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The steady march of technology’s ability to handle ever more complicated tasks has been a constant since the beginning of the information age in the 1950s. Initially, computers in business were used to automate simple clerical functions, but as systems have become more capable, information technology has been able to substitute for increasingly higher levels of human skill and experience. A turning point of sorts was reached in the 1990s when ERP, business intelligence and business process automation software reduced the need for middle managers. Increasingly, organizations used software to coordinate activities as well as communicate results and requirements up and down the organizational chart. Both were once the exclusive role of the middle manager. Consequently, almost every for-profit organization eliminated management layers so that today corporate structures are flatter than they once were. Technology automation also eliminated the need for administrative staff to perform routine reporting and analysis. Meanwhile, over the course of the 1990s, the cost of running the finance department measured as a percentage of sales was cut almost in half as a result of eliminating staff and because automation enabled companies to scale without adding headcount. During the last recession, companies in North America and Europe once again made deep reductions to their administrative staffs, relying on information technology to pick up the slack.

Given this history, the best career choice that an individual can make today is to stay ahead of the trend. Information technologies, especially cognitive computing, will continue to eliminate relatively high-paying white-collar jobs in corporate life, especially in the finance and accounting function. Executives and others working in tax departments in particular should recognize that a major shift is under way in their field. Automation will transform their work over the next five years, driving a fundamental change in what they do. To succeed (or even survive), they will have to embrace automation.

Spreadsheets are a major impediment to making the tax function more strategic for a company and more remunerative for those working in the department, as I have noted. Our Office of Finance benchmark researchvr_Office_of_Finance_15_tax_depts_and_spreadsheets finds that half (52%) of tax departments use spreadsheets only for tax provisioning and another 38 percent mainly use spreadsheets; just one in 10 utilize a third-party tax application. One well-known issue with spreadsheets is that they are error-prone – not a risk that tax professionals can be comfortable with. To be certain that the tax provision and other tax-related calculations are correct, individuals must double- and even triple-check the numbers. This overlaps with a second major issue with spreadsheets: They are time-consuming. Our spreadsheet research finds that those working heavily with spreadsheets on average spend 18 hours a month (equivalent to more than two full workdays) just maintaining their most important spreadsheet. Spreadsheets as so time-consuming that they prevent individuals from doing more valuable work, in this case tax analysis and planning.

Another related issue is that using spreadsheets for the tax function diminishes visibility into a company’s tax provision in at least two respects. First, using them takes so long that executives get to the numbers late in the financial close process. This matters because of the impact that tax expense has on a company’s profits. Second, spreadsheets are black boxes: That is, they are difficult to control, and it’s difficult for anyone other than the spreadsheet’s owner to understand their construction. Often, assumptions are buried in formulas and therefore hard to uncover. If these formulas are inconsistent or wrong, it’s not easy to spot them. (This was an important factor behind J.P. Morgan’s multibillion dollar trading loss, which I discussed.) When a spreadsheet is constructed with a given formula repeated in multiple cells, each of these must be updated when circumstances change, and it’s difficult to be certain that all of the changes have been made. Even with advanced techniques designed to make updates consistent, it’s hard to be sure that some cell wasn’t overwritten with another number.

Some people who work intensively with spreadsheets still view them as a form of job security because of their opacity. They think they’re indispensable because they are the only one who understands how their spreadsheet works. This is one of several reasons why their use persists in functions where they constitute more of a problem than a solution. However, these spreadsheet jockeys should recognize that their tools’ inherent inefficiency, lack of visibility and proneness to error make them vulnerable to being replaced by better technology. The real value of tax professionals is not their ability to overcome spreadsheet limitations. It’s in their training in understanding income taxes. Once freed from the drudgery of performing computations, massaging data and checking (two or three times) for errors, tax professionals can turn their attention to performing analytical work aimed at optimizing a company’s tax spend – and thus ensuring their value as employees.

Midsize and larger organizations, especially those that operate in multiple direct (income) tax jurisdictions and that have an even moderately complex legal entity structure, must use dedicated software to automate their income tax provision and analysis functions. They must manage their tax-sensitized data using what I call a tax data warehouse of record. Tax departments must be able to tightly control the end-to-end process of taking numbers from source systems, constructing tax financial statements, calculating taxes owed and keeping track of cumulative amounts and other balance sheet items related to taxes. Transparency is the natural result of a having controlled process that uses a unified set of all relevant tax data. An authoritative data set makes tax department operations more efficient. As noted, reducing the time and effort to execute the tax department’s core functions frees up the time of tax professionals for more useful analysis. Having tax data and tax calculations that are immediately traceable, reproducible and permanently accessible provides company executives with greater certainty and reduces the risk of noncompliance and the attendant costs and reputation issues. Having an accurate and consistent tax data warehouse of record enables corporations and their tax departments to better execute tax planning, provisioning and compliance. Using dedicated software today rather than relying on spreadsheets helps the tax department, and those working in it, increase their strategic value today so they won’t be obsolete tomorrow.

Regards,

Robert Kugel – SVP Research

The ERP market is set to undergo a significant transformation over the next five years. At the heart of this transformation is the decade-long evolution of a set of technologies that are enabling a major shift in the design of ERP systems – the most significant change since the introduction of client/server systems in the 1990s. Some ERP software vendors increasingly are utilizing in-memory computing, mobility, in-context collaboration and user interface design to differentiate their applications from rivals and potentially accelerate replacement of existing systems (as I noted in an earlier analyst perspective). ERP vendors with software-as-a-service (SaaS) subscription offerings are investing to make their software suitable for a broader variety of users in multitenant clouds. And some vendors will be able to develop lower-cost business systems to broaden the appeal of single-tenant hosted cloud deployments for companies that cannot adapt their businesses to share with other tenants or prefer not to.

Vendors also will be using analytical capabilities to broaden the scope of their ERP offerings – especially in financial performance management (FPM) – to complement the core functions of transaction processing and accounting. They have three important objectives in adding analytical capabilities. One is to increase revenue from customers; the second is to differentiate their offering in a highly commoditized market. The third is to increase the “stickiness” of the software (that is, to make it less attractive for a customer to switch to a competitor’s software) by increasing the number of process and user touch points in customer organizations.

An important value proposition behind the addition of vr_NG_Finance_Analytics_12_timely_data_supports_agilityanalytical capabilities to ERP is to make it easier for companies to obtain useful information directly from their system. Our Office of Finance benchmark research finds that companies are split on this issue: Half (50%) said that it’s easy or very easy to get information from their ERP system, but nearly as many (48%) said it isn’t. One benefit of having analytics built into a transaction system such as ERP is that it automates and therefore often speeds up the transformation of data into useful, digestible information.Our next-generation finance analytics research finds that nearly all (86%) of companies saying that they have up-to-date data are able to respond to changes in business conditions in a coordinated fashion, compared to 38 percent in which most data is current and just 19 percent of those whose data is less than up-to-date.

The FPM category includes closing and reconciliation, statutory consolidation, planning and budgeting, and financial and management reporting as well as external financial reporting. In the past vendors of software other than ERP have offered these capabilities because constraints in database technologies prevented consolidating them. In some cases, an ERP vendor acquired an FPM vendor but still sold the product as a stand-alone. The addition of any of these financial analytical capabilities increases the value of the ERP system to the owner.

Some ERP vendors are demonstrating or at least talking about providing the ability to handle intraperiod “soft closes” (using a degree of simplification to quickly produce nonstatutory financial reports) to enhance visibility and control. (History buffs may recall that Coda Software, the first ERP system to be built on a multidimensional database, offered this in the 1990s.) Some are taking steps to facilitate the ongoing consolidation of accounting information from all of a company’s systems into a central system. This permits corporate-wide intraperiod soft closes.

Providing analytical capabilities within an ERP offering also can facilitate the fusion of financial and operational data captured by the ERP system without a data warehouse. It can speed up reporting on this information and eliminate the need to maintain connections from the ERP system to a data warehouse to be able to perform analysis and reporting. Operational data may come from the human resources management, manufacturing, distribution, inventories and project components (to name a handful) that can be part of an ERP suite. The combination can provide a far richer set of performance management measurement capabilities than financial or operational data alone. Purely financial performance metrics are essential but insufficient to manage a business. For example, measuring unit-based inputs to outputs (such as direct labor hours per widget produced) enables a company to track its efficiency. Budgeting is another analytical application that lends itself to becoming an ERP extension application because actuals and budgeted amounts are linked in a single system.

The addition of FPM and other analytical capabilities to ERP systems is creating an overlap between these two categories, but the two aren’t on a collision course yet. Most FPM vendors offer suites with exceptionally rich functionality that will be time-consuming and expensive for an ERP vendor to replicate to a significant degree. Rather than replacing software that can execute specific tasks or provide rich functionality, the incorporation of analytics will simplify how companies perform the basics. In this sense, it’s more of a positive for the ERP vendors that are able to harness technology to provide easy-to-use analytical features and capabilities than a negative for FPM vendors. And it will likely be an important source of differentiation for ERP software vendors in the future. We advise finance professionals and others who manage these systems to keep an eye on developments going forward.

Regards,

Robert Kugel – SVP Research

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