Ventana Research Analyst Perspectives

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.

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.

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.