Budget Software that Turns on a Dime
Written by John J. Xenakis for
CFO.com,
Apr 18, 2001.
A budgeting tool is helping tech companies revise their budgets, if
need be, on a daily basis.
With the number of enterprise budgeting packages growing (see
OutlookSoft column on 4/3/01), it's not surprising that some are
targetling specialized areas.
For example, a package from ClosedLoop Solutions Inc. (http://www.closedloopsolutions.com) targets so-called high-velocity
companies -- or firms whose business plans change so quickly that the
standard annual budgeting cycle doesn't help.
"The companies that ClosedLoop is targeting don't have a lot of use
for the budgeting process," says Paul Hamerman, analyst with the Giga
Information Group. For these companies, budgeting has to be much more
collaborative, and much more event-driven, sometimes on an almost
daily basis, rather than calendar driven. "These high-velocity
companies need a continuous forecasting process, more often than on a
quarterly time frame. They feel the annual budgeting process is
irrelevant for these high-velocity companies."
The problem with the traditional budgeting process is the mismatch
between top-down and bottom-up results. Corporate spending and revenue
goals are set at the top, and then the departmental budgets are
computed from the bottom, often on spreadsheets, in a process that can
take several weeks. If the departmental budgets don't meet top
management goals after they've been merged, then arbitrary adjustments
sometimes have to be made.
In fact, especially in the current economic environment, a budget can
be obsolete almost as soon as it's completed. Many companies have to
deal with changes to partners, suppliers, customers, and competitors,
creating a climate where corporate direction has to change rapidly.
Traditional budget process provides no simple method for realigning
the departmental budgets when the corporate strategy changes abruptly.
If expenses have to be cut, for example, there's no simple way to
adjust all the line items except with a meat-axe approach of
across-the-board cuts. There's also no way to guarantee that the
imposed cutbacks will be realized. Fine-tuning will have to wait until
the next budget cycle begins, perhaps months down the line.
Network Appliance Inc. (http://www.netapp.com) of Sunnyvale,
Calif., is a company facing exactly those pressures. The company
competes with EMC Corp., the industry leader in disk drives and
storage networks. Network Appliance, which had over $1 billion in
sales last year, has to react not only to changes in the stock market,
but also to the ups and downs of PC and server sales, as well as to
announcements from its very aggressive competition.
That's why the company decided to implement ClosedLoop's SpendCap
Manager in January for its budgeting process, according to Leslie
Paulides, VP finance for the company. "ClosedLoop is not a mature
company, but they have a good vision for how budgeting should be
done," she says.
Instead of licensing the software, they use ClosedLoop as an ASP,
which has responsibility for hosting both the software and the data.
All functions of the software are handled through an ordinary browser,
so no client software is required, and little training is required for
users. "I pay a monthly fee to use it," says Paulides. "I have no sunk
cost if the product doesn't work out."
The product has been rolled out to about 150 of the company's 500
cost centers, with the remaining managers scheduled to be put online
by the end of the year. In the meantime, the financial analyst group
is budgeting for the other cost centers.
Paulides explained how the budgeting process has become more
interactive and collaborative with the new software. "Suppose I see
that I'm spending $25 million worldwide on consulting, and I want to
cut back to $15 million, and I want to be convinced that each cost
center is committed to their number," she says. "I tell each cost
center to cut costs and show me the new numbers by tomorrow." Each
cost center manager enters new spending forecasts, and Paulides can
roll up the modified budgets within 24 hours.
It's a cultural thing whether a company can use a product like
ClosedLoop's, according to Giga's Hamerman. "Even the traditional
budget process has a collaborative element, even though it's centrally
controlled," he says. "But ClosedLoop is pursuing a much more
interactive process. The whole thing is to engage the front-line
managers and business managers throughout the company. Being fully
collaborative is more a cultural style."
ClosedLoop's software comes in three modules: SpendCap Manager
maintains expense, capital, and headcount plans in real time, and
enforces top-down spending guidance. TopLine Manager captures actual
data and provides forecasts measured against budgets. The third,
BizPlan Manager produces pro forma financial statements that help
business owners decide when to grow and when to slow the business.
One-time license fees for each of these modules range from $100,000
to $250,000, depending on company size. ClosedLoop has eight customers
so far, and all of them are using its ASP service, which is typically
priced from $40,000 to $50,000 per month, according to Doug Barton,
ClosedLoop's VP marketing.
"Our customers are paying more than they would for traditional
solutions like [Hyperion] Pillar and Adaytum, and the reason is that
we're used more often by more people in the organization," says
Barton. "They use our app sometimes four times a month to change the
plan around. They use it on demand to respond to changing business
conditions. With other products, the budget's not trustable."
However, despite that view, users may wish to consider other
products, some of which are more mature and have more features,
according to Hamerman.
"For example, Adaytum is going after a similar kind of market with
similar features," he says. "They're looking for a broader segment of
the market. They sell to more mature companies, but they can also
pitch to companies that want to pursue collaborative forecasting."
Adaytum's ePlanning budgeting software costs $100,000 to $500,000 or
more per license, with $300,000 the license fee for the average sale.
(This is a modified version of an article that originally
appeared on
Apr 18, 2001
on
CFO.com
at
this location.
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