FSN White Paper
“The financial software industry is consolidating, but what should you do if you find yourself on the wrong side of a software acquisition?”
19th February 2007 |
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INTRODUCTION
The widely predicted shake-out of the software market for ERP and financial solutions is well underway. The software industry, like many other sectors before it is consolidating, fuelled by the effects of rampant globalisation, the convergence of technology and liquid capital markets with an apparently inexhaustible supply of funding for mergers and acquisitions.
But the impact of this turmoil on customers is frequently under estimated, especially by the deal makers, investment bankers and private equity houses. Whilst companies can readily change their supplier of fleet cars, recruitment services, banking, insurance and air travel, the same is not true of their software supplier. ERP and financial software is part of the ‘DNA' of a company that threads its way through every functional area and business process. It can be a source of strategic advantage that imbues an organisation with competitive edge as well as day-to-day processing efficiency. Moreover, in today's networked economy systems reach out beyond strict organisational boundaries and deeply into the supply chain, customers' and other stakeholders' systems.
So it is clear that profound systems changes cannot be made on a whim and that a stable and predictable supply of financial systems is crucial to the health of a business in the longer term. It follows that the software industry has a responsibility to its customers as well as its shareholders. But what happens when the short term interests of shareholders are in conflict with the longer term interests of customers; when profit taking becomes more important than making profits?
Unfortunately, this is the position that many businesses find themselves in today, following a succession of high profile acquisitions of household name ERP and financial software houses as well as software houses in the business intelligence and performance management market. Nevertheless, not all acquisitions are bad. It is important to distinguish the well measured and strategic acquisition that delivers competitive advantage for the software house and its customers through broader capability in skills, applications and technology from those that merely form part of a private equity-inspired shopping list.
But what should you do if you find that your company is on the ‘wrong' end of an acquisition and you have doubts about future support, product development and technology direction? In this white paper, we set out current market issues and trends and discuss what other choices of finance systems are available in the market place and what factors you should be taking into account.
THE MARKET DOESN'T STAND STILL – IS YOUR SUPPLIER TREADING WATER?
The last few years have seen one of the most tumultuous periods in statutory reporting and compliance as regulators and governments around the world seek to make organisations more accountable for their actions.
Developments in financial reporting
The introduction of International Financial Reporting Standards (IFRS) in 2005 for listed companies in Europe has been part of the drive for better comparability between financial statements prepared by companies in different EU Member States and many other countries that have embraced the IFRS standard around the world.
The net effect of these changes is that multinationals with shares or debt traded on US and other stock exchanges find themselves preparing reconciliations between one accounting standard and another and reporting under a variety of different accounting regimes in different jurisdictions around the world.
But the pursuit of comparability between financial statements is not the only factor driving changes in financial reporting. The transparency agenda is also causing internal and external views of reporting to coalesce as governments increasingly pressure companies to disclose more operational information about performance, trends, risks and prospects. This can be seen most clearly around segmental reporting where the aim is to present readers of financial statements with the same view (business segments) as that enjoyed by management and the recently introduced requirement in Europe to produce an Enhanced Business Review (EBR) as part of the Directors' Report is designed to provide more commentary and analysis to accompany the accounts.
The rise of so called, “Narrative Reporting” is not a European phenomenon. For example, in the US , the Management Discussion and Analysis (MD&A) is designed to accomplish the same degree of openness and transparency in financial reporting. However, narrative reporting is not confined to its literal meaning, for example, disclosures under the European Accounts Modernisation Directive oblige companies to report quantifiable financial data, i.e. Key Performance Indicators (KPIs) as well.
Whilst most companies should have little difficulty complying with these new measures, the additional requirement to report non-financial indicators around novel areas such as environmental reporting, corporate social reporting and human capital (employees) presents more of a challenge.
As if the complexity and broadening of the reporting agenda was not enough, companies also have to contend with faster and more frequent reporting – again on both sides of the Atlantic . In Europe the EU Transparency Directive is leading the way to quarterly reporting and in the US , The Securities and Exchange Commission's Form 10-K deadline for “large accelerated filers” is to be reduced from 75 days to 60 days.
Whichever way one turns, financial reporting is becoming much broader in concept, more complex in execution and subject to more accelerated timescales. Clearly, the impact of narrative reporting, together with faster and more intricate disclosures can have profound consequences for financial systems and processes. Navigating these ‘uncharted waters' requires a software vendor that not only stays abreast of these developments but has the deep financial expertise to develop a response to the challenges.
Sometimes the answers lie in the flexibility of the software, for example, a light touch on systems parameters or the redesign of reports, but on other occasions the need is for a new development, an additional software tool or even the acquisition of specialist skills and software. But in a constantly shifting and fluid reporting landscape a ‘just in time' response is insufficient. It needs a software house that is forward looking, investing in future development and safeguarding the needs of its customers.
The compliance burden
Turmoil in reporting requirements is not the only challenge to the adequacy of financial systems. The growing compliance culture - epitomised by Sarbanes-Oxley (SOX) but increasingly found in markets and industry sectors all over the world - has had far reaching implications for the regulated companies involved and the software industry. SOX is a good example of how the controls environment and traditional financial reporting are combining. In essence such regulation formalises the inextricable link between the robustness of the financial statements and the underlying systems and processes on which they depend. Yet surprisingly, very few financial software houses appear to have the capability to articulate this link in their financial solutions.
So the majority of companies that are required to comply with regimes like SOX, or who are simply under pressure to demonstrate good governance and control, find themselves under-served and using specialised standalone solutions alongside generic ERP systems that have failed to keep up with market developments.
Technology drivers
Although regulation and compliance have been important factors in the development of accounting solutions since the turn of the millennium, technology has also played a full role in shaping financial solutions. A growing recognition that systems are still too difficult to use and fragmented allied to falling hardware costs and significant improvements in processing power and communications over the Internet have produced the ideal conditions for technologically driven change.
In the past, accounting solutions have confined users to operational or functional ‘silos' which prevent them fulfilling their roles more broadly across the organisation. The rise of, so called, “roles-based processing” reflects the ability in some software packages to configure the user interface according to the user's role, enabling them to reach out across related application areas that impinge on their job.
Another dynamic of the roles-based approach is to give effect to communication and collaboration through workflow technology and tighter integration with Microsoft Office. Without these enabling technologies, users have to rely on an assortment of unconnected technologies and manual processes. For example, a sales order processing clerk may have to use a combination of telephone calls, visits to other departments and email exchanges in order to glean the information necessary to complete the most basic of transactions. In fact, Microsoft believes that around one-third of everyone's working day is spent just looking for information.
So the crucial question to consider is: Does your accounting software vendor recognise these trends and provide suitable solutions?
A FINANCIALS SOFTWARE HOUSE – OR A SOFTWARE HOUSE THAT ‘DOES' FINANCIALS?
It might seem like semantics but there is a considerable difference in orientation between a software house that specialises first and foremost in financials and say, an ERP provider for whom financials is an adjunct to the main product. Financial accounting and reporting is becoming more technical by the day so it is vital that any software house in this market has breadth and depth in financial skills.
Let's take a look at one of the remaining UK financials specialists to illustrate this point. CODA, for example, has a deep heritage in financial systems anchored in the pioneering development of the “unified ledger” approach which helps to simplify transaction processing whilst simultaneously opening up the possibility of more sophisticated analysis. Whereas most software packages were developed with separate modules governing accounts receivable, accounts payable and the general ledger, CODA-Financials' single ledger design, accompanied by extensive user definable analysis, enables the package to satisfy complex accounting requirements and fulfil a wide range of industry needs. As a result, CODA-Financials finds favour not only in the mid-market but also in complex head office settings in large corporates, the public sector and not-for-profit organisations. Despite the obvious advantages of having a single data structure serving multiple analytical needs few systems, even today, are architected this way explaining CODA's growing popularity as the financials ‘engine' of a number of specialist vertical market solutions. It also means that businesses that wish to take advantage of a unified ledger approach have few choices if they need to migrate from their current supplier.
The ease with which a unified ledger solution can be adapted compares very favourably with traditional ERP packages that are less amenable to change. Previously, well regarded ERP solutions provided by well known global software houses such as SAP and Oracle were popularised during a period of global expansion and continuous double-digit growth when the emphasis was on efficient transaction processing, shared service centres and outsourcing. Enron had not collapsed, Sarbanes-Oxley was not on the statute books and International Financial Reporting Standards were not yet on the agenda. The priority was to manage profitable growth and ‘business as usual' rather than constant business change. Now, in an era of constant flux, increased regulation and compliance, where fleetness of response to new reporting requirements is paramount, ERP systems have proved lacking in capability and costly to maintain. As a result, many groups have failed to complete their global roll-outs or benefit fully from a standardised platform.
In the main ERP systems are optimised for transaction processing and whilst they are widely credited with driving down average transaction costs, information management costs have remained stubbornly high. One of the reasons is that the degree of integration and consistency achieved across transaction processing has not been matched by capability in more specialised management information applications such as business intelligence, performance management and reporting.
But the differences between ERP systems and specialised financial offerings from organisations such as CODA are not confined to applications software and technology. The skills and competencies required to deliver success in the transaction ‘world' are quite distinct from the more specialised and intricate knowledge required to design and deliver solutions in the ‘information world'. This is most apparent around consolidation systems, workflow, controls based solutions and performance management.
PRODUCT ARCHITECURE OR LOOSE FEDERATION OF COMPANIES?
Whilst ERP and BPM vendors' offerings are increasingly commoditised CODA's architecture has developed uniquely. Over the years, the scope of ERP packages and BPM solutions has expanded, but the former often lack world class financials and BPM providers have largely confined themselves to information management. Architecturally, CODA occupies territory between these two extremes, uniquely leveraging the capabilities of both. But CODA's positioning is also differentiated from other suppliers of financial systems.
Building on its unified ledger, (itself a rarity), CODA-Financials provides the core capability to be expected of a ‘best of class' financials solution, namely; the ledgers, procurement, sales invoicing, asset management, document management and workflow. This highly configurable core functionality provides the kernel of the solution which is also aligned with analytical and control applications.
The workflow and business process management (CODA-Control) functionality is particularly noteworthy since it provides support not only for ‘regular' management processes such as the ‘procurement to pay cycle', but also for the more idiosyncratic processes that all organisations possess but find difficult to support using standard applications.
Naturally, with a heritage in ‘best of class' financials spanning three decades the ability to integrate with a wide range of different applications and information sources is a vital part of CODA's ‘stock-in-trade'. CODA employs a variety of integration techniques for linking with other systems. Whether it is linking to a manufacturing system at one end of the spectrum or a budgeting and planning system at the other, the CODA-Link utility, for example, allows data to be captured in a reliable and consistent way and the interface to be maintained dynamically as interface requirements change over time. CODA's strength in integration is a vital consideration as organisations strive to maintain control over an ever growing list of financial and non-financial data sources. Dependable and flexible integration tools are key to ensuring a seamless flow of data across the organisation and protecting the investment in interfaces when either the financial or the feeder systems to which it is attached are upgraded. CODA's continuing investment in web services, SOA (Services Oriented Architecture) and all major technology platforms such as Microsoft, UNIX and IBM iSeries means that it is able to maintain its distinct position as a financials software specialist deftly fitting into almost any financial systems architecture.
It is this capability to plug into virtually any setting that has made CODA a popular choice with suppliers of specialised vertical market solutions that require a strong financials backbone. For similar reasons, it is finding favour in Shared Services Centres (SSC) where customers rationalise transaction processing for a number of trading operations onto a unified platform in a single location. Few packages can handle the complexity and variety of financial requirements whilst maintaining tight links with other operational systems. But CODA, with its formidable array of integration possibilities (explained above) and ability to cost effectively handle multiple diverse, international operations on a large scale is increasingly attractive in this environment.
Unlike other financials software vendors which also cover the core financial processes such as business intelligence, scorecarding, financial consolidation, budgeting, planning and forecasting, these solutions are not hived off into a separate company or division but form an integral part of the overall CODA offering, supported by a single business entity so that customers benefit from a co-ordinated and integrated approach to solving business problems.
But it is the CODA-Control suite that firmly establishes CODA's credentials for leadership in the financials space since few, if any competitors, have embraced controls based solutions, SOX compliance and reporting. Although the product's genesis was in enabling and managing fast close, and further developed to support Sarbanes-Oxley compliance, it has broader application which will become even more significant as financial reporting and controls continue to coalesce. The recent addition of financial and management consolidation capability (OCRA) serves to round-off CODA's comprehensive solution aimed at the finance function. |
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The availability of such comprehensive functionality in the finance space from a single supplier is what distinguishes CODA from the pack. ERP with its ‘one size fits all' approach is expensive and time consuming to implement but on the other hand, very few finance systems providers can match the breadth and depth of specialist capability on offer from CODA without resorting to a portfolio of acquired companies or product partnerships. Furthermore, CODA's long history in finance based solutions allows it to leverage a wide variety of new and older hardware platforms allowing companies to build on existing investments, such as the popular AS/400.
DIRECT SUPPORT OR IS SUPPORT DIRECTED?
It takes more than a sophisticated suite of accounting software to guarantee the success of an implementation and the delivery of continuing benefits. Foremost amongst the factors for success is the quality of the supplier, implementation consultancy, training and support. However, a profound consequence of the rampant globalisation and consolidation of the software market is that some software houses have become too big, unwieldy and detached from their users.
The growth of the Private Equity (PE) industry around the world has raised concerns in many quarters for taking companies out of public ownership and into private hands, where management is less accountable for its actions. This is especially true of the software industry where business critical applications are deeply embedded in customers' operations and organisations are heavily reliant on the economic and technical stability of their suppliers for the integrity of their long term business plans. For this reason relationships between software vendor and customer have to be grounded in trust and accompanied by certainty around commitments to product roadmaps, technology and other developments.
However, these objectives are increasingly at odds with a PE industry that is more concerned with debt laced acquisitions and re-packaging companies for resale or floatation than the long term needs of customers. Re-structuring on this scale is rarely confined to ‘back office' infrastructure, personnel and support because software houses, acquired as part of a Private Equity inspired portfolio, often come with conflicting technology and overlapping solutions that sit uneasily in divisionalised structures.
Turning a quick profit for the PE house inevitably means rationalising product development, technology platforms, skills and resources. Technology decisions made for the benefit of the enlarged software group may compromise existing product roadmaps agreed with customers before acquisition, increasing the uncertainty around the direction of key applications and acting as a brake on progress. Furthermore, the supplier's responsiveness to unexpected changes in legislation may be seriously impaired during a transitional period in which already depleted development resources are spread thinly over a large number of different software solutions and hardware platforms.
Not all of the grand acquisitions of the last few years have been financially led. Some of the most audacious deals in the software industry, have been aimed at securing a ‘captive' user base and taking market share with the ultimate aim of herding customers onto a rationalised product platform. Although the motives are different from the Private Equity industry, the uncertainty created is often the same, with newly acquired customers fearing that they will be compelled to migrate to a new product. Unfortunately, all too often, an acquirer's real ambitions only become evident a year or two down the line, prolonging the period of uncertainty and stifling management plans.
Another consequence of larger software houses with rapidly acquired customer bases is that the ‘direct' delivery model, in which the software author licences the product directly to the customer becomes unaffordable. As a result the product is supplied through an ‘indirect' model in which hastily recruited dealers or re-sellers are responsible for supporting customers. Whilst this model is widely used in the SME sector, whose needs may be more straightforward, larger companies with more demanding multinational and multi-lingual requirements appreciate the direct involvement of the software author as well as the possibility of influencing future software development.
Rarely do the core applications dealers have the same quality and depth of resources as a software house, (with the exception of certain resellers that have deep vertical market expertise). This is why best of class software specialists like CODA prefer a direct business model in which appropriate product skills can be supplied, allowing companies to take full advantage of the capabilities of the software. |
| Comparative highlights and positioning of CODA |
| Characteristic |
Portfolio ERP players |
Global players |
The CODA difference |
| Direct supply model? |
Most work through resellers or a mixed model of direct and indirect support depending on company size. |
Almost always through resellers |
Sells directly in the main. Individual customers have a ‘voice' and access to appropriate skills |
| Exclusive Financials focus? |
Diverse interests with no clear focus on strength of financials. Solutions are ‘assembled' by portfolio companies, supported by a scattered skills base that give very limited advantages over the open market. |
A broadly based application set, designed for a commoditised market |
A CFO's system based on the unified ledger, clearly focussed on solutions to meet key market developments, in financial reporting, analytics, controls and compliance, roles based processing and workflow. |
| Portfolio of products? |
Loose federation of companies attempting to cross-sell functionality across the portfolio |
Several overlapping solutions to choose from, with no pronounced specialism in financials |
One company, one set of products and culture, designed to bring about complete cohesion between the ‘information world' and ‘transaction world'. |
| Stability? |
Constant acquisitions with no convincing strategy other than growth for its own sake. |
Good stability |
Mainly self sufficient path to growth, supplemented by occasional strategic acquisitions. |
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SUMMARY
As the global software market consolidates some of the resulting transactions are proving extremely unpopular as companies find themselves saddled with risks they did not bargain for, fewer choices of supplier and increasing levels of uncertainty as previously published product road maps ‘evaporate' and key employees in software houses leave for other companies.
The timing of these structural changes is unfortunate since they coincide with massive changes in financial reporting, performance measurement and compliance which require higher levels of integration and deeper financial skills than at any time in the past.
The software marketplace is polarising increasingly around ERP ‘portfolio players' that appear to seek growth for its own sake and the rising global market for commoditised solutions sold through resellers. Companies that previously had specialism in financial applications but had not kept pace with developments have been swallowed up by the ‘consolidators' leaving a gap in provision for the many companies that have complex financial requirements.
CODA is emerging as a leader in this segment not only because of its deep heritage in the unified ledger, handling complex analytical and financial requirements but also its constant investment in capability designed to keep the finance function ahead of the game. In recent years it has added business intelligence and financial consolidation capability as well as making pioneering moves in controls, compliance and collaborative applications such as CODA-Control which provides for both workflow and business process management.
But unlike many vendors, this additional capability has been harnessed through in-house developments supplemented where necessary with limited and well positioned acquisitions that have been fully absorbed so that customers benefit from an integrated product set that is well supported by deep product knowledge and relevant skills.
The result is a formidable breadth of solutions for the finance function, at the leading edge of market developments. They are presented in an accessible way and delivered by an organisation that has a clear focus on the needs of its target market unencumbered by unwieldy management structures and unconstrained by being part of an ‘anonymous' global software group. |
| About FSN Publishing Limited |
FSN Publishing Limited is an independent research, news and publishing Organisation catering for the needs of the finance function. The report is written by Gary Simon, Group Publisher of FSN and Managing Editor of FSN Newswire. He is a graduate of London University , a Chartered Accountant and a Fellow of the British Computer Society with more than 23 years experience of implementing management and financial reporting systems. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector.
Gary.simon@fsn.co.uk
www.fsn.co.uk
Whilst every attempt has been made to ensure that the information in this document is accurate and complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and not intended to be specific to a particular set of circumstances. FSN Publishing Limited and the author do not accept responsibility for any kind of loss resulting from the use of information contained in this document. |
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