. By their nature, these spreadsheets hinder a corporation’s ability to understand tax issues and optimize  related decisions.

Organizations do not have to put up with these outdated, counterproductive practices. New tools can help streamline tax processes. One is Vertex Enterprise (which I reviewed earlier this year). VR_tech_award_winner_2013Vertex recently was awarded Ventana Research’s 2013 Innovation Award for the Office of Finance for this suite of application and integrated use of tax data and analytics. Vertex offers a single-platform approach to managing all types of taxes (direct and indirect) across the entire tax life cycle, from analysis through provisioning to audit defense, using a single data source. Direct (income) tax management is still a largely manual process involving a plethora of desktop spreadsheets. Calculating and accounting for direct taxes is complicated, largely because income tax laws can be quite convoluted, especially in certain industries. As well, the larger the number of tax jurisdictions it operates in and the more numerous its subsidiary legal entities, the more complex tax management becomes.

Vertex Enterprise includes tax provisioning software for both indirect and direct taxes. Indirect Tax is managed by the company’s O Series software, a single platform that handles sales-and-use-, VAT- and goods and services taxes on a global scale. Direct taxes is handled by Vertex Tax Accounting, global tax provisioning and reporting software that works with multiple general ledger systems in  multiple currencies and across multiple years within the context of multiple accounting regimes such as US- and other national generally accepted accounting standards (GAAP) and International Financial Reporting Standards (IFRS). The web-based software supports a distributed, collaborative, enterprise-wide tax decision cycle process that can achieve more optimal tax-related decision making. Direct taxes exist in a parallel universe, and one advantage in having a single system is that it facilitates the process of reconciling the business accounting performed in ERP systems with the tax accounting governed by law. Vertex automates tax account reconciliation and reporting and manages adjustments that span multiple time periods.

One notable advance for corporate tax departments offered by Vertex Enterprise is its tax data warehouse (TDW). Because a TDW can automate much of the painstaking work that occupies much of the tax practitioner’s time, it can free these trained individuals to focus on making the best tax decisions possible. Also, because a TDW can increase visibility into tax analyses and calculations, corporations can be more confident in their tax-related decisions. And with this greater visibility and confidence, tax departments can become a mainstream participant in the finance function. This is especially important in an era of increasing cooperation between tax authorities worldwide. More than ever, corporations that operate globally must be able to optimize their tax positions over time and across multiple jurisdictions. A TDW enhances that capability.

Conceptually, a TDW is simple: It’s a data store that makes all tax data readily available and can be used to plan and provision a company’s taxes. However, in larger companies (those with more than 1,000 employees) that operate in multiple tax jurisdictions and have even moderately complex legal entity structures, tax-related data structures and calculations become fiendishly complex, as I noted in an earlier perspective. For that reason, the first attempts to create TDWs proved unworkable because the sheer complexity of the direct (that is, income) tax domain overwhelmed the available information technology. These limitations forced companies to take shortcuts, which meant that each TDW had to be a largely custom effort and therefore expensive to build. And because these shortcuts rendered the systems brittle and difficult to change, they were expensive to maintain. Today, however, technology is available to make TDWs practical.

A TDW has several purposes: to ensure accuracy and consistency in tax analysis and calculations, improve visibility into tax provisioning, vr_Fast_Close_2012_ERP_01_multiple_erp_systems_are_commonand cut the time and effort required to execute tax processes. The technology is especially useful because data management is one of the biggest operational challenges facing tax departments today. That is, the information necessary for tax provisioning, planning, compliance and audit may not be readily available to the tax department because accounting and other information is kept in multiple systems from multiple vendors. Our benchmark research shows that 90 percent of companies with 1,000 or more employees use financial systems from multiple vendors, and 43 percent use four or more. In addition, not all of the data necessary for tax department purposes is captured by the ERP system. As well, data collected in a general finance department warehouse or pulled together in a financial consolidation system may not be sufficiently granular for tax department purposes.

Moreover, most companies’ ERP systems (the core technology for gathering transaction data) are not inherently “tax aware,” so tax departments repeatedly need to perform transformational steps to ensure that data is formatted and organized properly. Sometimes the data must undergo multiple transformations because, for example, the transaction information collected in an overseas subsidiary must be reported locally using the local currency and accounting standard but translated to the parent company’s tax books in a different currency using a different accounting standard. In some industries (such as financial services) there may be multiple local reporting standards, one for general statutory purposes and another reflecting specific rules for that industry demanded by some regulatory authority. In short, there are numerous data-driven headaches tax professionals have to address before they even get down to work. A TDW addresses this problem.

Ventana Research is dedicated to helping organizations enhance the effectiveness and strategic value of the Office of Finance. Tax departments, CFOs and controllers in larger, more complex corporations should examine how the tax organization spends its time and determine to what degree more enterprise automation and fewer desktop spreadsheets would enable the company to understand and manage its tax needs more intelligently. Vertex Enterprise can be a useful foundation for transforming the tax function, which is why it received our Technology Innovation Award for Office of Finance for 2013.

Regards,

Robert Kugel – SVP Research

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