Managing Financial Technology Through Times of Change


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What can a company do when its financial systems stop meeting its needs? For modern businesses, such technology is crucial in day-to-day operations, providing automation, security and controls. But M&A activity, changing business models, and evolving accounting regulations can create an environment where this infrastructure no longer keeps pace. At the same time, replacing an entire system usually means substantial cost, risk, and disruption.

This session looks at how companies can augment existing enterprise systems to address new billing and revenue recognition needs without the pain of a full rip-and-replace. A practical example is provided by State Street - Princeton Financial Solutions business unit CFO Kenneth Riley, who successfully implemented an ERP augmentation strategy that allowed PFS to continue meeting GAAP billing and revenue recognition requirements, improving reporting and efficiencies while working within the context of its parent company’s systems.

Speakers: Ken Riley, VP of Finance/Division CFO, State Street
Graham Hulme, Director of Product Management, SOFTRAX

Presentation delivered at ProformaTECH 2014 -
Track: Finance Technology Landscape | Session: 1

Published in: Business
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  • Two key questions/considerations when addressing topic of change: what is going on in the environment? How is this manifesting itself?
  • Drive automation, controls, and securityOriginally intended for manufacturing; now prevalent in all major industriesAberdeen Group, May 2012 - A Guide for a Successful ERP Strategy in the Midmarket: Selection, Services, and Integration / Bingi, Sharma & Godla, 1999
  • Migration to new business models such as SaaS and subscription offeringsNot all of these changes can be anticipated or planned
  • Moves transactions from a one-time to recurring basisAllows flexibility in product & service offeringsThis flexible model can create accounting complexitySpecific challenges relating to subscription migration that go beyond the capabilities of typical ERP system? Consider chopping.
  • This joint Revenue Recognition project has been under development since 2002 with the new standard recently finalized New Revenue Recognition Standard prescribes a five-step model for revenue recognitionEffective dates are 12/15/16 (public entities) and 12/15/17 (private entities)
  • IT integration is one key factor in ultimate success or failure of M&AsErnst & Young study: 26% of respondents said IT issues “often” blocked post-transition objectivesParticular pain point: mismatches in ERP systemsMajority of M&A deals involve integrationof systemsERP needs vary from company to companyAcquisitions can also create new accounting requirements one or both partiesEmphasize that we’ll be looking at this in more detail with Ken’s case study. Ernst & Young: “IT as a Driver of M&A Success”, 2011 -$FILE/EY_IT_as_driver_for_M&A.pdf
  • 50% figure from Forrester Research; 7 years from Aberdeen ResearchInside ERP:
  • Live with it: Migrate work back to spreadsheetsCustomize existing ERP systemsRip and Replace:Pull out entire existing ERP and replace with a new systemERP AugmentationModular solutions that fill technology gaps while maintaining value of existing ERP
  • Advantages:Preserves existing ERP/financial infrastructureCan be implemented comparatively quicklyMinimal trainingDisadvantages:Lack of cohesive business intelligenceMigrating data across systems becomes difficult/time-consumingCannot be easily automatedError-prone; can create larger issues further down the line
  • Spreadsheet functional limitations:Data-driven, not process-drivenVersion control and security become difficultMagnifies the risk of human errorDifficult to scale – not feasible for large organizations
  • Ads:Preserves existing ERP investment in near termAllows platform to specific needs as of a point in timeDisadvantages:Time-consuming implementationIncreased maintenance cost / effortTransfers responsibility from vendor to customer for maintenanceRisk of “version lock-in” – platform updates may make your code obsolete
  • Ads:Provides a “fresh start”Addresses gaps that existed in old systemNew vendor responsible for addressing business issuesSignificant scope can cause disruptionsNew system may not address all requirementsNeed to retrain staff on new systemPotential for both cost and schedule overruns
  • Ansell (2012)Consolidated 25 legacy systems into single platform, but ‘design issues’ led to up to $15M in lost sales and customer (2008)Had to restate 5 and a half years of revenue due to problems with manual fixes to an ERP upgradeLevi Strauss (2008)Botched implementation of ERP system led to 98% drop in second-quarter results and one-week-long system shutdownAmerican LaFrance (2007)Botched implementation “crippled” company’s business, ultimately forcing bankruptcy
  • Advantages:Proven and tested solutions created by specialistsStrategically improve individual aspects of ERP systemThird-party vendor takes responsibility for ERP issuesFuture proof: modules can be upgraded or replaced independent of main ERPDisadvantages:Only address certain issues – with significant ERP problems, “rip and replace” may be only optionIntegration concerns –addressed by enhanced integration technologiesMultiple data sources for reporting – abundance of BI tools have addressed this concern
  • Managing Financial Technology Through Times of Change

    1. 1. Managing Financial Technology Through Times of Change Graham Hulme Director of Product Management, SOFTRAX Ken Riley VP of Finance, State Street
    2. 2. Agenda • How Business Factors Drive Change • Times of Change: What are the Options? • ERP Augmentation: A New Way • Case Study: ERP Augmentation at State Street 2 © 2014 Proformative
    3. 3. How Business Factors Cause Change Enterprise Solutions are Critical for Modern Companies • Enterprise resource planning (ERP) systems are information systems encompassing all aspects of business • Implemented at over 70% of Fortune 1000 companies and 84% of midsize companies (Aberdeen Group 2012) 3 © 2014 Proformative
    4. 4. How Business Factors Cause Change Enterprise Systems Face Continuous Challenges • Business Drivers of Change • New business models • New regulatory requirements • Merger & acquisition activity • Company changes: new products, new management, etc. 4 © 2014 Proformative
    5. 5. How Business Factors Cause Change New Business Models • Example: Shift to a subscriptionbased economy • Moves transactions from a one-time to recurring basis • Allows flexibility in product & service offerings • This flexible model can create accounting complexity 5 © 2014 Proformative
    6. 6. How Business Factors Cause Change Changing Regulatory Requirements • FASB/IASB Standards Convergence • US GAAP revenue recognition requirements differ from International Financial Reporting Standards (IFRS) – current focus on unifying standards ( 6 © 2014 Proformative
    7. 7. How Business Factors Cause Change Merger and Acquisition Activity • Mergers and Acquisitions can introduce fundamental changes to all parties included in the transaction. • What do these changes mean? 7 © 2014 Proformative
    8. 8. How Business Factors Cause Change Challenges of Outdated and Disparate ERP Systems • Typical ERP is updated every 2 years and 4 to 5 times in its lifecycle • 50% of ERP customers use systems two versions out of date • Significant number of companies use multiple ERP systems or a custom solution developed in-house (Aberdeen Group / Forrester Research) 8 © 2014 Proformative
    9. 9. Times of Change: What are the Options? Live With It, Rip and Replace, or Augment • Live With It • Rip & Replace • ERP Augmentation 9 © 2014 Proformative
    10. 10. Times of Change: What are the Options? Going to Spreadsheets May Be an Easy Fix… Weigh the Advantages 10 © 2014 Proformative Weigh the Disadvantages
    11. 11. Times of Change: What are the Options? …But Creates a Range of New Vulnerabilities • Spreadsheets and other manual workarounds also incur real labor and opportunity costs 11 © 2014 Proformative
    12. 12. Times of Change: What are the Options? View of a Spreadsheet-Driven Process Billing Backlog Revenue Allocation FMV/ VSOE Deferred Revenue Terms Journal Entries Revenue Forecast FMV/ VSOE Pricebook Milestones Contracts Revenue Recognition History Unbilled Revenue Analysis Process Documentation Services Revenue treatment memo Revenue Process Definition Approvals Audit Documentation 12 © 2014 Proformative Compliance Documentation
    13. 13. Times of Change: What are the Options? Customizing for Near-Term Relief…But at What Price? • Until recently, 40% to 60% of software in an ERP system was custom-coded for that installation • Only 11% of organizations implement ERP without customization • Relieves the symptoms but does not cure the fundamental issues Minor (1 - 10% of Code) Modest (11 - 25%) Significant (26 - 50%) 11% Extreme (50+% of Code) 4% 5% 37% Completely Custom No Modification 12% 31% SOURCE: Panorama Consulting (2013) 13 © 2014 Proformative
    14. 14. Times of Change: What are the Options? ”Rip and Replace” Considerations • Will it solve the problem? • Do you want to start over? • Will you lose anything? 14 © 2014 Proformative
    15. 15. Times of Change: What are the Options? The End Results of Rip and Replace • 61% of implementations took longer than expected • 53% of projects suffered cost overruns • 60% of companies received less than half the expected benefits from their new system (Panorama Consulting 2013) 15 © 2014 Proformative
    16. 16. ERP Augmentation: A New Way Modular Solutions to Fill Functionality Gaps • What is ERP augmentation? • Keep existing ERP leveraging its strengths • Take a seat at the table: fill gaps with modular best-in-class solution • Modular applications that work in conjunction with existing ERP to solve 16 © 2014 Proformative
    17. 17. ERP Augmentation: A New Way Significant Value Points • Retain the Value of Existing Systems • Continue leveraging what works in existing systems to protect your investment to avoid disruption, risk, cost • Enhance the Overall Value of Existing Systems • ERP augmentation solutions work side-by-side with existing systems delivering targeted resolutions • Minimize the need for customization, maximize use of productized functionality 17 © 2014 Proformative
    18. 18. 18 ERP Augmentation at Princeton Financial Solutions / State Street Bank Ken Riley VP of Finance, State Street Bank
    19. 19. Agenda • About Ken and State Street • Project Background: Systems and Pain Points • Making the Decision • Preparing for the Implementation • Implementation Status and Next Steps • Takeaways 19 © 2014 Proformative
    20. 20. About Ken • “Big 8” audit experience • Exposed to wide range of industries • Fascinated by small technology companies • 25 years in technology – primarily software industry • Private & public companies • Controller / CFO roles • 4 years as CFO of State Street’s software division 20 © 2014 Proformative
    21. 21. About State Street Corporation • Top 10 US bank • #2 US custody bank • $10B in annual revenue; 30,000 employees globally • State Street Software Solutions • Part of State Street Global Exchange • Consists of three companies: • Princeton Financial Systems • State Street Portfolio Solutions • Allocare 21 © 2014 Proformative
    22. 22. The Bigger Picture: Princeton Financial Systems • Acquired by STT in 1996 • Operated independently of STT • Growth pre-financial crisis • Finance teams in Princeton, NJ and Frankfurt, Germany • Historically disconnected infrastructure – no ERP • • • • Lead tracking (Onyx & Excel) Contract management/billing (CMS, HS, Projectile) Customer support (Onyx) Project management (Projectile, Bugzilla) • Operations now coalescing around single platform (SalesForce) 22 © 2014 Proformative
    23. 23. The Contract Management and Billing System • Built on old technology (Access 97) • Developed in-house by staff who: • Lacked an understanding of software revenue recognition rules • Were no longer with PFS at the time of the changeover • Serious issues uncovered by 2009 audit • Failure to implement SOP 97-2, leading to: • US$5M revenue adjustment 23 © 2014 Proformative
    24. 24. Our Pain Points • Lack of technical expertise in: • Software accounting standards • CMS design and maintenance • GAAP compliance issues discovered by audit • Unsustainable accounting processes • Manual spreadsheet manipulation • Manual journal entries (JEs) • Lack of integration with STT and PFS systems • Disparate practices and reporting platforms • 2 finance teams, 3 billing /revenue systems 24 © 2014 Proformative
    25. 25. Making the Decision: Custom or Off-the-Shelf? Advantages of a Custom Solution Risks • Flexibility – build vs. buy • Iterative cycle requires time and money – design, develop, test, evaluate • Design focus to address specific pain points • Problems with ongoing maintenance and support • Concentration of knowledge • Version stagnation • Cautionary tale: Base Ten 25 © 2014 Proformative
    26. 26. Our Project Objectives • Reach GAAP compliance • Create processing efficiencies • Scalability: automate JE calculations • System integration: STT accounting systems, PFS’ CRM platform / project management tool • Automate commissioning processing • Create a single billing platform • Improved reporting – one version of the “truth” • Risk mitigation through cross-training 26 © 2014 Proformative
    27. 27. RPF and Vendor Analysis The Criteria The Evaluation Team • Quality • Finance • Service Capacity/Domain Expertise • Project Manager • Compatibility with Key Systems • IT • Pricing • Sales & Marketing • Financial Stability • Customer Services • Commitment • STT Corporate Accounting Platforms • Contract 27 © 2014 Proformative
    28. 28. Preparing for the Implementation • 1. Identify and prioritize functions • • • • • • Billing Revenue recognition Contract management License Key Generation Commissions Time Tracking • 2. Synthesize processes between US, German teams • Contract process and setup: • Terminology, data fields, SKUs & other codes • Workflow – review and approvals 28 © 2014 Proformative
    29. 29. Challenges Facing Implementation • Regional differences • Contractual terms impact revenue recognition • Language on invoices • Sales tax vs. value added tax (VAT) • License key generation process • System integration • New requirement added – integration with autoreconciliation tool 29 © 2014 Proformative
    30. 30. Current Implementation Status • Phase 1: Go-Live • Achieved in November 2013 • GAAP compliance • Enhanced revenue recognition subject matter expertise • Automation of JE generation • Integration with Oracle & auto reconciliation system • Replacement of 2 systems 30 © 2014 Proformative
    31. 31. Next Steps • Phase 2 – Q1 2014 • Partial integration with SalesForce • Replication of license key generation process • New functionality development: security, audit tracking • Phase 3 – Q4 2014 • Full integration with SalesForce • Future Phases • Integration with project management system • Automation of commission processing • Allocare & any future acquisitions 31 © 2014 Proformative
    32. 32. Key Lessons and Takeaways • Changes in project scope are inevitable • Post-contract requirements added by STT Corporate Accounting Systems • PFS project management tool replacement postponed • Success means devoting sufficient resources • Remember that project management is a full-time job • Accounting staff supplemented by temp resources • Customers and vendors are partners in the process 32 © 2014 Proformative
    33. 33. Learn More About ERP Augmentation at 11:30 AM CORE ERP Order Management Billing Billing Data Fulfillment Usage Data General Ledger Signals to Relieve Revenue Sales Orders Journal Entries Revenue Allocation Revenue Scheduling VSOE/TPE/BESP Price Books Revenue Recognition JE Generation Fair Value Determination Revenue Manager © 2014 Proformative
    34. 34. & 34 © 2014 Proformative
    35. 35. Contact Information Graham Hulme Ken Riley Director of Product Management Vice President SOFTRAX, Inc. p 972-715-4041 35 © 2014 Proformative State Street Corporation p 609-580-5970
    36. 36. Thank You For Attending Managing Financial Technology Through Times of Change