Number Crunch

New financial-planning tools are letting companies react faster to changing economic conditions.
A wave of early-warning signals washed across the investment world last week, as dozens of businesses determined that revenue or earnings for the quarter ended June 30 would fall short of expectations. But give those companies credit for one thing: They performed some fast number-crunching to arrive at the bad news.

New disclosure rules are prompting companies to share financial information faster, and sophisticated data-collection and data-analysis applications are helping them do it. Just as important, the financial-tracking tools are making businesses better equipped to navigate in a stormy economy. "It's becoming a best practice to use some of these tools," says Aberdeen Group analyst Alan Yong. International Data Corp. estimates the market for such products will reach $2 billion in 2004, twice its size last year.

Rockford Corp., a Tempe, Ariz., manufacturer of audio equipment, will report this month that second-quarter sales slipped as much as 7% from a year ago. Earnings will decline, too. But profits might have suffered even more if the company weren't using Oracle Financial Analyzer to track and adjust expenses. "It gives us the ability to throttle back our expenditures in order to maintain profitability," says Dave Richards, Rockford's CIO and VP of IT.

Federal Reserve Chairman Alan Greenspan cites companies' ability to react swiftly to changing economic conditions-and the role that IT plays in that process-in explaining the acceleration of business cycles (see "Testing Greenspan," March 19, p. 41; The trend is away from tracking financial data via static quarterly reports and toward "rolling budgets" that account for changing conditions on a monthly or quarterly basis and reflect those changes going forward.

General Bandwidth Inc. compares monthly revenue and expenditures against its budget and circulates the results to managers within eight business days after the close of the month. It uses OutlookSoft Corp.'s Financial Planning and Analysis software to do the analysis, a process that took a month or longer using spreadsheets and other less-sophisticated techniques, says finance VP Steve Raich.

Older approaches, including the use of Microsoft's Excel spreadsheet, remain popular. But they tend to be labor- intensive, time-consuming, and error-prone. "We used to use Excel, but it became unmanageable," says Arthur Steinhorn, finance manager at PreNet Corp., a Portland, Ore., company that provides prepaid calling cards for wireless phones. Turmoil in the telecommunications industry has made planning tough for Steinhorn and his staff. "We've had to re-evaluate our budgets almost every month," he says.

PreNet can do that because late last year it began using FRx Forecaster, a budgeting application hosted by FRx Software Corp. The software is used to create 12-month rolling budgets on a monthly basis. Operating-unit managers use the tool to prepare multiple versions of budgets; they can change employee head counts, project schedules, and other costs based on different economic assumptions. Pulling all that information together at the corporate level in Excel would have required a full-time employee, Steinhorn says. "And who knows if the result would have been accurate?"

New options in software for budget planning, tracking, and analysis are emerging from startups such as OutlookSoft and Adaytum Software Inc., as well as from established software vendors. Cognos Inc. will ship a Web-based version of Cognos Finance this month, and Hyperion Solutions Corp. recently debuted Hyperion Planning as the successor to Pillar, its first budget-management app. Last month, SAP debuted a suite of financial, customer, supply-chain, and product life-cycle analysis tools to complement its mySAP data-warehousing and business-intelligence software.

The tools give companies a way to create budgets with input from managers throughout an organization. Companies can link to the corporate financial systems found in enterprise resource planning systems such as SAP and PeopleSoft to collect revenue and spending data that can be analyzed against budget projections. And they can create rolling budgets that are updated monthly up to 18 months out.

Managers say the tools give them greater control in these uncertain economic times. "It creates more visibility so that we can affect change rather than just react to it," says Rockford's Richards. To help trim expenses, Rockford used Oracle Financial Analyzer to assess freight charges, shipping volumes, and other data from its distribution operation and identify less-expensive alternatives, such as consolidating orders into fewer truckloads and leveraging volume to negotiate better deals with carriers.

Avoiding layoffs and keeping investors happy are General Bandwidth's goals amid slowing demand for the Austin, Texas, company's digital-subscriber-line equipment. Managers break down monthly operating and capital expenditures for 25 cost centers into 35 to 40 line items, including salaries, employee training, rent and utilities, product development, and travel. "We really tear things down to the gnat's eyebrow so we can see where we're spending our money," Raich says. After closely analyzing its data, the company has trimmed about 20% of discretionary spending, including travel and marketing expenses, and moved employee training inside the company.

Communications semiconductor manufacturer Conexant Systems Inc. in Newport Beach, Calif., implemented Hyperion Planning early this year to create four-quarter rolling budget forecasts. Sales and expense data pulled from the company's SAP R/3 financial and human-resource applications are loaded into the Hyperion system for comparison with the budget.

The system lets Conexant respond to changing market conditions more quickly than the spreadsheets and older Hyperion budget-planning tool it used in the past, says financial systems manager Matt Geyer. In March, when it became clear that sales for the quarter would be down 35% to 40% from the previous quarter, the company laid off 1,500 employees, cut pay for senior managers by 10%, reduced capital spending, and temporarily shut down some production lines.

When Ace Hardware Corp. installed Adaytum's financial-planning software last year, the plan was to pull data from the company's J.D. Edwards & Co. general-ledger system for preparing quarterly budgets. But when the economy soured, managers at the Oak Brook, Ill., hardware-store chain began analyzing sales and spending data each month. "We want to identify where we should be focusing our resources," controller Ron Knutson says. For instance, the software makes it easier to examine the cost of recruiting franchises vs. the expected return on sales of Ace Hardware products through those stores.

Despite all the potential benefits of budget-planning and financial-analysis software, Gartner analyst Lee Geishecker doesn't see an immediate spurt in demand for it-in part because of curtailed IT spending. The applications typically are priced from $100,000 to $300,000, but implementation costs can far exceed that. Adaytum, for example, recently disclosed a $1 million licensing and service deal with an insurance company. But there are ways to get around big outlays: PreNet's Steinhorn calls the $1,500 monthly fee he pays for FRx Forecaster a bargain.

Companies that foresaw the need for the new generation of financial applications before the economic slowdown are glad they did. Wyndham International Inc. is installing OutlookSoft's applications to replace a cumbersome, internally developed system for tracking and analyzing costs. Wyndham, which operates 175 hotels and resorts worldwide, has seen demand for its rooms slow as businesses cut back on travel. "Our timing couldn't have been more perfect to put this in place," chief technology officer Mark Hedley says.

Wyndham will finish rolling out the system to managers at all its hotels by Aug. 3-just in time to begin preparing 2002 budgets. With the software, Wyndham's financial analysts will be able to track detailed cost data that got buried in the old system as it was consolidated and sent to the company's Dallas headquarters. Management will be better able to keep labor, food, and beverage costs in line with occupancy rates, Hedley says. The tool also will help management analyze business choices, such as whether the chain should do laundry in-house or contract it out.

Budgeting and financial-planning applications also give executives better information for making strategic decisions. Until two years ago, Standard Pacific Corp., an Irvine, Calif., home-building company, relied on Excel for collecting operating financial data from divisions in four states. But the information lacked critical details. While the reports indicated changes in average house prices and cost of sales, they didn't include details on what spurred the changes, says Bruce Torkelson, assistant land development controller.

The company now uses Cognos Finance, which lets divisional managers enter financial data directly into a central repository using standard templates. The reports include data on land, material, and labor costs, as well as information on which options are sold with homes and premiums charged for lots with ocean views. That helps executives understand shifts in average home prices. With new-home orders in its Northern California division down 75% in the second quarter, the company's directors will need all that information when they meet this month to set pricing strategy for the third quarter, Torkelson says.

Still, for all their value, the tools aren't crystal balls-and business managers who expect them to help predict economic trends will be disappointed. Companies that installed these applications before the economic slowdown hit late last year say the software gave no hint of the changes to come. "That information really came from the field sales force," Rockford's Richards says.

Some applications do include forecasting capabilities, but there's no way they can account for the constantly changing variables-such as consumer confidence and fluctuating interest rates-that can have immediate and widespread impact on a company's performance. But that doesn't stop businesses from trying to add forward-looking capabilities to their budgeting systems. Later this year, Wyndham will augment the financial data in its tracking system with survey data from external sources that predicts near-term hotel-room demand.

But if new financial-planning applications aren't a panacea for managing the sputtering economy, the visibility they provide sure beats flying blind. Says General Bandwidth's Raich: "Data reflects your business, and anytime you can understand that, you're in a better position."

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