Best-of-Breed Software: Fewer Bells and Whistles, More Value

New developments in the evolution of stand-alone financial applications mean expanded functionality in a variety of BOB categories. But software buyers are focusing more than ever before on vendor stability and integration costs.

When Ernest Guerra Jr., director of travel services for American Standard Companies Inc., the $7.9 billion Piscataway, N.J., maker of air conditioning, plumbing and automotive braking systems, discusses expense management, he begins by mentioning his company's Six Sigma initiative and its related productivity and standardization objectives. When he gets to the organization's search last year for an expense management application (it chose Gelco), Guerra emphasizes vendor viability and due diligence. "We called several Gelco customers," he notes. "We needed to find out if the low implementation costs the company presented held up in practice. We also wanted to choose a financially stable firm that would stay the course with us."

The research paid off. Guerra's department implemented the Web-based expense management tool in 90 days. Since then, his team has shaved the time it takes to reimburse travel expenses for the 18,000 employees it serves (about 5,000 of whom are regular business travelers) from five days to three days.

Welcome to the world of best-of-breed (BOB) applications, circa 2003, where even the most focused software implementation requires alignment with strategic objectives and exhaustive due diligence. Jon Derome, senior analyst with The Yankee Group in Boston, recently helped a client select an accounts receivable application. "Eighteen months ago, the main question would have been whether or not an application had the 10 bells and whistles the company needed," he says. "That's no longer the case. Now the first two questions are: Will the vendor be around two or three years down the road? And how much will it cost to tie this application into my existing systems?"

Over the past year, improvements in BOB software have simplified and reduced the cost of application integration. Best-of-breed financial applications have also made notable strides in the realms of speed, ease of use, inclusion of nonfinancial metrics and data integrity. Plus, the vendors in this space appear to be improving their understanding of the challenges finance managers face.

Action in the Marketplace

The past year has given rise to less consolidation among BOB vendors than expected. Aside from Geac's acquisition of Extensity in March, recent activity has been light in most areas. Derome attributes this slowdown to continuing economic hardship in the technology industry. "I think analysts, including myself, expected more-rapid consolidation in the marketplace," he says.

Human resources marks an exception to the trend toward lighter consolidation. In January, $7 billion ADP announced its intention to acquire $170 million ProBusiness Services Inc. In late spring, the deal still awaited a green light from the Justice Department's antitrust division. In March, Paychex Inc. acquired InterPay Inc., a subsidiary of FleetBoston. Enterprise software vendor SSA Global Technologies bought InterBiz, formerly a Computer Associates company, late last spring. Smaller organizations, like $14 million Workstream Inc., have been busy acquiring as well. Workstream, formerly E-Cruiter.com, has picked up Icarian Inc., PureCarbon Inc. and Xylo Inc. in the past 14 months.

Perhaps in part because of this rash of consolidation, the HR space has seen more dramatic improvements than some of the other best-of-breed categories. These upgrades have focused on better integration with other software and new alternatives to paychecks. In June, Genesys Software unveiled My Cash Card, an optional pay-card service for organizations in which the work force is dispersed or in which a significant proportion of employees do not have regular bank accounts. The card enables workers to withdraw their pay from ATMs throughout the United States.

Moving Into the Suite

Competition between BOB and ERP vendors remains fierce. The dynamics of the enterprise vs. stand-alone decision are changing, as more and more BOB vendors begin to offer software suites. At the same time, the large enterprise vendors continue to make incursions into functionality initially offered only by stand-alone vendors. Oracle recently unveiled a revenue and receivables management module, which leverages much of the functionality from that company's CRM package. SAP planned to release in June new cash management capabilities and other "financial supply chain" offerings. ERP vendors are also moving into business performance management and expense management.

This scenario is nothing new, says John Hagerty, vice president, research, with AMR Research in Boston. "It's a situation where the enterprise vendors are saying, 'You know what? That's my business; stay out of it,' " Hagerty notes. "The enterprise vendors have a position in all of these areas that are very tightly tied to finance. And they're going to try to grow their influence." Yet ERP vendors appear to be avoiding some types of functionality. "There are definitely places for individual best-of-breed companies to come in and manage very specific problems, especially if you have a disparate back-end set of systems," Hagerty adds. "The large ERP vendors will most likely stay out of particularly thorny situations, such as global trade, which is very document-intensive."

Enter TradeCard, which specializes in global payments. TradeCard is one of many vendors that is expanding the traditionally niche focus of best-of-breed products, and the resulting application defies categorization. Is it credit management? Or is it cash management, in the sense that it improves cash flow? Yes and yes. TradeCard describes its offering with the clunky but accurate phrase of "just-in-time working capital management."

Like competitors edocs (which bills itself as a "customer self-service and e-billing" solution) and Emagia ("enterprise cash flow management") -- and the services of banks such as ABN Amro in Chicago and U.S. Bank in Minneapolis -- TradeCard focuses on the order-to-payment process. But unlike many offerings in this space, TradeCard's application is designed to simplify and accelerate every stage of the order-to-payment process. On the buyer's side, this includes procurement, accounts payable, treasury, banking and logistics. On the vendor's side, it involves sales and service, accounts receivable, and other components of finance.

"This end of the cycle is historically complex and very opaque because it tends to be laden with paper and to involve multiple parties," notes Brad Scheller, vice president of worldwide sales and marketing with TradeCard Inc. in New York City. "From a CFO's perspective, that obscures good cash-management visibility. So the trend is toward connecting the parties involved in this part of the chain, removing the paper and opening it up with complete visibility. If you only take a slice of the order-to-payment flow, you don't get the visibility you're looking for."

In this respect, TradeCard illustrates a trend: The line between the large suites that the term "ERP" brings to mind and the more focused stand-alone products denoted by "best of breed" blurs as BOB vendors expand their products to manage certain business processes end to end. In fact, some best-of-breed vendors would rather avoid that label altogether. John Kopcke, CTO of Hyperion Solutions in Sunnyvale, Calif., says the description "best of breed" was fine a few years ago but no longer fits his company. What Hyperion now offers, he says, is a suite which weaves together tools that originated as different "point solutions."

"There's a parallel to this," Kopcke says. "If you went back to the early '80s, you would have seen a best-of-breed general ledger and best-of-breed accounts payable and accounts receivable systems -- a bunch of different, disparate back-office systems. When people realized that there was much greater value in bringing those systems together, we saw the birth of ERP as a concept. We believe that the same value proposition is occurring in the business performance management space now, of saying these systems -- which drive insight into the organization, provide transparency to what's going on in the enterprise and help drive performance -- are best driven by an entire suite."

The development of technology standards has also influenced the BOB vs. ERP debate. "If you have, say, SAP and Siebel and you're tying in an order management application from a BOB vendor, because of standards development around XML and Java that integration effort today is marginally less expensive than it was 18 months ago," Derome reports. He explains that "marginal" translates to reducing the total cost of an implementation project by "a few percentage points." Derome adds that these new software standards and the cost reductions they deliver "substantially weaken" the enterprise-vendor argument that BOB implementations necessarily involve weighty integration costs.

Where BOB Is Thriving

Business performance management (BPM) is one area that ERP vendors are keenly interested in, but best-of-breed vendors seem to be holding their own. Robert Cox, director of financial planning for Erickson Retirement Communities in Catonsville, Md., has worked with several different ERP systems during his career. He helped Erickson select a BPM solution from Hyperion two years ago. "I feel pretty confident saying that reporting, budgeting and forecasting are not their [ERP vendors'] core competencies," Cox says. "They're good at transaction processing, handling tremendous amounts of data, aggregating it up and spitting it out in a very straightforward way."

Likewise, when Gilbane Inc., the $2.8 billion Providence, R.I., construction company responsible for the new World War II Memorial in Washington, D.C., launched a business performance management system from Cartesis in April 2002, it did not consider its ERP vendor as a viable alternative. "That's our transaction system," assistant corporate controller Lori Enos explains. "We take summary data from it and download into Cartesis on a monthly basis."

Two key messages have been coming from best-of-breed BPM vendors over the past year: They're enabling greater access to data in a controlled, secure way, and they're enhancing planning applications to support deeper analysis and adjustments based on economic, marketplace and regulatory changes.

Dick Jablonski is vice president of finance for Omaha, Neb.-based Election Systems & Software, the world's largest provider of hardware, software and services for use in government elections. He describes the motivation behind his company's June 2000 investment in SRC software as "an opportunity to get information out and then go deeper by understanding what the information means." In addition, Jablonski says, Election Systems needed to simplify its budgeting process.

Finance executives today expect their BPM tools to deliver information in a simple format, one that inspires -- rather than discourages -- end-user acceptance. At New York City-based college textbook publisher Bedford, Freeman & Worth Publishing Group LLC, editors are key business decision-makers because they decide when their company should invest in the long-term process (frequently a five- to 10-year project) of developing a book. Until the company implemented a BPM system from Adaytum in late 2000, editors relied heavily on intuition in making those decisions. They assessed the overhead costs associated with a book, projected the likely sales volume and then made an investment decision.

"Back then," says CFO and vice president Larry Jankovic, "we didn't load the profit-and-loss statement with all of the overhead items, so people were making decisions along the lines of 'Well, it has a margin of 40 percent. I know our goal is 45 percent. Oh, we'll just go with it.' " Now editors make rational decisions based on a complete set of financial information. Among other benefits, the software has affected how editors perceive the finance department. "They don't view us now as a burden," Jankovic says. "We counsel them more and demand less information from them because that information is in the system."

A year ago, Progress Rail Services Corp. senior vice president and CFO David Klementz sought a software engine that would help his department spend more time preparing for the future and less time on financial processes' caboose -- collecting historical financial data. The supplier of railroad and transit products and services, an Albertville, Ala.-based subsidiary of $7.9 billion Progress Energy, recently divested several divisions following its 28 acquisitions in the three years prior. As a result, Klementz needed a set of tools that would improve the collection of financial data from disparate and poorly integrated systems, strengthen the integrity of the data, speed up the financial reporting process, deliver information to executives and managers in a user-friendly fashion, and help his financial analysts conduct more-sophisticated forecasting by inserting more-appropriate business drivers into their calculations. Despite a familiarity with ERP offerings (he worked for Oracle earlier in his career), Klementz settled on best-of-breed performance management solutions from SAS Institute.

Progress Rail Services' choice reflects how BPM, and best-of-breed financial applications in general, have advanced during the past year. "When you talk about communicating expectations to stakeholders, there's a component that translates to performance and there's a component that translates to being a better predictor of your business," Klementz says in summing up one of his primary challenges as CFO. "And to the extent that you're a better predictor of your business, you can help increase the confidence in your business by just minimizing the variance."

Sarbanes-Oxley Stirs Things Up

"Sarbanes-Oxley" is usually among the first phrases out of the mouths of BOB financial application vendors when they identify finance executives' most pressing concerns. "The CFO has two immediate needs: reducing costs by becoming more efficient and improving corporate governance," says Andy Birch, product manager for SunSystems in Farnborough, England. "Financial information has to become more visible, to be shared more widely among stakeholders, and CFOs have to respond more rapidly than ever to changing information demands."

Phil Strand, global strategist and program director for SAS Financial Management Solutions in Cary, N.C., agrees, emphasizing that within finance processes, the margin of error has become minuscule. "By far, the most important need for the CFO is the assurance of data quality and well-defined disclosure controls and procedures," he says. "In this era of increased scrutiny of corporate ethics and uncertain trends in the stock market, CFOs can't allow even the perception that financial systems are anything less than robust, auditable and reliable. The investor community and legal authorities will quickly and negatively react to any sign that a company might have engaged in improper accounting practices. What could be explained away in the past is now assumed to be an indication of executive or organizational improprieties."

The Sarbanes-Oxley Act, to the extent that it has been enacted and fleshed out by the SEC and the recently activated Public Company Accounting Oversight Board, requires publicly listed companies to assess, document, test and report on the quality of their internal control frameworks. That rule, Section 404 (which also requires external auditors to attest to management's report on internal controls), has greatly increased the need for processes and tools that strengthen and demonstrate the integrity of accounting data and the financial reports it generates.

Not surprisingly, a swarm of software vendors -- some new firms but more established ones -- have responded, giving rise to "Sarbanes-Oxley compliance management" products. The category is currently the Wild West of financial applications, for two reasons. First, Section 404 contains fairly broad marching orders. And second, the process of strengthening internal controls touches multiple finance and business processes. Sarbanes-Oxley-specific solutions are coming out of ERP vendors; the Big Four; second-tier accounting and consulting firms; and best-of-breed vendors that specialize in document management, risk management, contract management, business performance management, project management and compliance management (a term that used to apply primarily to applications in the HR space).

One of the few points that software vendors, finance and accounting consultants, and external auditors agree on amid all of the regulatory uncertainty is that Sarbanes-Oxley compliance efforts demand highly disciplined project management capabilities. Fortunately, best-of-breed project management software has matured to the point that, in mid-April, consultancy and research firm Project Management Solutions Inc. launched the Project Management Benchmarking Consortium, which gives the discipline's professionals access to best practices guidance and measurement tools.

Project portfolio management, a new BOB category that encompasses professional services automation, offers to help companies organize resources in ways that align with corporate objectives. These applications answer questions like: What resources are required for a particular project? And are the best people assigned to the highest-risk projects? Although project portfolio management vendors make few compliance claims, some have begun to stretch beyond the services industry to link the corporate IT department's activities to the bottom line.

When Jeff Stewart, CFO of Clarkston Consulting, a private consulting firm based in Research Triangle Park, N.C., describes his professional services automation package, it sounds like BPM and CRM merged into a single system. "We needed a solution that would improve our ability to accurately forecast where the business was going, provide key metrics and visibility," says Stewart, who opted for a Changepoint solution. "It enabled us to kill several ad hoc processes. I eliminated our CRM package as a result because Changepoint begins at the initial customer contact and provides support all the way to cash collection on the back end of the cycle."

BPM vendors emphasize that the speed with which financial information is produced is critical to Sarbanes-Oxley compliance efforts. "There is a pressing need to get the budgets done faster, close the books and get through the planning processes faster -- all without compromising accuracy," says Brian Hartlen, senior vice president with Comshare Inc. in Ann Arbor, Mich., who co-authored "The Strategy Gap: Leveraging Technology To Execute Winning Strategies" (John Wiley & Sons, 2003).

Vendors also have turned greater attention to metrics, looking at both financial and nonfinancial measures of quality and quantity. "Financial executives are looking to best-of-breed applications to help them stay on top of key performance indicators (KPIs) such as global or regional sales figures and trends, personnel statistics and trends, real-time supply chain information, or anything else deemed critical to the success of their business," reports Andy Kamlet, director of marketing with FRx Software Corp. in Denver. "The ability of a financial analytic system to highlight more meaningful information, like current cash flow status, and provide that information to the right people at the right time is an area where many financial application vendors are focusing their attention."

Corporate finance departments need a single tool that helps improve the timeliness, depth and consistency of information, says Mark Ruddock, president and CEO of Toronto-based Inea Corp. "Many CFOs and their finance teams share the vision of transforming the function from its traditional 'number cruncher' role to one that provides value-add analysis support to senior executives and business line managers," Ruddock says. "They want to put in place the capabilities and systems that equip management with quick, easy access to more meaningful information that helps them keep a detailed eye on what's going on and make the most informed business decisions possible."

Clear Returns

Vendors sound sensitive, but do they walk the talk? Finance managers appear better equipped to answer that question than they've ever been before. Many have been stung, at least once, by technology investments that fell short of expectations. Judging from the scrutiny CFOs pour into vendor selection, they have learned their lesson.

Many finance teams are turning to quick-win travel and entertainment expense (T&E) software implementations. These applications automate the process of answering questions that the economic downturn has made top priorities, questions such as: What do we need to buy? Who do we buy from, and how do we choose the best supplier? How do we enforce contractual obligations? Until recently, the vast majority of answers required evaluation through some combination of Excel and manual processes.

This year's "Managing T&E Operations, Costs and Automation" study by the Institute of Management and Administration found a 13 percent increase in the number of survey respondents who identified "using new technology to increase T&E staff productivity" as a way to improve T&E management. Smaller companies appear most eager to invest in T&E automation right now; survey respondents from companies with 250 or fewer employees identified technology as the third most effective way to lower T&E costs -- following "obtain better, more timely T&E reports from individuals" and "eliminate or reduce the use of cash advances."

Although analysts say that expense management applications have not undergone any earth-shattering developments during the past 12 months, The Yankee Group's Derome reports that the area is particularly attractive to CFOs now because the applications are relatively inexpensive compared with other financial applications. "These applications offer a very hard-dollar return on investment," he says, ticking off a list of purchasing-automation vendors: Ariba, FreeMarkets, SupplyWorks, Emptoris and ICG Commerce.

These days, convincing management to purchase any software requires effort. After Clarkston Consulting's Stewart selected Changepoint, he had to clear the investment with his company's board. "We said that we had a decent-sized implementation, and they answered, 'How are you going to measure this?' " he recalls. Stewart and his team explained that Clarkston would gauge the application's return in terms of improvements in cash flow performance and financial forecasting accuracy. They also explained that they expected to gain visibility into the sales pipeline that they never had before. But the board wanted more. Specifically, it expected a positive change in the ratio of billable hours to available hours (per consultant). "And ours," Stewart says, "easily jumped 8 points to 10 percentage points in the first six months."

Stewart suspects that the technology also led to other improvements. Clarkston Consulting enlists The Conference Board to measure its customer satisfaction, a vital metric for professional services firms, each year. Before and during the Changepoint implementation, that satisfaction rating hovered around 90 percent, a level that translates to "highly satisfied." One year after the firm installed the PSA system, the customer-satisfaction figure leaped to 98 percent. "I want to believe that improvement stems from our ability to concentrate more on customers because we're spending less time and energy on internal administration," Stewart acknowledges. "That is an intangible that is difficult to measure in financials. Still, when I see the customer satisfaction rating go up, it strikes me that we're allowing our consultants to spend more time with customers making sure their needs are met vs. meeting my needs as a CFO and senior management trying to run the business."

Those impossible-to-measure benefits come up frequently in discussions with finance executives about returns on their investments in financial applications. Paul Harrison, vice president of planning and analysis for Krispy Kreme Doughnut Corp. in Winston-Salem, N.C., agrees that the benefits of many best-of-breed applications stretch beyond the finance department. "It's not limited to finding a better way to do reporting and consolidation," he says. "It's about creating value for shareholders, and that's difficult to measure. It's not like installing a new piece of equipment in a doughnut store that increased our productivity and therefore increased earnings, and therefore increased what our share price might be."

Krispy Kreme is currently implementing a BPM system, but Harrison is looking further ahead. "A year from now, or perhaps two years from now, our organization will look back on this investment and say, 'Wow, I don't know what we would do if we didn't have this information available to us in this manner,' " he notes. "If we can't say that, then we will have failed our objective."

Progress Rail Services' Klementz is also looking forward, as his company enters the third phase of its SAS rollout, a phase that will focus on sophisticated forecasting capabilities. "The more performance history we put into the system, the more correlations we can make," he notes. "You can look at things like earnings risk and the probability of achieving earnings by division." The company will soon be steaming ahead, with high-end statistical analyses leading the way.

A Sweet Tooth for BPM

Krispy Kreme Doughnut Corp. had such a craving for business performance management (BPM) capabilities that the $492 million Winston-Salem, N.C., doughnut shop chain skipped an enterprise resource planning (ERP) implementation and sunk its teeth into a best-of-breed Comshare solution instead.

The company began the Comshare implementation this spring, knowing that the ERP implementation still awaits, six months to a year down the road. Vice president of planning and analysis Paul Harrison says the company considered killing two birds with one stone, but research and "the feedback we received suggested that the ERP vendors, in general, did not have the robust capabilities we were insisting on." Krispy Kreme needed a system that could access, analyze and distribute a wide variety of financial and nonfinancial information.

The company is in a growth phase. Its fiscal year 2003 revenues marked a 25 percent expansion compared with 2002. Profits grew 27 percent over the same period. "Our key avenue for growth is opening new stores, so an important measurement for us is the performance of the store pipeline," says Harrison. "We need to have that data available so we can measure where we are vs. our target vs. what we told the outside world at any point in time. That's typically not the kind of information you find in a financial reporting system. We had specific performance management requirements that we needed to solve quickly."

The company completed its Comshare purchase in late March and has moved ahead with a phased rollout. The first phase encompassed the installation of the budgeting and forecasting tools. The second phase will create access to nonfinancial measurements. "I'm not sure the implementation ever ends," Harrison says. "As soon as we get one key batch of information to where people are using it in Comshare, we're going to move to the next one." Once users get a taste of that visibility, Harrison predicts, they will begin asking him to bake new components into the system.