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Longview Solutions has a longstanding presence in the financial performance management (FPM) software market and was rated a VI_FPM_Hot_VendorHot vendor in our most recent FPM Value Index. Several years ago it began offering a tax provision and planning application. I think it’s worthwhile to focus on the tax category because it’s less well known than others in finance and is an engine of growth for Longview. We expect larger corporations increasingly to adopt software to manage direct (income) taxes to improve the quality and efficiency of what today in most companies is an inefficient, spreadsheet-driven process.

Longview’s tax offering consists of four main components. Its Tax Data Platform can be the central repository of a corporation’s tax information. I’ve commented on the need to maintain tax data separate from the data that’s used for financial reporting, managerial accounting and performance management. One reason is that tax accounting must be aligned with legal entities, not corporate organizational structures, because direct taxes are levied on legal entities, not corporate divisions or reporting hierarchies. A second is that tax data must be held in an “as was” state, without regard to subsequent corporate actions such as acquisitions and divestitures or management reorganizations. Longview’s Tax Data Collection software consolidates book and tax data from disparate source systems; it is designed to automate and streamline the movement of data and eliminate time-consuming manual work. It can do consolidations in different, parallel paths if dissimilar methods of consolidating tax-related data are required by the statutes of individual taxing authorities. The Tax Provision/Reporting component performs global tax accounting and reporting. And Tax Planning supports a company’s analysis and planning of its taxes.

Software vendors are taking two different approaches to dedicated tax management software. One mostly focuses on the needs of the finance department: It automates and simplifies incorporation of already calculated tax data into the financial consolidation and close process. This is useful for companies that operate in up to a handful of tax jurisdictions and have relatively simple legal entity structures. The other approach addresses the needs of the tax department as well as the rest of the finance organization. Longview’s tax offering falls into the latter category because it provides the functionality and data-handling capabilities that tax departments need to streamline their operations, enhance their ability to manage tax expenses and improve senior executives’ understanding of tax exposures and strategies to deal with them.

Longview’s tax software can replace desktop spreadsheets, which are the most common tool used for direct tax provisioning and planning in companies of all sizes. Spreadsheets are the wrong choice for managing taxes because they are so time-consuming. Tax vr_fcc_tax_insightdepartments use them to make often complex tax calculations, manage tax data and direct tax processes – these are tasks that dedicated software can handle easily but spreadsheets cannot. They are not well equipped to do these tasks quickly and accurately on a consistent basis. Consequently, facing looming deadlines, tax departments have little if any time left over to analyze and plan tax exposure and tax expense options more broadly and more intelligently. Spreadsheets also do not provide sufficient transparency or forward visibility in a timely fashion in the way that a dedicated system can. Spreadsheets make it difficult for companies to manage their tax risk exposure in a consistent fashion across all business units. They do not give executives sufficient insight into their risk exposure options. Our research on the financial close finds that a majority (53%) of finance executives believe that having better understanding of and deeper insight into their company’s tax positions would enable them to reduce their tax expense.

There are several other reasons why desktop spreadsheets are the wrong choice for handling taxes strategically. One is that tax laws and regulations are so fiendishly complex. For example, some countries have industry-specific statutory reporting requirements (for example, for insurance companies and other financial services). Tax calculations for subsidiaries in one country may not apply to those required for a regional headquarters or the parent company. There may be multiple tax rates applicable to a given legal entity and multiple bases or methods on which to apply each tax rate. Moreover, because book accounting for taxes and actual tax calculations almost always differ in multiple ways, it’s necessary to record and track these differences. Since rules, rates and assumptions will vary from year to year, it becomes necessary to adjust these differences. Desktop spreadsheets lack the dimensionality, data integrity and referential integrity necessary to be able to manage this level of detail easily. Dedicated tax management systems are designed to do it.

One reason why tax departments lag in adopting new tools is that until recently the technology necessary for managing the full range of requirements in direct tax analysis, provisioning and compliance was not mature enough for the organizations that needed it the most. Until recently, corporations that operate in multiple, worldwide jurisdictions with even modestly complex legal entity structures overtaxed the ability of IT systems to support them. However, using dedicated software for direct tax management enhances the efficiency of the tax department, enabling it to become more strategic and contribute to improving the company’s results.

Adopting a more strategic approach to managing direct taxes is an emerging trend in finance organizations, but it’s still at an early stage. Tax compliance is usually the main (and overwhelming) focus of tax departments. Most do this essential work reasonably well, but compliance is a tactical issue. To elevate tax management to a strategic level, tax and finance executives must have greater visibility into tax data and how operational decisions affect tax exposures. For example, finance and tax executives may construct a tax-optimized approach to transfer pricing, but their strategy may not be implemented if the company’s incentive compensation system is not aligned to this strategy. Operating managers in high-tax jurisdictions will try to maximize revenues because that’s what they’re rewarded for, even if it results in higher taxes than are necessary. Using spreadsheets is a significant barrier to tax departments taking a more strategic role in their company. When direct taxes are managed using desktop spreadsheets, there rarely is time for organizations to do much more than basic compliance. There’s usually not time to discover the fundamental disconnects between tax strategy and reality or other, similarly strategic activities such as analyzing and assessing the tax implications of long-term corporate plans.

vr_fcc_tax_effectivenessIndeed, one sign of the tax function’s lack of strategic impact is its invisibility. There is a general lack of understanding of how the tax department functions, even within the finance department. For example, our research discovered that nearly two-thirds of finance executives (and, specifically, 60% of CFOs and controllers) do not know how long it takes their tax department to calculate tax liabilities.

Another reason is the relatively low status of tax departments in their company, which we can gauge through the distribution of titles and relatively low compensation for the highly credentialed individuals in these departments. Those that work in tax also tend to be tight-lipped and reluctant to reveal that their processes are time-consuming and difficult to manage, lest they be viewed as less than competent. The tax department’s invisibility contributes to a lack of focus on direct taxation by senior management, which also diminishes an understanding at that level of the potential benefits of investing in technology. Companies that are most likely to want to improve how they manage their direct taxes appear to be the ones where a senior finance department executive has spent time in tax and therefore has a firsthand appreciation for the challenges.

I’ve commented on the need to make tax more strategic. An increasing number of companies are finding that investing in dedicated software to improve the performance of their tax department is worthwhile. It gives them a deeper understanding of how best to manage what is usually one of their biggest expenses and enables them to make more optimal decisions about taxes. I recommend that all larger companies look into the benefits they can achieve by making their tax department more strategic and that they investigate dedicated software such as Longview’s that can enable them to have such a strategic tax function.

Regards,

Robert Kugel – SVP Research

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

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