Robert Kugel's Analyst Perspectives

Businesses always see a lag between when technology makes some advance possible and when a majority of companies actually adopt it. There’s even a longer lag between the emergence of an advance in a business process or technique and the time it takes to become mainstream. When we write our research agendas at the top of each year, we have to strike a balance between focusing on the new and different, which is still many years away from general acceptance, and the mainstream, which has been anticipated for so long that it almost seems passé. Our research agenda for office of finance to support business for 2013, which I just finalized, is once again an attempt to balance the leading edge and the mainstream with an eye to practical solutions.

I expect the pace of change in business computing will accelerate over the next several years, reflecting the cumulative impact of a decade’s worth of technology evolution and, increasingly, the demographic shift from executives and managers from the baby boom generation to those who grew up with computer technology. These demographic shifts will drive demand for a new generation of software, one that emphasizes mobility and agility.

Our research focus for office of finance in 2013 will cover three main areas.

First, we’ll look at the application of financial performance management (FPM) to achieve consistently better results. Ventana Research defines FPM as the process of addressing the often overlapping issues that affect how well finance organizations support the activities and strategic objectives of their companies and manage their own operations. FPM deals with the full cycle of the finance department’s functions, including corporate and strategic finance, planning, forecasting, analysis, closing and reporting. It involves a combination of people, processes, information and technology. We see information technology as a particular focus of FPM because we find that most finance organizations are not using IT assets as fully as they could. In particular, too often they focus only on efficiency and neglect opportunities to use IT to enhance their effectiveness, which can make a difference in their overall results.

Several technologies will be particularly important in transforming the finance function during this decade. Consider in-memory computing. Because of its ability to rapidly process computation of even complex models with large data sets, in-memory computing can change the nature of planning, budgeting, forecasting and reviews. It enables organizations to run more simulations to understand trade-offs and the consequences of specific events, as well as change the focus of reviews from what-just-happened to what-do-we-do-next. In-memory computing may also drive more companies to trade in their desktop spreadsheets for dedicated planning applications. Our recent planning benchmark research revealed that a majority of midsize and larger companies continue to use spreadsheets for planning, forecasting and budgeting – and these companies continue to suffer the consequences, such as an inability to do effective contingency planning or drill down into underlying data to have true visibility into root causes of opportunities or issues.

Predictive analytics is another technique that companies can utilize to achieve better results. Although it can be used to create more accurate or nuanced projections of future outcomes, predictive analytics is especially useful in quickly finding divergences from expectations to create more timely alerts. Rather than having to wait until the end of a month to look at actual results and then initiate a course of action, early in the month a corporation could spot and therefore be able to address a probable revenue shortfall in a specific product line, or change production rates or shipments to avoid a likely regional stock-out caused by stronger than expected demand. Technology for human capital management (HCM) is evolving to address the far more complex employment environment that exists today and the persistent need to manage people resources more effectively without unduly burdening managers.

A second area where technology will play an expanding role in business computing is in guiding operations. Software that helps manage pricing and profitability has been used in hospitality, transportation, retailing and consumer financial services for years. Adoption in other areas – especially in business-to-business industries – will increase through the rest of the decade. Used properly, this type of software enables a company to tailor its control of individual decisions regarding pricing, discounts and other terms to achieve results that are best suited to its strategy. In some businesses, pricing has to be centrally controlled, while in others some level of discretion must be given. Pricing systems can guide pricing decisions to follow a volume-leader strategy, a high-margin strategy or something in between. Rather than constraining businesses to wait weeks or months to make changes to price lists or pricing policy, these systems can continuously make adjustments consistent with longer-term objectives in response to market conditions. Increasingly companies are using expense management systems to gain greater control over aggregate spending and vendor selection. These sorts of systems can provide controllers and treasurers with greater forward visibility into future outlays, ensure volume discounts are utilized and honored, and help streamline the accounts payable process to earn early-pay discounts.

Taxes are one of a company’s biggest expenses, yet direct (income) tax management is still in its infancy. All larger and even some midsize corporations can benefit from a dedicated tax data warehouse to help automate tax planning and provisioning. Today, most organizations use desktop spreadsheets to manage their direct tax analytics and provisioning, a time-consuming process that fails to deliver transparency or the ability to manage tax risk exposure effectively. They would do well to adopt technology more conducive to a strategic approach to managing income taxes.

A third area where technology can help senior executives achieve better results is in implementing fundamental changes in business management. For example, we are just completing benchmark research into long-range planning, an area where better management of technology and information can support improved alignment between strategy and execution. As well, far from simply being a technology concern, cloud computing enables corporations to cut costs and gain access to more sophisticated technology than what they could feasibly support in an on-premises deployment. Using the right technology can boost performance. The improper use of spreadsheets continues be an unseen killer of corporate productivity. Desktop spreadsheets are excellent for individual, ad-hoc analysis, modeling and data management. They were not designed for use in collaborative, repetitive enterprise-wide processes because they have inherent defects that significantly reduce users’ efficiency in these tasks. Increasingly companies have inexpensive options that are easier to use and enable them to go beyond desktop spreadsheets for modeling, analysis and reporting.  Managing operational risk outside of financial services is still pretty hit and miss, as our recent governance, risk and compliance benchmark research showed. Occasionally major disasters occur to remind executives that they are exposed. Non-financial businesses rarely manage risk as well as they should, because usually risk is not explicitly measured or not measured well, and therefore is not formally considered as a trade-off in making decisions. To address this issue, risk must be part of any balanced scorecard.

Overall, finance and line-of-business operations still focus heavily on improving the efficiency of the mechanics of day-to-day operations, and often fail to use available technology to support more effective approaches. Executives in finance and business must look at their existing IT systems with an eye to making better use of them to automate repetitive tasks and speed execution of cross-departmental functions. Doing that can free up time and money better spent on activities that return value, such as more insightful and actionable analyses or more accurate forecasting and planning.

Information technology is an essential element of business management. Yet, too many senior executives and managers have too narrow and too limited an understanding of IT’s full potential, much as those managing corporate information technology usually don’t appreciate business issues and how IT can address them. The business/IT divide is a barrier that prevents most companies from achieving their true performance potential. The divide has remained a constant impediment since the dawn of business computing six decades ago. It’s not necessary for a CEO or executive of a company to be able to write Java code or master the intricacies of an ERP or sales compensation application. However, each CEO and executive should master the basics of IT just as he must understand the fundamentals of corporate finance, the production process and – at least at a high level – the technologies that support that process. My research agenda for 2013 continues to focus on the major issues that confront businesses where IT plays a key role in addressing those issues.

Come read and download the full research agenda.

Regards,

Robert Kugel – SVP Research