So where is it? Where's the financial bonanza–the next Y2K–that technology vendors were expecting after passage of the landmark Sarbanes-Oxley Act in 2002? It's going on two years, and no one has yet seen anything close to a repeat of the ballyhooed buying spree of corporate information technology that accompanied the turning of the century.
Software and systems providers–at least half of the 140 surveyed–recently told business advisory firm Meta Group that they were, in fact, disappointed with the sales generated so far. But they need just a little more patience because there are indeed rumblings that financial tech spending is gaining momentum–although slowly and not necessarily as a direct result of Sarbanes-Oxley.
As the economy has started to show real signs of life in the second half of this year, a few vendors are reporting that finance departments are loosening the purse strings for solutions that will help them meet the increasingly rigorous demands of the investment community for real-time numbers and accountability on financial projections. While all the proposed purchases will ultimately assist in compliance with Sarbanes-Oxley and other corporate governance regulations, compliance seems almost an afterthought in the rationale for the tech buy. "We are starting to see activity," says Steve Pugh, CEO of accounting software provider CODA Financials Inc. "People are interested in updating their financial systems and improving their planning and budgeting functions. But this is tied much more to corporate performance than Sarbanes-Oxley."
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Pugh and other providers are learning that Sarbanes-Oxley actually makes finance executives gun-shy about the idea of a total overhaul. "If I'm a finance guy and I have to meet deadlines for Sarbanes-Oxley in 2004," Pugh says, "I don't necessarily want to be replacing a system that's working okay with a system that may or may not work better. I'm looking for upgrades with quick implementation and quick paybacks."
The projections for growth in financial tech investment tend to support this analysis. AMR Research, for instance, reports that revenues in the business intelligence and analytics market in 2004 should increase by 6%, essentially matching the growth that was experienced this year. In 2005, the increase will be closer to 9%. According to AMR, the bulk of the revenues will go to software licenses, implementation and maintenance–not hardware.
More and better tools
On the treasury side, tech consulting firm IDC, based in Framingham, Mass., predicts similar growth in technology investment, up 7.5% in 2004 and 8.7% in 2005. One recent important factor: Large enterprise applications vendors like Oracle and SAP are "finally" taking this market seriously, says Scott Tiazkun, IDC's research manager for enterprise applications. "They are not only offering more robust treasury management applications, but they have tailored functionality to fit their customer base. This is important when these vendors revisit their client base and have a product-specific application that doesn't offer functional overkill for mid to large corporate treasury needs.
Tiazkun also attributes the growth to aggressive efforts by best-of-breed treasury management vendors like SunGard and Trema, which are both making significant inroads with treasury exchange and straight-through processing. "This will ultimately make cash and risk management faster, more efficient and error-free." He admits, however, that only large corporate treasuries or financial institutions are usually able to justify the cost of such a complete system overhaul versus the business impact on day-to-day treasury processes.
In other words, the spending is healthier than it has been, but not quite at the celebratory level. The next "revolution" in financial technology is more of an evolution as companies slowly upgrade software and integrate systems for improved working capital management and generally better visibility into their numbers. With the June 15 deadline for compliance with Sarbanes-Oxley's Section 404 approaching, companies feel the need to get their house in order before doing too much to their technological infrastructure. Meta Group estimates that two thirds of compliance spending has gone towards documenting internal controls and processes, and in a survey of its corporate clients, treasury consultants Treasury Strategies Inc. recently reported that 67% of respondents claimed to be in the process of reviewing cash management structures and processes and 80% were reviewing treasury controls and documentation. As Doug McKibben, research director for Gartner's G2 Financial Services points out: "Technology is only an enabler of process."
To make that process work better requires much more intensive financial supply chain management than has been the practice of most treasuries and finance departments. While companies have automated their physical operations to manage inventory and sales plans, they are only just starting to address the isolated silos that house their financial systems. "The trend is to tie the financials and treasury operations into the business operations," says Glen Solimine, vice president of sales at XRT Inc., a leading supplier of financial and treasury management systems in King of Prussia, Pa. "That's a lot of the impetus behind financial tech spending."
Upgrades, not overhauls
This doesn't necessarily translate into the purchase of a sophisticated treasury management or ERP system. Instead, many companies are installing applications or middleware that can pull data from their existing systems. Take Sola International Inc., a $600 million manufacturer of eyeglass lenses. The company is very decentralized. It has a small headquarters staff of about thirty people and operates 80 separate entities around the globe, each with its own financial reporting systems. "We needed to make better judgments and decisions," says Patrick Kiernan, a senior financial systems analyst at the company. Sola purchased software from Hyperion, a maker of business performance management software, to consolidate information from various regional operating units while allowing them to continue reporting in compliance with local rules and standards. "Now, we're able to talk the same talk," says Kiernan. "It's provided us with a lot of useful information we didn't have–what's our total cash balance right now? We've taken a big leap forward."
Companies are also looking to construct seamless connections between various international operations as well as integrate recently acquired units. It's hard to get a handle on liquidity or financial risk when the data is locked up in Excel spreadsheets around the globe or on a hodgepodge of systems. This drive for integration across operations is forcing finance to work outside its silos. "We're seeing more involvement from the IT group, because we're touching their systems and going outside the company to partners," notes XRT's Solimine.
Hillenbrand Industries Inc., a $2 billion healthcare services conglomerate, took the clean-sweep approach after making two recent acquisitions. The Batesville, Ind.-based company purchased a treasury workstation that will be the hub for all its financial data. The $250,000 system from Selkirk Financial Technologies–the first major technical project treasury has undertaken in many years–will connect to Hillenbrand's domestic and international cash management banks, as well as its internal general ledger systems. The general ledger systems were recently consolidated from 10 to one global system made by J.D. Edwards, now part of PeopleSoft. "Five or ten years ago, finance was a fairly closed environment. If you lived in your own little cocoon, that was easier," says Stephen Burrington, Hillenbrand's assistant treasurer. "But now we're trying to get better visibility into cash and be able to manage that better, and that takes integration."
As a side benefit, says Burrington, the workstation supports Sarbanes-Oxley compliance by providing better documentation and control–a selling point that appealed to the company's CEO.
So much for the next Y2K. But clearly Sarbanes-Oxley figures into decisions and rationale, even if it isn't turning out to be the initial impetus for a tech spend. While Y2K was slated as a Big Bang event, Sarbanes-Oxley compliance is shaping up to be more about slow but steady effort. "Y2K was to fix a problem that would go away," says Vani Kola, CEO of Nth Orbit Inc., a San Jose, Calif.-based developer of compliance software. "Compliance is not going to go away."
Still, savvy finance officers will use the act to justify more strategic technology initiatives. "Forward-looking companies will use [Sarbanes-Oxley] as a trigger for change," says Gartner's McKibben. The research firm estimates that midsize to large companies will spend $2 million each through 2005 to comply with Sarbanes Oxley. "It's not just about reporting. Good governance comes with good information," he adds.
Some companies, by necessity, are ahead of the game. After acquiring Young & Rubicam in 2000, WPP Group, the advertising giant, realized it had to meld its disparate financial systems. The company made a big investment of time and money to implement XES, a comprehensive financial system by XRT. John Forster, treasurer of WPP Group's U.S. unit, says it has resulted in better integration, reporting and control, as well as reduced costs. "We were already moving ahead to capture the data required under Sarbanes-Oxley," says Forster. "We were a little clairvoyant."
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