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Oracle continues to enrich the capabilities of its Hyperion suite of applications that support the finance function, but I wonder if that will be enough to sustain its market share and new generation of expectations.VI_Financialmanagement At the recent Oracle OpenWorld these new features were on display, and spokespeople described how the company will be transitioning its software to cloud deployment. Our 2013 Financial Performance Management Value (FPM) Index rates Oracle Hyperion a Warm vendor in my analysis, ranking eighth out of nine vendors. Our Value Index is informed by more than a decade of analysis of technology suppliers and their products and how well they satisfy specific business and IT needs. We perform a detailed evaluation of product functionality and suitability-to-task as well as the effectiveness of vendor support for the buying process and customer assurance. Our assessment reflects two disparate sets of factors. On one hand, the Hyperion FPM suite offers a broad set of software that automates, streamlines and supports a range of finance department functions. It includes sophisticated analytical applications. Used to full effect, Hyperion can eliminate many manual steps and speed execution of routine work. It also can enhance accuracy, ensure tasks are completed on a timely basis, foster coordination between Finance and the rest of the organization and generate insights into corporate performance. For this, the software gets high marks.

Unfortunately, this FPM suite remains more difficult to deploy and maintain than other vendors’ suites, and its user experience is becoming dated. As well, social collaboration is increasingly important in business, especially to fit specific requirements of the finance function, as I recently noted. Oracle understands that it must address changing user experience requirements as the baby boomers retire and are replaced by people who have fundamentally different expectations of how software is supposed to work. While there was plenty of evidence at OpenWorld that Oracle is taking steps to remedy this at a corporate level, it’s up to individual units to implement changes to their software portfolio, and it’s not clear that this is a priority for the Hyperion group. But in other areas, Oracle is busy addressing gaps in its FPM offerings. It is adding mobile enablement to Hyperion Financial Management and Planning, starting with an executive approval application to ensure that necessary signoffs can occur anywhere to speed the completion of routine work. To address the growing popularity of its cloud-based rivals, Oracle’s long-awaited Planning and Budgeting Cloud Service should be available by the end of 2013, providing budgeting, planning, collaborative forecasting and reporting as services to companies. And the company is offering financial and management and reporting in the cloud to streamline production and delivery of reports.

Hyperion still has the strongest franchise in the finance function, the legacy of achieving early market dominance in software for vr_fcc_financial_close_and_automationconsolidation, reporting, planning and budgeting. It succeeded because it gave the finance department autonomy from IT with applications designed by people who understood their needs. Hyperion offers a rich set of capabilities to automate the extended close cycle – all of the activities that start with the preclosing functions and continue through completion of external reporting. Our recent benchmark research on the financial close found a correlation between the time it takes a company to close and the degree of automation that it applies to the process. On average, those with a high degree of automation are able to close their books in 5.7 days, compared to 9.1 days for those that apply little or no automation. Oracle’s Financial Close Suite of applications is designed to enable companies to execute their period-end close faster and more accurately while requiring fewer resources. This is important because managing their close well is an issue for more than half of companies. Our research found that 61 percent of corporations take more than six business days to complete their quarterly or semiannual close (the consensus best practice is closing within six business days). Rather than achieving a faster close, which 83 percent of companies said is important or very important, the research found that on average it takes a day longer for companies to close than it took them five years earlier. In conjunction with better process design, using software to automate manual processes, manage all phases of process execution and limit the use of desktop spreadsheets is an effective way to shorten a company’s close cycle. Oracle’s Financial Management Analytics allows finance executives to closely monitor this extended close cycle.

One recent addition to Oracle Hyperion’s Financial Close Suite is Tax Provision. Accurately calculating and reporting direct (income) taxes is a time-consuming, labor-intensive process for almost all midsize and larger companies. I’ve written about the importance of using technology to bring the tax function into mainstream finance. There are two necessary IT elements to managing this process. One is ensuring that all of the data needed for provisioning and any subsequent audit is readily available. An option here is a tax data warehouse for companies that have a large number of legal entities and/or operate in multiple tax jurisdictions. Hyperion doesn’t have this capability. However, for companies that have less complex requirements or just want to simplify and centralize the gathering of tax data, it provides the second necessary element: an environment that manages tax data collection, improves the accuracy of the data and the calculations (by substantially reducing the need for desktop spreadsheets and rekeying of data from source systems) and automates data movement through configurable wizards. Especially in the quarterly and year-end accounting closes, numerous adjustments may take place that can affect the tax provision or changes in tax calculations that can have an impact on reported results. A tax provision application can speed up the back-and-forth adjustments, helping to shorten the accounting close cycle. It also can enhance the effectiveness of the tax function because those professionals will have more time to spend on analysis and optimizing a company’s tax position rather than wrestling with spreadsheets.

Oracle has added important new capabilities to its FPM suite since acquiring Hyperion. Expanding the suite has helped the company sustain its franchise in the face of determined competition from large to smaller sized software vendors such as IBMInfor and SAP, as well as smaller ones including Adaptive PlanningAnaplanHost AnalyticsLongview and Tagetik. The generational change that’s under way in corporations poses a serious competitive threat to Oracle. For finance professionals, word of mouth and brand loyalty count far more than “enchanted boxes” or “undulations”: That’s how Hyperion came to dominate the market. But times change, and Oracle is vulnerable because of the time and cost of deployment, ease of use and maintenance and user experience of its FPM suite. These were reflected in our 2013 Financial Performance Management Value Index. This year’s OpenWorld demonstrated that Oracle can pivot – albeit slowly – to address a rapidly evolving applications software market. With Hyperion it needs to focus more on addressing core competitive issues if it expects to sustain a leading market position.

Regards,

Robert Kugel – SVP Research

Because of its impact on the Office of Finance, I’ve written in the past about the proposed timeline and IT implications of the convergence of U.S. Generally Accepted Accounting Principles (U.S. GAAP) and the International Financial Reporting Standards (IFRS). While the bottom-line differences between U.S. GAAP and IFRS are likely to be minimal for most businesses, some aspects of the convergence promise to be significant and problematic. One important change is how companies account for leases. The process of arriving at these rules has been contentious because it represents a major change that will entail substantial process and accounting challenges for U.S. GAAP companies. These changes are likely to go into effect as part of U.S. GAAP well ahead of any adoption of IFRS in the U.S. IT systems also will be affected, but software could smooth the transition if vendors provide a workable product.

The proposed change to lease accounting involves a sweeping conceptual change from the operating lease model, which simply records lease payments as they occur, to a right-of-use model, which reflects the present value of the future lease payments as a liability along with a corresponding asset on the balance sheet. The objective is to more accurately reflect a company’s financial position by presenting a more complete calculation of its financial liabilities. Although future material lease payments must be disclosed, currently this information is found in the footnotes.

The new approach to lease accounting will increase the workload of the accounting function, as it involves two phases: the initial posting of all existing lease liabilities and the posting of ongoing transactions related to recording leases and amortizing them over time. Gathering all relevant information about all leases will be problematic because the information may be scattered and details may be missing, and getting it into existing accounting systems will add to the burden. Moreover, on an ongoing basis, those entering into a lease will need to capture the corresponding vr_ss21_errors_in_spreadsheetsinformation at the time of the initial transaction and transmit it to the accounting department.

As things stand, it’s very likely companies will default to using desktop spreadsheets for data collection and even for period calculations, which is a shame because they certainly are not the best solution. Given that the data in these spreadsheets is likely to be copied and rekeyed, it is prone to error. Indeed, our research confirms that this issue is common with 35 percent of organizations have data errors compared to formula errors (24%). Maintaining spreadsheets is also likely to be time consuming, which is another common problem where organizations spend up to 18.1 hours per month on these tasks. Spreadsheets are not the best means of tracking the various lease terms or the forward-term and variable rent assumptions an organization needs to vr_ss21_spreadsheet_maintenance_is_a_burdenstore and track to accurately compute the value of assets, establish the initial lease liability and calculate its amortization over time. Moreover, the current guidance envisions a requirement that companies regularly reassess lease terms to determine if conditions that affect the valuation or amortization of the lease have changed. For instance, if economic incentives to renew the lease term change following the initial contract, that must be reflected in the valuation. If, say, a contract for a two-year lease is amended to include attractive options for renewals extending out an additional eight years, the liability on the balance sheet (and corresponding right-of-use asset) will increase.

Those entering into and managing leases are not necessarily accountants with access to core financial systems. Rather than having to rely on spreadsheets or make extensive changes to their ERP and financial systems, what companies need is a lightweight lease application that could be used by accountants and non-accountants alike. Such an app would serve as a distributed data entry vehicle to capture and update all relevant lease information, as well as an analytical tool for managing lease-related calculations. The software would need to provide the low-cost and ease-of-use characteristics of a spreadsheet but offer data connectivity and the controls of an enterprise application. It might even use a spreadsheet interface to give users a familiar environment in which to work. However, unlike a spreadsheet, the application would enable both flexible and consistent data entry for even the most complicated leases. The characteristics of individual leases could vary, but in almost all cases their basic structure, terms and conditions would follow a straightforward model. Rather than relying on uncontrolled email-enabled workflows, the process of entering information about a lease, reviewing and approving it as well as handling periodic reviews and updates would be handled by defined and auditable workflows. Rather than having to re-key information from a spreadsheet into financial systems, such an application would automate the process of posting information to financial systems.

The coming changes to lease accounting will present companies with substantial business challenges. Although there will be no real change to their economic condition, the increase in assets and liabilities may affect some companies’ credit rating or require changes to loan covenants. Recording and tracking leases will become a greater burden than before – in some cases considerably so. Therefore, it would be great if vendors could provide a low-cost, low-maintenance application to help corporations and their finance departments manage leases, reduce workloads and ensure accuracy.

Regards,

Robert Kugel – SVP Research

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