Editor’s note: Dave Kellogg, CEO of Host Analytics, says a great CEO is really about two things: financial outcomes (and how they create shareholder value) and the future (not just next year, but the next few years). Host Analytics provides cloud-based enterprise performance management (EPM) solutions enabling CEOs to achieve these objectives. I spoke with him about EPM, and he says his personal interest in the software business has always been enterprise software in one form or another. In this article he shares his insights into EPM trends and how the software will change over the next two to three years.
What is the top trend currently driving change in EPM solutions?
Dave Kellogg: The move to the cloud. There’s a great Bill Gates quote that we overestimate change in the short term and underestimate change in the long term. When it comes to cloud adoption of enterprise software, that’s absolutely true. As evidence, the percent of sales force automation software that is in the cloud today versus still on-premises is about 50 percent. And that’s the lead segment in the cloud.
About 95 percent of all software sold to CFOs is still on premises. So the cloud penetrating finance applications is lagging by almost a decade behind sales automation. Consequently, calling up CFOs and asking if they would like to move EPM apps to the cloud is still somewhat novel to them. It’s not that they haven’t heard of it. As a CFO told me, “I sign the checks for Salesforce and Marketo every year; I know darn well about the cloud. I just haven’t decided to go there yet.”
They’re aware of the cloud. But in terms of actually moving their systems to the cloud, the adoption has been slow. Finance departments keep asking if it’s safe to get in the water. It creates kind of an elastic rebound theory opportunity; pent-up demand is building. In my opinion, we know how this movie ends – enterprise software moves to the cloud, and you have pent-up demand building that will one day be released.
And we’re starting to see the tipping point, starting to see core financial applications get penetrated by the cloud. Certainly NetSuite has had a lot of success in financials in the cloud. So CFOs are finally feeling cloud safe. And EPM in my mind is a core financial application.
Is there a new functionality that enterprises want to see included in EPM solutions?
Dave Kellogg: Yes. Modeling, or building driver-based models for operations and scenario planning is a hot trend. The core of EPM is what I call the “hamster wheel” of finance. It’s a lot of repetitive drudgery to make an annual budget, produce the documentation of it and present it to the board, have the board say “cut here” or “add there,” go back and iterate, create a new version and get the final budget approved. Then every month people need to see how they are doing relative to the budget. And at the end of the period, they close the books, put out the final numbers and then start the whole process again. There is an enormous amount of work in the process I just described, and EPM automates that drudgery.
Automation takes closing from weeks to days, or assembling the board deck in hours instead of days. So EPM solutions create time for the finance department, in which they can focus on the future. How can finance really add value to the business? How can finance be a strategic partner to the CEO in driving the business? The CEO cares a lot about the future, and the future is all about long-range modeling and scenario planning. In the last year or so, we’ve seen a huge interest in focusing on the future and building models.
Are there any other major trends driving change in the EPM space?
Dave Kellogg: A third trend is data integration at a business level. I’ll give you an example of a gaming problem inherent in budgeting, which is a reason why data integration is necessary.
Let’s say the finance department asks for the sales forecast and the salesperson says it will be 100. The CFO plugs in 100, but then gets burned when the actual number turns out to be 104. The sales team is not incented to forecast 105 or 110. That surprise extra revenue from the sales team’s over-performance flows directly to the bottom line; now the CFO has an EPS expectations management problem. There is a conflict of interest in the forecasting process between sales (which is trying to beat their number and kind of sandbag the plan) and the CFO (who is trying to manage EPS expectations on Wall Street).
Finance departments understand this is happening, and these days they want to make their own forecast. They want to grab data from the pipeline in Salesforce, Web traffic and marketing data; pull all that data together into the financial systems and build some regression models of their own.
Then when the CEO asks sales for their forecast and they say 100, the CFO can say, “Based on our models, we think it’s 104. And in terms of managing the expenses on P&L for planning and forecasting purposes, I would go with 104, not 100.” That can create an enormous amount of value to the business; that’s four units that could be invested in growing the business forward.
This notion of finance not just being the anchor newsperson telling the forecast but actually having an opinion is new. But in order to do that, they need to integrate data from the various other systems that are required to solving a given problem.
How will these three trends change EPM in the next two or three years? What should enterprise buyers look for?
Dave Kellogg: First, you’ll see more and more investment in cloud EPM by mega vendors. All the cloud startups like us have cloud-based solutions. But the mega vendors only have partial coverage; most of their functionality is not in the cloud. The mega vendors are definitely trying to get cloud software out there; it’s just hard to do.
Second, you’ll see more and more people requiring cloud-based modeling tools. Frankly, there aren’t many available today; we’re one of the few vendors that offer this. People want to build forward-looking models and want to do it in the cloud. So you’ll see an increased demand for this. If a vendor just has cloud-based planning and budgeting, that’s not good enough going forward.
Last, vendors will focus on cloud-based data integration capabilities. Ask the vendor: how many sources can you pull data from, and do you have a place to put them so I can line up the non-financial data against my financial data to try and better predict financial outcomes? Along with this capability, vendors will need to add associated analytics so enterprises can actually look at the data and do something with it to find conclusions.
As Host Analytics CEO, Dave Kellogg is on a mission to “disrupt then transform” the enterprise performance management (EPM) space. Prior to Host Analytics, Dave held roles as SVP and GM at Salesforce.com, CEO of MarkLogic and head of marketing at Business Objects. A recognized thought leader on topics ranging from venture capital and Silicon Valley culture to cloud, big data, and social enterprise technologies, Dave is a highly regarded blogger at www.kellblog.com. Follow him on Twitter.