Digital Financial Reporting

Another construction crew has shown up in the ongoing project to build the last mile of finance: SAP. Well, they were actually on the project site before, but they seem to be bringing in additional heavy equipment. A couple of days ago it was announced that SAP is acquiring disclosure management solutions from cundus AG. It seems that SAP is doing this to better compete with Oracle's and IBM's offerings to the market.

So we have IBM, Oracle, and SAP in the game. These three companies can move some dirt! I wonder where the middle market software vendors are.  It will be interesting to see who ends up succeeding and who ends up as road kill.

Microsoft PowerPivot helps one see the possibilities which something like XBRL enables. PowerPivot is an Excel add in with gives users the flexibility they need but at the same time gives the IT department the control they need. This videohelps you get an understanding of PowerPivot. (Gemini was the initial name for PowerPivot.) This videoshows how and information mashup can be put together.

I have not tried PowerPivot yet, you need Office 2010 to use it. But now I am very motivated to upgrade and try this free Excel add in. Mr. Excel in the second video says this about PowerPivot:

"Greatest thing I have seen coming from Microsoft in 15 years."

Imagine a PowerPivot "database" (not sure what to call it) which combines information internal to your organization and information external to your organization working seamlessly together to help you manage some aspect of your business supply chain. I have heard this called "external analytics".  Your data set is connected to other data sets external to your organization.  Perhaps the SEC XBRL data set as an example of one publicly available standardized set of information.

Not interested in public company financial information?  That is not the point. While the SEC XBRL data set itself might not be useful to you, think of other data sets which could be useful.

There are four overarching trends which work together to make this sort of vision possible:

• The Internet. If we were not all connected together there would be less of a possibility to be able to exchange information because of the expense of doing so. Lots of people exchanged information before the Internet existed, now anyone can exchange information with anyone else for pennies. I am talking about the Internet here, not the Web. If you don't understand the difference, you definitely want to read about how the Web is dead.
• Model based reporting. Business intelligence (BI) applications are growing in popularity. One example of this is how BI applications are changing the last mile of finance. One of the core pieces of BI is use of the multidimensional model which provides flexibility.  You can use the same piece of information in different ways. The important piece here is not BI, it is the flexibility of the multidimensional model. This OLAP Council white paperhelps you understand why the multidimensional model is important.
• Structured, standard data formats. Unstructured information such as a word processing document or HTML file or PDF file makes reusing the information in those files impossible. But structured information can be put into a database and reusing it is quite easy. But you need your database to connect to someone else's databaes. So if one database is going to be connected to another database; what is the standard database format which you are going to use? Well, of course, it is your database format, right?  Well, others with different database formats would likely disagree. There is no standard database format. Nor should there be. But, you have to somehow link systems together and you need some syntax to do that. XML, RDF/OWL, XBRL, CSV, it really makes little difference.  As long as the format is understood, technically anything can be integrated.
• Semantic and process interoperability. In addition to the technical interoperability, you still need semantic interoperability and process interoperabilityto achieve business system to business system integration. An example of this is how I can use my Apple iMac and create a video in iMovie and then upload it to Google's YouTube.com.  Two different applications, two different companies, working together seamlessly.

All this sound mind-numbingly complicated to you?  Don't worry about it.  That is what technical people do, they make stuff like this work. What is important to understand is that fundamental changes are coming to business processes.  One example is financial reporting.

Don't be fooled into thinking that the SEC's little experiment with XBRL is a misguided regulatory mandate which does little more that add unnecessary costs to a process which works fine today. The SEC is being quite progressive, not something one might expect from a government agency. What the SEC is doing is only part of a larger global trend started by little regulators like the Dutch Association of Water Board as early as 2004 and bigger regulators like the Federal Deposit Insurance Corporation (FDIC), and others. These government regulators are only priming the pump.

While I do think PowerPivot has its short comings such as it requires you to have Excel (i.e. it is proprietary to one vendors software) and it cannot be used to create content, only report on content and it seems to be focused on numeric information (i.e. I have not seen it handle textual information); PowerPivot is a very nice piece of software which helps one see the possibilities.

This is a great Gartner research report: The 21st Century Disclosure Initiative will Reprioritize Your Business Intelligence and Performance Management Strategies. The punch line is:

Publicly traded companies should use these regulatory reforms to gain a competitive advantage, rather than treat them as a cost of doing business.

The research report discusses how the "last mile of finance" will change, the benefits of the change, and approaches to implementing these changes within your organization.

In my view these changes will not be limited to public companies. Private companies reporting to their financial institutions in support of commercial loans is the obvious next step.

Further, the report points out the benefits structured data provides internal information systems.

Many people make the mistake of asking, "What it costs to add XBRL to a business report." The equation has two parts: cost and benefit.  Another logical question one might ask is, "What is the cost of not having XBRL tagged business information." As more and more information becomes available in an XBRL format, comparing the true costs and benefits will become easier.

As these net benefits are seen, more and more organizations will realize that the "outsource" and "bolt-on" options are less favorable than an embedded or integrated approach to implementing XBRL.  Perhaps not for everyone, but for many.

In an article published for Chesapeake System Solutions, Standardize to Streamline - The Implications of Supply Chain Standards for Accountants; Mike Willis, Partner, PricewaterhouseCoopers and Chairman, XBRL International; summarizes the benefits standards offer to streamline processes.

Standardize to Streamline
The benefits of supply chain standardization in the retail grocery segment accrued to producers, distributors, retailers and consumers. The entire supply chain benefited from a six-fold increase in product diversity.

Yesterday I posted an entry on this blog, Road Work Ahead: Last Mile of Finance, which delivers a similar message. Accounting and financial reporting processes are changing. These changes are not unique to accounting and financial reporting, other industries are being impacted.  Mike gives the example of the retail grocery supply chain. In another blog postI pointed out some things health care are up to in this area.

It looks like there is road work ahead for the "last mile of finance". In an FSN article, "Tagetik goes head to head with Oracle and Clarity (now IBM) in the ‘Last Mile’ of Finance" the IBM acquisition of Clarity is hailed as a wake up call:

The IBM deal is a wakeup call to the market – expect to see much activity in this space over the coming year.

I am hearing terms that I have never heard before: Disclosure Management and Collaborative Disclosure Management (CDM). This seems to be a new class of software.

While business intelligence (BI) software was generally used for consuming information, this new class of software is for creating information. Enterprise Performance Management (EPM) seems to be the buzz word for consuming financial information.

As I mentioned in a blog post several months ago, Oracle Hyperion Disclosure Management and Oracle Hyperion Financial Close Management work in conjunction with other Oracle EPM applications such as Hyperion Financial Management or can be deployed directly with ERP General Ledger systems.  SAP has its offerings for reporting. IBM with their acquisition of Clarity means they are in the game.

Those names I have heard before. It seems like every day I get the name of another software product that either can be used to create financial information or consume financial information.  Here are some: Information Builders, Tagetik, Quantrix, WebFilings, Trintech and Longview Solutions.  There are likely many others.

In 2008 Gartner and Ventana Research white papers described ineffecient corporate reporting process which they predicted would change. (See Gartner's XBRL Will Enhance Corporate Disclosure and Corporate Performance Management and Ventana's Selecting the Right XBRL Solution: Addressing Compliance Requirements and Automating the External Reporting Process.) This is Ventana's description of the process:

Thus, the current close-to-file process is structurally prone to error. It poses a risk that mistakes and misstatements will occur.  Most companies deal with this potential for errors and the risks they pose with a brute-force approach, using well-paid professionals (who could be doing more productive things) to check and double-check the documents.  This might be a workable approach today, but it becomes increasingly difficult and costly as the amount of required tagging increases.

These large number of spreadsheets and word processing documents and the highly manual, time consuming and error prone process they require is the approach of today.  It is like a dirt road. The tools of the future will be more like an interstate freeway.

While external financial reporting and regulatory reporting are paving the way, the change which will occur will impact all business reporting, not just financial reporting.

XBRL is only part of the change, I guess I would call it a trend.  I am hearing the term "model based reporting" come up.  This is a new way to think about business reporting. The electronic spreadsheet was a significant improvement over the paper-based spreadsheet. These new tools will be an improvement to the electronic spreadsheet.

So get your hard hats. Road work ahead.