Rigidity in your accounting is killing the business

I’ve just seen an IDC report sponsored by Agresso (registration required) entitled: Modifying and Maintaining ERP Systems: The High Cost of Business Disruption. It makes startling reading. Anyone engaged in accounting needs to read this carefully as part of their festive season education. It will make sobering reading. Before I go on, I should add that I am normally sceptical of vendor sponsored research. It’s often tainted with pre-built methodological bias designed to achieve a particular result. In this case, the results are so startling that the researchers could not have anticipated the results. What’s more, the lead analyst is someone who I hold in high regard and whose independence I don’t call into question lightly.

Here are the key takeaways: “IDC found that businesses making system changes to accommodate a variety of change scenarios caused significant business disruption: a 20.9% decline in stock price, a 17.3% decline in revenue due to a missed or delayed acquisition, and a 16.6% decline in customer satisfaction.”

You might argue – well – so what? These are not exactly startling findings. Well, yes they are. We’re talking millions of dollars arising out of baked in inefficiencies arising out of rigidity. The exact opposite we were supposed to get from implementing ERP. My colleague Brian Sommer puts the topic into perspective:

The study respondents were asked to report if they experienced any of the disruption cost categories for each of the five top drivers of systems’ change. IF THEY DID, they then had to choose from a list of estimate ranges that defined the extent of the disruption they encountered. IF THEY DID NOT, no estimate was given and those null responses were not added to the basis.

Brian then goes on to list what he considers some of the factors leading to this parlous state of affairs. In summary (and concentrating on the ones that relate directly to accounting:

• Conflicting reporting structures
• When the accounting calendar isn’t the business calendar
• Code block insanity
• Vendor’s assume accounting is a constant

Readers who have engaged with any reasonable sized business will know that each of these is a constant headache. It in part explains why so many professionals use and love spreadsheets. The ERP simply doesn’t give them what they need across a variety of requirements. I could argue that XBRL could solve the first problem and potentially the second. But there is no getting away from the 3rd and 4th in the above list.

It is the last one that, in my opinion, provides the lead into all the others. Brian’s expanded comment says:

Double-entry accounting came into being in 1495. Many ERP vendors would be very happy if it didn’t change again for another 500 years. That’s not realistic, though.

He’s right, identifying a topic which strikes at the heart of what professional accountants think about, train for and do for a living.

The problem as both Brian and the report’s author make clear is that today’s accounting errr…ERP is rapidly being rendered irrelevant to what matters in business. The speed at which companies need to adjust to changing conditions is too fast for the old style ERP. Here are IDC’s cost estimates from the survey respondents:

“It is unacceptable that 51.4% of respondents with financial management–driven ERPchanges reported losses of approximately $12 million to $296 million, 72.2% reported losses from delayed product launches of approximately $10 million to $255 million, and 76.2% of executives reported losses of approximately $10 million to $255 million from delayed cost reduction plans — and these are only a few of the many examples of the high costs of business disruptions.”

Did anyone see it coming? I doubt it would ever be expressed in those terms. Plenty of us have known for years that for most systems, once you’ve got the good ol’ chart of accounts in place then you hope and pray you don’t ever have to dig up that particular lump of concrete. You just know it mean a re-implementation. Trouble is the multiple demands of business are now such that digging up the COA is likely the least of your problems once you check under the covers and see the spaghetti soup of wiring that’s holding the whole fragile edifice together.

Is there an alternative? Agresso would not have sponsored such a report if it wasn’t for the fact they believe they have an alternative. The last few years I’ve been impressed with the way they’ve met this challenge. When I first came across Agresso in the late 1990’s they had what looked like a weird reporting system but which at its heart is where the building blocks for today’s agile Agresso come from. Like other vendors they’re tied to Pacioli-esque double entry in the end but they started from the analysis end of the problem to arrive at what’s needed to build an ERP.

I’m not sure we’ve really cracked the nut of what this means for the future of transaction based systems. Agresso’s fast change software certainly goes some way towards dealing with the problem but then there is no getting away from the complexity that exists in many businesses. Often, I feel that complexity is un-necessary and more to do with the hierarchical nature of business that unintentionally propels business towards acquiring a variety of software.

The combination of Salesforce.com and Financialforce.com as SaaS offerings built on a platform designed for integration might represent a glimpse of the future. Alternatively, the new forms of business designed around collaborative processes might hold better clues. The problem with the second approach is that as yet, we don’t seem to have figured out what kind of ‘accounting’ is going to be required to synchronously fulfill both the regulatory and management needs of the near future.

As we start to wind down for the holiday season, this surely must be sobering reading. After all, it strikes at the heart of what ‘we’ have been taught and know about accounting.

Tagged as: Accounting, ERP, Financialforce.com, Salesforce.com