International Data Corporation (IDC) recently reported that worldwide analytic applications software revenue broke the $1 billion mark in 1997, will pass $2 billion by 2000 and is poised to reach $3.6 billion by 2002 (Analytic Applications: 1998 Worldwide Markets and Trends). The burgeoning analytic applications market represents the "buy" market for solutions that automate activities for planning, forecasting and predictive modeling.
IDC first defined the term analytic applications in an August 1997 bulletin as packaged software that meets three distinct conditions:
Process support: Packaged application software that structures and automates a group of tasks pertaining to the review and optimization of business operations or the discovery and development of new business;
Separation of function: The application functions independently of an organization's core transactional applications, yet can be dependent on such applications for data and may send results back to these applications; and
Time-oriented, integrated data: The application extracts, transforms and integrates data from multiple sources, supporting a time-based dimension for analysis of past and future trends.
Analytic applications differ from generic information access tools in that they are specialized to a particular purpose or business function. As such, it is convenient to describe and measure distinct market segments for analytic applications. Some are cross-industry and some are vertical-specific:
- Finance/Accounting includes forecasting, budgeting, cost and profitability analysis, financial consolidation.
- Human resources includes workforce planning and optimization, labor scheduling.
- Materials management includes route optimization.
- Customer relationship management includes customer retention, cross-selling, territory analysis.
- Retail includes site selection and market-basket analysis.
- Manufacturing includes demand planning and forecasting.
- Healthcare includes outcomes analysis.
- Financial services includes risk management, fraud detection.
Finance/accounting-related analytic applications represent nearly half of the market today, by far the largest single segment for packaged analytic applications. Finance/accounting-related analytic applications include a mix of applications:
Financial Consolidation: This application meets the needs of companies that must consolidate heterogeneous general ledgers for financial reporting. The integrated financial data can also be leveraged for trend analysis. Continued business mergers and acquisitions ensure that large companies will continue to have a need for this type of application software. The sector is dominated by Hyperion Enterprise, though other solutions (e.g., Comshare, Walker and SAS) are available.
Budgeting and Planning: This sector, the largest within finance/accounting-related analytic applications, is the single most popular OLAP-based packaged application including software such as Hyperion Pillar. Other budgeting applications include Oracle Financial Analyzer, Walker Horizon and Comshare BudgetPlus. Many existing budgeting systems are built on Hyperion Essbase and targeted at larger companies. New packages built on Microsoft's OLAP server (such as OmniVista and PowerPlan) will help advance the penetration of OLAP in mid-sized companies.
Activity-Based Costing (ABC): This sector is small in size, but growing in importance as evidenced by the recent acquisition of Price-waterhouseCooper's Activa by Oracle and the equity stake taken by SAP in ABC Technologies. ABC is moving from a standalone application to a foundation for strategic business measurement and analysis. The trend is for ABC models to become a foundation for higher level applications, such as activity-based budgeting or customer and product profitability.
Business Performance Management: Products packaged, marketed and sold as "business performance management" (such as Comshare Decision and Walker Horizon) are targeted at financial managers such as the CFO and the controller. Consistent with this trend, initiatives for business performance management from Oracle and PeopleSoft come out of their financial applications groups as extensions to their core financial applications.
Other: The breadth of financial analysis is illustrated by a variety of specialized applications. For example, Alcar has long espoused shareholder value analysis. Other specialists, such as Roadmap Technologies, have applications for sophisticated financial forecasting. Another category that is emerging is risk management software associated with the treasury management function. Many of these applications are candidates to be incorporated in broader financial analytic applications or suites.
Figure 1 shows IDC's estimates for the shares of the finance/accounting-related analytic application market by application type. The percentages apply to the overall finance/accounting-related analytic application market for 1997.
Business Performance Management vs. Business Performance Measurement
Many packages coming to market today are termed "BPM" which may refer either to "business performance management" or to "business performance measurement." The terms are so alike that it is inevitable that any distinction between them will diminish. However, there is a difference between "measurement" and "management" that can reflect on the depth of the application:
Measurement: Applications that provide support for specific KPIs (key performance indicators) enable a business to measure their performance. This is often coupled with comparative information from industry sources, so a company can compare their performance against that of others in their industry. From a technological perspective, packaging this information in a multidimensional or OLAP structure enables the user to navigate to various measures of performance by relevant business dimensions. Business performance measurement applications support the analysis phase of the business improvement cycle.
Management: Applications that help direct modeling or scenario exploration activities take the user a step further. Rather than simply exploring what happened and why, the application can help the user consider the implications of alternative courses of action before they become operational. Analytic applications can provide additional value by moving beyond analysis to modeling and potentially the application of these models to adjustments and actions. (See Figure 2.) Performance management suggests an explicit relationship to action, and modeling is the key link to do this. Analytic applications that support predictive modeling provide more value by developing actionable information that can be related directly to business operations. Examples are scoring customers for future profitability and sending the results directly to sales and marketing systems (as with SAS's Solution for Customer Relationship Management coupled with Exchange Applications' marketing execution system), or predicting earnings per share in advance of a quarter's closing so that managers can take actions in time to influence the result (as with a large retailer that has implemented Walker's Horizon series of financial analytic applications).
Many BPM applications today are performance measurement rather than performance management products. Over time, however, the products will move from analysis of past results to predictive modeling, closing the loop between analytic and operational systems. At that point, they will become business performance management enabling organizations to manage, rather than simply measure, their performance.
Here are some trends to watch for in the future:
Verticals. The verticalization of finance/ accounting-related analytic applications is a trend, especially in selected verticals with strong mandates to improve efficiency and reduce costs. These include industries such as healthcare, utilities and transportation where packages specialized to these verticals will appear.
Single Source vs. "Best-of-Breed." The analytic applications market is still emerging and its outcome will be driven by two major scenarios the triumph of vendor-led suites or framework plus independent ("best-of-breed") applications. Vendor-led suites is an analytic market that is dominated by a single or small group of application vendors. The second scenario represents a more mixed market comprised of separate, department-level applications along with analytic application frameworks accompanied by "best-of-breed" applications certified to work with the framework. Some version of this second scenario is more likely, with some organizations buying and some building the integration framework. The resulting combination of framework, transactional and analytic applications will become the new benchmark for enterprise applications as enterprise optimization systems.
Future Impact on Today's Packaged Operational Applications. The current generation of transactional applications (such as general ledger, payables/receivables, and the like) were not built with the idea that they needed to support the analysis of business performance. Hence, they may not be collecting the information needed to support analytic activities such as activity-based management and customer or product profitability analysis. As a result, these operational applications will either need to change to meet these new requirements or risk being replaced by another generation of applications designed to address the new requirements for performance management. Organizations are rushing to implement today's generation of operational applications before the clock strikes midnight on January 1, 2000. After the year 2000, however, companies could discover that a new generation of applications will be needed, designed with the goals of analysis, modeling and business performance management foremost in mind. This could have a significant impact on companies and on the overall applications market.
The convergence of packaged transactional applications, analytic applications, data warehousing and domain-specific content influences the direction of tomorrow's information systems. But providing a solution of such a broad scope is beyond the capability of any individual supplier today. For the foreseeable future, companies will need to employ a strategy of buy, build and integrate to craft solutions that meet their specific requirements.
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