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We recently issued our 2012 Value Index on Financial Performance Management (FPM). Ventana Research defines FPM as the process of addressing the often overlapping people, process, information and technology issues that affect how well finance organizations operate and support the activities of the rest of their organization. FPM deals with the full cycle of finance department activities, which includes planning and budgeting, analysis, assessment and review, closing and consolidation, internal financial reporting and external financial reporting, as well as the underlying information technology systems that support them. We construct the Index through a detailed evaluation of each product’s suitability to task in five categories, as well as the effectiveness of the vendor’s support for the buying process and customer assurance. The resulting index gauges the value offered by a vendor and its products.
Financial performance management is a necessity for running an organization efficiently and effectively. Corporations, small businesses, government entities and nonprofits all must be able to set financial objectives, plan and budget, and review and evaluate their financial performance in a timely fashion to control their fiscal well-being and achieve their strategic objectives. Increasingly, finance organizations also are being asked to play a more strategic role, providing analytic support to operating units in areas such as profit optimization. Rather than being the rear-view mirror on performance, Finance can use advanced analytics to support more forward-looking activities, providing early alerts to executives and managers about opportunities and threats, while making robust contingency planning substantially easier to do.
Traditionally, managing financial performance has involved well-established processes and analytic techniques. Today, the maturation of information technology systems is adding another dimension. The term FPM was created to encompass the once separate but now interrelated information systems that have transformed financial management, increasing the breadth and depth of financial and operational information that organizations can access and analyze. FPM enables a much deeper understanding of an organization’s historical performance and gives it the tools to dynamically realign future activities to support internal strategy. Increasingly the focus is shifting more to action-oriented analytics.
Using our rigorous benchmark research methodology, Ventana Research examined how organizations execute FPM, which includes exploring their maturity in planning and budgeting, reporting, analysis, consolidation and closing. We also have done extensive research into how companies use spreadsheets to manage and support these activities and how those tools undermine the quality, timeliness and accuracy of core business processes. The research shows that in the major financial performance management processes and capabilities, most organizations are relatively immature, with just 10 to 15 percent at the highest of our four maturity levels. To put it simply, a majority of companies fail to provide financial information on a timely basis.
Having the right technology and using it to its fullest are essential to achieving better execution of FPM processes. For example, our benchmark research on trends in fast closing your financials shows that on average, companies that use consolidation software close their books about one-third faster than those that perform this task using spreadsheets, and companies that use spreadsheets sparingly in the closing process encounter fewer errors in preparing their financial statements than those that use them extensively. Having the right software is vital to a corporation’s ability to manage finance operations and performance.
Our Value Index examines suites of software that comprise a comprehensive approach to FPM. The advantage of using such a suite is that it is usually easier for individuals that have to use more than one piece of it to become proficient in them. For instance, a suite almost always provides a single sign-on, which is probably not the case if an organization assembles various pieces from multiple vendors. As well, those managing the software also will find it easier to learn and work with a single suite, especially in handling administrative functions. In midsize and larger companies, administrators can wear multiple hats, and their responsibilities can shift from one piece of the suite to another over time. Then, too, from an IT perspective suites are usually easier and less expensive to maintain.
In assessing the capabilities of the FPM suites, we evaluate a full range of functionality – think of these software packages as Swiss Army knives. Some of these capabilities cover core functions that every company does, such as statutory consolidations, dashboards and budgeting). Others support tasks that have been adapted to varying degrees by finance organizations, such as profitability management or advanced costing methods. We believe that the finance departments of midsize and larger corporations (those with 100 or more employees) need more tools in their Swiss Army knife these days to fulfill their expanding roles, which is why we score based on the full set of functionality, even if your organization may be looking only for budgeting or consolidation software.
The Financial Performance Management suite category is a mature one, as evidenced by the close and almost uniformly high scores garnered by the software vendors in our Index. The company delivering the highest value in an overall weighted evaluation is SAP, followed by IBM, Infor, Longview, Tagetik and Host Analytics; all of these earned the Hot Vendor rating. They are followed by SAS and Oracle, which earned the next level rating of Warm.
I find that too often finance organizations take too narrow a view when purchasing FPM software. Technology has evolved slowly over the past decade, but the cumulative result had made software offerings that support FPM considerably more sophisticated in their capabilities and easier to use with less direct support from IT organizations. While those working in finance today may not feel a pressing need for mobile access to FPM-generated data and reports, corporate executives and those in certain roles such as sales certainly do. Before acquiring or replacing FPM-related applications, I recommend that executives and managers investigate what’s available and how it can support better management of the finance function.
Robert Kugel – SVP Research
Management decision-making typically involves a three-step process of inform, analyze and act. In the earliest days of what came to be known as business intelligence, developers created decision support systems that provided information and analytics to help executives and high-level managers choose the best course of action. Working with numbers rather than gut instinct still is viewed as a best practice. After all, a pilot who doesn’t trust his or her instruments is heading for an accident.
Over the past couple of decades, crude, expensive corporate information systems have become more comprehensive and affordable as organizations collect broader sets of data from a wider range of functional organizations and processes and apply more sophisticated analyses to these data sets. Today, dashboards and scorecards are pervasive even in midsize and smaller companies. Yet alongside the explosion of data available to executives and managers and the tools to make sense of it, there is a stark reality: It’s not enough to know; action is required. This isn’t news to people who have to make those decisions, but most of the software demonstrations I see stop with the “inform” and the most basic part of the “analyze” stages of the three-step process. These sorts of vendor presentations assume that this is all decision-makers need to make consistently good decisions, but from my perspective this level of capabilities falls under the heading of “necessary but insufficient.”
More is needed and, happily, more is possible. Most organizations use analytics to make sense of the past. While this is useful, it also is not enough to be actionable. Addressing shortfalls and capitalizing on successes are a good first step, but these are essentially reactive approaches. Having a better understanding what might happen in the future and weighing the implications of potential actions is more valuable to a line manager or an executive looking to steal a march on the competition. Today, to address these shortcomings, more powerful business analytics are becoming accessible to generalists. New computing architecture (notably in-memory processing) is making it easier for companies to do more interactive and collaborative contingency analysis and planning to explore the implications of future actions.
For several years Ventana Research has been providing research on and stressing the importance of using predictive analytics. Predictive analytics helps enhance the accuracy of forecasts, often by detecting unseen drivers of results, giving companies greater precision in projecting future sales, expenses and operating results. Predictive analytics also provides a baseline set of expectations that can be used for early detection of departures from expected results. At the start of a holiday selling season, for instance, such departures could signal the need for early discounting or (if still feasible) allocating a product in high demand to the best customers. Predictive analytics also can be used to manage supply chains and to project cash flows more accurately.
Leading indicators are another tool that companies use less well than they could. Especially in the areas of demand analysis, supply chain risk and cost projection, such indicators can enable companies to anticipate future changes in markets and gain additional time to develop contingency plans or alter strategy.
Contingency planning and what-if analysis give people the ability to make better decisions more consistently and with greater agility. Thinking about pilots again, they use simulator training to help make the right decisions faster in the event of an emergency. This sort of planning can enable executives and managers to react sooner and with greater confidence when conditions change and even help determine how best to modify strategy or tactics in a volatile business climate. However, most midsize or larger companies have found it challenging to do contingency planning because technology limitations have made it impractical to do except at a very high level. This sort of planning is best done interactively in a collaborative setting. Until in-memory computing systems were applied to this process, response times have typically been too slow for many enterprise systems. If desktop spreadsheets are employed, it can take hours or days to recreate a scenario with a couple of changes in major assumptions.
It would be great if action-oriented decision support systems also provided the framework and capabilities for people to work collaboratively to follow through on decisions once they are made and to track the necessary follow-ups to see the process through to completion. Only with these capabilities could a system rightly be characterized as “closed loop.”
I see performance management, business intelligence and analytic applications becoming increasingly action-oriented over the next three years. Information technology can be of greater value to executives and managers in supporting their assessments and decision-making, and ensuring follow-through once a decision is made. But I question how long it will take before using the technology to do this becomes a standard feature of business. Some technology-inspired changes in behavior have happened rapidly over the past decade, but these have mainly been on the consumer side. While business computing has spurred changes in how organizations work, most businesses have been focused on efficiency by automating processes or eliminating the need for middle managers to coordinate activities. The kinds of changes to, for example, corporate planning that are now feasible require companies to set new expectations for planning and to alter how they plan. Although I believe the need for change is compelling, I fear adoption will take longer than it should.
Robert D. Kugel – SVP Research