Analyst Perspectives

This is the third in a series of blog posts on what CEOs (and for that matter, all senior corporate executives) need to know about IT and its impact on running a business. The first covered the high-level issues. As I noted, it’s not necessary for a CEO to be able to write Java code or master the intricacies of an ERP or sales compensation application. However, CEOs must grasp the basics of IT just as they must understand basic corporate finance, the production process and – at least at a high level – the technologies that support that process. My second post was about four supporting technologies that will drive change in business computing over the next five years. It relates examples of how applications can help every part of a business operate more effectively, not just efficiently. Now let’s turn our attention to finance and sales – and as I’ve noted in the previous posts, what follows is an “elevator pitch” treatment of what could be a much longer discussion.

The business application revolution began two decades ago as technology and the market’s demand for open systems enabled a large number of startup companies to offer software that could manage some aspect of a business. Some of these offerings were oriented to record-keeping functions (such as accounting, inventory, human resources, maintenance and repair, sales force automation or supply chain management) while others (statutory financial consolidation and planning and budgeting) were analytical in nature, designed to support executives’ decision-making processes. Today, almost all larger companies have deployed record-keeping systems that cover the gamut of their business operations. Yet too often companies rely on desktop spreadsheets to manage complex, repetitive tasks, perform analyses and generate reports when they should be using dedicated application software.

Three important areas where companies frequently misuse or overuse desktop spreadsheets include planning and budgeting, the financial close and sales management. Typically, senior executives don’t think about how the work is done – they are mainly interested in the results. However, they should pay closer attention because very likely they don’t know what they’re missing. Spreadsheets often limit what an organization can accomplish, because as users work to overcome their limitations using spreadsheets becomes time-consuming, even if many users are inured to this aspect. As well, people often lack the skills to perform more sophisticated analyses. If their employees were using more appropriate information technology, executives would have access to better information sooner, making them more effective in their jobs.

Senior management must improve business planning. I’ve commented frequently on the poor state of business planning. Executives can and should have the ability to gain deeper forward visibility, spot favorable or adverse business trends sooner and have a better grasp of the impact of their decisions rather than going with the gut feel. One of the biggest barriers to more effective business planning is the inappropriate use of desktop spreadsheets. When spreadsheets replaced paper-based systems three decades ago they revolutionized companies’ ability to plan. Today, however, they are a barrier to more effective planning because desktop spreadsheets have inherent defects that limit planning effectiveness. Moreover, as I mentioned in the second post of this series, in-memory technology gives organizations the ability transform review meetings from a rehash of what’s happened to a forward-looking, action-oriented session. It enables executives to delve deeper into underlying business conditions and enables them to drive a fact-based discussion of what to do next and why.

The accounting close is a core finance function that a majority of companies do not handle well. Our research finds that on average, it takes longer for companies to close their books today than it did five years ago. In 2007, nearly half (47%) were closing their quarters within five or six days, but now only 38 percent can do it as quickly. CEOs should insist that the finance organization be able to close the books in one week or less. One reason is that the close process itself is a good diagnostic of how well finance is performing. Addressing whatever issues are preventing a company from closing the books within a week, whether they are related to process design or execution, information, software, training or communications, is likely to have a knock-on effect that enhances the overall performance of the finance department. A second reason is that closing faster enables corporations to review their management and financial performance sooner and therefore allows them to seize opportunities and deal with issues quicker. A third reason is that by operating more efficiently, the finance function can play a more strategic role in supporting executives, managers and operations. Ventana Research assesses software for financial performance management (FPM), which includes capabilities for planning, budgeting and closing, in our FPM Software Value Index. Our Index specifies the requirements for this category of software and measures how well vendors address these requirements.

CEOs must also demand better use of technology in the sales function. Our research finds that a majority lag in managing the performance of the sales function and in the use of sales analytics. Most larger companies could benefit from the use of predictive analytics that would allow them to spot sales issues earlier and therefore address them sooner. Moreover, outside of a handful of industries (notably travel and leisure and retail), few have adopted price and profitability optimization as a discipline to increase revenue without having to sacrifice the bottom line. Increasingly, companies have been adopting dedicated sales compensation management software to replace spreadsheet-based systems to ensure that they achieve the best results from their incentive compensation spending. This software is essential if companies want to enhance the effectiveness of their pricing management. All of these applications are part of what we call sales performance management. We assess the vendors and their offerings in our Sales Performance Management Value Index, which lays out requirements and measures how well vendors in this category address these requirements.

CEOs and senior executives must have a basic understanding of how information technology can be used to improve the performance of these core technologies and how they will affect each part of their businesses. Everyone running a company must find the time to better understand and manage the information technology dimension of their business. Over the past 60-odd years, IT has grown in its importance to the daily functioning of a business, and increasingly has become a means of competitive differentiation. IT is a major element (and in some companies the major component) of capital spending. Technology continues to advance, bringing threats and opportunities. CEOs must stay on top of how IT can serve their businesses, improve performance and make their lives easier.

Regards,

Robert Kugel – SVP Research