One of the more interesting products I saw at Oracle Open World was Financial Close Management (FCM), which will be generally available (GA) sometime in 2010. (One member of the audience at a session I attended insisted on calling it “vaporware.” Strictly speaking that is true, but the product will be the result of assembling already mature software, so we would be very surprised if it’s not available next year.) I don’t make a habit of talking about applications that are not GA, but this one is important enough to highlight because of its potential positive impact on how public companies manage their close-to-report cycle. Today this is a largely manual process that is time consuming and, because it is error prone, becomes even more time consuming as companies must work diligently to avoid errors in appearing their external financial statements.
I have been advocating automating more of the close-to-report cycle for the better part of this decade, and from what I saw, FCM promises to do this well. Public companies spend too much time executing this core finance function – the processes that begins with the quarterly close and ends with a completed document filed with the appropriate regulatory agency (such as the SEC in the United States). The “interactive data” requirement that will require companies to apply XBRL tags to their financial statements is likely to spur companies to adopt software to automate the cycle because most larger ones will find there isn’t enough time to perform the tagging and document creation without having to substantially accelerate their accounting close, adding more people or cutting corners on some pieces of the process. The shift to IFRS from US GAAP that’s due sometime in the middle of the next decade is also going to put a premium on automating this process. (Check out “IFRS: Assembly Required”).
There are several basic problems companies have faced for years when it comes to the close-to-report cycle. One is data integration. Not all of the data that goes into their filings comes out of their financial consolidation system. Some of it is kept in other enterprise systems or desktop spreadsheets (either on individual computers or a secure server). There also is the need to handle the integration of data from multiple systems in a consistent, automated fashion. (See “CFOs Need Better Financial Information Management”) Then there is the fact that some of the numbers in the tables in an external filing are referenced in the text along with calculations and ratios based on these numbers (such as percentage change or a measure of balance sheet strength). It is critical that these numbers are accurate and tie to the tabular information. Third, assembling and reviewing the text is often not the job of a single person so assembling these bits and pieces pose basic document management issues such as version control and approvals.
Manual systems for handling the close-to-report cycle are far more time consuming in creating and editing the content. And because they are error-prone, they require hours of checking and re-checking by very highly paid individuals. Then there is the mandate just imposed by the SEC (and existing in other countries) to report data in an interactive format; that is, using XBRL to enable investors to be able to work more effectively and easily with the financial data. By the time the third year of the interactive data phase-in kicks in, companies will have a large amount of discrete pieces of data in their financial statements to tag. Add to that the shift to IFRS from US GAAP which is scheduled to take place sometime in the mid-‘teens. Being principals based, IFRS will require greater amounts of commentary on the rationale behind accounting treatments. Creating, updating and reviewing this much text will be an additional time burden if left to manual systems. All of this will put additional pressure on companies to accelerate their accounting close. (See “Don’t Forget to Close Faster”).
Oracle/Hyperion is the latest company to decide to offer a product that will integrate the processes of assembling text and numbers into a final filing, along with the requisite reviews and approvals. This was a natural extension of the company’s strong franchise in statutory consolidation. The final details of the product are not yet out but I expect that it will look a lot like Clarity Systems FSR product, which has been available for more than a year now. The application will use the well-proven UB Matrix XBRL engine to automate the tagging process.
One reason we’re not concerned about Oracle’s ability to deliver the product is that conceptually and functionally, Financial Close Manager appears to be a lot like Clarity Systems’ FSR software, which has been available for more than one year. Clarity has provided public companies with an easy to implement, Microsoft Office-based system for assembling the numbers and text into a final document and applying XBRL tags in a consistent, automated fashion. FCM will do that too, but I see three significant differences. One is that existing Hyperion Financial Management (HFM) users, and those mainly using Oracle EPM software will have an easier integration path for these pieces if that’s what their company has as a standard. A second difference appears to be a more highly featured workflow capability (though this is just slideware at the moment, the same level of capability also exists in other Oracle applications). A third area is that the key document management piece of the solution will be more robust and structured than Clarity’s. To simplify, users will think they are working natively in Microsoft Word, but there will be an underlying full-featured document management engine that acquired when it bought Stellent (formerly known, trivia fans, as Intranet Solutions). My guess is that the overall difference between Clarity FSR and Oracle FCM on this point will be a tradeoff between ease (and cost) of implementation, operation and maintenance versus the depth of capabilities in areas like document management.
I don’t expect that IBM (which already has all of the piece parts) and potentially packaged together (See: "The Finance Appliance"), Infor or SAP will be ignoring this category, and Oracle/Hyperion’s entry further validates the category as an emerging piece of a comprehensive financial management suite. I would not be surprised if this is one of those newly classified Oracle Fusion applications that discussed on stage by Larry Ellison and analyzed by my colleague (See: "Larry Ellison Stumps Oracle Exadata and Fusion Applications with California Governor"). I‘m looking forward to the GA announcement of Oracle FCM sometime next year, as well as further announcements by other vendors.
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Robert D. Kugel - SVP Research