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The Internet is ushering forth a new breed of business applications that could streamline financial functions or simplify back-office functions. But compared with other senior managers, CFOs have been slothlike in embracing this technology.
Scott Leibs, eCFO
April 15, 2000
The well-worn axiom "time is money" manifests itself in surprising ways. In the 1800s, the Rothschild brothers built their vast financial empire in part with a private courier service that allowed them to get vital information faster than their competitors. Later, they used carrier pigeons to transmit buy and sell orders for the stock markets. So eager were they to shave precious seconds off a transaction that their notes contained simple one-letter codes — B for buy and D for sell — so they could act more quickly. When the telegraph was first invented, James Rothschild bemoaned the loss of the family's competitive edge. "Over here, people are too well-informed," he wrote his brother Nathan, "and there is therefore little opportunity to do anything."
—Niall Ferguson, The House of Rothschild: Money's Prophets, 1798-1848
If technology has proved something of an equalizer in business, it has hardly been a panacea. Today, companies still labor mightily against time. In fact, despite more than a century of wired communication, the fundamental problem of receiving payment for goods and services has barely changed: 45 to 60 days was the norm at the time the Rothchilds's pigeons were flying, and it remains the norm today.
The truth is, CFOs and treasurers have been notoriously slow in flocking to technologies that could streamline financial functions or simplify back-office transactions. Today, the Internet is ushering forth a new breed of business applications, everything from browser-enabled financial software to portals and exchanges. But compared with other senior managers, CFOs have been slothlike in embracing this technology.
The reasons for this vary. Until recently, there hasn't been a lot of Web-enabled financial software to embrace. "What tends to move to the Net first are applications that touch customers," explains Stacy McCullough, an analyst at Forrester Research. Beyond that, some finance directors are not overly tech savvy, tending to shy away from investments that resist a traditional rate of return analysis. Other CFOs have simply been worn out by lengthy rollouts of ERP software. Still others have seen so many Next Big Things that they're not sure of the real thing when they see it.
The Internet is definitely the real thing. According to the latest research from the Gartner Group, a technology consultancy, business-to-business E-commerce will top $7 trillion by 2004. Online applications are revolutionizing the way companies buy their supplies, manage their inventory, and process their front-office transactions. "While many companies haven't yet decided where to place their chips, they understand that it's now an E-commerce world," says Mark Paulson, a partner in the finance and performance management area at Andersen Consulting. "It's the next wave, and it's upon us."
CFOs finally seem to be waking up to the revolution. Over the past six months, a growing number of companies have started purchasing, testing, and deploying a new generation of browser-enabled financial software. The applications run the financial gamut, including accounts receivable programs, enterprise resource planning modules, payroll and accounting applications, and treasury systems. "There's a huge trend toward moving financials to the Net," McCullough confirms. "If transactions take place on the Web, it makes sense to have the supporting applications running in the same space."
We're not talking E-mail here. Porting financial applications to the Internet dramatically alters the way finance managers do their jobs. In their most basic incarnation, Net-enabled financial applications use the Web as a low-cost, easy-to-manage distribution medium. Users access the applications via the Web, choosing whatever portion of it they need. The software looks just like its Windows-based predecessor, and in fact, users may not even realize they're working on a Web-enabled version.
But experts say this is only the beginning. Over the next year, virtually all these applications will be ambitiously retooled for the Net. They'll look different, mimicking the blue-underscored, point-and-click friendliness of a typical Web page.
More important, these applications won't simply use the Internet as a hassle-free way to reach users' desktops. The redesigned programs will incorporate all the functionality of leading E-commerce software. That, in turn, will enable the finance department to access information from across the organization — from back office to front office, from department to department, from operating unit to business partner. "Things are moving so fast," says Amy Mizoras, an analyst at market researcher IDC, "that in three or four years, the landscape will be completely changed in ways we can't imagine."
Gary Darst is not waiting. The director of financial planning at Litton Electron Devices (www.littonedd.com), Darst has turned to the Internet to help improve the company's cash management. "Our receivables are averaging 55 to 58 days DSO (days sale outstanding)," he acknowledges. "If there's a way to reduce that significantly, we're going to sit up and take notice."
Darst has done more than take notice. In October 1999, software vendor eTime Capital's Jack Barry visited Darst at Litton Electron's San Carlos, California, headquarters. eTime (www.etimecapital.com), launched in 1999, provides a range of receivables management services and products linking key elements of a company's demand and supply chain. The goal, however, is not simply to expedite accounts receivable. By connecting buyer, seller, shipper, and financial institution(s) over the Net, eTime is designed to eliminate the AR function altogether.
Darst was immediately sold on the concept. Litton Electron, part of Litton's $1.5 billion Advanced Electronics division, signed on as a beta customer just a few weeks after Darst met with Barry. "We had nothing to lose," Darst says. "We had about four of our people spend a couple of hours a day on it, working to shape the product to our needs." Those efforts began in late 1999, and by the end of March 2000, Litton Electron was about to go live with the new system. Darst anticipates a big return. "I think with eTime Capital, we can easily knock 15 days off our DSO," he says, "and eventually 20."
Compressing the cash conversion cycle will squeeze a substantial amount of cash from Litton Electron's working capital. "If we get it down 20 days, we can save at least a quarter-million dollars a year in interest," Darst notes. "That's money I can reinvest in our business, hiring people and improving our processes."
As with many Web-enabled applications, corporate users have some options in how they administer the eTime system. In one model, once a product has arrived at the buyer's site, eTime guarantees payment to the seller in 48 hours. To do that, eTime has formed a partnership with Deutsche Bank (http://group.deutsche-bank.de/ghp/index_e.htm) and other financial institutions. But companies can take a simpler approach. Rohan Champion, CEO of eTime Capital, says corporate customers can use the information captured by the system to work out their own payment terms, remitting a $2 transaction fee to eTime.
That will likely have real appeal, Darst believes. He concedes that some delays in paying outstanding bills occur because buyers want to play the float. But mostly, he says, the conversion of receivables to cash is slowed by the huge amount of manual intervention needed to fix errors. Despite substantial investments in automation in cash management systems, simple data rekeying is still shockingly common at most companies. Champion claims that nearly one-fifth of all receivables transactions require some back-and-forth between buyer and seller to rectify mistakes.
Given such gross inefficiency, it's not surprising that, on average, six out of ten payables dangle longer than 50 days. "If I can go to the eTime Capital Web site and pull up all the data on a shipment," Darst says, "while I'm on the phone with the buyer, who's looking at the same screen at his place, we can work out any problems very easily." Litton Electron's rollout of the eTime modules should be in place by April. "If it goes well," crows Darst, "I'm going to let corporate know about it."
The 2 Percent Solution
At Cargill Inc. (www.cargill.com), corporate already has an inkling about those benefits. The Minneapolis-based commodities giant is planning to purchase a browser-based treasury system called eTreasury. Marketed by Calabasas, California-based Sungard Treasury Systems (www.sungardtreasury.com), a division of Sungard Data Systems, eTreasury offers browser-based processing on intranets and extranets for all Sungard's existing treasury applications, including GTM (Global Treasury Management) and ResourceIQ.
The ability to run the product on its corporate intranet is a big selling point for managers at Cargill, which operates in 59 countries. Sue Foster, treasury operations project manager at Cargill, says eTreasury provides a bridge from Sungard's GTM software, which is already in use at the company, to browser-based applications. But, she notes, Cargill does not plan to use the software to provide direct Internet connections to any of the private company's trading partners. Foster explains that Cargill management prefers to keep the company's treasury application in-house — and separate from the ERP package that controls most of the rest of Cargill's financials.
Nevertheless, even Cargill's limited deployment of eTreasury should demonstrate the almost limitless benefits of e-nabling the finance function. In the past, Cargill's treasury department used three different applications to handle transactions: one for posting entries, one for interest allocation, and one for maintaining transaction balances. The company's old mainframe system was so restrictive it couldn't be modified to address new cash types, such as ACH transactions. Worse, the treasury staff spent half its day manually reconciling every transaction, matching up faxes, E-mails, and handwritten notes from the company's 400 remote locations.
With eTreasury, bank statements are imported daily and automatically reconciled within the system, meaning the staff has to address only 15 to 20 exception items each day. Employees at the company's remote offices enter their information directly into the system over the company intranet. That amounts to about 2,500 transactions a day. Remarkably, using the browser-enabled system, Foster says only 2 percent of those transactions now require manual intervention. The result: Cargill has been able to reduce the number of treasury employees from 18 to 6. "The staff can spend more time analyzing the data and adding value, and less time simply processing the transactions," Foster notes.
Compared with the light speed pace of the dotcom world, Gary Darst and Sue Foster would probably be considered E-commerce laggards. By finance department standards, they're early adopters. The same thing cannot be said of leading ERP vendors, most of whom have only released robust Web-enabled versions of their products over the past ten months or so. SAP (www.sap.com) didn't release MySAP.com, the company's four-tiered, E-commerce suite, until May 1999.
That's about the same time PeopleSoft (www.peoplesoft.com) came out with e7.5, a system that enables customers to execute most PeopleSoft transactions over a Web browser. Early in 2000, J.D. Edwards (www.jdedwards.com) came out with Activera, a collection of Web-enabled business suites designed to work with the company's Oneworld platform. And as of press time, the first modules for Oracle (www.oracle.com) Applications Release 11i, the company's overarching Internet-enabled application, were still in beta testing.
FileTek Inc. (www.filetek.com), a maker of data warehouse software, has been using the new browser capabilities of Oracle's applications for almost a year. The company began rolling out version 11 financial and manufacturing modules in June 1999. For FileTek's finance managers, purchasing and deploying browser-enabled versions of ERP software means the company's remote offices will be fully connected to FileTek headquarters in Rockville, Maryland.
"We are very headquarters-centric," explains William Loomis, the company's CFO. "Our remote locations have to connect to our internal systems to do many things." Loomis has discovered that tapping into the company's core financial modules via the Net is simpler than using a dial-up system on a leased line. What's more, FileTek's remote users can access the same information that employees back in Rockville use. After starting with financial and manufacturing modules, FileTek brought Oracle's human resources program online in February 2000.
That laid the groundwork for a new application that will be used by every employee at FileTek — a travel-and-expense system. "It may not sound like a big deal," admits Loomis, "but as the first Web-enabled application that everybody taps into, it means a lot." Using the browser-based software, employees will submit their expenses via the Web. A workflow system will then take the information through approval and on to accounting, with no rekeying of data. "It's far more efficient than what we do now," Loomis says, "After that, we plan a similar system for procurement."
What FileTek does not plan, at least now, is to use these systems to reach beyond its own walls. Loomis does say the company is considering implementing a Web-based order-entry system at some point. But right now, he's squarely focused on in-house processes. "There is so much we can do internally," he says, "that our resources are stretched pretty thin right now."
That seems to be a common theme lately among finance managers. For his part, Loomis chose to buy Oracle's new ERP software. But other companies — often with limited budgets or minimal in-house tech expertise — have started to rent financial programs from online providers. In the so-called apps-on-tap approach, a vendor known as an application service provider (ASP) acts as an intermediary between a software maker and a corporate customer. Typically, an ASP buys a program from a software maker, installs it on its own system, then charges a corporate customer a monthly fee to access the applications via the Internet.
The advantages of renting are hard to ignore. Strategically, it frees companies to focus on core competencies rather than information systems. Financially, the ASP model enables customers to pay as they go — with no huge upfront cost. Some companies choose an arrangement in which they rent the software for three to five years, after which they own it. Others choose a straight rental, with no desire to own. Some purchase the software up front. But in all cases, the ASP sweats the hard stuff, including investing in the hardware and staff needed to keep the applications tuned up and running. Further, most ASPs keep customers current, upgrading software as new versions come out.
Smitten by an ASP
With those advantages, it's not surprising that many analysts believe the ASP business is set to explode. Current projections for annual spending on all ASP-based applications put the market at upward of $20 billion in three to four years. (Spending in 1999 was between $150 million and $800 million, depending on how analysts define the industry.)
Managers at smaller businesses, particularly technology companies, have been the first to wholeheartedly embrace the ASP model. Ken Goldman, CFO at Excite@home (www.home.com), a company that provides Internet access to consumers, uses an ASP called Corio (www.corio.com) to access a range of PeopleSoft financial applications. "There's little difference from one GL (general ledger) package to another," explains Goldman. "It's not strategic, so it makes sense to find a low-cost, reliable service, and that's what an ASP can provide."
Originally, application service providers targeted smaller companies like Excite@home, giving these businesses the chance to rent software they otherwise probably couldn't afford. But some ASPs are now trying to win business from large corporations, as well. "No big company is running its core systems from an ASP," notes William Martorelli, vice president of e-services and sourcing strategies at the Hurwitz Group, a consultancy in Framingham, Massachusetts. "But you can mix and match. A large company might tap an ASP for a customer relationship management application, or an ERP module they haven't bought yet."
ERP vendors are glomming onto the potential of apps on tap. In March 2000, SAP US reported that the number of customers accessing the company's applications from certified ASP partners had risen to 10,000. That's nearly double the January number. Indeed, the ASP approach is catching on so fast that some enterprise software vendors are now planning to host their own applications for customers. In early 2000, Oracle, PeopleSoft, and SAP, among others, announced new divisions that will provide ERP software to customers via an ASP model. Observers say those plans may force traditional ASPs (if there is such a thing in such a young industry) to come up with ways to differentiate themselves from ERP makers.
Scratching a Niche
The vendors know their own products best," notes IDC's Mizoras. "But the ASPs can offer services beyond the individual applications." Those added services include integrating applications from various vendors into one customized package. She adds that even if rental and service fees for an ASP exceed the cost of buying a piece of software, the ROI equation probably tilts in the customer's favor. The reason? Software renters don't have to hire systems administrators or buy more hardware.
Managers at some companies are still figuring how Web-enabled software fits with their existing systems. Executives at Owens-Corning (www.owenscorning.com), the Toledo, Ohio-based maker of building materials and composites systems, say they are re-examining their Internet strategy. "We're seeing an immediate benefit with our E-commerce efforts," says Steve Strobel, the company's vice president of finance. "And we think we can get important gains from Internet-enabled software." But, he adds, "It's a mountain to climb."
You can't blame Owens-Corning for going up the hill gingerly. The company spent the last two years implementing an ERP application from SAP. The Owens-Corning finance manager does say he is studying the benefits of installing a portal for finance applications that would enable employees to access the company's R/3 system via the Web. But he wants to maximize prior investments: "We need to use what we already have to its utmost."
That attitude leads some finance managers to ask whether Net-based products can augment their existing financial systems. Larry Tomlinson, vice president and treasurer at computer maker Hewlett-Packard (www.hp.com), is evaluating a financial Web portal called Cfoweb.com (www.cfoweb.com), which allows users to manage a portfolio of financial products, such as interest-rate swaps.
Tomlinson concedes he is intrigued by the concept. "A Web-based system would let us move away from the Reuters service we use now," he says, "which would save money and provide easy desktop access." But Tomlinson wonders whether a company the size of Hewlett-Packard — $45 billion in revenues in 1999 — could hope to find any portal that would satisfy a broad range of its needs. "At least in its first wave," he says, "Cfoweb.com is probably more useful to a small or midsized company, although we might include it among the things we do."
Tomlinson says he'd really like to see a Web-based system that marries front-office and back-office applications. "In an ideal world, you'd find a way to do that on the Web and really cut transaction costs," he says. He pauses. "I don't think that's there yet, but if that seamless integration is made possible, it will be huge."
That's the curious thing about the Net. Even as it creates possibilities, it suggests better answers may be just down the road. Tomlinson believes that however finance managers proceed, Internet explorers will be rewarded. "It'll all come together," he says. "And we're ready for it."
Scott Leibs is the technology editor of CFO.