Best-of-Breed Software: A New Level of Results and ROI

A New Level of Results and ROI

Until recently, Textron Inc., the $12 billion Providence, R.I.-based parent company of Bell Helicopter, Cessna and other businesses, operated 87 e-mail servers across its global business units. Eighty-seven. It's a number that Larry Costello, Textron's director, finance information systems, often returns to when describing his role in transforming the company.

For five years, through mid-2000, Textron was busy acquiring companies to strengthen its aircraft, fastening systems, industrial products and finance organizations. Now the company wants to meld these acquisitions into a networked enterprise. For Costello, that means standardizing 100 general ledger systems down to one chart of accounts and one consolidation system.

The number 87 serves as Costello's mantra as he works to consolidate corporate performance management applications, a top priority at Textron. It's also a focus for his colleagues who are winnowing out the organization's excess finance applications. "Sometimes the tendency is to roll with what you've gained," Costello notes. "You don't fix what's not broken in that acquisitive mode, and all of a sudden you wind up with 87 e-mail servers and an abundance of financial systems." Textron is investing in both best-of-breed and enterprise resource planning (ERP) solutions to meet its consolidation objectives. "We're transforming the company so that when the economy does pick up, we're in a much better position than we would have been in had we not done this," Costello adds.

Textron's challenges illustrate several key trends that are boosting today's best-of-breed market. First, despite vigilant cost controls that limit IT purchases, companies are using best-of-breed solutions to enhance their financial systems during the economic downturn.

Second, shifts in underlying corporate strategy, such as the need to consolidate after a spate of acquisitions or a change in senior management, are driving many businesses' best-of-breed investments.

Third, despite a continuing shakeout in the market and targeted incursions into best-of-breed strongholds (e.g., financial consolidation, planning and forecasting) by ERP vendors, best-of-breed solutions remain viable -- in many cases even preferable. Plus, corporate performance management (CPM) investments, which enhance budgeting, planning, reporting and consolidation processes, consistently appear at the top of investment priority lists.

And fourth, now that companies have spent several years building their familiarity with Internet-based solutions and have come to understand the benefits of integration and the challenges of implementation, the next major hurdle involves finding sufficient time and resources to execute these projects.

Finance executives purchasing and implementing best-of-breed solutions invariably cite these four major trends as reasons behind their need for new financial systems and their selection criteria as they try to reposition their enterprise.

Driving the Decision

While Textron's best-of-breed investments have been spurred by the company's growth, Coty Inc.'s game plan was shaped by a change in management. When CEO Bernd Beetz joined the New York City-based manufacturer of fragrance, cosmetics and skin care products in May 2001, he brought a new focus: organizing the company into a three-tiered structure built on category, brand and market. Prior to Beetz's arrival, Coty looked at its results along geographic lines and then by brands within those geographies. "To make that transition, we had to develop reporting systems that enabled the company to quickly view, synthesize and react to the information we had," notes senior vice president and corporate controller Jim Shiah. "About a year ago, we embarked on a project to improve the business reporting infrastructure of the company and allow those types of analyses and decisions to be made."

The primary corporate performance management capabilities Coty needed were a Web-based architecture, the ability to integrate with other financial systems, flexible modeling and analysis capabilities, and the ability to handle the organization's international scope. "That boiled down to two key selection criteria: finding a way to easily take our data and turn it into information, and leveraging off the investments we'd already made in our financial systems across the world," Shiah adds.

Sharon Garris, budget manager for the Children's Hospital of the King's Daughters Health System in Norfolk, Va., sought flexibility, a Web-based architecture and a reduction in closing times when she chose best-of-breed performance management software for her company. "My main objective was to find a solution that the end users could learn quickly and easily," she says. On the other hand, Garris wanted to be able to customize the solution as much as possible, while hiding that complexity from end users.

"The directors of our large nursing areas don't have the time or the capacity to sit down and do a complex productivity report to try to build out their budgets," she adds. "But I can create a model that will do nine-tenths of everything they need to do. What they see looks like a simple spreadsheet, and all the math I need takes place in the background." As a result, the quarterly close has shrunk from 45 days to 10 days.

Retrenchment, ROI and Resources

As Costello notes, finance organizations can play a key role in the retrenchment processes that companies have initiated as a result of the recession. But other external forces affect best-of-breed decisions, as well.

"We're seeing more sophisticated tools that can help make better financial decisions," notes Katherine Jones, Ph.D., research director for Aberdeen Group Inc.'s enterprise applications practice in Palo Alto, Calif. "In light of Andersen and Enron, that's a darn good thing."

Technology cannot deliver integrity, but new contract management, credit management and HR applications can provide more timely visibility into the business. This sharper vision into the supply chain helped dampen the negative impact of the recent downturn for some companies. "One of the things that made this recession hit so hard and so quickly was that, for the first time, people could tell that their demand chain was dwindling," Jones notes. "It used to take months to trickle up through the system, like tremors. Now we have the earthquake. Some people could tell very quickly that they needed to cut production and dump inventory, thanks to their financial application. That's all about getting the numbers."

Along with the new premium on visibility, companies are emphasizing ROI. Much of the responsibility for demonstrating return has fallen on best-of-breed vendors. John Hagerty, vice president, enterprise management service, with AMR Research in Boston, says that during the past 12 months managers have become insistent that vendors demonstrate ROI when making their pitches. "In the past, ROI evaluations were more of an intellectual exercise," he says. "Now users ask their vendors for the tools to guarantee payback within a certain time. I believe the user community has very much put the responsibility on the vendor side: Give me the model by which I will be successful, and then give me the tools to be successful."

While initial scrutiny of ROI models has increased, most companies appear less than vigilant about communicating those measures throughout the organization and revisiting them on a regular basis, at least during the implementation phase. "I've heard our transformation to a more networked enterprise and the investment in the systems that will enable us to achieve that described as 'a ticket to the game,' " says Costello.

Chances are good that Costello can trust the ROI analysis conducted by his vendor. After they narrow the software selection process down to three or four finalists, finance managers tend to run vendors' ROI calculators side by side. "And vendors don't pull this stuff out of thin air," says Hagerty. "They'll use their existing customer base to predict what's going to happen. The best ROI studies are the ones based on what other companies have done. And that's what these ROI calculators are doing right now: looking at history to predict the future, as opposed to pulling together a bunch of hypothetical numbers."

CPM's Added Functionality

Although some ERP vendors have recently developed well-regarded planning, budgeting and reporting offerings, the field of corporate performance management remains a stronghold for best-of-breed software. When asked to identify the most important best-of-breed trends, most analysts begin with CPM.

"There has been an emergence of performance management applications that drive the business forward rather than just reflect what happened," says Hagerty. "These financial planning and budgeting applications look at real-time data and enable users to make determinations very quickly with regard to what business strategies they need to pursue. And they can help make those changes pretty much in real time." Hagerty also says that companies "are having much more success in using best-of-breed vendors to solve that challenge, as opposed to suite players." Part of the reason is that ERP vendors have only recently begun adding this type of functionality to their software offerings.

While some companies knew early in the economic downturn that they needed to cut production and dump inventory, many more did not. So finance executives emphasize the importance of improving their organization's forecasting capabilities. "Companies still have not figured out how to anticipate a problem before it arises," says Shiah. "So the challenge for the next generation [of best-of-breed applications] will be: Can you diagnose a problem or a risk in advance of its occurrence and take action to prevent it? I think these new systems and tools give us a better ability to explain what happened, and to some degree to make better resource decisions going forward. But we won't be at nirvana until we're able to stop something before it happens. That's a tall order."

And perhaps an unrealistic one. But Don Schulman, global leader, financial management solutions practice, for PwC Consulting in New York City, notes that finance executives should expect their CPM applications to offer at least some basic risk-management capabilities. "Suppose that 'We're not going to make sales goals' is on the left-hand side of our spectrum for risk management," says Schulman. "That means the sales forecast isn't consistent with the order trend coming in. Therefore, you can report that you're not going to make quarterly results. From ani-analytics perspective, your software should be able to do that." On the other side of Schulman's spectrum would be, for example, a capability that recognizes that the telecom sector has imploded and then determines how that will affect the company for the next six months. "Or," Schulman adds, "predict for me when we're going to have another recession. That certainly occupies the 'tall order' space."

Few companies can devote the time or the resources necessary to test out financial modeling applications that promise to predict the effects of industry implosions, but the majority of enterprises would benefit from elevating their planning, budgeting and forecasting capabilities. "The next thing I'm looking at is Internet-enabled, real-time budgeting," notes Garris. "Our vendor offers it; we just haven't reached the point where we can use it yet."

The Bottom Line: Greater Visibility

The most noteworthy developments in other specialized finance applications -- expense management (fixed assets and T&E); professional services automation (an area that encompasses more general functions, such as project management, contract management, and time and billing applications); human resources; credit management; and cash management -- can be distilled into two words: greater visibility.

"Companies need to see the cost of people that they don't even know they have," notes Aberdeen Group's Jones. "Across the board, we don't know how many temp workers we have, how many contract workers we have. Until a company measures its payroll in terms of everybody who's working, as opposed to the full-time employees who can be counted, they cannot manage that area of spending."

In addition to the finanical aspects of human capital management, some best-of-breed HR applications help strengthen the tie between employee performance and corporate objectives (perhaps in response to the rise of variable compensation). But again, the underlying goal is greater visibility. "It's vital for us to get a better handle on staffing," says Children's Hospital's Garris. "In health care, that is a very volatile area right now. So we're playing with care-delivery models to make sure all patients are covered while we do a better job of managing cash output for staff."

At Textron, the quest for greater visibility led to the development of a purchasing council and the implementation of a centralized travel and entertainment expense (T&E) application that enables the company to see how much it spends annually on hotels and airlines. Textron can leverage data on its companywide expenditures to negotiate better deals on lodging and airfare.

The purchasing council recently flexed its muscle when a small business unit reported that a supplier had substantially raised its prices. "The supplier was essentially saying that it didn't need their business because the order was so small," Costello recalls. "When another of our businesses, Cessna, called the supplier and threatened to cancel its order because of the supplier's proposed price increase to Cessna's sister company, the supplier changed its tune in a hurry."

The contract component of purchasing agreements is another capability that best-of-breed vendors address. "This is one of my hottest areas of inquiries," notes John Van Decker, senior program director, application delivery strategies group, for Meta Group Inc. in Stewartsville, N.J. "I think CFOs are recognizing that the enterprise typically does not do the best job in managing trade agreements." Trade agreement processes typically target either the buy side or the sell side; very infrequently do organizations have an integrated process for both.

Enter enterprise contract management (ECM), which can help resolve purchasing problems like the one Textron recently addressed. "Visibility is also an issue," says Van Decker. "Division A may have a contract that Division B doesn't know about. Consequently, you're relying on the vendors to say, 'I already work with you.' This is an opportunity in a down economy. A lot of companies get invoices and set up POs and really don't have that linkage back to the contract. They wind up overpaying in a lot of cases."

In discussions among end users, vendors and analysts, credit management and cash management tend to be the most frequently mentioned best-of-breed applications behind performance management. "I do see a trend toward greater interest in credit management applications," says Dan London, North American managing partner of finance and performance management at Accenture in Atlanta. "The thought is, 'Gee, if I do it once for the corporation, I could probably link with credit organizations to do credit scoring and be able to look at customers more broadly than I might be able to do if I'm doing it in five or 10 different places.' "

For companies weighing the pros and cons of credit management applications, various questions arise: At what level are we managing credit? Large companies must also ask themselves: What's the probability that customers do business with numerous parts of our enterprise? "If you're managing credit in a distributive fashion," London says, "you may not be optimizing your relationship with those customers. The question is: How can I do something in a highly efficient and effective manner while managing my business in a way that allows me to maximize customer contact and relationships on a local basis?"

AMR's Hagerty views credit and cash management in the bigger picture of the financial supply chain. "Where the most activity seems to be happening right now is around the visibility of where the cash is and from an invoice presentment angle," he notes. "That's all pretty much a specialty vendor play right now, although you're beginning to hear the suite players talk about what they're going to do in this area."

Kit, Suite -- or Both?

Hagerty's summary of credit management developments also illustrates differences between the traditional product-development patterns of best-of-breed and ERP vendors. Best-of-breed vendors develop offerings with deep functionality that meet a specific need. ERP vendors observe market response and then knit similar offerings into subsequent versions of their suites.

How do finance executives make the kit vs. suite decision? Some wait to see what their ERP vendors have to offer. Others don't have the luxury of time. "When someone wants a new-kid-on-the-block functionality that sounds like it's critical," Jones says, "the question is: Do I need this now? What would happen if I waited two years for it? If the answer is 'My business depends on this now,' then [buying] the solution is very logical. And then in two years you can either integrate it or swap it out with your ERP vendor when they come up with it."

Ease of integration vs. ease of customization is a tradeoff that sometimes underpins the now vs. then decision. For example, at her previous employer, a large health-care company, Garris suffered through a poorly planned ERP investment. "We bought a $3 million software suite, and it was vanilla," she notes. "When you're in the health-care industry with different lines of businesses, vanilla is not what you want. You think it is until you get it and try to do all the things you're accustomed to doing."

On the other hand, the ease with which best-of-breed applications can be integrated with ERP and other financial systems varies. "Almost anything can be integrated with something else these days," Jones notes. "But keep in mind that integrating stand-alone software often is not a one-shot deal. I may integrate it once, and then, when that vendor comes up with a new version, I have to do it over again. So you can have a reiterative cost of integration. But, again, that doesn't mitigate the fact that if the product is so compelling that you can't live without it, the company should do it. It's just that they'd better have a very solid understanding of what they're getting into and what the costs of not doing it are."

Generally, companies that opt for suites place a priority on integration and standardization. Those that go with best-of-breed solutions tend to place high value on depth of functionality and time to implementation. Perhaps the most important point to note is that today, more and more companies are opting for both ERP suites and best-of-breed add-ons.

"We're doing a little of both, in that we are currently driving toward standardizing software packages and ledgers," says Costello of Textron's effort to consolidate general ledgers throughout the company's business lines. "Although we may choose something like SAP for our big companies, we don't necessarily want to impose SAP on our $20 million-a-year fastening plant in Germany when its existing system runs fine. But with our larger segments, we're not going to choose Oracle for one implementation, SAP for the next and Oracle for the next.

"Hyperion Financial Management is a tool we use to extract data from all the different ledgers and put it all in one place in one centralized consolidation system. If there's ever a day when Textron is 100 percent on SAP, we may not need a Hyperion Financial Management system, but that day, if it ever comes, is pretty far off. And we need something in the meantime to help manage the businesses," Costello adds.

With that mind-set, those 87 e-mail servers should contract to a handful in no time at all.