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I recently attended Vision 2012, IBM’s conference for users of its financial governance, risk management and performance optimization software. From my perspective, two points are particularly worth noting with respect to the finance portion of the program. First, IBM has assembled a financial performance management suite capable of supporting core finance processes as well as more innovative ones. It continues to build out the scope of this suite’s capabilities to enhance ease of use, deepen the capabilities of existing areas and broaden to coverage to complementary or immediately adjacent software categories such as its pending acquisition of sales performance management vendor Varicent Software (covered by my colleague Mark Smith). More specifically, automating management of the extended financial close – that is, all activities from closing the books through filing financial reports with regulatory bodies such as the Securities and Exchange Commission (SEC) in the U.S. or the FSC in the U.K. – is growing increasingly important as regulatory requirements for external financial reporting expand. Companies that have adopted software to manage the extended close are demonstrating the value of using it.
From the briefings I received and the event itself, I conclude that IBM has a clear roadmap for advancing its customers’ execution of the broad scope of their financial performance management functions. At the core is enabling consistent, fast, accurate and intelligent finance processes. Our benchmark research consistently shows a significant disparity between the best-performing organizations and the rest. Typically, two-thirds of corporations have below-average competence in their performance of ordinary finance procedures. For example, in the case of something as basic as the financial close, our research finds a wide disparity in how quickly companies with exactly the same characteristics are able to close their books. I believe that one important reason for slow closing is simply poor management – a lack of organizational agility, weak communication skills and an unwillingness to challenge the status quo mentality. However, another contributing factor is not having the proper tools (or not utilizing these tools to the fullest). Our assessment of IBM’s financial performance management suite last year put it in the upper echelon of these vendors for its ability to support and enhance the ability of finance organizations to perform planning, forecasting, reporting, performance management, closing, reporting and the extended close.
Beyond these important basics, IBM also offers important analytical tools and packaged solutions useful for Finance, which I covered in detail here. They have the ability to enhance productivity and increase effectiveness by providing individuals and organizations with a better understanding of how well they are performing and why, as well as offering guidance on the best course of future action. Analytics, especially predictive analytics, can continuously monitor the details of a business and alert managers only when something needs their attention, enabling them to focus their efforts efficiently on things that matter while knowing they’ll receive the information they need to make decisions about what to do next. Analytics also enables managers to perform simulations to assess the impacts of possible outcomes and calculate the impact of taking each of a variety of courses of action. Moreover, as companies address their data fragmentation issues, they are able to use these broader sets of data to have a clearer picture of their company’s performance beyond their workgroups or functional silos.
With respect to the extended close, one of the sessions at Vision 2012 was a case study of a large oil exploration and production company’s experience in adopting IBM Cognos Financial Statement Reporting (FSR) for managing the production of its financial disclosure documents, including tagging the statements using eXtensible Business Reporting Language (XBRL). The company was able to increase the efficiency of the process in almost every respect. The last-minute changes that once created turmoil are no longer a big issue. By managing the entire process in-house, the company got back the two weeks of lead time a third party would need and uses that time to prepare narratives and readily handle last-minute changes. Moreover, because the company does its own XBRL tagging, it has greater control over decisions on what tags to use. It has cut in half the number of taxonomy extensions (nonstandard tags) it uses. Today, a majority of companies use third-party providers to prepare their filings and tag their financial statements. I think this is a big mistake. Our recent financial close benchmark research indicates that about half of the companies using third-party providers plan to bring their XBRL tagging in-house over the next two years. If they integrate tagging with automating the preparation of their financial filing documents, most will find their extended close is more efficient, gives them more time to prepare the narratives, gives them more control over the tagging and cuts the cost of preparing these filings.
Our benchmark research shows that a majority of finance departments have the potential to improve the quality of and efficiency with which they execute core processes and support the strategic objectives of their company. Software can be a key enabler of efforts to improve finance department performance. I recommend that senior finance executives periodically review their operations to determine whether they are getting as much from their existing software as they can or their performance is hindered by not having the right tools.
Robert Kugel – SVP Research
JDA Software is an established vendor of (among other categories) accounting software for the retail sector. So it is a bit ironic that the company is in the process of restating its earnings for 2008 through 2010 because of revenue recognition practices that led it to book some revenue sooner than it should have. The issue centers on certain transactions the company linked to service agreements and license revenue. As well, in 2009 and 2010 some of its license contracts included a clause protecting customers if certain products were discontinued, which can be construed as promising a future deliverable that would have required a delay in recognizing some or all revenue from those license contracts. Also, JDA is re-evaluating vendor-specific objective evidence (VSOE) for its Cloud Services in 2008 through 2010 to determine whether it met the appropriate requirements to recognize revenue at the start of those contracts; otherwise revenue would have to be prorated over the life of the contract. For a public company, any accounting restatement is serious, and JDA’s stock price has declined since the start of the year, but this seems to be due more to a fourth-quarter 2011 revenue shortfall relative to expectations and a downward revision in earnings expectations than to the restatement. The changes it is likely to make are more optics than substance, which accounts for the muted response from the market.
While it remains to be seen how JDA will fare in the restatement, I think its predicament has applicability for many companies and their finance departments, in the technology industry and elsewhere.
Accounting for the sale of intellectual property can be a slippery thing. Many software companies’ revenue recognition policies were extremely aggressive until 1991 when the first standards were put in place. Those first iterations proved too feeble, and further revisions attempted to prevent abuse, but in the process the rules have become highly detailed, and it’s easy to make mistakes trying to abide by accounting regulations that have more than 100 requirements governing recognition of revenues and gains. Partly to remedy this complexity, the U.S. Financial Accounting Standards Board (FASB) is looking to simplify these rules and move to more of a principles-based approach as it harmonizes U.S. accounting standards with the broadly adopted International Financial Reporting Standards (IFRS). (I covered this topic earlier this year). But for the time being, rules are rules. Especially because accounting for revenue in software is so tricky, companies must make extra effort in implementing and maintaining processes. Documentation must be thoroughly reviewed and vetted by auditors (and based on experience, I’m afraid even that isn’t an ironclad guarantee of compliance).
The shift to more of a principles-based approach in U.S. accounting standards is necessary. In the case of revenue recognition, the current rules can obscure economic reality rather than reflect it, giving professional investors an edge over others because they have the ability to see through the reported numbers (this is the exact opposite result of FASB’s stated intentions). Worse, in this case it can distort (and to my knowledge has distorted) the behavior of software companies, keeping them from making decisions that would benefit shareholders because of the negative impact those choices would have on reported revenues and earnings.
Another important point may be found in JDA’s efforts to address accounting process issues in a more comprehensive fashion. According to its CFO, JDA is implementing an end-to-end “opportunity-to-cash” process, which connects each step of a business process as it crosses departments and cuts across multiple IT systems. By smoothing handoffs between participants and linking necessary data from one step to the next, automating the progression from identifying a potential customer to closing a deal and collecting the cash can be performed faster, more efficiently, with fewer errors and with greater customer satisfaction than an approach that is not integrated. However, our research finds that too few companies have deployed such automated processes. Although implementing end-to-end processes (other examples include “requisition-to-pay” for purchasing and “hire-to-retire” in HR) is not simple, I believe inertia is the main reason why many corporations have not embraced this approach.
It shouldn’t take a crisis to drive change, especially when timely change can avert crises. I urge finance departments to re-examine how they do things on a regular basis. In my judgment, the reflexive “we’ve always done it this way” mentality is the most common barrier that prevents Finance from operating more efficiently and effectively. I believe every CFO should review major processes at least once a year to assess opportunities for improvement. Identifying ways to use existing information technology must be part of this effort, since only a minority of departments fully utilize these resources. Unfortunately, human nature being what it is, it often takes a crisis to force finance departments to act. In the 10 years that Ventana Research has been doing benchmark research, I’ve seen little evidence of substantive improvements in major processes; as just one example, the financial close now takes longer than it did five years ago. There’s a lot of lip service paid to change but as usual, when all is said and done, more is said than done.
Robert Kugel – SVP Research