With the rapid pace of change in the business environment, planning and control cycles have become disconnected, says Frank Buytendijk, research director at Gartner. But, he argues, large enterprises are working to improve these processes and make them more agile.
FDs are looking at what forward-looking indicators should be measured and what objectives must be set. They are then putting in place information tools and measurement systems to report against these and to aid decision-making. This requires close integration between planning, budgeting and forecasting systems, and those for operational and financial reporting and analysis. Unfortunately, these are complex systems with different objectives that are either built in-house or sourced from different specialist vendors. As a result, FDs have so far had no integrated solution to quickly analyse and revise plans and report execution against targets.
The basic problem is that accounting systems and other core business systems are designed to execute transactions, not report them. Jeremy Roche, chief technical officer at Coda, explains that this is because accounting systems have to hold data in a format that is good for putting in transactions and taking out balances. “Because of the way you have to store data to get transactional throughput, you can’t store it in meaningful ways for reporting,” he says. “If you did do that, it would take the application too long to receive and manipulate data and you wouldn’t get a fast response.”
The traditional reporting solution is to transfer the data out of the accounting system into spreadsheets. These are quick and cheap to build and allow data to be manipulated and presented in a number of different ways. They can be used to perform financial consolidation and also enable data from other core business systems, such as customer relationship management, manufacturing, logistics and the web site, to be entered. This allows financial and operational data to be presented together.
However, spreadsheets’ strengths are also their weakness. Their ease of use means that accountants are able to build more and more complex systems, and can spend too much time building and maintaining them at the expense of focusing on the figures themselves. Spreadsheets are also notorious for being very personal and largely undocumented, so problems arise if the person who built them leaves the organisation. They are also prone to errors.
“The good thing about spreadsheets is that they are wonderfully flexible and enable users to do exactly what they want,” says Buytendijk. “However, what seems like flexibility in the beginning turns into total spaghetti in the end. The costs of making them, which are all blood, sweat and tears, are completely hidden.”
Another solution is to use a third-party report writer, such as Crystal Reports or Cognos Impromptu, to present data held in the accounting system.
However, Roche points out that the data in the accounting system is not meaningful to the reporting tool, as it is hidden away in the tables.
If somebody wants to get out a meaningful report they have to know which tables belong together and how to join them.
“We find that our customers are asking increasingly difficult questions,” he says. “They want to work on a specific aspect, such as a single product over a particular geographical region, which might change from month to month. If you use a report writer you have to keep changing reports all the time.”
One excellent solution is to transfer data from core business systems into a separate reporting database that is configured for reporting, not transaction processing. Many information-intensive organisations have built massive data warehouses of detailed customer data. From these, summarised figures are transferred into a smaller relational database, called a “data mart”, for use by the finance function.
Some organisations set up a data mart directly. However, the most popular solution is to use a multidimensional database known as an online analytical processor (OLAP). But whatever database is chosen, the organisation involved uses it to create a “single source of the truth”. This brings an end to arguments about where figures came from, so that people can concentrate on what they mean.
“You need a single clean source of as much data as you can to ensure you are reporting on the correct information,” says Roche. “The organisation must be able to capture non-financial information and join it in the database, rather than trying to force it into the accounting system where it doesn’t logically sit.”
Much preparatory work has to be done to make data from different systems consistent by agreeing common definitions. Roche advises customers to get help transferring information from multiple systems into an OLAP database.
He also points out that interpreting and maintaining data is quite a labour-intensive job.
However, once established, the data can be accessed by a wide range of tools, including report writers and powerful graphical executive information systems. These are all interactive and cater for the different needs of different groups of users. As well as presenting standard reports, they allow users to produce their own ad hoc reports, analyse and manipulate the data, build models and run “what if?” scenarios.
The existing spreadsheets can also still be used. But because they now contain links to data, rather than the data itself, they are easier to maintain. Only one spreadsheet is needed as a template for each format, rather than one for each subsidiary or departmental report.
The strength of the separate database approach is that different users can use different tools to access the same data. Those who need powerful functionality use a complex tool from a specialist vendor, whilst those with simple information needs use a generic tool, such as a spreadsheet, report writer or web page.
“The days when a finance department turned out a monthly management report that was used to make decisions on what would happen the following month are pretty much gone,” says Ian Jefferies, principal consultant at KPMG Consulting. “It is much more about the finance function collecting the information, putting it in the correct format and giving users tools and access to get whatever information they need.”
However, these strengths can create a major weakness. Although the data is common, a wide range of different applications are used to access it.
As well as reporting applications, these include planning, budgeting, forecasting, financial consolidation, modelling, analysis, business intelligence, activity-based costing, activity-based management, balanced score card and performance management software. Even tax and treasury departments need to access the data for tax calculations.
OLAP packages are flexible enough to allow most of these applications to be built using a tool from a single vendor, usually with the help of consultants. “It would be brave to go it alone because it is a big and expensive task,” says David Jones, director of PwC Consulting’s iAnalytics practice. “It is practical in small organisations, but isn’t feasible in large ones.”
The problem is that organisations want the rich functionality of specialist applications. Financial consolidation systems have a specific structured task that requires manipulation of data, but they are not as good at reporting as specialist reporting tools. Planning, budgeting and forecasting systems involve consolidation, but require a two-way flow of information, as well as more flexibility in manipulating data.
Over the years, there has been much activity in the industry to integrate different applications. This has either been through acquisition, such as financial consolidation leader Hyperion buying Arbor Software for Essbase, a leading OLAP product. There has also been considerable partnering for integration between different front-end applications and OLAP databases.
“Corporate centres can see the cost of maintaining a collection of disparate data that has very strong interrelationships,” says Jones. “If it could be brought together in an integrated environment it could release a lot of value, both at their level and lower down the organisation.”
Nigel Youell, marketing director of Hyperion Solutions, has detected a clear change in the market in the past 18 months. “In the days before enterprise resource planning (ERP) systems, people bought software from different sources and stitched it all together,” he says. “They found the benefits of an integrated end-to-end solution for themselves. But finance directors are now looking for an integrated solution for their management processes. Just as ERP is the end-to-end solution for transaction processing, so they want an end-to-end solution for business performance management.”
He explains that an FD will want to start by reviewing goals and strategies and then model them to check they are valid. He will then want to work with business managers and financial analysts to develop detailed plans and budgets. Next, he will collect data to monitor execution of those budgets, analyse the results against plans and report the results. The cycle then needs to be repeated and an integrated solution needs to address all those aspects.
“The software should do the back-breaking work so the accountants can concentrate on the data,” says Roche. “That ensures delivery of information to the entire organisation.”
The cycle becomes even more important in the current difficult economic climate. “Comparing actual performance against latest forecasts and budgets should be a reasonably quick process,” says Jones, “although for many it can still take 15 to 20 working days. If the financial director then wants to compare that performance with the five-year strategic plan put together the previous year, it normally involves downloading into spreadsheets for analysis, which can be a long-winded and difficult exercise in some organisations.”
“If the FD then wants to flex budgets and forecasts at the corporate level, based on the current actuals, it is often a separate non-integrated spreadsheet process,” he says. “If he wants to cascade new performance targets down the organisation to reflect the fact that the economy has taken a downturn, this is still a very disjointed and manual process.”
It is early days for this approach. SAP has launched Strategic Enterprise Management, a new module that integrates a number of existing modules.
Hyperion’s Business Process Management integrates its existing applications and Cartesis in France has released Magnitude. Other vendors will follow shortly.
Nigel Pendse, lead author of The OLAP Report*, endorses the principle of integrated applications. “It is good to have a system that lets people participate in budgeting in a easy and productive way more than once a year,” he says. “That way they can produce better plans and then monitor them. It is good if the workflow is built in, if nobody has to maintain spreadsheets, if people can enter data via the web and if they can do private analysis.”
Jones believes FDs are now appreciating how much more value they could release from all the information they collect and process if reporting and decision support were integrated. “Timely, quality information in an integrated environment means they can redo strategic planning and react to events, based on actuals,” he says. “The vendors are moving quite quickly and in 18 months we should see an increasing uptake of this kind of solution.”
Pendse points out that most organisations buy a statutory consolidation package, but use a tool to build the rest of their applications themselves.
“Application sales are not growing,” he says. “Adaytum and Outlooksoft are expanding, but some of the large application vendors are shrinking.
The number of people using spreadsheets is growing, so the vendors are losing market share now. Their main competition is not each other, but people doing it themselves in spreadsheets.”
He believes that people start by building a small spreadsheet application that works well. They then keep stretching it until they get to the point where they really ought to have used a package. “By then, they have so much invested in the spreadsheet solution that they are too locked into it to buy a package,” he says.
Buytendijk points out that the cost of cleaning up a spreadsheet spaghetti mess by going to a software suite could easily be #150,000. Although this is a lot of money, it would make a lot of business sense because the hidden costs of spreadsheet costs are even greater.
“Integrated business performance management solutions are a great idea in theory and some of the products are pretty good,” says Pendse. “But either the vendors’ message isn’t good enough or they charge too much, so the market as a whole is still using spreadsheets.”
Jefferies points out that the objective of financial directors is to get the right information to the right people at the right time, so that they can make better decisions. “Technology is having a big impact by allowing them to get more current information to more people – and have confidence that it is right,” he says.
Fully integrated, flexible management systems help FDs quickly review and change the leading operational indicators that support decision-making.
They also support monitoring of execution through reporting and analysis, ensuring systems stay tuned to the business.
And these kinds of systems are becoming ever more important in an age where regulators, shareholders and other stakeholders demand insight into the enterprise’s operation. “In the age of corporate transparency, after Enron and WorldCom, you better know what is going on in the enterprise before the outside world finds out,” says Buytendijk.
The OLAP Report, by Nigel Pendse and Richard Creeth, is available at www.olapreport.com.