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The imperative to transform the finance department to function in a more strategic, forward-looking and action-oriented fashion has been a consistent theme of practitioners, consultants and business journalists for two decades. In all that time, however, most finance and accounting departments have not changed much. In our benchmark research on the Office of Finance, nine out of 10 participants said that it’s important or very important for finance departments tovr_Office_of_Finance_05_finance_should_take_strategic_roletake a strategic role in running their company. The research also shows a significant gap between this objective and how well most departments perform. A large majority (83%) said they perform the core finance functions of accounting, fiscal control, transaction management, financial reporting and internal auditing, but only 41 percent said they play an active role in their company’s management. Even fewer (25%) have implemented a high degree of automation in their core finance functions and actively promote process and analytical excellence.

Despite these findings, we believe that today finance transformation is both necessary and achievable. Practical, affordable technology is available to enhance productivity in order to de-emphasize the department’s “bean counting” role and promote its ability to enhance the performance of the entire corporation. Technology enables Finance to be more proactive and more strategic in providing analyses and methods that enhance its capabilities and improve the performance of the entire corporation. Of course, technology by itself will not transform a finance organization, but most of the longstanding issues that it must address to improve performance can be fixed using information technology to address interrelated people, process and data issues in a comprehensive fashion.

Our Office of Finance research agenda for 2016 emphasizes three broad technology-related themes serving the goal of finance transformation:

  • Applying a continuous accounting approach to promote greater departmental efficiency and effectiveness
  • Adopting technology that promotes action-oriented continuous planning, using rapid, short planning cycles to promote agility, coordination and accountability
  • Using software and other information technologies to achieve continuous optimization to promote ongoing organizational alignment across departments and business units.

Continuous Accounting

We introduced the term “continuous accounting” last year to identify the three areas where our research consistently finds tactical roadblocks to achieving a more strategic finance organization. By focusing on these three areas, finance executives can achieve steady gains in effectiveness.

vr_Office_of_Finance_11_automation_speeds_the_financial_closeThe first area concerns how the organization uses technology and manages information. To enhance effectiveness, finance departments must use software to automate all mechanical, repetitive accounting processes in a continuous, end-to-end fashion. Automation improves efficiency by eliminating the need to have people perform repetitive tasks. For example, we find that most (71%) companies that automate substantially all of their financial close complete it within six business days of the end of the quarter, compared to 43 percent that automate some of the process and just 23 percent that have automated little or none of it. Using software enables the department to manage the flow of data through its processes in a continuous, end-to-end fashion. This ensures data integrity, which in turn eliminates the need for checks and reconciliations that can consume time that could be spent more productively. Data integrity is undermined every time data is re-entered manually or when a spreadsheet is used in a process: for example, when data from one system is manually transferred to another; when the same information is entered twice in two different systems; or when a spreadsheet is used to perform an allocation or a set of calculations.

The second aspect of continuous accounting involves optimizing scheduling of tasks. Continuous accounting incorporates a process management approach that, wherever possible, distributes workloads continuously to flatten spikes of activities, whether in the month, quarter, half-year or year. This approach eliminates bottlenecks and optimizes when tasks are executed. It reduces stress on the department and can eliminate the need for temporary help and its associated expense. Much of the traditional accounting cycle and related departmental practices are artifacts of paper-based bookkeeping systems. These methods dictated the need to wait until the end the month, quarter or year to take accountants off line to perform aggregations, allocations, checks and reconciliations; that rhythm represented the best trade-off of efficiency and control in such antiquated approaches. Today’s systems offer far more flexibility that enables departments to spread workloads more evenly over time and complete them more expeditiously.

The third aspect of continuous accounting is the need to instill continuous improvement in the departmental culture. This steps counters tendency of any organization – but especially finance – to embrace a “we’ve always done it this way” mindset that resists needed change.  Continuous improvement acts as a mission statement that sets increasingly rigorous objectives. To achieve those objectives it’s necessary to have regular reviews of performance toward those objectives and make addressing shortcomings a priority. For departmental executives, communicating the need for continuous improvement is an essential element to achieving finance transformation.

Used as an organizing principle for the department, continuous accounting frees up time and therefore the resources needed to implement changes that result in performance improvements in a sustained and steady fashion. Adopting a continuous accounting approach enables CFOs and finance executives to reduce the amount of time spent “fighting fires,” many of which are the result of not using capable technology.

The Transformation of ERP

In most companies, ERP systems are the backbone of the accounting function, and this software category will continue to be an important focus of our research in 2016. The ERP software 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 enable a major shift in the design of these systems – and it amounts to the most significant change since the introduction of client/server technology in the 1990s. Vendors are seizing on technologies such as in-memory computing, improving the user interface and user experience, adding more in-context collaboration and extending the use of mobility to differentiate their applications from rivals. Those with software-as-a-service (SaaS) subscription offerings are investing to make their software suitable for a broader variety of users in multitenant clouds. These and other topics will be addressed in the results of our next-generation ERP benchmark research, which we will release in 2016.

We’ll also continue to look at the application of financial vr_NG_Finance_Analytics_01_finance_analytics_users_dissatisfiedperformance management (FPM) to improve results. Ventana Research defines FPM as the process of addressing the often overlapping issues that affect how well finance organizations support the activities and strategic objectives of their companies and manage their own operations. FPM deals with the full cycle of the finance department’s functions, including corporate and strategic finance, planning, budgeting, forecasting, analysis, closing reporting and statutory filing. In each of these areas, using inappropriate technology has a negative impact on how well a company performs. We will continue to highlight the importance of improving the creation and use of analytics. For example, our Office of Finance research finds that on average, companies that are heavy users of spreadsheets in their closing process take longer to close their books than those that limit them or don’t use them at all. Elsewhere, our next-generation finance analytics research finds a high degree of dissatisfaction with finance analytics in the company: 58 percent said that significant or major changes are necessary while just 7 percent stated no improvements are necessary. The research also shows that heavy use of spreadsheets for all forms of analysis is at the heart of this dissatisfaction. In 2016 also we’ll publish the next installment of our Financial Performance Management Value Index, which assesses vendors and products in this software market.

Financial Performance Management

As noted above, we recommend that finance organizations that want to play a more strategic role in the management of their corporation should adopt a continuous planning methodology for their financial planning and analysis function. A continuous planning approach uses frequent, short planning cycles to promote agility, coordination and accountability in operations. It includes establishing an ongoing dialogue among finance and line-of-business managers and executives to track current conditions as well as changes in objectives and priorities driven by markets and the business climate. To manage planning in such a comprehensive way requires dedicated software that enables members of the FP&A organization to focus more of their time on analysis and modeling. Technology also enhances the quality of plans, forecasts and budgets. In particular, in-memory computing makes it feasible to rapidly process computation of even complex models with large data sets. Consequently, it can expand the range of planning, budgeting, forecasting and reviewing performed in rapid cycles. It enables organizations to run more simulations to understand trade-offs and the consequences of specific events, as well as change the focus of reviews from what just happened to what to do next. For these reasons, in-memory computing also may encourage more companies to replace spreadsheets (which have practical limits to the size, complexity and adaptability of the models that are created in them) with dedicated planning applications that can harness the power of in-memory processing.

Sales and Operations Planning for Finance

Companies that deal in physical goods that are manufactured or sourced and then sold direct or into distribution channels often benefit from using sales and operations planning (S&OP). The process of orchestrating the flow of parts and materials through the production process to meet expected customer demand involves many functional units, each of which make plans, as well as the finance organization, which assesses the financial impact. Sales and operations planning is a discipline aimed at aligning and optimizing the plans of several business units. There are sales plans, product plans, demand plans and supply chain plans. Within a corporation, the performance of each of the functional units that produce these plans is assessed using different, often conflicting metrics. Information technology enables corporations to manage their inventories more skillfully and  minimize their working capital investment while maximizing their ability to fulfill demand. S&OP is designed to align a company strategically so that it can execute tactically in more effective fashion. The ultimate goal is to determine how best to manage company resources, especially inventory and cash, to be able to profitably satisfy customer demand with the lowest incidence of stock-outs. The output of an S&OP group is a SKU-level demand forecast that is used to create a detailed inventory plan. This quantitative plan is a major driver of a process that guides the purchasing an optimal amount of inventory (the one that best balances desired fulfillment rates while minimizing the investment in inventory) from the best set of suppliers (balancing a range of considerations including goods availability, pricing, discounts, economic order quantities and supply chain constraints). To enhance their strategic value, the financial planning and analysis group should play an integral role in the sales and operations planning process.

Advanced Analytics

We also will monitor the ongoing development of advanced analytics for business users. Using technology to make better use of data through advanced analytics can provide companies with breakthrough results. Often that’s because using capable information technology can provide insights and visibility that are unavailable by eyeballing data or using spreadsheets. Advanced techniques such as predictive analytics provide companies with more nuanced forecasts as well as the ability to spot deviations from expected results and thus address problems or seize opportunities sooner. For example, price and revenue optimization is rapidly developing applied analytic techniques that enable businesses to achieve higher profitability, increased sales or some combination. Software that helps manage pricing and profitability is spreading from hospitality, transportation, retailing to consumer financial services and other areas, especially business-to-business verticals. Used properly, this type of software enables a company to tailor its control of individual decisions regarding pricing, discounts and other terms to achieve the results best suited to its strategy. It can continuously make adjustments consistent with longer-term objectives in response to market conditions. Price and revenue optimization is impossible to achieve without using software and analytics that can deal with the huge volumes of today’s data.

Tools for Promoting Productivity and Effectiveness

There are a range of specialized software tools also can promote a more effective finance function, and executives must focus on acquiring and using those that enable the department to take a more active role in improving performance in the company’s operations. Finance has the necessary analytical talent and is positioned to be a neutral party in balancing the requirements of different functional groups or where issues cross business units or geographic boundaries.

The Office of Finance practice will continue to focus on software categories that can improve corporate efficiency, increase visibility and enhance agility. Our main objective is to enable finance organizations to be more effective by eliminating the root causes of time-wasting, low-value activities. For example, more companies are adopting a subscription or recurring revenue business model. This model isn’t always handled well by ERP systems, especially if a company is selling something more complex than simple subscriptions. These companies need to automate their quote-to-cash process from end to end, with the objective of controlling the flow of data, from configuring, quoting and pricing all the way to billing. Using this type of automation to ensure data quality enables companies to achieve two usually conflicting goals: substantially reducing finance and accounting department workloads while still allowing sales and marketing to offer customers flexibility in how they buy their services or products. Expense management is another classic time-waster poorly executed in most companies. Automation not only can save the finance department time, it also can reduce the “administrivia” workload for employees who have to submit expense reports. The cost of these expense management systems is typically less than one full-time equivalent employee, but it can save a multiple of that amount of time.

Managing Taxes More Intelligently

Taxes are one of the biggest expenses corporations face. There are two basic types of taxes: direct or income taxes and indirect taxes, which include sales and use tax and value taxes. Managing direct tax provision and analysis is still in the dark ages in most companies. We recommend to corporations that operate in multiple countries and that have even a moderately complex legal entity structure that they consider tax provision software that is supported by what we call a tax data warehouse of record. Taxes operate in a parallel universe from business management. Our research confirms that most companies use spreadsheets to manage their tax provision and analysis: Half (52%) rely solely on spreadsheets, and another 38 percent mainly use them. Several issues arise in using spreadsheets in the tax function: They are time-consuming, provide limited visibility to senior executives and pose unnecessary risks through errors. International companies are facing increasing scrutiny of their tax positions and can benefit from using dedicated software to manage their direct taxes more intelligently. Among the indirect taxes, in the United States, sales taxes are notoriously complex to administer. We recommend that any company with 100 or more employees doing business in more than a handful of states adopt a sales tax service for the same reason that they use a payroll service: It’s not worth the time, hassle and potential liability to do it in house.

The Impact of Changes to Accounting Rules

The Office of Finance practice at Ventana invests a great deal of time in researching software applications and related information technology. Uniquely, though, we also read accounting bulletins. The world of accounting is undergoing a substantial change now and over the next three years as a result of the adoption of accounting rule changes for revenue recognition and, to a lesser extent, lease accounting. The impact of revenue recognition changes will be profound because it is built on a fundamentally different conceptual framework than classical accounting. The upshot of this framework is that systems must account for revenues and expenses in a parallel fashion rather than in a balancing one. This type of approach would have been extremely problematic in paper-based systems. It’s feasible only because of the nearly universal use of computer-based accounting systems. Almost all ERP vendors are gearing up to support the new accounting rules, but it’s important for companies to plan ahead to make the transition as smooth as possible. And it’s important to be sure that sales contracts and documentation are designed to make accounting for them as efficient as possible.

Technology’s Role in the Office of Finance

One major reason for investing in technology is to help senior executives achieve better results by supporting more effective business management techniques. For example, our benchmark research on long-range planning demonstrates that better management of technology and information can improve alignment between strategy and execution. And when it comes to cloud computing, far from simply being a technology concern, cloud computing enables corporations to cut costs and gain access to more sophisticated technology than they could feasibly support in an on-premises deployment. Using technology can boost performance. The improper use of spreadsheets as seen in our research continues be an unseen killer of corporate productivity because these tools have inherent defects that significantly reduce users’ efficiency. Relying on spreadsheets makes it impossible to find the time to improve performance. Increasingly companies have inexpensive options that are easier to use and enable more advanced, reliable modeling, analysis and reporting.

Information technology is an essential element of business management and promotes a discipline of continuous optimization, a term we use to emphasize the importance of achieving better alignment of organizations to a company’s strategy. Yet many senior executives and managers have too narrow and too limited an understanding of IT’s full potential, much as those managing corporate information technology usually don’t appreciate business issues and how IT can address them. The business/IT divide is a barrier that prevents many companies from achieving their performance potential. The divide need not exist. Business executives don’t have to be able to write Java code or master the intricacies of an ERP or sales compensation application. However, they should master the basics of IT just as they must understand the fundamentals of corporate finance, the production process and – at least at a high level – the technologies that support that process. Our research practice addresses the significant business issues where technology plays an important role in addressing those issues. Because business is dynamic, optimization must be continuous to adapt to changes in markets, the competitive landscape and customer demands. Continuous optimization requires companies to operate in faster cycles and have real-time visibility to improve responsiveness and agility. Information technology can remove the barriers that prevent them from achieving more optimal results.

Regards,

Robert Kugel – SVP Research

Workday Financial Management (which belongs in the broader ERP software category) appears to be gaining traction in the market, having matured sufficiently to be attractive to a large audience of buyers. It was built from the ground up as a cloud application. While that gives it the advantage of a fresh approach to structuring its data and process models for the cloud, the product has had to catch up to its rivals in functionality. The company’s ERP offering has matured considerably over the past three years and now is better positioned to grow its installed base. Workday recently added Aon, the insurance and professional services company, to its customer list (becoming its largest customer to date) and reported that its annual contract value (ACV – the annualized aggregate revenue value of all subscription contracts as of the end of a quarter) has doubled since the second quarter of this year, albeit from a low base. This is an important milestone because for years the company’s growth has come from the human capital management (HCM) portion of the business, not financials. Workday has around 160 customers for its financials (more than 90 of which are live) compared to more than 1,000 customers for HCM.

The latest release of Financial Management, Workday 25, enhances its analytics and dashboards, including an audit dashboard with 14 prebuilt reports that can, for example, flag issues in separation of duties. The company’s Composite Reporting, introduced last year, enables users to automate the assembly of highly configurable reports that can combine operational and financial data to provide a more complete picture of a company’s performance without having to use a separate business intelligence system. These multidimensional reports also enable users to drill down and around to underlying information – the why behind the what. The ability to quickly get to authoritative numbers that describe the underlying causes of issues and opportunities does away with delays in people “getting back to you with that information” and enables faster response to changing conditions. These reports can be viewed on mobile devices to enable more interactive dialogues about a company’s condition and performance.

Workday 25 also adds an inventory module to address the need of many services companies to manage their indirect inventories (materials that are not incorporated in final products such as computers or facilities maintenance items) on an end-to-end basis (which speeds their completion and ensures data integrity). It also has improved its global configuration engine to make the product more useful to entities around the world (including subsidiaries operating in jurisdictions in a range of countries). And now the mobile expenses app finally includes direct posting from captured receipts rather than requiring manual entry.

Reflecting the maturing of its Financial Management offering, management will assign all of its salespeople quotas for this product in the upcoming fiscal year. Achieving a large, sustainable presence in the ERP segment is essential to Workday’s long-term success. Longer-term prospects for the financial software are best understood in the context of the evolving ERP software market and the company’s strategy of positioning its offerings as easier to own and use than others.

The outlook for the multitenant software-as-a-service (SaaS) ERP market – which will impact Workday – is simultaneously encouraging and vr_Office_of_Finance_20_finance_prefers_on-premiseschallenging. Revenue and user growth in the ERP segment of enterprise software (both in the cloud and on-premises) is coming almost exclusively from cloud adoption, mostly in a multitenant format. At the same time, however, our Office of Finance benchmark research finds that nearly half (46%) of participants still say their company prefers to deploy its ERP systems on-premises. (By analogy, on-premises ERP may be a dinosaur, but we’re only at the start of the Cretaceous period and extinction is a long way off.) That insistence apart, the percentage of on-premises ERP has been declining and likely will continue to decline over the next five years. One reason is that resistance to the cloud for security reasons in this category is waning. An increasing number of companies are realizing that their on-premises servers are likely to be more vulnerable than those operated by a cloud ERP provider. For many companies, a cloud deployment can provide higher quality of service than on-premises (because of better hardware and the greater competence in maintaining the software compared to one’s internal IT staff), and its total cost of ownership can be lower.

However, anyone looking for a replay of the rapid-growth, 1990s-era ERP client/server applications market will be disappointed. Multitenant cloud software doesn’t have the substantial advantages that vr_Office_of_Finance_01_ERP_replacementclient/server had over the mainframe applications of that era nor the Y2K rationale for immediate replacement. Demand for financial management systems in midsize and larger corporations is almost always driven by the need to replace an existing one. Our research also shows that replacement has slowed over the past decade. Companies are changing ERP less frequently than a decade earlier, on average every 6.4 years as opposed to 5.1 years in 2005.

Another significant challenge for multitenant SaaS ERP vendors like Workday is that their market potential is actually constrained by a key benefit of multitenancy. Because buyers configure the features and capabilities rather than customizing the core code base, implementations can be done faster and cost less. Note, though, that ERP deployments by large, complex organizations are still difficult. For example, Aon expects to spend 14 to 15 months implementing Workday Financial Management. A related benefit is that since all customers are running the same code base, when the software vendor issues new releases or modifications to the software, those changes are quickly made to the code that everyone is running, either immediately or after a grace period. This requires far less work for the customer than on-premises versions and patches. Moreover, the changes are implemented accurately and securely. The trade-off, however, is that the core software cannot be customized. If the cloud software offering cannot be configured to meet the customer’s feature, functionality and process requirements, and if a potential customer cannot adapt its operations to these limitations, it isn’t a feasible solution. Unlike with on-premises software, there is no option to customize multitenant SaaS offerings to the needs of a single customer unless the vendor is willing to make changes to its code base within timing acceptable to the customer. So Workday and other cloud software vendors are finding it necessary to target specific types of businesses in order to focus development efforts on specific business needs. In this company’s case, for Financial Management these verticals are chiefly financial services, business services, software and Internet services, higher education, government and nonprofits.

On the other hand, some software categories lend themselves to a multitenant SaaS environment because the needs of most companies are easily accommodated through configuration. Sales automation, travel and entertainment and human capital management are in this category and consequently have benefited from rapid adoption.

Not so with ERP, which is less amenable to the SaaS multitenant model because of the inherent complexity of the business processes the systems manage and the difficulty in creating SaaS offerings that are sufficiently configurable – as I’ve written previously. This is one important reason why on-premises remains an attractive option; even though sales in this segment are not growing, they are still a large percentage of the market. ERP systems must be able to handle the specific needs of users, which can differ considerably from one industry to another and even between specific microverticals. A large company’s ERP requirements might span multiple business units in multiple industries in multiple locations and jurisdictions. Many manufacturing and product-centric businesses have found multitenant offerings impractical because their requirements cannot be met by available software. Workday is not targeting these types of companies.

As resistance to cloud-based ERP wanes, Workday will benefit as ERP software buyers evolve from a nearly complete focus on features and functions to a more nuanced set of requirements that include ease of use, reliability and security. The maturing of the category and advancing technology are behind this shift. Total cost of ownership and the ability to meet business requirements are becoming gating factors (packages that don’t fit the basic needs don’t make it to the short list), but increasingly vendors will have to differentiate their ERP software based on the user experience and – for cloud services – the ability to minimize disruptions and eliminate vulnerabilities to disasters and hackers. From the start, Workday’s product strategy has been to provide customers with a user experience that addresses many of the issues that business users have had to date with ERP systems. Its focus on providing a practical, pleasing and productive working environment gives it an edge in successfully addressing the needs of companies that do not have complex operating requirements. For example, Composite Reporting makes it easier (compared to many on-premises systems) for companies to get actionable information out of the software by combining analytical capabilities with transaction management. Technology limitations made this extremely difficult until recently and forced companies to invest in and maintain business intelligence and reporting systems. (This capability is not unique to Workday and is likely to become a baseline requirement for ERP systems within the next several years.) Another objective is to simplify the process of creating dashboards and reports in order to provide individuals with the information they need and to do so with the shortest possible time lag. Having a rich set of employee data in the same data structure as the financials, companies that are in people-centric businesses can find it easier to create performance metrics to improve management effectiveness.

Workday’s Planning application (due for release in 2016) also illustrates its approach to using technology to provide a better user experience. Does the world need another planning application? At first glance, not really. The category at the enterprise level is decades old. Perhaps because of that, our 2015 Business Planning Value Index confirms that the category is a commodity. Although there are differences among the packages offered by vendors that can drive preference, all that we evaluated rated highly in handling this task. Their plusses and minuses netted out to a tight range of scores. Moreover, at this stage in its evolution Planning lacks many refinements that are useful for companies operating in dynamic business environments. But unlike other planning applications, Workday Planning is not designed to address complex planning requirements in dynamic business conditions. It is designed to address the needs of organizations that must manage to fixed budgets. This group includes higher education (especially universities with limited commercial or for-profit activities), government and nonprofits – key targeted vertical industries for Workday. Unlike business enterprises that operate (largely) from a common pot, departments and other units are allocated specific amounts at the start of the fiscal year and are not permitted to exceed that amount. Properly configured, Workday Planning can alert department heads, controllers and others when there is a risk that a limit will be exceeded at the point where a purchase order is entered into the system and before it’s approved. In some cases, predictive analytics can be used to generate alerts if it looks as if specific funds accounts are in danger of being overspent. In these types of organizations, the focus on simplicity of use and native integration with the general ledger should help attract buyers since it is often the best way to ensure high participation and compliance.

Very soon “the cloud” will cease to be a point of discussion. It’s likely that within a decade software as a service will be the favored means of consuming ERP functionality, either in a multitenant or a hosted single-tenant format. Shortly, software vendors, industry analysts and journalists will have to focus on the more substantive qualities of specific business applications. In this era, total cost of ownership, system performance and security will be pass/fail gating factors in selection. For vendors offering multitenant services, the ability to configure their offering to suit the operating needs of the company (highly objective) and the user experience (highly subjective) will be the key determinants driving preference. Workday has succeeded in creating a brand image that emphasizes a useful, simpler user experience. Its strength in HCM provides an advantage in selling Financial Management into these companies. However, it also will be facing stiff competition from other vendors (especially Infor and Oracle) in its targeted verticals. Financial Management has advanced significantly over the past several years. To achieve a significant position in the ERP market, it will be necessary to sustain a rapid pace of product development to expand its scope of configurability and keep pace with a rapidly evolving set of user experience norms.

Companies that find they need to replace their ERP system should assess whether the available multitenant offerings can address their requirements. To do this, they need to sort out requirements that are essential to running their business from those that can be adapted to the capabilities of the individual offerings. I recommend that organizations on Workday’s list of targeted verticals investigate whether its Financial Management application will fit their needs.

Regards,

Robert Kugel – SVP Research

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