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The steady march of technology’s ability to handle ever more complicated tasks has been a constant since the beginning of the information age in the 1950s. Initially, computers in business were used to automate simple clerical functions, but as systems have become more capable, information technology has been able to substitute for increasingly higher levels of human skill and experience. A turning point of sorts was reached in the 1990s when ERP, business intelligence and business process automation software reduced the need for middle managers. Increasingly, organizations used software to coordinate activities as well as communicate results and requirements up and down the organizational chart. Both were once the exclusive role of the middle manager. Consequently, almost every for-profit organization eliminated management layers so that today corporate structures are flatter than they once were. Technology automation also eliminated the need for administrative staff to perform routine reporting and analysis. Meanwhile, over the course of the 1990s, the cost of running the finance department measured as a percentage of sales was cut almost in half as a result of eliminating staff and because automation enabled companies to scale without adding headcount. During the last recession, companies in North America and Europe once again made deep reductions to their administrative staffs, relying on information technology to pick up the slack.

Given this history, the best career choice that an individual can make today is to stay ahead of the trend. Information technologies, especially cognitive computing, will continue to eliminate relatively high-paying white-collar jobs in corporate life, especially in the finance and accounting function. Executives and others working in tax departments in particular should recognize that a major shift is under way in their field. Automation will transform their work over the next five years, driving a fundamental change in what they do. To succeed (or even survive), they will have to embrace automation.

Spreadsheets are a major impediment to making the tax function more strategic for a company and more remunerative for those working in the department, as I have noted. Our Office of Finance benchmark researchvr_Office_of_Finance_15_tax_depts_and_spreadsheets finds that half (52%) of tax departments use spreadsheets only for tax provisioning and another 38 percent mainly use spreadsheets; just one in 10 utilize a third-party tax application. One well-known issue with spreadsheets is that they are error-prone – not a risk that tax professionals can be comfortable with. To be certain that the tax provision and other tax-related calculations are correct, individuals must double- and even triple-check the numbers. This overlaps with a second major issue with spreadsheets: They are time-consuming. Our spreadsheet research finds that those working heavily with spreadsheets on average spend 18 hours a month (equivalent to more than two full workdays) just maintaining their most important spreadsheet. Spreadsheets as so time-consuming that they prevent individuals from doing more valuable work, in this case tax analysis and planning.

Another related issue is that using spreadsheets for the tax function diminishes visibility into a company’s tax provision in at least two respects. First, using them takes so long that executives get to the numbers late in the financial close process. This matters because of the impact that tax expense has on a company’s profits. Second, spreadsheets are black boxes: That is, they are difficult to control, and it’s difficult for anyone other than the spreadsheet’s owner to understand their construction. Often, assumptions are buried in formulas and therefore hard to uncover. If these formulas are inconsistent or wrong, it’s not easy to spot them. (This was an important factor behind J.P. Morgan’s multibillion dollar trading loss, which I discussed.) When a spreadsheet is constructed with a given formula repeated in multiple cells, each of these must be updated when circumstances change, and it’s difficult to be certain that all of the changes have been made. Even with advanced techniques designed to make updates consistent, it’s hard to be sure that some cell wasn’t overwritten with another number.

Some people who work intensively with spreadsheets still view them as a form of job security because of their opacity. They think they’re indispensable because they are the only one who understands how their spreadsheet works. This is one of several reasons why their use persists in functions where they constitute more of a problem than a solution. However, these spreadsheet jockeys should recognize that their tools’ inherent inefficiency, lack of visibility and proneness to error make them vulnerable to being replaced by better technology. The real value of tax professionals is not their ability to overcome spreadsheet limitations. It’s in their training in understanding income taxes. Once freed from the drudgery of performing computations, massaging data and checking (two or three times) for errors, tax professionals can turn their attention to performing analytical work aimed at optimizing a company’s tax spend – and thus ensuring their value as employees.

Midsize and larger organizations, especially those that operate in multiple direct (income) tax jurisdictions and that have an even moderately complex legal entity structure, must use dedicated software to automate their income tax provision and analysis functions. They must manage their tax-sensitized data using what I call a tax data warehouse of record. Tax departments must be able to tightly control the end-to-end process of taking numbers from source systems, constructing tax financial statements, calculating taxes owed and keeping track of cumulative amounts and other balance sheet items related to taxes. Transparency is the natural result of a having controlled process that uses a unified set of all relevant tax data. An authoritative data set makes tax department operations more efficient. As noted, reducing the time and effort to execute the tax department’s core functions frees up the time of tax professionals for more useful analysis. Having tax data and tax calculations that are immediately traceable, reproducible and permanently accessible provides company executives with greater certainty and reduces the risk of noncompliance and the attendant costs and reputation issues. Having an accurate and consistent tax data warehouse of record enables corporations and their tax departments to better execute tax planning, provisioning and compliance. Using dedicated software today rather than relying on spreadsheets helps the tax department, and those working in it, increase their strategic value today so they won’t be obsolete tomorrow.

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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