The cloud is widely acknowledged to be the next frontier for corporate performance management systems. John Van Decker, research vice-president in corporate performance management and financial management systems at Gartner, speaks to Finance Director Europe about the technology’s development and what needs to happen in the industry before corporates wholeheartedly embrace it.
Technological developments in recent years have tended to happen on a smaller scale than before, but with greater mobility. Though large corporates have tended to lag behind their smaller counterparts, they have recently started to catch up, with cloud computing and big-data analysis tools quickly becoming part of their technology suites. In certain aspects of the corporate finance function, however, this transition is not yet complete.
Corporate performance management (CPM) systems - also known as enterprise performance management (EPM) systems - are a good example of this reluctance to change. Originally adopted in the 1980s and 1990s by the finance departments of large corporates, these on-premise systems were designed to take care of processes such as budgeting, forecasting and reporting, and to consolidate financial information in a way that could more effectively inform strategic decision making. Using Excel as a foundation, these systems involved high up-front hardware costs and periodic disruptive updates. They were increasingly complex, unwieldy and expensive to maintain.
These days, it is the norm for CPM systems to be used as a tool to support performance management throughout the organisation, not just in the finance division. From a business intelligence standpoint, key performance indicators such as revenue, overheads, return on investment and operational cost can be analysed on an enterprise, divisional or project basis and tested in various scenarios to help management plot the company's strategy. Office-of-finance (OOF) CPM and strategic CPM are now considered distinct systems, according to technology consultancy Gartner, with the former acting as the glue to link these operational areas back to financial and enterprise performance targets, ensuring that all department-level CPM activity remains rooted in financial reality.
The analytical tools, supported by increases in computing power and in-system memory, are more impressive now than the in-premise solutions of the past. As well as getting down to an unprecedented degree of data granularity, system information can be turned into a broad array of visuals and graphics, accessible through intuitive dashboards.
Most current solutions are modular for flexible implementation, and are delivered through a cloud-service model, which means reduced hardware requirements, lower costs and less need for on-site computer expertise, as software and operating system updates are handled by the vendor through the cloud.
Mirroring this potential is the fact that Oracle, IBM and SAP - the in-premise CPM old guard - all introduced cloud-only offerings in 2014. At the same time, a number of up-and-coming cloud-only CPM suppliers, unburdened by involvement with the old model, have been raising plenty of cash. Anaplan, with its in-memory Hyperblock technology, raised $33 million of Series C funding in 2013 and $100 million of Series D funding in 2014; Adaptive Insights raised $45.9 million of Series F funding in 2013.
This activity is reflected in corporate attitudes. According to a 2014 survey by Boston-based technology research company Nucleus Research, 98% of current CPM system users are satisfied with the service it offers. Only 4% envisage a reduction in CPM budgets over the coming year, with 34% considering the cloud their primary platform for CPM deployment, and 49% saying they are considering making the move to a cloud-based delivery model.
"The outlay of cost for on-site systems, maintenance and support, and the variety of purchasing strategies, including subscription pricing, has made the cloud more attractive," says Nina Sandy, principal analyst at Nucleus Research. "The concerns regarding security of the systems and protection of the data have started to dissipate as software as a service [SaaS] and cloud implementations are becoming more common and proven, and the technology has improved."
Reality is a lag
While the intention to move to the cloud is clear, many larger companies are still clinging to the on-premise systems. This is partly due to fears about cloud computing, security issues and the desire to keep certain information guarded in-house. It is also due to the historical difficulty CPM solutions have had integrating with ERP and other in-house systems, which makes many wary of the potential disruption a new cloud-based offering could cause.
John Van Decker, vice-president of corporate performance management and financial management systems at Gartner, says that cloud-based operators haven't done enough to prove that they can handle the complexities associated with CPM in a large enterprise with multiple business lines.
Van Decker says: "What we are seeing is that the SaaS solutions are chipping away at the big corporate market, but still they tend to be below $5 billion or even $2 billion revenue-type organisations.
"As there are more proof points with these solutions, and as we start seeing more companies leverage these solutions from names like SAP, Oracle or IBM, it will become more mainstream in large organisations. But that's one of the main challenges for the SaaS vendors that want to move up to large organisations, knowing that they can support the needs at the enterprise level for planning, budgeting and forecasting."
Not only do technology providers need to demonstrate this capability, they need to package it in a way that ordinary finance employees understand. According to Van Decker, there is a clear desire for simpler design and ease of use, as well as for traditional upgrade and maintenance times to be reduced. Corporates want tools that are customised to their needs and don't take a lot of trial and error to come up with the right configuration. This becomes more difficult as the analytics in CPM systems grow more sophisticated, particularly with the introduction of things such as complex forecasting algorithms and models that simultaneously examine the impact of multiple business scenarios.
Vendor relationships need to be more trusting for cloud computing to succeed. Finance departments are dependent on the vendor to monitor the system, ensure it is secure and running at its optimum level. These departments give up a lot of control by placing core processes beyond their own four walls and they want to make absolutely sure that the risk is warranted.
"Companies give up more control with SaaS vendors than with those offering traditional application hosting or on-premises options," Van Decker wrote in an April paper entitled 'Magic quadrant for corporate performance management suites'. "In the cloud, customers must rely on their vendors to a higher degree. This elevation of the importance of vendor trust and SaaS competency makes customer satisfaction vitally important. This is especially true within the office of finance - a business domain that is necessarily conservative and risk-averse."
The trend towards cloud adoption is strong. According to Gartner's estimates, the compound annual growth rate of cloud-based CPM adoption is between 20 and 30%. Though growth is quicker among small and medium-sized companies, a clear upwards trend is identifiable among large enterprises and this is sure to accelerate as the industry adjusts to the challenges of compatibility and user-friendliness.
Slow and steady
It is also important that new solutions are introduced slowly to ensure that finance employees are not overwhelmed by the change. Many larger companies are introducing hybrid systems, employing the on-premise system on an enterprise level, but handing a specific type of planning over to a cloud-based system. This ensures that transformation costs don't get out of control and that the move away from the traditional IT support model is a smooth one.
"It's universally agreed upon that it's best from a roll-out and maintaining-of-technology standpoint to move away from solutions that require upgrades over time," Van Decker says. "What we need to focus on is, with a cloud approach or a public cloud approach, allowing for new capabilities to be rolled out quarterly and in a controlled fashion. It's like [saying] here are three more reports, rather than here are 27 more reports. The screens have all changed, we now have this capability, and we are using a different technology layer.
"One good thing is that the technology layer for the most part, the changes in technology in a cloud environment, can be hidden in good part from the client," Van Decker says. "It leaves them to focus more on the capability within the solution."
The ambition is to bring key systems for finance, HR, IT and capital planning on to a single cloud-based CPM platform. With the speed at which things are moving, this might not be too far away.