Trends in Treasury, Financial and Risk Software

Executives today are starting to rely more heavily on their financial operation teams, such as treasury and risk, to accurately gauge and measure the financial health of the organization. Accounting and audit who were the original protectors of corporate fortunes have received serious criticism from a litany of scandals. Shareholders and executive boards no longer exclusively rely on the financial statements to measure the organization’s wellbeing. They have now started to validate the reported accounting positions against expected liquidity and they have started to segregate the teams that manage both.

Rising Role of Liquidity Analysis at Board Level

Forensic accountants have known for a long time that the fastest way to identify untoward accounting practices is to review the difference between the underlying operational systems of the organization and its books. The higher the variance, the more likely that a rogue accounting practice has, or is, taking place. One of the primary ‘underlying validation’ forensic tools is the bank account reporting system. Let’s face it, recording $5bn in sales revenue should equate at some point to $5bn in cash inflows and usually relatively close to the point in time when the revenues have been posted to the general ledger (G/L). If, on the other hand, the accountants fudge the books to make the company look better, then empty bank accounts after huge sales gains, this is a massive red flag.

Today these same forensic tactics and techniques are starting to make their way into boardrooms and executive offices and into financial modeling, analysis and reporting systems. Shareholders are also starting to demand reporting line separation between accountants and audit on one side and treasury and risk on the other. Simply watching the Enron trials highlights the dangers of committing the fatal act of consolidating liquidity and accounting under a single individual reporting line.

The financial reporting teams rely heavily on software to capture, track, manage, control and report on the liquidity values of the organization. Those teams are being pushed to provide both real-time exception based liquidity reporting to executive dashboards as well as ongoing real-time liquidity analysis. Some of this analysis comes in the form of forecast variance reporting while other new forms of analysis are emerging, such as posted value variance (calculating an independent ‘mark to market’ value of underlying items, e.g. cash, gas reserves, or inventory on hand against posted G/L inventory levels), liquidity posting analytics (reports that map the accounting G/L balances back to the underlying transactions that created them with exception reporting for items that cause any calculated material difference) and accounting level analysis (the application of benchmark posting levels derived from the underlying feed systems against G/L account balances with exceptions reported in real time). All of these reports are designed to provide boards and executives with an instantaneous pulse of the organization and a valuable comparison to the posted health in the financial statements. In this way, rogue CFOs are effectively unable to manipulate both sides of the financial reporting equation as long as control line segregation is maintained.

Treasury Systems Struggling to Evolve

Up until now, the current state of treasury systems have had a difficult time just providing stable and quick to install functionality let alone branching into new areas, such as benchmarking/exception liquidity reporting and analysis tools. The difficulty in meeting current market demands, such as multi-stream strings for hedge accounting, is proving a significant resource challenge as it is, resulting in minimal investment in analytic and reporting functionality, e.g. dashboards. Often added as web-based reporting amalgamation tools, the current state of executive dashboards is nowhere near capable of advance liquidity to posting analysis in demand by large organizations. In addition, the inability of most of these older generation systems to effectively gather disparate data from across the organization is also proving a significant challenge.

Eight Emerging Trends

1. Consolidation – Consolidation in the financial systems market is removing competitive pressure and thereby removing a significant portion of the desire to innovate existing systems. This is further compounded by the decreasing adoption rate of new standards, methodologies and technologies. The philosophy in the labs is akin to a ‘if it ain’t broke, don’t waste money innovating it’ mentality combined with a ‘if the customers aren’t beating down our door for it, we won’t waste our resources adding it’ attitude.
2. The Drive to Profit – Profit in software organizations is gained by ongoing license revenue and ongoing sales. Licence revenue is offset with support costs and sales revenue is offset with implementation and development costs. One thing that the software shops have learned is that ‘simple is cheaper’ in both support and implementation. If it’s new or complicated, such as mapping liquidity to postings, it is better to enhance the report building tools and farm out the pain to a third party like the big four consultancies or custom software consultancies. The result is less support from treasury software builders for the money paid to purchase the system.
3. The Focus on Tools for the ‘Do-It-Yourself’ Type – Let’s say that you want to buy a house and you go to a builder for your new house. Now it just so happens that he has a number of pre-built homes available for you and you look at all of them but none suit your lifestyle. So you tell him that you want to order a custom house. He says sure, he takes your money and hands you a key to one of the existing houses along with a set of tools. Welcome to the new world of treasury software. But don’t worry, as a treasury software vendor he will give you the name of a great contractor who can wield the tools on your behalf to make the system fit your organization. Unfortunately this new contractor charges a separate fee and the original contractor won’t vouch for, support or guarantee his work or service any of the new changes. But then where are you going to go (see point 1).
4. Cobbling – Not the act of fixing shoes but the act of stitching together components. Building offshore is cheap but you know what’s really cheap? Plug-ins built offshore by someone else. Software is slowly moving towards the world of the plug in component.
5. Generalization – If you want something custom added to the code of the treasury software you are buying then you better find a lot of powerful friends to ask for the same thing. Otherwise forget it. Customization in the world of treasury software development equals higher support and implementation costs. Unless of course the customization is infinitely marketable to other organizations and you’re willing to fund the development. Then it’s a win, win scenario for the software company.
6. The Desire for Market Expansion – A new accounting tool or a bank transaction entry mechanism with advanced accounting features may make your life much easier. Everyone else wants it, so it should be added – right? Wrong. The only thing software companies want to build is something that really sells to a wide variety of organizations or is a significant pain to most organizations buying treasury software. Otherwise, why spend the time and resources to build it? Requested updates to treasury software will begin to be validated for ongoing profitability as financial managers start to run software organizations, wrestling control away from marketing, sales and business development executives. Large companies will have as much impact as they do on Windows development. That’s somewhere between very little and none.
7. The Need to Look Young and Cool – In financial software design, new and cool features are beginning to overshadow the mechanical guts and it is not costing buyers any more. A painless Office of Foreign Assets Control (OFAC) list management system, a drag and drop dashboard or an ultra flexible and easy forecasting or deal modeler will make far more sales headway than a custom built tool to help accounting do their reconciliations and adjustments.
8. Making the ‘C’ Look Like the Hero – In corporate software sales, every user is important right? Well, yes, that’s true but there are degrees. Some users are more important than others and software companies will look to please the decision makers as a priority and look to cut back the influence of line managers. Line managers with too much influence can effectively bleed the profits right out of any deal if they have too much leeway. Look for closed contracts not dependent on ‘go live issues’ or ‘deliverables’. This will keep those pesky line managers with hidden agendas away from holding your project for ransom.

Conclusion

The old models of software purchase negotiation are fast disappearing as the leveraged buyout experts start to take a greater role in the day-to-day management of financial software development operations. New treasury and financial system buyers will have to contend with a far less compassionate and hungry field of vendors in the next decade unless some of the new upstarts on the horizon with the latest delivery models can manage to gain enough of a foothold to change the playing field. As it stands now, the mainstay system vendors are not threatened or under any pressure. And that equates to negative change in the world of treasury, finance and risk software from the buyer’s perspective.

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