PERHAPS IT REALLY IS WHAT YOU KNOW
Business intelligence software is booming as companies get serious about analyzing the data they collect.
By Scott Leibs
Pop culture likes to portray computers as magical boxes that spew out answers to any questions posed. Think of HAL in 2001: A Space Odyssey or Mother in Alien. If only it were that simple. In the real world, computers have proven far more adept at capturing and storing information than in putting it to good use. But that may be changing. Business intelligence (BI) software, a category that encompasses a wide range of tools and packaged applications, is designed to help companies ask relevant questions of all that data they've gathered, and act on it.
While BI is not new--current products can trace their lineage back to decision-support applications, executive information systems, and all manner of database reporting and querying tools--it has suddenly become hot. The market, in fact, is growing at 34 percent a year, according to International Data Corp. (IDC), and some leading vendors are achieving 50 percent increases in year-over-year sales. The reason? What else-- the Internet, which not only allows companies to gather more information about customers but also allows them to share that information with employees around the world.
Several things differentiate today's BI from yesterday's clunkier tools. For one, it's simply easier to use. "Querying a database took skill," says Gord Watts, director of solutions for market leader Cognos Inc., whereas today nonspecialists can use BI to concoct questions or drill down through data much more easily. And data visualization has been improved, with many products adding charting features, dashboard representations of information, and similar capabilities. Some products will soon go wireless, so field workers will be able to use a variety of devices to get access to the latest business information.
Companies aren't just analyzing customer data, either. The B2B marketplace FreeMarkets Inc., for example, uses BI to "look at buyers across horizontal buying industries, and suppliers across vertical supply categories, so we can understand the volume and types of transactions" taking place, says David R. Silvester, director of business applications.
In addition, vendors are designing their products to function as portals, so customers can surf through data as easily as they visit Web sites. And the products are better at aggregating information from many sources, not just a single database. BizWorks, from InterBiz, for example, uses "dynamic wrappering" to reach into many data repositories and sources of live data. One benefit: Companies that rely on several enterprise resource planning systems don't have to consolidate in order to analyze data.
The very idea of "analyzing" data, in fact, may be changing. While today most "intelligence" is derived from studying what has already happened, BI products are forging into new areas, alerting customers when certain key performance indicators are lagging, for example. Interelate Inc., which offers "customer intelligence" applications in an application service provider model, integrates a client's data with third-party information such as demographic data to arrive at a "propensity score," or likelihood of cross-selling to a given customer. That sort of "actionable" information is, increasingly, the focus of most BI software.
The route that companies take toward greater intelligence can vary. There are a plethora of online analytical processing and data mining tools that enable companies to create their own BI systems, and packaged applications from Cognos, InterBiz, Brio, Interelate, Business Objects, and others provide out-of-the-box intelligence or, at least, the ability to exercise it.
What's the Big Idea?
Daniel Hay, CEO of ArchivalCD Inc., has been plagued by cash flow problems ever since a flood wiped out the vital equipment that scans historic documents onto CDs and DVDs in his Crockett, Tex.-based business two years ago. A self-underwritten initial public offering for about $5.6 million seemed the best answer, but that process--launched two years ago--is still not complete. New hope materialized recently, however, when he discovered a potential $10 million cache sitting inside his own company.
"I have a process I think is patentable," says Hay, "and an online intellectual property evaluation tool helped me assess the potential license revenue." Hay came across the tool on the Patent and License Exchange (www.pl- x.com), a site he believes can help him both license his process and shop for complementary processes.
User-friendly tools like the evaluator-- more formally known as the Black Scholesbased Technology Risks/Rewards Unit (TRRU) metrics system--are just one factor behind a renewal of interest in patenting intellectual property (IP). Companies large and small are eager to harness the worth of their own IP inventories and to see what they can license from their competitors, and a number of Web sites have been launched to facilitate these and other IP needs.
The $4.6 billion Eastman Chemical Co., for example, has joined ArchivalCD and nearly 400 other firms in using TRRU metrics, along with a variety of other exchange-related tools offered by pl-x.com. William Heise, director of Eastman's licensing division, has just completed the Patent and License Exchange's very first transaction--the sale of a fairly low- value patent to German-based Bruckmann & Kreyenborg Granuliertechnika (BKG). He says that without the exchange, the deal might not have happened. BKG demanded patent validity insurance (which would protect it in the event that the patent was later deemed invalid), but Eastman balked at paying for it. Because the exchange offers such insurance as a perk, however, the companies simply did the deal online.
Improved transaction speed and a wider universe of potential buyers are among the prime reasons Eastman has made the Internet part of its strategy for managing approximately 1,500 patents. "As we close more deals, more revenue flows back to the businesses and more opportunities come our way," says Heise. He is expecting to close up to 14 sales or licensing transactions this year, up sharply from 2 in 1999.
The Patent and License Exchange is one of the most tool-laden online IP exchanges, but it is hardly alone. Mark Haller, head of PricewaterhouseCoopers's Intellectual Asset Management Group, estimates there are nearly 30 such sites in existence, ranging from online bulletin boards like Yet2.com to sites like the IBM-backed spin-off Delphion, which allows users to research and analyze patents for offline negotiations.
Virtual venues for less-formal idea exchanges are springing up as well. Boasting participation by such companies as Coca-Cola Co. and International Paper, ideas.com debuted in November to solicit new ideas from Web surfers on items like healthy drinks for kids and three- dimensional paper. Companies post queries, usually with a preset dollar amount to be paid for a worthy submission, and accept both patented and unpatented ideas from Web surfers who agree to the company's terms.
Coca-Cola, for one, is hoping that the Internet system may replace the 1,500 or so unsolicited submissions that trickle in each year through letters, phone calls, and faxes. "In reality, many of the ideas we get have been considered before or have been generated inside Coca-Cola," says Michael J. Kline, the company's patent and technology counsel. By asking more targeted questions to a wider audience, he says, "the dream is we could generate fewer yet better ideas."
While offering a new level of liquidity to the previously sticky market for IP, the online exchanges still have some hurdles to overcome in helping companies transform IP into salable assets. "Intellectual assets are difficult to describe because they are more unique than established hard assets where you see trading sites popping up, like cars and boats," says Haller. Adds Eastman's Heise: "Actually putting something on the Internet is easy--the hard part is deciding what to put there, and how much technology, data, and know-how to put with it." -- Alix Nyberg
ONLINE IP EXCHANGES
Virtual assets abound in virtual reality, but so far few deals have actually materialized.
|Web site||Key features||Notable participants/backers|
|www.anidea.com||Buy, sell, and license patents and trademarks||500+ subscribers, including Lucent, Ferrari, and Princeton U.|
|www.delphion.com||Search and analyze patents; no exchange yet||Financed and maintained by IBM and Internet Capital Group|
|www.ideas.com||Elicit, buy, and sell patented and unpatented ideas||"Anchor tenants" are Coca-Cola, International Paper, SC Johnson; 50 Fortune 100 firms are considering the idea|
|www.pl-x.com||Value, buy, and sell IP; site includes such tools as escrow, legal documents, and insurance||400 subscribers, including BP Amoco, Bristol-Myers Squibb, Dow Chemical, and Ford Global Technologies|
|www.yet2.com||Buy and sell patents and licenses||55 founding sponsors, including investors Honeywell and P&G|
Source: Company Data
Life in the FAS Lane
Six months into the existence of FAS 133, the Financial Accounting Standards Board accounting rule that determines how companies must account for derivatives and hedging, one thing is clear: Sorting through new software products may be as time-consuming as complying with the rules.
Deloitte & Touche says there are at least three dozen companies touting software or Web services designed to automate various aspects of FAS 133 compliance, and new players are arriving almost every week. Why? Satisfying the new reporting requirements will be complicated, generating what PricewaterhouseCoopers terms "an unprecedented level of documentation" for each derivative valuation. The Big Five firm recently surveyed Fortune 1,000 executives and found that 60 percent are relying on internal systems to meet these needs, but that 30 percent believe that a mix of internal systems and software or Web services from outside providers will be needed to manage what FAS 133 has wrought.
The new rules, which took effect in the first full fiscal year to end after June 16, 1999, require companies to report all derivatives on balance sheets at full value, and in most cases to record changes in fair value on income statements. Companies must also calculate hedge effectiveness, as well as describe risk management strategies and the rationale for undertaking particular hedges.
Since most derivatives are privately negotiated, providing historical valuations is difficult. "You can't look up the information you need, as you can with last quarter's stock prices," says David Glassco, CEO of FinancialCAD Corp., in Vancouver. Historical data is only one part of the equation, however; also needed are analytical capabilities that draw on models for pricing, market value, and other aspects of derivatives.
Because those models can vary by industry, and because values change constantly, many companies are offering technological help for FAS 133 in a Web-based subscription model, rather than via shrink-wrapped software.
FinancialCAD's The Perfect Hedge, for example, is priced at $500 per month per user (plus a $7,500 activation fee and a $500 monthly companywide access fee), and, Glassco says, offers as one benefit "a central record of information maintained over a long period of time, which we can do by offering it as a Web service."
PricewaterhouseCoopers also offers a Web- based service, Solution133.com, priced between $25,000 and $100,000 a year, depending on how many employees use it. The site allows users to test hedge effectiveness, calculate the fair value of derivatives, produce FAS 133compliant reports, and access specialists for additional help.
Such costs can add up. Rhoda Woo, senior manager in the capital markets group at Deloitte & Touche in New York, says that some of her company's clients have spent as much as $1 million on software and training in order to comply with the new regulations. "I don't think every company needs this kind of software," she says. "It depends on how many and what sort of derivatives a company uses. Fair value hedges, for example, are pretty straightforward, but cash flow hedges are quite complex."
Whether technology can help ease the pain of FAS 133 compliance may be a moot point at some companies. "There's a lot of head-scratching going on over this," says Stan Friedman, a partner at PricewaterhouseCoopers. "Some companies don't even know they have derivatives. They think auditors will provide a solution, but they aren't allowed to."
Rob Royall, partner in the national accounting group at Ernst & Young, agrees. "It's a moving target, complicated by the many interpretations FASB has provided," he says. "Many companies have held off on preparing for it, and very few have it under control."
Friedman believes some companies will simply stop using derivatives rather than have to worry about how to report them. But most will simply endure some growing pains as they adjust to a slightly more regulated world. -- S.L.
TO HAVE AND HAVE MORE
Firms run the gamut in their use of derivatives.
- Under 10: 43.9%
- 11-25: 10.2%
- 26-50: 9.2%
- 51-100: 7.1%
- 101-250: 9.2%
- 251-500: 3.1%
- Over 500: 6.1%
- Not sure/Not reported: 11.2%
DERIVE YOU CRAZY
Top concerns for financial executives stemming from FAS 133 regulations
- Testing hedge effectiveness: 62%
- Documenting risk management strategies: 61%
- Valuing derivatives: 57%
- Earnings volatility: 54%
- Identifying derivatives: 47%
- Stock price volatility: 26%
- Investor unease: 22%