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Forrester Research

Increasingly sophisticated software is helping executives to cope with the challenges of managing financial performance in today’s business environment.

A combination of factors has created a high level of interest in software for financial performance management (FPM). These factors include post-Enron regulation of corporate governance, growing dissatisfaction with traditional budgeting processes, increasing use of metrics-based performance management techniques, and improvements in technology for delivering management information. Vendors have been attempting to link a variety of financial, operational, and measurement applications under the broader theme of business (or corporate) performance management (BPM), combining packaged applications with business intelligence (BI) technology.

Financial performance management, the core of BPM, includes a collection of related applications that include financial planning, budgeting, forecasting, management reporting, financial consolidations (for statutory and external financial reporting), and activity-based management. FPM expands into BPM with measurement, or scorecarding, applications that encompass operational (nonfinancial) analytical applications.

Typically, these applications are related by function and by a common technology platform and user interface layer (e.g., a portal). The functional relationship of this collection of applications is based on the concept of delivering information for managing the business, consisting of planning, control (e.g., budgeting and forecasting), reporting and compliance (e.g., financial reporting and consolidations), and management and analysis (e.g., performance measurement, cost/profitability analysis).

The interest in business performance management is, to a significant extent, a result of the balanced scorecard (BSC) methodology and philosophy developed by David P. Norton and Robert S. Kaplan in the early 1990s and described in their book The Balanced Scorecard, Translating Strategy Into Action. While many corporations have adopted this performance methodology, implementation has proven to be very challenging, requiring significant cultural change and careful selection of performance measures. Nevertheless, the balanced scorecard has had a tremendous influence in creating awareness about the value of setting performance goals (e.g., productivity, growth, efficiency, customer satisfaction) and measuring performance against those goals.

Financial performance management applications tend to be more mature and account for the bulk of the revenues at this point within the BPM category. In fact, leading enterprise applications and BI vendors, such as SAP, Oracle, Hyperion, and Cognos, have based their overall performance application product strategies around the financial performance management core components.

Issues and Opportunities

One of the most common sources of pain in organizations is the cumbersome nature of the widely used budgeting process. Our research indicates that more than half of medium-sized and large companies are still using spreadsheets to execute enterprise budgeting process. Spreadsheets have proven to be ineffective for enterprise financial processes for several reasons.

Spreadsheets are subject to significant error rates, similar to software programming, but spreadsheet-based application development is often done by end users without the discipline of professional programming methods. In addition, spreadsheets are ill-suited to handle large volumes of data and consolidation of such data. Companies using spreadsheet for enterprise financial planning processes among a distributed set of contributors have processes with high levels of effort, long cycle times, data integrity challenges, and relative inflexibility.

In addition to the technology used to manage the process, the budgeting process itself is inherently flawed. Common problems include misalignment with corporate strategies, rigid hierarchical structures that enforce a command-and-control orientation, imprecise estimates, dysfunctional gaming behaviors, and a drawn-out negotiation process that tends to diminish performance. Despite its faults, budgeting remains ingrained in corporate culture, and the process can often be improved with better automation, more frequent revisions and better business alignment.

Two key financial performance management opportunities are continuous forecasting and performance measurement. Increasingly, companies need more agile processes that enable forward-looking management of the business with up-to-date forecast information. This is being done either to supplement budgeting or as a replacement for budgeting. Many companies have adopted rolling budgets, and forecasts provide more frequent updates (e.g., monthly) to support better reaction to evolving market and business trends. Some faster-paced businesses (e.g., high-tech) are taking the concept even further, using virtually continuous forecasting and real-time reporting to dynamically run the businesses.

Performance measurement is another important evolution from traditional management techniques because it enables business strategy to be actionable. In addition to measuring financial and nonfinancial results, the performance system assigns relevance to the results by using goals and thresholds. If implemented properly, the performance measurement process can occur at more granular levels where individuals are accountable for achieving results that are aligned to the business strategy, and good performance can be appropriately rewarded.

Figure 1 illustrates the key processes within the financial performance management cycle. The financial performance cycle enables strategy to effectively be linked to a series of processes that produce timely and actionable information.

The key processes are developing a plan, measuring progress against the plan, and acting on the information to manage performance. The plan must reflect the business strategies and objectives. A high-performance business culture flows from the vision and strategic principles of an organization rather than a command-and-control orientation. Appropriate targets must be selected to measure progress against, in order to encourage appropriate behaviors.

In the book Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap, authors Jeremy Hope and Robin Fraser emphasize the importance of relative targets that compare performance to prior periods and competitors rather than trying to achieve a fixed performance target that is negotiated with management. Forecasting and business performance measures can be effectively used to run a business in place of a traditional budgeting process and latent accounting information. Analysis and reporting complete the cycle. Reporting encompasses required external reports for compliance purposes as well as disseminating timely and actionable information to internal audiences.

Figure 1 — Financial Performance Cycle: Strategy to Action
Source: Forrester Research, Inc.

Solutions Functionality

A conceptual application architecture framework for financial and business performance management applications is illustrated in Figure 2. The financial performance subcategory is the most mature, but it is evolving in terms of refinement and technology. The enterprise component consists of metrics-based tools for measuring business results against goals and strategies, which may incorporate the balanced scorecard performance methodology.

This component emphasizes dashboard-style displays of key metrics and symbolic performance indicators, enabled by BI technology. The analytic application category consists of a wide variety of domain-specific solutions, such as workforce analytics, sales, customer, project, and supply chain analytics.

These applications vary in terms of maturity. While the financial performance category is generally mature, the enterprise management and analytic applications are generally less mature. The operational and customer relationship management (CRM) analytic applications and the BI architectural components are mentioned here for completeness, but are not the focus of this article.

As financial and business performance management applications evolve, it is important to distinguish between products offering prepackaged functionality and those that are actually tools for building such applications. In most cases, this distinction is obvious, but some products are offered as performance applications that are, in fact, tools or minimal application shells. This is not necessarily a bad thing, because many businesses find that a tools-based approach is better suited to their analytical requirements and prefer to build the applications.

Good packaged financial and business performance applications contain substantial functionality to address specific business processes (e.g., budgeting and financial reporting) as well as frameworks to support various types of business performance management (e.g., balanced scorecard, economic value analysis, activity-based management, etc.). At the same time, the applications must offer a high degree of configuration flexibility to model the structures and requirements of the business based on various dimensions, such as organization hierarchies, products, customers, suppliers, time frames, geographies, and statutory requirements.

In addition, the following functional capabilities are often relevant:

• Management of organizational reporting structures, which may be configured graphically and have point-in-time capabilities for “what if” and retrospective analysis;
• Integration to financial and enterprise resource planning (ERP) transactions systems for importing data, organizational data, and exporting results, ideally with predefined data mappings;
• Workflow automation, incorporating routings and alert notifications (important for iterative, input-driven processes, such as budgeting and to alert managers of critical performance situations);
• A detailed set of domain-specific key performance indicators (KPIs) that are predefined within the application;
• The ability to drill into supporting levels of detail behind the KPIs and summarized results (and potentially into the underlying transactions);
• Foreign currency and international support;
• Extensive business modeling capabilities to support planning activities, which may include pre-built calculation formulas to represent various types of business drivers and allocation capabilities for distributing and spreading amounts;
• The ability to document, in context, the underlying assumptions used to develop the business models; and
• User interface formats (e.g., forms, spreadsheet-style grids and portals) designed to suit a wide variety of user requirements and abilities while supporting interaction and collaboration.

Few vendors offer comprehensive FPM/BPM suites at this point, and some of these suites are in fact loosely integrated sets of component applications. One of the key challenges in delivering these applications is the linkage to the related transactional systems (e.g., accounting). Often, a data warehousing platform is used to enable multidimensional analysis (e.g., OLAP and star schema) and summarization as well as to provide an open platform for managing data originating in disparate systems (the planning applications must also be updateable and include workflow).

The large enterprise applications vendors (SAP, Oracle, and PeopleSoft) offer predefined mappings for the planning and performance applications to and from their own underlying transactional systems. Oracle has taken this a step further with a strategy to combine its transactional applications, performance analytics, and data warehousing into a single database, using its latest database technology (Oracle 9iR2). The advantage of such a strategy is more frequent updating and the ability to drill back to the transactional details while (potentially) eliminating the need for a separate data warehouse to support basic analysis requirements. Overall, however, the integrated solutions from these vendors tend to lag best-of-breed FPM solutions in maturity and functional depth.

Figure 2 — Business/Financial Performance Management Architecture
Source: Forrester

FPM Software Market Analysis

Although actual growth in the financial performance software segment has been slow due to the unfavorable climate for technology investment, interest in applications for budgeting, planning, forecasting, reporting, and analysis remains strong. Within the past year, a heightened level of interest in financial planning and reporting solutions has occurred as a result of accounting scandals such as Enron and the subsequent enactment of the Sarbanes-Oxley Act of 2002 in the United States to strengthen corporate governance, and accountability and new standards from the International Accounting Standards Board (IASB) are expected internationally. At the same time, dissatisfaction with inflexible and time-consuming budgeting processes has continued to grow, along with the realization that more agile planning and forecasting processes are needed.

The BPM market is composed of three types of vendors: BI vendors, comprehensive enterprise application (CEA) vendors, and specialized software vendors. BI vendors are generally focused on selling tools and platforms for information analysis, but lately they have been looking to increase their revenues from packaged applications. The three primary comprehensive enterprise application vendors have made substantial investments in BPM during the past few years and continue to develop these product lines, which are designed specifically for their core application customers. Independent, specialized software vendors continue to be very much in play. Several vendors offer products for financial planning, forecasting, budgeting, and financial reporting. Midmarket companies have a number of lower-cost options for financial planning and budgeting packages as well.

We believe there are several key trends driving the growth of FPM:

• Economic factors. Even though the weak economy has slowed technology investment, interest in financial planning/reporting and business performance software has been strong because these applications are essential to help companies manage through economic uncertainty;

• Increased regulation. The accounting scandals and subsequent enactment of Sarbanes-Oxley in the United States have raised the awareness of the need for sound and reliable financial reporting systems, as well as the need to increase the visibility and transparency of financial information. Evolving standardization of international accounting rules and Basel II for banks present additional regulatory considerations;

• Accelerated planning cycles. Traditional annual budget and long-range planning cycles are increasingly proving to be inadequate for companies to plan and manage business performance. More companies are adopting rolling budget/ forecast cycles, and some are moving to continuous forecasting and nearly real-time information delivery, driving customer demand for solutions with such capabilities;

• Technology. Collaboration capabilities, critical for iterative budgeting and planning processes, have improved through the use of Web client architectures, workflow, and process management features. The ability to deliver relevant financial and performance information via Web portals has become a fairly standard feature. In addition, expanding use of data warehouses and multidimensional capabilities within relational platforms are providing opportunities to deploy performance applications more cost-effectively and with increasing scalability; and

• Vendor strategies. Large software vendors, including the CEA and BI market leaders, are putting significant development, sales, and marketing resources into this application area, creating broadening suites with better integration within the suites and to transactional applications and portals. The large CEA vendors — SAP, Oracle, and PeopleSoft — are in the best position to drive market growth because of their large installed bases and their ability to deliver transactional system integration.

Costs and Benefits

For larger companies, software costs for enterprise budgeting, financial planning, consolidations, and performance management systems typically range from $250,000 to $1 million. Pricing is typically based on the number of named users and product modules. Implementation costs will vary depending on platforms, system integration requirements, and software configuration requirements. Integration with transactional applications, including accounting and operational systems, is a key implementation requirement. Most companies have disparate financial and operational transactional systems, making this data-summarization process more complicated, and potentially requiring a data warehouse architecture to support FPM. In addition, implementing the applications requires considerable planning and configuration effort, including setting up reporting hierarchies, line-item details, modeling logic, performance thresholds, security, and workflow. In large companies, implementation costs may range from one to three times the software costs, depending on complexity and integration requirements.

For organizations that execute a time-consuming and iterative annual budgeting process, efficiency improvements will be a significant factor in justifying an investment in an enterprise budgeting and planning application. Benchmarking specialist The Hackett Group estimates that companies spend an average of 25,000 person-days of effort on financial planning activities per $1 billion in revenue. The majority of this time is a function of the iterative and negotiation-oriented nature of the process, but advanced automated budgeting solutions can reduce the overall effort level by 5 percent or more, particularly in organizations dependent on the use of spreadsheets.

Beyond efficiency, significantly higher levels of benefits can be achieved. This value proposition includes the following:

• Flexibility and agility. Scenario-based business planning capabilities support management decisions on product lines, markets, acquisitions, and other key aspects of the business. Companies will be able to react more quickly to changing business conditions using collaborative planning processes and tools;

• Financial reporting accountability and transparency. In combination with sound internal controls and reliable transactional financial systems, the financial performance applications enhance an organization’s ability to accurately report financial results to internal and external parties. The current regulatory emphasis on corporate accountability makes this a business imperative;

• Expectation management. In addition to reporting actual results, future-oriented planning and forecasting will enable companies to potentially reduce the volatility of the company’s stock price by accurately setting expectations of the market. Internally, timely and actionable financial and performance information will allow managers to avoid problems and recognize opportunities; and

• Bottom-line results and shareholder value. The BPM applications will support a well-conceived strategy to measure, manage, and reward business performance. When implemented effectively, the performance system will drive improved profitability, staff retention, and customer satisfaction.

Recommendations

Enterprises evaluating financial and business performance applications should consider the following recommendations:

• Understand the future requirements of the various performance management business processes before selecting packaged applications. Automating current processes will produce only marginal returns. Choosing appropriate software to optimize the processes and aligning them with business strategies will enable companies to achieve measurable improvements in efficiency and business effectiveness;

• Consider the FPM applications from the large application software vendors if you are already using their financial transactional applications. While these products are less mature than some of the leading best-of-breed solutions at this point, the out-of-the-box integration can be a significant advantage, and the functionality offered by these vendors is rapidly maturing and improving;

• Use a best-of-breed approach where the financial accounting systems environment is heterogeneous or supported by applications other than those from the major vendors. This best-of-breed approach can include the individual component applications, since few vendors provide a comprehensive FPM/BPM suite, and the component applications are likely to be very loosely coupled to one another for the next two years;

• Implement applications incrementally (rather than all at once) to address key business priorities, such as improving process efficiency (e.g., budgeting), compliance (e.g., financial reporting), or strategy (e.g., planning and performance). An incremental approach is more manageable and can more quickly address pain points; and

• Recognize that performance management software is much more than an elaborate reporting system — it encompasses a discipline to optimize business results. The software itself is of limited value without the organizational commitment to drive change and innovate planning and management processes.

About the Author

Title: 

Research Director

Forrester Research

Paul Hamerman is a research director covering enterprise business applications for management and administration. His research expertise encompasses financial management, business performance management, human resources and business-to employee solutions, as well as general enterprise applications market research and evaluations of the major applications vendors. Mr. Hamerman has 21 years of experience in research advisory services, management consulting, and systems integration. He received an M.B.A. from Duke University’s Fuqua School of Business and is a C.P.A.