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The ERP 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 are enabling a major shift in the design of ERP systems – the most significant change since the introduction of client/server systems in the 1990s. Some ERP software vendors increasingly are utilizing in-memory computing, mobility, in-context collaboration and user interface design to differentiate their applications from rivals and potentially accelerate replacement of existing systems (as I noted in an earlier analyst perspective). ERP vendors with software-as-a-service (SaaS) subscription offerings are investing to make their software suitable for a broader variety of users in multitenant clouds. And some vendors will be able to develop lower-cost business systems to broaden the appeal of single-tenant hosted cloud deployments for companies that cannot adapt their businesses to share with other tenants or prefer not to.
Vendors also will be using analytical capabilities to broaden the scope of their ERP offerings – especially in financial performance management (FPM) – to complement the core functions of transaction processing and accounting. They have three important objectives in adding analytical capabilities. One is to increase revenue from customers; the second is to differentiate their offering in a highly commoditized market. The third is to increase the “stickiness” of the software (that is, to make it less attractive for a customer to switch to a competitor’s software) by increasing the number of process and user touch points in customer organizations.
An important value proposition behind the addition of analytical capabilities to ERP is to make it easier for companies to obtain useful information directly from their system. Our Office of Finance benchmark research finds that companies are split on this issue: Half (50%) said that it’s easy or very easy to get information from their ERP system, but nearly as many (48%) said it isn’t. One benefit of having analytics built into a transaction system such as ERP is that it automates and therefore often speeds up the transformation of data into useful, digestible information.Our next-generation finance analytics research finds that nearly all (86%) of companies saying that they have up-to-date data are able to respond to changes in business conditions in a coordinated fashion, compared to 38 percent in which most data is current and just 19 percent of those whose data is less than up-to-date.
The FPM category includes closing and reconciliation, statutory consolidation, planning and budgeting, and financial and management reporting as well as external financial reporting. In the past vendors of software other than ERP have offered these capabilities because constraints in database technologies prevented consolidating them. In some cases, an ERP vendor acquired an FPM vendor but still sold the product as a stand-alone. The addition of any of these financial analytical capabilities increases the value of the ERP system to the owner.
Some ERP vendors are demonstrating or at least talking about providing the ability to handle intraperiod “soft closes” (using a degree of simplification to quickly produce nonstatutory financial reports) to enhance visibility and control. (History buffs may recall that Coda Software, the first ERP system to be built on a multidimensional database, offered this in the 1990s.) Some are taking steps to facilitate the ongoing consolidation of accounting information from all of a company’s systems into a central system. This permits corporate-wide intraperiod soft closes.
Providing analytical capabilities within an ERP offering also can facilitate the fusion of financial and operational data captured by the ERP system without a data warehouse. It can speed up reporting on this information and eliminate the need to maintain connections from the ERP system to a data warehouse to be able to perform analysis and reporting. Operational data may come from the human resources management, manufacturing, distribution, inventories and project components (to name a handful) that can be part of an ERP suite. The combination can provide a far richer set of performance management measurement capabilities than financial or operational data alone. Purely financial performance metrics are essential but insufficient to manage a business. For example, measuring unit-based inputs to outputs (such as direct labor hours per widget produced) enables a company to track its efficiency. Budgeting is another analytical application that lends itself to becoming an ERP extension application because actuals and budgeted amounts are linked in a single system.
The addition of FPM and other analytical capabilities to ERP systems is creating an overlap between these two categories, but the two aren’t on a collision course yet. Most FPM vendors offer suites with exceptionally rich functionality that will be time-consuming and expensive for an ERP vendor to replicate to a significant degree. Rather than replacing software that can execute specific tasks or provide rich functionality, the incorporation of analytics will simplify how companies perform the basics. In this sense, it’s more of a positive for the ERP vendors that are able to harness technology to provide easy-to-use analytical features and capabilities than a negative for FPM vendors. And it will likely be an important source of differentiation for ERP software vendors in the future. We advise finance professionals and others who manage these systems to keep an eye on developments going forward.
Robert Kugel – SVP Research
Tagetik provides financial performance management software. One particularly useful aspect of its suite is the Collaborative Disclosure Management (CDM). CDM addresses an important need in finance departments, which routinely generate highly formatted documents that combine words and numbers. Often these documents are assembled by contributors outside of the finance department; human resources, facilities, legal and corporate groups are the most common. The data used in these reports almost always come from multiple sources – not just enterprise systems such as ERP and financial consolidation software but also individual spreadsheets and databases that collect and store nonfinancial data (such as information about leased facilities, executive compensation, fixed assets, acquisitions and corporate actions). Until recently, these reports were almost always cobbled together manually – a painstaking process made even more time-consuming by the need to double-check the documents for accuracy and consistency. The adoption of a more automated approach was driven by the requirement imposed several years ago by United States Securities and Exchange Commission (SEC) that companies tag their required periodic disclosure filings using eXtensible Business Reporting Language (XBRL), which I have written about. This mandate created a tipping point in the workload, making the manual approach infeasible for a large number of companies and motivating them to adopt tools to automate the process. Although disclosure filings were the initial impetus to acquire collaborative disclosure management software, companies have found it useful for generating a range of formatted periodic reports that combine text and data, including board books (internal documents for senior executives and members of the board of directors), highly formatted periodic internal reports and filings with nonfinancial regulators or lien holders.
Tagetik’s Collaborative Disclosure Management automates the document creation process, eliminating many repetitive, mechanical functions and reducing the time needed to administer the process and ensure accuracy. Automation can shorten finance processes significantly. For example, our benchmark research on trends in developing the fast, clean close finds that companies that use little or no automation in their accounting close take almost twice as long to complete the process as those that fully automate it (9.1 days vs. 5.7 days). Manually assembling the narrative text from perhaps dozens of contributors and combining it with data used in tables and elsewhere in the document is a time-consuming chore. Regulatory filings are legal documents that must be completely accurate and conform to mandated presentation styles. They require careful review to ensure accuracy and completeness. Complicating this effort recently are increasingly stringent deadlines, especially in the U.S. Anyone who has been a party to these efforts knows that there can be frequent changes in the narratives and presentation of the numbers as they are reviewed by different parties, and those responsible need to ensure that any change to a number that occurs is automatically reflected everywhere that amount is cited in the document; to use the depreciation and amortization figure as an example, that would include the statement of cash flows, income statement, the text of the management discussion and analysis and the text or tables of one or more footnotes. Moreover, automated systems afford greater control over the data used. They make it possible to answer the common question of where a number came from quickly and with complete assurance. While inaccuracies in other types of financial documents may not have legal consequences, mistakes can have reputational or financial consequences.
Those managing the process also spend a great deal of energy simply checking the document to ensure that the various sections include the latest wording, that the numbers are consistent in the tables and text, that amounts have been rounded properly (which can be really complicated) and that the right people have signed off on every part of the filing. Automation obviates the need for much of these tasks. Tagetik’s CDM workflow-enables the process, so handoffs are automated, participants get alerts if they haven’t completed their steps in timely fashion, and administrators can keep track of where everyone is in the process. Workflow also promotes consistent execution of the process, and the workflows can be easily modified as needed.
In designing Collaborative Disclosure Management, Tagetik took advantage of users’ widespread familiarity with Microsoft Excel and Word to reduce the amount of training required to use its product. CDM’s workflow design makes it relatively easy for business users to define and modify business process automation. Typically, individuals or small groups work on different sections of the document. CDM enables multiple contributors from finance, accounting, legal, corporate and other functions to work with their part of the document without being concerned about other contributors’ versions. Work can proceed smoothly, and those administering the process can see at any time which components have been completed, are in progress or have not even started. Tagetik’s software can cut the time required to prepare any periodic document, since once a company has configured its system to create what is in effect a template, it’s relatively easy to generate these documents on monthly, quarterly or annual bases. The numbers relevant to the current period are updated from the specified controlled sources, and references to tabular data within the text are automatically adjusted to tie back to these new figures. Often a large percentage of the narrative text is boilerplate that either must not be updated or requires only limited editing to reflect new information. Starting with the previous edition of the report, contributors can quickly mark up a revised version, and reviewers can focus only on what has changed. Other important automation features are data validation, which reduces errors and revisions, and the system’s ability to round numbers using the appropriate statutory methodology.
CDM also handles XBRL tagging, which is essential for all SEC documents and necessary for an increasing number of regulatory filings around the world. The software specifically handles tagging for the two main European prudential regulatory filings for banks and other credit extending institutions, COREP (Common Reporting related to capital) and FINREP (Financial Reporting performed in a consistent fashion across multiple countries).
Companies can gain several key benefits by automating the production of their periodic regulatory filings and internal or external financial reports that combine text and data. One of the most important is time. Automation can substantially reduce the time that highly trained and well-compensated people spend on mechanical tasks (freeing them to do more productive things), and the process can be completed sooner. Having the basic work completed sooner gives senior executives and outside directors more time to review the document before it must be filed or made public. Time that can be devoted to considering how best to polish the narratives or if necessary lengthen upstream deadlines to handle last-minute developments and consider options for how best to treat accounting events. Automation can also reduce the chance of errors, since the numbers tie directly back to the source systems and (if properly configured) ensure that references in the narratives and footnotes to items in tables and the numbers in those table agree completely. Restatements of financial reports caused by errors are relatively rare but when they occur are exceptionally costly for public companies’ reputations.
Disclosure management systems are an essential component for any financial performance management (FPM) system. All midsize and larger corporations should be using this software to automate the production of their periodic mandated filings and other documents that combine text and data. They will find that they are useful in cutting the time and effort required to produce these documents, provide senior executives and directors more time to review and craft the final versions, and reduce the chance of errors in the process. Companies that are using older FPM software should investigate replacing it with an FPM suite to gain the additional capabilities – including disclosure management – that newer suites offer. Tagetik’s should be among the financial systems evaluated for office of finance.
Robert Kugel – SVP Research