For many people, managing personal finances is difficult enough. Most of us forget to keep bills and receipts, and end up at the end of the month with a big black hole where our bank balances should be. Imagine, then, the difficulty that most IT and financial directors face when trying to construct a software solution that will manage a whole company's finances.
The market for financial and accounting software separates neatly into three tiers. At the high end, financial software often merges with other business process software into a "one size fits all" approach, normally sold under the banner of enterprise resource planning (ERP) software.
Players in this field often sell not only accounting modules such as general ledger and reporting software, but will also offer other modules covering areas such as human resources and manufacturing. This market has been divided among a gang of five vendors, in the form of JD Edwards, Baan, Oracle (with its Oracle Financials product), PeopleSoft and SAP.
They have become such an institution that they are often known in financial software circles as the JBOPS group.
Simon Edwards, CEO for Europe and EMEA at financial software vendor Systems Union, identifies the lowest tier of accountancy software vendors as those small players operating in local markets. "At the bottom end of the market there is a need for very simple software products that are easy to use for the smallest type of organisation," he says. "They don't necessarily need to support a huge range of functionality." He places companies such as Sage and Pegasus in this category, and adds that they often cater for owner-managed enterprises.
Edwards contends that demand for these low-level solutions has been tapering off, leading to a heightened level of consolidation in this lowest tier.
The primary reason for this has been the increase in merger and acquisition activity in the customer base, leading to an increased demand for homogenised software infrastructures with a broader set of functions and a more scalable architecture.
According to Edwards, Systems Union occupies the middle tier medium-sized organisations, with revenues over #10 million. Unsurprisingly, having managed to put the low-end market in its place, he also contends that there are difficulties in the ERP marketplace.
One of the largest problems for ERP vendors is the inevitable decline of the high-end market, he says. Large ERP vendors have been feasting on a customer base consisting of very large companies running legacy systems that haven't been significantly upgraded for a long time. The recent explosion in the ERP market has been due to a general growth in the popularity of packaged software.
The millennium problem, combined with the impending EMU challenge, has forced many large companies to take a close look at their computing infrastructures.
A large proportion of them have decided that, rather than trying to mend old systems, they should make the radical change that would inevitably be required at some stage anyway. However, there are only so many of these customers in existence, and Edwards argues that the market growth curve enjoyed by the ERP vendors must inevitably become a bell curve with a down slope on the other side.
Furthermore, he argues that because ERP vendors have traditionally been associated with high implementation costs, it may be difficult for them to shoehorn their solutions into medium-sized companies in the middle tier while still maintaining a healthy profit margin. SAP is one company that has been plagued with comments about long, expensive implementation cycles in the past. Peter Robertshaw, product marketing manager for the German giant, moves quickly to defend the company.
He explains that SAP has been targeting small- and medium-sized companies for the past three years. He argues that the company's Accelerated SAP toolkit, provided free to customers on CD, contains a project roadmap and a set of accelerators designed to make projects go faster. These include sample meeting agendas, sample kick-off plans and project plans.
There is also a question and answer database, he points out. He argues that 64% of SAP implementation is completed within nine months, and that many smaller companies complete in four months or under.
One company targeting customers in the low- to middle-tier market is Sage. The company markets a product called Instant Accounting 98, aimed at businesses with a turnover of up to #250,000. Its other product lines, Sage Line 50 and Sage Line 100, cater for businesses with turnovers of up to #20 million.
Accounts group product manager Steve Attwell highlights the benefits that the Internet has bought to financial software. An example of this is the Internet button included in Sage's products, which when clicked launches a browser that connects to the customer's desired ISP. It then gives them access to an exclusive area on the Sage Web site providing online information and service packs.
Attwell adds that the Internet facility also makes it easy to check customer credit ratings online. "If you're setting up a customer account, you can press a button, log onto a third-party credit checking service and pull off information about that customer's credit worthiness, cutting and pasting it straight into the customer account record," he says.
Other Internet-related facilities include online parcel checking. The Financial Controller package sold as part of the Sage Line range enables customers to check customer deliveries online. On 1 November, the company also launched its first product for Internet banking. Attwell explains that Sage has been speaking to retail banks for some time about supporting online customer services.
Another approach to Internet-enabling financial software involves integrating Ecommerce solutions with the back-end accounting function. Financial software vendor Tetra is readying a solution in this area according to marketing director Andrew Yuille. He explains that the company, which floated on the London Stock Exchange last year, is currently beta testing an Internet order processing toolkit. Many companies are starting to see the benefit of the Internet as a low-cost, easily accessible network. It is consequently replacing EDI as a means of exchanging commercial data. The product will complement Tetra's core product set, he explains.
Another type of financial software focuses specifically on budgeting.
Mike Hartley, managing director of Adaytum, explains that his company sells products in this area. Essentially a finance-oriented multi-dimensional online analytical processing (MOLAP) tool, it is designed to take over the budgeting process for companies finding that simple spreadsheets cannot cope. "Once you start putting together a budget for a company with a #100 million turnover, spreadsheets start flying apart," says Hartley.
The company, which moved its software from DOS to Windows relatively late in 1995, uses either basic ASCII or ODBC links to exchange data with third-party financial applications. Hartley says that the firm will eventually introduce an OLE DB link, which will enable users to exchange metadata (information about data). The firm has also built a link directly into PeopleSoft's product, and is working with third party companies to produce links into SAP.
This need to integrate different financial products is becoming increasingly important as customers become disillusioned with "one size fits all" solutions, according to Wendy Haylock, head of communications for the Business and Accountancy Software Developers Association (BASDA).
In response to suggestions from financial software companies about forming a best-of-breed initiative in the industry, Haylock researched an article and found a surprising level of support from European customers.
The general consensus was that the large ERP vendors' products could often impose limitations on companies wanting to implement financial solutions.
Instead, many customers wanted the option to pick and choose specialist modules from different companies to form a more tailored solution.
Richard Hannam, corporate communications manager for financial software vendor QSP, agrees. He cites one public sector contract in Australia, where the customer wanted a combination of human resources and financial software. QSP, which was initially bidding against PeopleSoft, eventually combined its bid with the latter company to offer what Hannam describes as a best of breed solution.
Although recent financial results from SAP suggest that the market is still buoyant, the tide seems to be turning for these large players in the financial software arena. As the base of very large customers is exhausted, the JBOPS community may suffer if smaller companies turn to more focused suppliers to source their financial software solutions.
The recent lawsuit against SAP by US drugs company Fox Meyer, in which the latter is suing the German supplier for $500 million, for alleged negligence, combined with Baan's poor financial results won't do much to encourage customer confidence.
KEY PROBLEM OF THE EURO
One of the biggest issues affecting both vendors and users of financial software is the emergence of the single European currency, or euro. European Monetary Union, or EMU, has become even more of a concern for UK companies following Gordon Brown's announcement of a framework for moving to the euro on 3 November. This move was widely interpreted as a thawing of government attitudes towards the euro - the official policy of both the Conservative and Labour governments has hitherto been to "wait and see" how the initiative panned out for the member states.
According to Wendy Haylock, head of communications for the Business and Accountancy Software Developers Association (BASDA), the level of euro compliance among the financial software vendor community is impressive.
This summer, BASDA conducted a member survey to assess the general level of readiness. Most vendors said that they would be able to handle currency conversion and rounding by the end of this year. This includes triangulation, a concept that has proved difficult for many developers to handle. Under the triangulation rules, companies converting sums of money from one national currency unit to another must do so via the euro. This law will be imposed until the end of the EMU transition phase, when all national currency will cease to exist among the member states, and the euro will be the only option.
Haylock says that there is one area where customers should watch their software vendors very closely. They should be wary of suppliers claiming that they can handle the conversion of base currencies now, because there is a distinct lack of local legislation defining the supporting rules.
"Under the laws of the single currency, the rounding rules are passed centrally, but each country has the right to cast its own laws on how it handles things. That can make a difference to how companies report their accounts, and so we can't really complete conversion tools until we know what the tools are," she warns, adding that conversion routines for base currencies won't be available until next year at the earliest.
CASE STUDY: LLOYDS TREASURY
When Lloyds Treasury decided to move from its existing accounting system to Flexi's FinancialDatawarehouse product, the main driver was the need for a faster, more integrated financial system to cope with shortening business cycles. The Treasury, which started the project in 1997 and is due to finish next summer, had been running its financial control and reporting applications on a disparate selection of databases and spreadsheets.
David Kale, senior manager for financial systems at the Treasury, explains that when the development team started looking for a financial product, its scope was limited because the Treasury had already selected Windows NT as a core computing platform. At the time, scalable financial solutions encompassing the functionality that he needed were thin on the ground in the NT environment, Kale says. He eventually found Flexi, which at the time was called the Dodge Group. After talking to the company about porting the product to NT, the Treasury took it on board from the start of 1997.
"We were looking for the ability to collect and report on large volumes of data, so while we needed one aspect for a general ledger, we also needed financial information for other management purposes," he says. "We needed dealer information, for example, and we have handled that by using the Flexi segments' feature." The company runs eight data segments that enable it to slice and dice its accounting data more effectively. These segments are divided into Legal entity, Data source, Chartered accounts, Profit centre, Customer, Product, Dealer and Portfolio.
To support the system, the Treasury runs eight Compaq Proliant servers, four of which are there for contingency purposes. Data is collected into a 5500 model Proliant, which acts as the data warehouse for the Treasury.
The data is then distributed by a 5000 model server using replication, feeding into a variety of datamarts. The financial control datamart is housed on a 5500 machine, which is in turn supported by a 5000 model for monthly reporting purposes.
Kale explains that the data warehouse feeds figures to other datamarts that are not associated with the financial control function. These include marketing and customer support systems that are currently in development.
He adds that they have already proven useful for handling Bank of England surveys, which are arriving with increasing regularity.
At present, the Flexi software is still being run mostly as a development system. The team aims to take it into full production in January next year. Until then, the existing collection of spreadsheets and databases will continue to handle the majority of the Treasury's operational financial data. "That solution still works, but it takes a lot of time and energy simply to collect the data," says Kale. "Reconciliation is difficult and time-consuming. Adjustments to the system are equally painstaking because there are so many parallel systems." He adds that the Lloyds Bank/TSB Group has shortened the reporting timeframe by a day, making it even more difficult for this system to function effectively.
The main business benefit provided by FinancialDatawarehouse is the single repository for information according to Kale. He says that the system makes information easier to manipulate, and also adds that it increases the quality of the data because it only appears once. As the team has implemented the system, it has restructured its data collection processes, eliminating much of the manual intervention inherent in the existing solution.
This means that reporting is faster than before.
The most recent development that the team has made with the system is the introduction of daily derivative reporting on a live basis, which happened in October. Before the rest of the software goes live in a production environment, Kale says that he has to fine tune the data collection processes that occur during the overnight window when the system has access to Treasury data. This would involve tailoring the software's archiving policy to handle the volumes of data that are processed on a daily basis - this currently amounts to roughly 750,000 individual accounting records.
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