Robert Kugel's Analyst Perspectives

The US Securities and Exchange Commission’s (SEC) “Interactive Data” initiative continues to progress forward. Thus far, some 1,500 corporations have filed their financial information using XBRL tags to facilitate review and analysis, of which almost 400 have had done detailed tagging of their footnotes. By June 2011 all public companies will have to provide an XBRL-tagged, interactive version of their financial statements. As I’ve noted in the past, I think companies should find ways to automate the XBRL tagging process to make it as efficient as possible and make this a part of a close-to-report process automation effort that can lower the cost of compliance, and give companies more time to review the substance (not just the details) of their filings.

Ventana Research has just announced its Value Index for Financial Performance Management (FPM) for 2010. Our value indexes are user-focused assessments of how well software vendors and packages enable companies to improve their execution of core processes. This one is designed to help businesses, especially the finance organization, evaluate the FPM software suites offered by major vendors in the context of their specific needs. Ventana Research defines financial performance management as the practice of managing the efficiency and effectiveness of financial processes including analytics, budgeting, consolidation, planning, reporting and strategy. The methodology we use to produce the Value Indexes involves evaluating in detail aspects of product functionality and suitability-to-task as well as the effectiveness of vendor support for the buying process and customer assurance.

Actuate held its annual customer day in San Francisco amid the happy chaos of the World Series champion Giants’ ticker-tape celebration, and on that day the company’s ticker symbol changed from ACTU to BIRT (a shift, incidentally, botched by NASDAQ). There was a great deal of focus on its ActuateOne platform (which my colleague reviewed here) and the advancements in using open source software like BIRT with now over ten million downloads, but the aspect I want to highlight is the BIRT spreadsheet (originally Actuate’s e.Spreadsheet).

For the past couple of years I’ve been asserting that most larger companies (those with 1,000 or employees) need to adopt a new approach to using software to handle their taxes comprehensively, both the direct sort (income taxes) and the indirect variety (sales and use taxes as well as value-added or goods and services taxes). This is a necessary response to an emerging challenge from more competent and determined tax enforcement by governments worldwide. It will require corporations to make changes in how they employ software to manage their taxes, structure their tax-related data and manage their tax processes. Increasingly, corporations will need to have better control over the way they manage tax data, calculate taxes and handle associated processes so they can minimize their tax liabilities and their tax risk exposure.

IBM announced it has acquired Clarity Systems, a Toronto-based vendor of performance management software and consulting. Terms of the deal were not disclosed. (My most recent blog and analysis about Clarity Systems can be found here. The acquisition fills an important hole in the IBM Cognos applications portfolio, as Clarity FSR is a leading application for automating and managing the close-to-report cycle. This capability has become essential for companies that are required to file financial statements with the U.S. Securities and Exchange Commission (SEC) under its “interactive data” mandate. That mandate, which is being phased in now, requires these corporations to tag their financial statements (and most of the footnotes attached to the statements) as well as their 8-K forms (which are essentially press releases, but especially earnings announcements). I estimate that for a large majority of Fortune 1,000-size public companies, automating the close-to-report cycle alone will have a positive ROI and a short payback period. This is why earlier this year I listed automating the close-to-report cycle as a 2010 priority for finance departments. Many finance departments use up a great deal of time of highly paid employees in this process, cobbling together tables with data from multiple sources; writing, editing  and reviewing scattered snippets of text and triple-checking the resulting documents for errors. Many of them, too, will have to automate the process of tagging data to reliably meet filing deadlines. I also expect that most corporations ultimately will prefer to prepare their own filing documents internally and use the financial publishers (Bowne, Donnelley and Merrill are the leaders) as conduits rather than outsourcing this work to them.

With its FXR offering, Longview Solutions becomes the latest entrant into the market for software that automates the close-to-report cycle. Addressing the steps in the accounting cycle after the books are closed, the product assembles this accounting data, data from other sources (for example, management data such as a business segment breakout of revenues and operating profits or nonaccounting data such as the amount of real estate owned or leased), and the written commentary that accompanies such data in external reports, such as a legally mandated filing by a public company (for instance, in the United States, form 10-Q, 10-K or 8-K) or a periodic filing required by a creditor or lien holder. Longview FXR and its competition come at an opportune time for both vendors and users. Until recently, companies prepared these documents manually with little if any automation. However, the mandate of the U.S. Securities and Exchange Commission (SEC) that U.S. public companies must tag their filings using the eXtended Business Reporting Language (XBRL) is forcing companies to rethink this manual process because of the time it will take to perform once the requirement is fully phased in. Larger companies may have thousands of items that they will have to tag at this stage. If history is any guide, the number of tagged items is likely to grow over time. For example, items in the management discussion and analysis and in the compensation table are not covered by tagging at this point because of how long it will take to create a useful taxonomy for these items. Moreover, governments worldwide are likely to increase the scope of business reporting that must be tagged.

As part of its recent IBM Business Analytics Industry Analyst Summit, I participated in a demonstration of IBM Business Analytics Workshop, a simulation that the company uses to demonstrate the capabilities of its performance management software. Rather than offering a canned demo or a Microsoft PowerPoint deck, the workshop gives a team of individuals from a company a reasonably realistic interactive experience of using the software for a purpose. The group starts with a set of financial goals and then has to comb quickly through a set of operating data to establish a product strategy for the coming year - which products to emphasize in which segments of the geographical markets it serves. In a series of "moves," participants progress through the year, seeing how well they've done, adjusting their strategy if necessary, reforecasting and making sure that the company's resources are aligned with the strategy that they established. IBM and its analytics from acquisition of Cognos offers different flavors of the workshop: The shortest, most basic one takes several hours and can be played with a handful of people, but longer versions that involve many more players and get into many more details are also available.

Ecology and economy are two words with the same root. Similarly, the focus on sustainability in business has two sorts of "green" impacts: on the environment and (if you do it right) on the bottom line. Perillon has an on-demand and cloud computing-based solution for companies that want to manage their double-green sustainability efforts more effectively. Perillon Workspace Suite offers "sustainability performance management" for organizations in energy and environmental management. It delivers the kind of benefits that all enterprise performance management systems are designed to provide: the ability to assemble all relevant performance-related data, put that data into the proper context, present it relative to objectives, provide individual managers with alerts when results require their specific attention and incorporate a mechanism for ensuring that out-of-tolerance situations are addressed adequately. Moreover, because of its engineering history, Perillon captures data, in effect, all the way from the smokestack and not just in the technology stack. This differentiates the product from reporting tools that, while intelligent enough to have already built data and reporting structures designed to support sustainability efforts, must obtain the data from separate systems.

Oracle unveiled its Fusion Financials applications at its latest OpenWorld confab as part of its broader Fusion Applications announcement. The software will be generally available shortly. Beyond it being the approach to bringing together the disparate ERP/Financial applications the company owns (E-Business Suite/Oracle Applications, PeopleSoft and JD Edwards), Oracle Fusion Financials rethinks the architecture on which the software is built consistent with the longer-term business software trend of having applications mould themselves around business processes rather than having to mould business processes around available software. This is not just a simpler integration of business intelligence and on-line transactions processing. It results in an easier, more consistent and faster way to execute the execution of finance department functions. It is a breakthrough in the making, but owing to the conservative nature of the buyers and the lack of any compelling reason for Oracle to encourage them to migrate, one that I expect will take most of this decade to pan out.

For the past couple of decades Xenos' distinctive competence has been the transformation of print streams into content used to assemble documents. Its focus these days is in addressing the needs of organizations that have to handle high volume transactional output (HVTO) and all forms of enterprise content. The company, which was acquired by Actuate earlier this year, recently released their Enterprise Server Version 2.0.

Looking forward to Oracle OpenWorld, I was recalling that about 20 years ago, when I started covering the software industry as a Wall St. analyst, I paid a visit to the company. There were many fewer database-shaped glass buildings there in Redwood Shores then but the lack of corporate focus on business applications and users remains unchanged.

Most large corporations have embraced some form of “performance management” software – perhaps even multiple forms – including business analytics to help create key performance indicators, reporting systems for graphically presenting information in a useful context (such as dashboards, scorecards or a recurring performance report) as well as planning systems to create budgets and forecasts or handle reviews. These sorts of systems become rarer as the size of the organization gets smaller. One reason is that in smaller organizations the time and effort needed to create and maintain these sorts of systems doesn’t seem to be worthwhile. Having an IT department that is large enough to have (and maintain) the skills support multiple applications and the data infrastructure to feed it can be more than midsize company or the division of a large corporation may be willing to bear. Yet, few of them want to compromise on features and capabilities and so they continue to cobble together their data, reporting and planning and review functions, often using desktop spreadsheets as the backbone. In midsize or large companies this can produce false economies. Our research finds that organizations this size that rely on spreadsheets to handle their performance management requirements waste a considerable amount of time trying to overcome the shortcomings of the technologies they are using and do not achieve the kind of return on the time invested they should. Time is a precious commodity to any business, but especially in any organization that has outgrown more informal systems and yet are not giant enough to be able to afford a large IT department.

Accelerating the completion of the accounting cycle remains an important objective for Finance organizations. Research shows that about half of the midsize and larger companies take more than five business days to close their books on a monthly or quarterly basis; some much longer. A fast, accurate close is important if only because it enables companies to provide financial feedback to executives and managers sooner and therefore allows them to address issues or opportunities faster. One of the most important insights provided by Ventana’s Research Benchmark on the financial close is that cutting the time to complete the accounting cycle is rarely a matter of finding one or two bottlenecks. Like most management challenges, it is almost always a matter of addressing a large number of small things, which in aggregate add up to days or weeks that can be saved. Moreover, the research also shows that companies that have established clear objectives to shorten their closing cycle and ones that have frequent formal periodic reviews of their process execution (at least monthly or quarterly) are more likely to succeed in reducing the time it takes to close the books.

Activity Based Costing (ABC) is one several popular techniques to apply marginal cost analysis to arrive at a more accurate measure of a product’s true economic cost. It became popular in the United States starting in the 1980s (earlier in Germany) as it became clear to many that traditional cost accounting techniques do not reflect the true, economic cost of production in complex, multi-product environments. Consequently, companies might price items higher than they should and lose market share, or consider them unattractive from a profitability standpoint and possibly under invest in them from a sales/marketing standpoint. Or, the company’s profitability might be impaired because standard cost accounting measures do not enable them to determine the decisions that will maximize their profitability. Sales people might be given the wrong set of incentives, heavily promote less profitable products while ignoring high margin ones. ABC attracted a great deal of attention in the English-speaking world in the 1980s and early 1990s because proponents presented compelling arguments for its adoption. Unfortunately, it quickly fell out of favor because the time and cost of doing the type of “boil the ocean” comprehensive analyses associated with it at that point did not provide commensurate benefits. This was especially true because marginal cost analyses must be performed periodically to keep them up to date.

In July, Australia adopted what it calls "Standard Business Reporting" (SBR), which is designed to reduce the reporting burden imposed on businesses by the country's federal and state governments by streamlining the information submission ("lodging" for the Oz) process. In essence, the country is on its way to a file-once-use-many approach whereby companies provide data using a single secure sign-on known as "AUSkey"  As of now, SBR reports include the Business Activity Statement, Tax File Number Declarations, payment summaries, payroll tax returns and financial statements. While the data can be compiled manually, the objective is to have SBR-enabled software to pre-fill and complete government forms directly from their own accounting and other business systems. The Australian initiative has been in the works for several years and appears to be off to a good start.

I’ve focused attention of integrated business planning for the past several years as our benchmark research on business planning and other related topics consistently finds companies are not getting enough of a return on the considerable amount of time and effort they spend on budgeting and planning. Moreover, the current economic climate makes substantive contingency planning more important than ever. Our research finds that there is a great deal of planning going on. Most managers and executives participate in multiple planning exercises, although these are focused on their own business silo and do not have a firm, ongoing connection with other plans. Unfortunately, this leads to a lack of coordination between various parts of the organization because the plans in one area are only vaguely understood by others. Moreover, when changes take place in the future outlook of one part of the business, they are not immediately communicated (or communicated in sufficient detail) to everyone that would benefit from this knowledge. The main form of integrated business planning is the annual budget and the periodic budget review and re-forecast. However, this is relatively short-term and financially focused, usually does a poor job of projecting the operational aspects of a changing business landscape and is not always in sync with the company’s various operating plans. Even when companies do some integrated operational planning, it often does not do a good job of measuring the financial impact of changes in the operational forecast because the models use simplistic financial assumptions that can quickly become outdated.

Intacct, which offers cloud-based accounting software for small and smaller midsize companies is starting to put more emphasis on addressing the needs of project-oriented, professional services businesses. One of the challenges that these companies face is getting their accounting systems to support their business at a functional level. To be sure, any ERP system can account for projects, in the sense that they can aggregate labor and material costs attributed in some subcategory such as "new building" or "annual conference." However, unless they are built from the ground up to support businesses that revolve around projects, people in the finance department will wind up wasting time doing workarounds to overcome the system's deficiencies and companies will need to invest in adapting the system to offer the process support they need to perform routine business tasks. A lot of those workarounds will involve desktop spreadsheets which means there will be errors that will also take time to address and impose needless costs to the business.

It turns out that some consumer goods manufacturers and retailers are having a hard time finding space on container ships and even finding containers to ship in. This has driven up the cost of shipping these items and at times resulted in deliveries arriving too late for scheduled promotions or seasonal demand peaks. This, during a time of constrained consumer spending in North America and Europe and an extended period where the Baltic Dry Index (a measure of shipping rates for bulk commodities such as ore and grain) has been dropping at a record-breaking rapid clip. This sort of unexpected and counterintuitive event has been having a negative impact on the affected companies. Could they have anticipated this possibility? Should they have? I think the answer is: Yes.

Anyone who has had to regularly produce a written business forecast that goes out more than a couple of months understand all too well Yogi Berra’s famous observation: “It’s tough to make predictions, especially about the future.” Certainly the economic events of the past two years have regularly made forecasts obsolete in a very short period of time. Using the wisdom of crowds can help the accuracy of forecasts in some cases because the impacts of individual biases are largely cancelled out. But surveys of expected business trends turn out to be most accurate in stable business environments when simple extrapolation turns out to be the best forecasting tool. It’s less reliable at turning points because people tend to extrapolate from current conditions. Nonetheless, I think it’s always good to examine surveys of expected business conditions, if only because they accurately summarize current attitudes.